Earnings Call Transcript
Zoom Communications, Inc. (ZM)
Earnings Call Transcript - ZM Q1 2024
Operator, Operator
Hello, everyone, and welcome to Zoom's Q1 FY '24 Earnings Release Webinar. As a reminder, today's webinar is being recorded. And now, I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.
Tom McCallum, Head of Investor Relations
Thank you, Kelcey. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of fiscal year 2024. I’m joined today by Zoom’s Founder and CEO, Eric Yuan, and Zoom’s CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also, on this page you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the second quarter and full fiscal year 2024; our expectations regarding financial and business trends; impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations; and product initiatives and the expected benefits of such initiatives. These statements are only predictions based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today’s webinar. And with that, let me turn the discussion over to Eric.
Eric Yuan, CEO
Hey. Thank you, Tom. Thank you, everyone for joining us today. As we continue to execute on the strategic focuses, which I shared with you in our last quarter, we are very grateful for the support, feedback, and trust that we have received from our customers and investors. Last month, we closed our acquisition of Workvivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social intranet and employee app into one central hub, forming the heart of a company's digital ecosystem. Incorporating Workvivo's feature-rich technology into our all-in-one collaboration solution will allow us to offer Zoom customers a unified platform that keeps knowledge workers and frontline employees informed, engaged, and connected throughout the workday, regardless of in-person, remote, or hybrid work style. According to Enterprise Apps Today, communicative employers have mobile workers who are five times more productive and feel three times less burned out. The Workvivo team is working very hard to capitalize on this opportunity and is 100% aligned with our culture of delivering happiness to customers and employees. We are so excited to join forces with Workvivo and help our customers raise the bar for employee communication and engagement. Last quarter, we reiterated our strong positioning in AI and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made considerable progress towards that vision. We outlined our approach to AI as to drive forward solutions that are federated, empowering, and responsible. Federated means flexible and customizable to businesses' unique scenarios and nomenclature. Empowering refers to building solutions that improve individual and team productivity as well as enhance the customer experience. And responsible means customer control of their data with an emphasis on privacy, security, trust, and safety. At Enterprise Connect, we unveiled ZoomIQ’s new set of in-beta features leveraging generative AI to support Chat and Email compose, and meeting summary. We are also building new features to summarize long chat threads, catch up tardy meeting participants on what they missed, and brainstorm in Whiteboard. Last week, we announced our strategic investment in Anthropic, an AI safety and research company working to build reliable, interpretable, and steerable AI systems. Our partnership with Anthropic further bolsters our federated approach to AI by allowing Anthropic’s AI assistant, Claude, to be integrated across Zoom’s entire platform. We plan to begin by layering Claude into our Contact Center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in beta, Zoom Workforce Engagement Management. With Claude guiding agents toward trustworthy resolutions and powering self-service for end users, companies will be able to take customer relationships to the next level. Now moving on to some of our customer wins. I would like to thank Major League Baseball. MLB has long used the power of the broader Zoom Platform to strengthen its connection to fans and teams. And this quarter, we expanded our relationship by launching a first-of-its-kind partnership that leverages Zoom Contact Center to enhance real-time replay reviews and deliver increased transparency to baseball fans. By introducing Zoom technologies into operations on and off the field, MLB strives to create an engaging and unique experience for its fans and teams. I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom Phone seats as well as Zoom Contact Center to their Zoom Meetings deployment. We brought responsiveness, reliability, and regulatