Earnings Call Transcript - ZM Q4 2022

Operator, Operator

Hello, everyone, and welcome to Zoom's Fourth Quarter Fiscal Year 2022 Earnings Release. As a reminder, today’s earnings webinar is being recorded. And now, I will have things over to Tom McCallum, Head of Investor Relations. Please go ahead, Tom.

Tom McCallum, Head of Investor Relations

Thank you, Kelsey. Hello everyone, and welcome to Zoom's earnings video webinar for the fourth quarter and full year of FY22. 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.com. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first quarter and full year 2023, our expectations regarding financial and business trends, our market position, opportunities, growth strategy and business aspirations, product initiatives and the expected benefits of such initiatives and our stock repurchase program. 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 the 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 that we make on today's webinar. And with that, let me turn the discussion over to Eric.

Eric Yuan, CEO

Thank you, Tom. Before I begin, I want to welcome Bill McDermott, CEO of ServiceNow, who will join our Board of Directors tomorrow. I look forward to working with Bill, a visionary in the technology space and a successful software executive. I’d also like to thank Bart Swanson, who is stepping down from our Board of Directors tomorrow, for his years of service on our Board, and wish him the best in his future endeavors. Let me also thank our global Zoom team, customers, partners, and investors for their support as we celebrate the 10-year anniversary of our inception and three-year anniversary of our IPO. Now, I'd like to share with you three key pillars of the Zoom strategy, which we are building out to drive future growth: The first pillar is really about being a full unified communications platform. We made enormous strides over the past several years evolving from a meetings company into a multi-product platform, including video conferencing, events, chat, phone, and more. The missing piece was the contact center, that was until our announcement last week. More on that in a moment. The second pillar is hybrid work. Because we believe hybrid work is going to become more flexible and less about location. No matter where you are - office, traveling, or home - Zoom wants to make sure you have a consistent experience. Whether with Zoom Rooms or on a Zoom-connected device, we want to make sure you're part of the conversation and able to collaborate anywhere and everywhere. The third pillar is business workflows and how we leverage our API marketplace, our Zoom Apps, and our SDK. Many technology companies tell me that they want to integrate Zoom into their platform to improve the communication and collaboration experience for their customers. For instance, we recently announced a Zoom-DocuSign integration. This will allow customers to review a document during a Zoom Meeting and approve it as part of a simple bi-directional business workflow. We are in the early innings of this transformation of work and communication. We believe there is a massive opportunity, and we plan to address it with the same level of innovation, scalability, and simplicity that has made Zoom the trusted platform for hundreds of thousands of businesses around the world. As a key part of our UC stack, I am super excited about the announcement we made last week. We announced the general availability of Zoom Contact Center, an omnichannel customer engagement solution that is optimized for video and integrated right into the Zoom client. It brings unified communications together with modern contact center capabilities, helps customers connect over video, and also supports channels like voice, SMS, and webchat. Zoom Contact Center is simple for admins to configure and deploy. They can easily create menus, greetings, and prompts right in the Zoom Admin portal. The product can also integrate chat and video into an existing digital presence, like a website, helping organizations have conversations with customers in the right place and at the right time. This is just the beginning of our plan to modernize the contact center and enrich the experience for our customers and our customers’ customers. Speaking of customers, we ended the year with a lot of great wins. First, I want to thank Medtronic, a global leader in healthcare technology, for expanding their partnership with Zoom. In 2020, Medtronic chose Zoom Meetings, Zoom Rooms, and Zoom Webinars to enable its global employees to communicate and collaborate better. In Q4 of FY22, after a careful vendor selection process, they decided to add 60,000 Zoom Phone licenses to a new multi-year agreement. Thank you, Medtronic, for trusting Zoom to deliver a modern, integrated UCaaS solution to support your global communications needs. Thank you, Intuit, the global technology platform that makes TurboTax, QuickBooks, Mint, Credit Karma, and Mailchimp, for entrusting Zoom with their video communications over the past few years and recently adding Zoom Phone to create a unified communications platform across their organization. Thank you, Arizona State University, which was recently recognized by U.S. News & World Report as the country’s most innovative school and has been a strong supporter of Zoom products over the years. As a leading research university, a highly effective communications platform is important to drive collaboration between their students, staff, and community. ASU chose Zoom to be a complete communications platform with 50,000 Zoom Meetings, 700 Zoom Rooms, and 15,000 Zoom Phone licenses as well as Zoom Webinars. I also want to recognize LIXIL Group Corporation, a Japanese manufacturer and pioneer of building materials and housing equipment. As a Zoom Meetings and Zoom Rooms customer, LIXIL has embraced hybrid work for communication and collaboration while leveraging the ease of use of the Zoom platform to enhance their customer experience with video tours of their showrooms. In Q4, LIXIL added 10,000 Zoom Phone licenses, committing to a unified communication platform. Thank you Midtronic, Intuit, Arizona State, and LIXIL. I am so grateful to have such an excellent group of customers. The world wants a full communications platform; one that is integrated with other workflows, supports hybrid work, and is secure and easy to use. Zoom is hard at work ensuring our customers exceed the soaring expectations of how businesses collaborate internally and communicate externally. To sustain and enhance our leadership position in this new era of digital transformation, we plan in FY '23 to build out our platform to further enrich the customer experience and expand our go-to-market motions, which will enable us to drive future growth for Zoom. I want to thank our Zoomies for their hard work over the past 10 years. We have grown to nearly 6,800 strong and are more focused than ever on delivering happiness every day to our hundreds of thousands of customers around the world. And with that, let me pass it over to Kevin. Thank you.

Kelly Steckelberg, CFO

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY '22 and the results for Q4, then provide our outlook for Q1 and FY '23. We delivered another year of strong results. Revenue grew 55% to $4.1 billion as we exited FY '22 at an annualized run rate of $4.29 billion. We grew non-GAAP operating margin to 40.4%, up from 37.1% in FY '21 as we scale our operations. And we achieved an adjusted free cash flow margin of 38%. In Q4, total revenue grew 21% year-over-year to $1.07 billion, exceeding the high end of our guidance of $1.053 billion. The growth was primarily driven by strength in our enterprise business, which continued to grow significantly faster than our online business. We also saw strong demand for Zoom Phone, which had a record quarter, adding over 550,000 paid seats. Much of the Zoom Phone growth came from strength in large customers with a number of customers growing 149% year-over-year, and the number of customers with more than 10,000 paid seats growing 122% year-over-year. We also added a major global bank as a Zoom Phone customer. We saw 66% year-over-year growth in the upmarket as we ended the year with 2,725 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 23% of revenue, up from 18% in Q4 of last year. We exited the quarter with approximately 509,800 customers with more than 10 employees, up 9% year-over-year. In Q4, customers with more than 10 employees represented 67% of revenue, up from 63% in Q4 of last year. As we approach our three-year anniversary as a public company, a lot of incredible things have occurred at Zoom. We’ve seen unprecedented growth and brand awareness for Zoom Meetings and incredibly strong momentum for newer products. We have also expansively built out our direct, channel, and ISV go-to-market motions, which we collectively call Enterprise. These customers have high lifetime values as they tend to increase deployments, extend terms, and churn at much lower rates over time. Starting today, we will provide metrics that more closely align with the way our internal view of the business has evolved following this period of unprecedented growth and expansion. This will include the number of Enterprise customers and the Net Dollar Expansion rate for Enterprise customers. In the appendix of the investor deck you will find two years of historical data for these new metrics. Additionally, through the end of FY '23, we will continue to provide the number of customers with more than 10 employees in the appendix. In Q4, the number of enterprise customers grew 35% year-over-year to approximately 191,000. Revenue from enterprise customers grew 38% year-over-year and represented 50% of total revenue, up from 44% in Q4 FY '21. We expect revenue from enterprise customers to become an increasingly higher percentage of total revenue over time. Our Online business, which we define as customers self-serviced through our online channel, represents the other half of our revenue, up from approximately 25% in the fourth quarter of fiscal year 2020, before the pandemic. The self-service model is very attractive from profitability and cash flow perspectives. And while we have seen online grow more slowly than enterprise in recent quarters and expect that to continue going forward, we are continuing to invest in and innovate around this channel to drive growth. We will also be presenting our Net Dollar Expansion rate for Enterprise customers rather than our Net Dollar Expansion rate for customers with more than 10 employees. First, let me start with the historic metric; our Q4 Net Dollar Expansion rate for customers with more than 10 employees was in line with what we discussed in Q3, being just under 130% at 129%. Going forward, we will report the trailing twelve-month Net Dollar Expansion rate for Enterprise customers, which in Q4 was 130%. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 21% year over year. Our combined APAC and EMEA revenue grew 23% year over year to be approximately 33% of revenue, stable with Q4 of last year. On a quarter-over-quarter basis, Asia Pacific revenue grew slightly faster than the overall company, but we saw headwinds to our online business in EMEA, partially associated with the holiday seasonality. Let me share a few international highlights with you. We closed our largest overall deal ever in EMEA with 200,000 meetings licenses, and our largest Zoom Rooms deal in APAC with a customer deploying more than 3,300 Zoom Rooms to drive hybrid work across their offices. We have also expanded our partnership with Deutsche Telekom by committing to developing a joint solution specifically for the German market. We continue to view international expansion as a major opportunity for future growth. Now turning to profitability, which was strong from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donations of common stock, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, income tax benefits from discrete activities, and undistributed earnings attributable to participating securities. Non-GAAP gross margin in Q4 was 78.3%, an improvement from 71.3% in Q4 of last year and 76.0% in Q3 of this year. The sequential improvement was mainly due to optimizing usage across the public cloud and our co-located data centers as well as the seasonally lower usage during the holidays. We expect this figure to return to the mid-seventies in the short term, before improving in the mid to long term, as we continue to build out our data centers. Research and development expense grew by 133% year over year to approximately $72 million. As a percentage of total revenue, R&D expense nearly doubled year over year to 6.7%, demonstrating our commitment to innovation and product development. We plan to further invest to enhance our platform, including our recently announced contact center product. Sales and marketing expense grew by 58% year-over-year to $251 million, or approximately 23.4% of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in worldwide sales capacity and the platform. G&A expense grew by 22% to $95 million, or approximately 8.9% of total revenue. Non-GAAP operating income expanded to $420 million, exceeding the high end of our guidance of $363 million. This translates to a 39.2% non-GAAP operating margin for Q4 compared with a 40.9% a year ago and 39.1% last quarter. Non-GAAP diluted earnings per share in Q4 grew to $1.29 on approximately 306 million non-GAAP weighted average shares outstanding. This result is $0.22 above the high end of our guidance and $0.07 above Q4 of last year. Turning to the balance sheet, the deferred revenue at the end of the period was $1.2 billion, up 34% year-over-year from $883 million. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.6 billion, up 51% year-over-year from $1.7 billion. We expect to recognize approximately 63% of the total RPO as revenue over the next 12 months compared to 70% in Q4 of last year, reflecting a shift back towards longer-term plans. As a reminder, due to the seasonality of renewals being front-end loaded and tapering through the year, our collections followed the same trend. Since our renewal linearity is unique, let me provide you once again with some color on next quarter's deferred revenue. We believe it will peak in Q1 at 12% to 13% year-over-year growth and moderate over the rest of the year, reflecting the smaller renewal rates. We ended the quarter with approximately $5.4 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $209 million as compared to $399 million in Q4 of last year. Adjusted free cash flow, which excludes a one-time $85 million cash outflow related to a legal settlement that we disclosed and recognized as a GAAP expense in Q1, was $274 million as compared to $378 million in Q4 of last year. Now turning to our FY '23 guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow substantially faster than our online business. It also assumes that our year-over-year total revenue growth rate will modestly accelerate in late FY '23. For the first quarter of FY '23, we expect revenue to be in the range of $1.07 billion to $1.075 billion. We expect non-GAAP operating income to be in the range of $345 million to $350 million. Our outlook for non-GAAP earnings per share is $0.86 to $0.88 based on approximately 309 million shares outstanding. As mentioned last quarter, due to our multiyear history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the U.S. blended tax rate in FY '23. For the full year of FY '23, we expect revenue to be in the range of $4.53 billion to $4.55 billion, which would represent approximately 11% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately $1.43 billion to $1.45 billion, representing a non-GAAP operating margin of approximately 32%. While our revenue grew 558% from FY '20 to FY '22, our operating margin also increased from 14% to 40%. We are pursuing a massive opportunity, and we will continue to focus on the appropriate balance between growth and margins as we build out and deliver on the potential of our platform. Our outlook for non-GAAP earnings per share is $3.45 to $3.51 based on approximately 312 million shares outstanding. As indicated in our earnings press release today, our Board has authorized a $1 billion share repurchase program that we intend to execute on beginning this quarter. This not only underscores the confidence that our Board and our management team have in the future of Zoom but also allows us to leverage our strong profitability, cash flow generation, and strength of our balance sheet to deliver returns back to our shareholders. We are excited about the large and growing opportunity ahead of us as we continue to execute on our strategy and growth outlook. As always, Zoom is grateful to be a driving force, enabling connection and collaboration worldwide with our high-quality, frictionless, and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors. Kelcey, please queue up our first question.

Operator, Operator

Our first question is from Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Great. Kelly and Eric, you're coming up on the anniversary date of COVID and close to the renewal date that a lot of your customers are going to have. So can you just speak to some of the trends you're seeing? We're just trying to get a sense of is this a good Phone entry point? Are you seeing normalization of kind of room attack rates? Or what are you seeing as far as video license we need licenses? Just any trends that you're seeing as one of these major renewals kind of come up at the end of this month and into the next one?

Kelly Steckelberg, CFO

Yes. Thank you, Meta. So we continue to see strength in our renewals, especially in the enterprise business. And as you heard from some of the highlights we talked about earlier, we had a very strong performance from Zoom Phone in Q4 as well and also Zoom Rooms as customers are really thinking about the future of hybrid work and how they're going to keep everyone connected as they bring them back to the office. This is a really important strategy for them. And you heard Eric talk about some of that, and maybe Eric sets on the strategy around that, but continue to see strength both in renewals in the enterprise as well as additional Phone seats and Zoom Rooms.

Meta Marshall, Analyst

Got it. That's it for me. I mean just in terms of maybe just another quick question in terms of what kind of metrics you're looking at as you make some of these sales and marketing investments to just determine what return you're going to see on those? Or what benchmarks you're kind of measuring yourself against that? And that's it for me.

Kelly Steckelberg, CFO

Yes. I mean one of the key things we always look at internally is sales productivity, looking at it both from a U.S. and an international perspective. And then on the marketing side, we look at internally. We also look at things like opportunities and leads that get generated from any of those. And then, of course, maybe the external benchmark, we're always looking at is sales and marketing as a percentage of revenue.

Operator, Operator

Michael Turrin with Wells Fargo has the next question.

Michael Turrin, Analyst

I was hoping to ask one on contact center. And just some more detail, can you help just frame out initial observations around positioning? Is there a certain size contact center you're targeting? Are there advantages you see with Zoom Video? Or lessons learned from having Phone in the market you would point to? And just in terms of the go-to-market motion, how different is that? Or how well geared are you from some of those initial conversations?

Eric Yuan, CEO

Hey, Michael, that is a great question. We are super excited about our contact center announcement last week. And first of all, this is based on our customers' feedback. Several years ago, after the launch of Zoom Phone, many of our customers told us they would like to standardize on Zoom platform for unified communications. The only missing piece is the contact center. We listen to our customers, our team is working so hard and finally, we've announced the Zoom Contact Center. But in terms of growth, similar to what we did to grow our Zoom Phone business, for the first year, for sure, we are going to target those customers who really want to standardize on Zoom platform, probably starting from Meeting, for those customers who deploy both Meeting and Phone, now they look at the contact center. Also at the same time, we are working very hard at more and more features. I think probably for those customers as long as they want to embrace the cloud business contact center, as long as they want to standardize on Zoom unified communication platform, who would like to be targeted to, right? And that's our strategy. And that's omnichannel, Video, and it's very strong. We also support SMS, voice, and web chat. Again, a lot of hard work, and we are going to continue innovating and to drive our Zoom Contact Center growth. And based on the early data feedback, our customers are also very excited. They wanted to deploy a solution and really understand the unified collaboration. Also at the same time, we build this solution from ground up, and it's very consistent competitor video and Phone, and we're very excited about this opportunity.

Operator, Operator

Our next question will come from Sterling Auty with JPMorgan.

Sterling Auty, Analyst

Hopefully you can hear me okay, given the wind noise. But Kelly, I didn't quite hear Meta's question. I was just wondering, within the guidance for this coming year, can you give us a sense what the enterprise growth specifically looks like within that guide?

Kelly Steckelberg, CFO

Yes. So specifically, in enterprise, we expect that part of our business to grow at approximately 20% year-over-year. And then you can back into that what we're expecting from our online business is for it to be flattish for the year, but it might have some variability quarter-over-quarter.

Eric Yuan, CEO

Yes, Sterling, by the way, our enterprise growth is pretty strong as we add more and more new services like the contact center is the first one. We are not going to stop here. This is our company being who truly understands the enterprise customer need. We are going to add more and more enterprise services to further grow our enterprise business.

Operator, Operator

Jim Fish with Piper Sandler has the next question.

Quinton Gabrielli, Analyst

This is Quinton on for Jim Fish. The labor market right now remains difficult, especially as you're looking to hire and retain some of the top engineering and sales talent. Can you talk about any changes or impacts you've seen in Zoom's ability to maintain your top talent? And then how you plan on differentiating and acquiring this new talent?

Eric Yuan, CEO

Yes, Kelly, feel free to chime in. So Quinton, you are right on, given the great resignation, it’s pretty challenging across the industry. Again, we always double down on our company culture, and this is extremely important for us, right? How to make sure we deliver happiness to our customers. My number one priority is really to think about our employees and how to make sure our employees are happy, right? We are doing so many things to really help our employees. And also, again, over the past two years, we have more than probably tripled the size of the company. Many employees are drawn to Zoom remotely. Again, that's not easy, but good news soon is going to change. Especially if you look at our remote employees, how to make sure we offer the flexibility and also make sure to support our employees' needs by always getting feedback from our employees. We also have a happiness crew, always trying to understand what's the pain point of whatever we can do differently to think of an employee. By doing that, I'm pretty sure, and we are going to make sure I'm pretty happy, and we'll be okay. And that's always our formula.

Operator, Operator

Moving on to Ittai Kidron with Oppenheimer.

Ittai Kidron, Analyst

Kelly, I have a couple of questions for you. First, I think you mentioned in your prepared remarks that you're looking for reacceleration in the second half of the year. Maybe can you walk us through the kind of the puts and takes and what's behind that assumption? And the second question will be regarding the online business. I know you're only giving expansion rate, the dollar base expansion rate on the enterprise side. But given that online is still 50% of your revenue, can you at least give us kind of a rough range of where online net dollar expansion rate typically falls just so we get a sense of how to model that out?

Kelly Steckelberg, CFO

So in terms of the second half acceleration, you're looking at in the upmarket or the enterprise, I should say now. It will be driven largely by continued expansion and growth in our existing customers as well as contribution from some of our new products that we're really excited about, including the contact center. And then in the online business, what you're going to see is maybe we talked about at Analyst Day last year, how once those cohorts get to a certain age of 16 months and older, there's a lot of stability that comes with those retention rates. By the time we get to the second half of this year, all of those cohorts that we acquired during the pandemic are going to have hit that cycle. So it's really going to start to bring stability to the online business in a way that we haven't seen historically. And then in terms of the net dollar expansion rate to the online, we won't be disclosing that. So in other words, I think the best I can give you is based on what Sterling just asked, which is, what's the growth rate for that business? And as I mentioned, we expect it to be flattish for next year with some variability quarter-over-quarter.

Operator, Operator

Baird's William Power has the next question.

William Power, Analyst

Great to see the strong Zoom Phone numbers again. I guess I'd love to get more color around the key drivers there. It sounds like particularly upmarket. How are you competing there? What have been kind of the key differentiators? So just trying to understand growth within existing customers versus landing new customers, and I guess it's a multipart, but first, where does distribution stand? I mean, how important has that been expanding distribution? How much further is there to go using the channel, etc.?

Eric Yuan, CEO

Yes, that's a great question. Q4 was a record quarter in terms of new seats, with more than 500,000, around 550,000 newly added seats for Zoom Phone. This achievement is not only for our existing customers but also for new ones, reflecting the trust we have built with customers over the years. As they consider transforming their businesses and moving their on-prem phone systems to the cloud, they want to implement the best solutions. Many customers have already deployed our video content solutions and seek a consistent experience. The front-end and back-end experiences are seamless, reliable, and user-friendly, with strong security and many features, all of which drive customers to choose Zoom Phone. When customers select us in their decision-making process, we are confident about their choice. For example, look at Intuit and Medtronic, which are both significant users with thousands of licenses. This business is performing well, and we plan to continue enhancing it by adding more features and innovations, especially in conjunction with the contact center. We anticipate accelerated growth for both Zoom Phone and our Contact Center in the future.

Operator, Operator

We'll now hear from Ryan Koontz with Needham.

Ryan Koontz, Analyst

I want to ask about your business workflow strategy there, Eric. And for your API and SDK, what type of applications are you using that for? Typically, is this primarily tech companies? Any color there would be helpful.

Eric Yuan, CEO

Hey, Ryan, that's a great question. Regarding our growth strategy, we have three main pillars. The first is a unified communication platform, where we've recently added a contact center and plan to introduce even more features. The second pillar focuses on hybrid work. The third, which is essential, is our business workflow platform. We provide an SDK, which some healthcare customers are interested in using for their telemedicine offerings, and we also have an API marketplace. The key highlight is our Zoom Apps; we just announced an integration with DocuSign that allows users to easily review and approve documents during meetings with just one click. We're working on more integrations like this, enhancing the meeting experience. Another reason we invited a strong leader and the CEO of ServiceNow to our Board is that ServiceNow excels in workflow applications. We aim to learn from them and incorporate more business workflow applications into the Zoom platform while ensuring our customers can complete their tasks without leaving the Zoom interface. Additionally, we're focusing on expanding our SDK platform, particularly in sectors like education and healthcare, where many startups want to integrate Zoom into their services. We're very optimistic about our business workflow platform.

Operator, Operator

Brad Sills with Bank of America has the next question.

Unidentified Analyst, Analyst

It's Mike on for Brad Sills, if I could. So first, on your churn by cohort. I love to hear your thoughts and the assumptions around that. And then second, the visibility into the attach rate for contact center.

Kelly Steckelberg, CFO

Sure. Mike, if you recall from our Analyst Day last fall, we presented a chart illustrating how cohorts stabilize in terms of retention rates once they reach 16 months and older. Looking back at that chart, you can see the retention rates and our position in the aging process. This makes it straightforward for us to predict how these retention rates will influence the overall online business. We expect them to continue to age, as we've observed strong stability in retention rates at the 15 to 16-month mark. Even with the overall volatility in the business, this trend remains unchanged. We're simply tracking this development.

Unidentified Analyst, Analyst

And then the assumption to the attachment rate for the contact center?

Kelly Steckelberg, CFO

Yes, it's still early right now. We haven't analyzed the attach rate yet. We're looking forward to the second half of this year and expect to start seeing some revenue. We had many strong enterprise customers sign up for the beta, so we're excited to see the outcomes.

Operator, Operator

Matt VanVliet with BTIG has the next question.

Matthew VanVliet, Analyst

I guess as you look at the many investments you made on the international side of things, where do you feel like you are from a sales force maturity, and efficiency relative to a lot of the efficiencies you've already shown in the U.S.? And just as each of those markets mature, maybe any kind of regional or country by country specifics would be great.

Kelly Steckelberg, CFO

So the international team has grown tremendously over the last few years. We certainly continue to see opportunity. And we talked about this before, but as a quick reminder, with the growth and the brand awareness over the last few years, it's really enabled us to go in and put reps where we see opportunities without having to see markets with marketing dollars. I think the big area of opportunity that still is for us internationally is the channel. There is a cross-functional initiative in the company to really focus on the channel, especially focused around on Phone, and that can be master agents that can be carriers. Deutsche Telekom and our strong partnership there, we just announced, is a great example of that effort. And we're going to continue to focus especially over this next coming year because that's a really important part of the distribution strategy for Zoom Phone.

Operator, Operator

And Matthew Niknam with Deutsche question.

Matthew Niknam, Analyst

You've talked about M&A being a greater part of the story going forward. I'm just wondering with the pullback in market valuations for some higher growth themes, how are you thinking about inorganic opportunities? And are you seeing more of these opportunities surface, particularly in the private market? And then maybe if I can just sneak in a follow-up. On the customers with more than 10 employees, I believe that declined slightly sequentially. Just wondering if there's any color you can give in terms of maybe what drove the bulk of those departures in terms of customer size?

Kelly Steckelberg, CFO

We remain committed to pursuing inorganic growth and exploring merger and acquisition opportunities. Our strong cash position provides us with many options, regardless of our stock price fluctuations. We will keep looking for ways to enhance our talent and technology, which we've always stated as a priority. Regarding the slight decline in customers with over 10 employees, it's important to note that when we went public, we chose this metric to represent our direct business, while customers with fewer than 10 employees were used for our online segment. As our online channel has significantly grown, these segments have started to overlap, which is why we believe this metric is no longer the best one to use moving forward. The decline was primarily due to churn in our Online segment among customers with more than 10 employees.

Eric Yuan, CEO

Yes, to add to what Kelly mentioned, I believe it's time to really evaluate both our online business and our direct business based on sales channels. An online business refers to those customers who have never interacted with our sales representatives and simply use their credit cards to make purchases online. I think this is the right time for us to focus on the online business and the direct channel, rather than solely on businesses with fewer than 10 employees, as the situation can be a bit confusing. Customers sometimes interact with our sales representatives and sometimes buy directly online. It's essential for us to examine the pure online business, where customers do not interact with our sales team at all. I believe this will yield better metrics in the future.

Operator, Operator

Peter Levine has the next question with Evercore.

Peter Levine, Analyst

To follow up on the discussion about the contact center, I understand that you're offering seats at $70 per month per agent, which is significantly lower than the industry average of around $200. Does this pricing suggest that Zoom lacks certain features or functionality, or is it a strategic move to aggressively capture market share? Additionally, I assume the goal is to eventually enhance the features, including AI, and adjust the pricing to align more closely with current industry standards.

Kelly Steckelberg, CFO

So Peter, I would say that Zoom has always been disruptive in pricing, and contact center is absolutely different. If you look across the market in how we price Meetings, how we price Phone, we introduced it. We're approximately half the price of any of our competitors' list price. And that continues to be the case with contact center as well. I mean, over time, we absolutely will continue to add features and functionality with the exact same approach that we took for Zoom Phone in terms of the launch and how it grew over time and expanded the features and functionality. The same is true with Contact Center. But you should not take the price as reflecting anything in terms of the quality of that product.

Eric Yuan, CEO

Yes, Peter, Kelly is right on. Our growth strategy always better product, better price, and also much better service.

Operator, Operator

Shebly Seyrafi with FBN Securities has the next question.

Shebly Seyrafi, Analyst

So with your guidance for fiscal '23, it looks like you're guiding for about 11%-or-so revenue growth. In my model to fit your bottom line guidance, I'm getting around 40% OpEx growth, it’s like 4x your revenue growth. And that's an unusual kind of multiple like 4 to 1. And usually, that's indicative of a company's belief that they could grow fast, meaning like 20% plus in the future. So my question really is, is the goal here to invest way ahead of your expected revenue growth in '23 with the idea of accelerating your revenue growth to 20%-plus at some point in the future? And related to this, I know you're guiding for online being flattish this year. Is your goal to get that to at least double-digit growth in the future?

Kelly Steckelberg, CFO

As we stated in our prepared remarks, we certainly anticipate a turning point where revenue will begin to reaccelerate in the latter half of the year. At this time, we are not ready to provide multi-year guidance. However, you can expect that we are projecting the exit growth rate to surpass the full-year growth rate for fiscal year 2023.

Eric Yuan, CEO

Yes. Just quickly, prior to the pandemic, our growth strategy is very clear, right? Double down on enterprise; every two years, we're going to introduce a new service to really add mobile, right? Also upsell. Over the past 2 years, we have to really think about how to help the world and help people stay connected. That's the reason why we spend a lot of time to make sure I offer the K-12 school free services also and focus on online business as well. Right now, we're seeing the end of the COVID crisis. We got to go back, double down on our enterprise growth strategy. Also, at the same time, we have to adjust our previous enterprise growth strategy, which is every 2 years, you are to add a new service. Now probably every 1 year, you need to add 1 more new service, right? That's a way for us. That's the reason why we adjust our growth strategy to double down, triple down our enterprise customers.

Operator, Operator

I'm moving on to Karl Keirstead with UBS.

Karl Keirstead, Analyst

Kelly and Eric, the EMEA and APAC growth has been a big part of the Zoom story as the U.S. market has become more penetrated yet. In this past quarter, the growth in both those regions decelerated pretty sharply. Kelly, I know you talked a little bit about seasonality in Europe. Do you mind elaborating on what's happening in international? And when you set your 11% growth target, what's embedded in that number in terms of your non-U.S. growth even if you can be directional?

Kelly Steckelberg, CFO

Yes. In the fourth quarter, we observed strong performance in the Asia Pacific region and also in EMEA. As you may recall, we announced our largest deal ever for EMEA, which is very exciting. There was noticeable strength in the enterprise segment of our business. However, we did experience some impact from holiday seasonality, which we anticipated and discussed during the Q3 call. Looking ahead, international markets remain a critical aspect of our growth strategy, and we expect them to grow at a rate that outpaces the U.S. Additionally, we will continue to invest in our international sales capacity at a higher percentage compared to our efforts in the U.S.

Operator, Operator

And our next question comes from Rishi Jaluria with RBC.

Rishi Jaluria, Analyst

I appreciate the new way of reporting. It makes a lot more sense. However, regarding the above 10 and sub-10 employee segment, it declined sequentially again, but it has seen a slight increase compared to Q1 and year-over-year. How does this align with your expectations? How should we consider that segment going forward? Additionally, with the decrease in the above 10 employee customer count, I understand many of those are online customers, which makes sense. Based on your observations, what behaviors are you seeing from those customers? Are they discontinuing their service, switching to a competitor, or downgrading to a free version of Zoom? Is there a potential monetization opportunity in the future?

Kelly Steckelberg, CFO

Yes. This number has become confusing because it is intertwined with the customers and the channel. The distinctions between the size of customers and the channel have become unclear with this metric, which is why we will no longer discuss it. Going forward, we are not even modeling this metric anymore. We are focusing on enterprise and online, as mentioned earlier, which truly reflects our business perspective and how we measure and manage it. Moving ahead, we expect to see continuous growth in the enterprise business, which we are very excited about, along with double-digit growth projected for next year. Meanwhile, we anticipate the online segment to be relatively stable. Regarding our smaller customers, we have observed that they may take breaks but often return when the timing is right for them. Our goal is to make it easy for them to come and go based on their needs for our products.

Operator, Operator

And we will now hear from Tyler Radke with Citi.

Tyler Radke, Analyst

Kelly, I wanted to ask you just a couple of points on the FY '23 outlook. I guess, first, how are you thinking about price increases and just generally pricing power philosophically? And then second of all, the reported revenue this quarter relative to your guide was some of the smallest upside we've seen as a public company. So just any changes in guidance philosophy? Or how you're approaching the guide for this year would be helpful.

Kelly Steckelberg, CFO

Yes. In terms of the outlook on pricing perspective, we currently don't have plans to increase our prices across the board. We are especially for the online segment of our business, looking at opportunities for localized pricing and selling in local currency, which I think will be really helpful in terms of especially some of the smaller customers in those markets, and getting those plans rightsized to those markets. But no plans to increase our prices across the board. And then in terms of the beats that you were mentioning for as we've grown and scaled as a business, I think you're starting to see our guidance and our beat get more correlated to the size of the business and reflects the growth rates that we're experiencing going forward.

Operator, Operator

Moving on to Alex Zukin with Wolfe Research.

Aleksandr Zukin, Analyst

I have a question about competition and another about the numbers. Eric, let's start with you. Considering the growing significance of the enterprise business and the rising expenditures there, along with product diversification, how should we understand the post-pandemic competitive landscape, especially in relation to Microsoft and your other competitors? Are the sales cycles similar or longer? Please share what you're observing and how you are planning for the full year.

Eric Yuan, CEO

Yes. So again, Alex, that’s about competition in communications. We always prioritize our customers, which allows us to easily build on our innovations. This approach is very sustainable. However, if we focus on our competitors, I would mention Microsoft as an example. Some enterprise customers have standardized on Microsoft, while others have adopted the Zoom platform. For many enterprise customers, it's notable how companies like Okta are deploying Microsoft Office 365. The percentage of customers using both Zoom and Microsoft solutions is increasing year over year and is around 45%. Many Microsoft Office 365 customers require both solutions. We also collaborate with Microsoft in various areas, which highlights the market's potential. Some customers appreciate the Zoom platform and utilize Microsoft Chat, deploying Zoom Video and Voice as well. This trend is expected to continue. Additionally, we have introduced a contact center and plan to add more services. Alongside our focus on horizontal collaboration, we aim to provide more value-added services like the contact center. By pursuing this strategy, we can compete against larger rivals while also integrating more with them. That’s our plan.

Aleksandr Zukin, Analyst

Got it. Kelly, I want to revisit the point that Sterling raised regarding the guidance for enterprise compared to online, which is 20% and flat. Can you help us connect that to the negative billings guidance for Q1 and the low single digits for the full year? What specific forward-looking metric should we focus on to reassure us about the expected reacceleration of revenue growth and the sustainability of the enterprise and online trends?

Kelly Steckelberg, CFO

Yes. Unfortunately, billings is not a reliable forward-looking metric. This is due to the split in our business. The billings from our enterprise business align with what you would typically expect from a normal SaaS company, which involves multiyear contracts. In contrast, our online business does not follow that pattern, though many customers are still purchasing and paying monthly. Thus, it’s not a meaningful metric, which leads to the ongoing volatility. To provide some clarity, we’ve shared insights on deferred revenue to help you understand the seasonality and linearity related to our renewals and billings. The best information I can provide is our revenue guidance, as we are striving to offer metrics that better reflect our current perspective.

Operator, Operator

We'll now hear from Kash Rangan with Goldman Sachs.

Tom McCallum, Head of Investor Relations

Hey, Eric, before Kash jumps on here, I just wanted to let you know, Kash, unfortunately, was on the participant side. So we just pulled him in as a panelist, but he used our Zoom Chat product to come on over. So welcome to the world of Zoom Chat.

Kasthuri Rangan, Analyst

So Eric, I believe 2022 is a year of transition. I was really interested in something you mentioned back in September about how you're positioning Zoom for the next era of communications. You have many products in the pipeline, like the video exchange center and the event platform. I'm eager to hear your thoughts on how you're preparing Zoom for the next chapter. What product milestones should we be looking forward to from the company? Additionally, what about the go-to-market transformation, strategic initiatives, and partnerships that will help Zoom align with the vision you shared in September?

Eric Yuan, CEO

Yes, Kash, that's a good question. Given that you are using Zoom Chat, right? It's always our unified communications platform. Not only that. But when it comes to the unified communications platform, Chat, Phone, Video Conferencing, Events, Webinar, and all those missing parts of the contact center we just added on, right, to the UC platform. And also look at other 2 pillars and also the hybrid work and the business workflow as well. Essentially, in the next several years, we are working very hard to transform our business from a meeting company to a platform company, right? In terms of metrics, you got to look at our enterprise growth. Now online base used to be revenue-wise very small, it's more like the byproduct of our online marketing platform because of COVID, right? That revenue grows very well, also very profitable. Now given the COVID is over, we have to go back to triple down on our enterprise growth in terms of more new services, and also embracing the platform, right? You will see in the next several years, we are going to introduce more and more enterprise services. And also from a technology perspective, like AI and also some more integration with other business workflow applications, I think, overall, add more and more value to our enterprise customers. I think that's the way for us to look at our growth for the next few years.

Operator, Operator

Matt Stotler with William Blair.

Matthew Stotler, Analyst

Hey, Eric, Kelly, Tom. Maybe just one, as you think about building out the full UC stack. Obviously, you've got many of the key components, video, phone, everything around those two contact center now that you're pushing into. When you look at especially some of your enterprise competitors, some of the large buy-in that you get from IT around those other solutions is because they're based on things like foundational productivity tools like e-mail or file sharing or scheduling and full-feature chat, things like that. So how do you think about how those fit into your roadmap? Or if not directly, how you satisfy those needs for your enterprise customers as you keep moving that market?

Eric Yuan, CEO

Yes, Matt, first of all, for now, we're focused on the unified communications platform, right? And not like a file sharing. That's the reason why Kash is using Zoom Chat, which is our persistent group chat. It's a part of our unified communications platform, right? Customer can standardize on Zoom, send or chat a message, send a chat message to a group. I continue. I have a phone call and contact center. That's our unified communications platform, right? That's part of the first pillar of our platform strategy. In terms of file sharing or an alternative, first of all, we are integrating very well with other vendors, right? How to further embed those solutions into the Zoom platform play? This is also our strategy down the road. More to come and stay tuned.

Siti Panigrahi, Analyst

Hey, Eric and Kelly. I just wanted to ask you about the growth drivers. You referred earlier, you talked about so many products besides Video, you talked about Phones, Chat, Contact Center, so many other products. So how do you rank sort of this growth driver near term versus maybe medium term, like 2-3 years out?

Eric Yuan, CEO

Yes. Near term, as I mentioned earlier, right, look at our platform, 3 key pillars, unified communications platform, hybrid work, and business workflow platform. In terms of a near-term driver, we got to focus on double down, triple down our unified communications platform for the time being. And the future driver is not only that but also how to support hybrid work, how to support the business workflow platform. Those two things will help us to further grow our business down the road in addition to the unified communications platform.

Siti Panigrahi, Analyst

I mean what about contact center? When should we expect that to have some kind of material contribution?

Eric Yuan, CEO

Contact center is part of our unified communications platform, right? And again, customers already deployed meetings in the phone, they would like to deploy the contact center. Overall, we put the contact center into our nascent piece of the unified communications platform. Together, right, will drive our UC growth. But new growths will come from the second and third pillars.

Taz Koujalgi, Analyst

I have a question for Eric and then a follow-up for Kelly. Eric, as you launch your own contact center, what does that mean for your partnership with Five9?

Eric Yuan, CEO

The partnership continues to thrive as some customers are already using Five9 alongside Zoom. We are committed to enhancing that experience. Additionally, there are new customers who have implemented on-prem solutions and want to transition everything to the Zoom platform, and we are eager to attract these customers. The market for contact centers is vast. Many customers who have already adopted Five9 are looking to integrate more features from Zoom or potentially switch to the Zoom contact center or Genesys if it fits their needs. Our primary focus will be on our existing customer base, particularly those who believe in Zoom's unified communications vision and wish to standardize on our platform. This will be our key strategy moving forward.

Imtiaz Koujalgi, Analyst

And then one for Kelly. Kelly, if I look at your free cash flow margins for this year, there's about a 4-point gap between the operating margin and free cash flow margin. Going forward, as we have a bigger mix of enterprise, I guess, versus the online cohort, does that gap get wider? Do you see a bigger delta between operating margins and free cash flow margins in fiscal '23?

Kelly Steckelberg, CFO

The gap in operating margins year-over-year is really being driven by our ongoing investment in R&D. So at a little over 6% this year, it's still not within our target range. Our targeted range for R&D is 10% to 12%. So that's a big driver for our continuing to invest and innovate for the future. And a little bit of that will be offset in the overall improvement in the gross margins for the long term, but we still are in the middle of that multiyear strategy of moving from the public cloud into our own co-located data centers, so that's going to take a little bit more time. And then sales and marketing is also going to increase a little bit as a percentage of revenue as we continue to focus on sales capacity, as we talked about. Also really, as we're building upon this amazing brand awareness that we garnered for new meetings, we want to make sure that everybody also understands the great value they can get from being phone from events as well as in contact centers. So you should expect to see more targeted product marketing in the future.

Imtiaz Koujalgi, Analyst

I don't provide guidance on free cash flow margins, but should the difference between operating margin and free cash flow margin remain consistent going forward? Or might that difference increase since you now have more enterprise customers who are likely paying more upfront, resulting in an improved cash flow margin?

Kelly Steckelberg, CFO

Yes. Over time, we anticipate that the relationship between our operating margin and free cash flow will return to pre-pandemic levels. If you review the variability or the difference that existed before, that is what you should expect as we progress through the latter half of FY '23, and it should start to normalize again. We are still making some investments early in the year to expand our data centers and complete some office build-outs. Therefore, you should expect our capital expenditures to be slightly higher than the usual rate. However, we will eventually return to that normal relationship.

Operator, Operator

And we have time for one additional question, which will come from Parker Lane with Stifel.

Parker Lane, Analyst

With the return of business travel and mandates being rolled back, curious to hear what your customers are thinking about in terms of their event plans for this year. Are you still anticipating that your customers will do more virtual-only and hybrid events than they did pre-COVID? And how is that translating into the demand you're seeing for events in 2022?

Kelly Steckelberg, CFO

We really expect that as people start to travel, they're going to travel for certain events, but not for all of them. So we really expect the future to be hybrid, and that's why we're really excited about our Zoom Events strategy and that it can accommodate both in-person as well as virtual attendees. And that's what we think is going to be the future because people, I mean, are excited to be out and traveling again, but they want to do it when it's convenient for them and when it makes sense in their life. I don't think we expect people to return back to the way it was pre-pandemic, and it's going to be some combination just as work is, we expect events to be the same.

Eric Yuan, CEO

Parker, I just want to add to what Kelly mentioned. Looking at the events, they will definitely be hybrid. For example, last summer, I participated in the Salesforce Dreamforce Hybrid Event and had a fantastic experience. Many people joined online, and there were several hundred attendees in person. Moving forward, even if events remain hybrid, I believe the proportion of attendees who will attend in person will continue to increase. However, it will still be hybrid, and many people will join online as well. I don't think we'll return to the pre-pandemic model where everyone attended events in person; based on discussions with some of our customers, that doesn't seem likely.

Operator, Operator

And again, that concludes our Q&A. So Eric, I'll turn it back to you for any closing comments you may have.

Eric Yuan, CEO

Yes. Thank you. I really appreciate your time. Thank you for your time. Thank you for your support. I truly appreciate it. Thank you. Take care.

Operator, Operator

Thank you so much, Eric. And again, everyone, that concludes today's earnings release. We thank you all for your participation. Enjoy the rest of your day. See you next time.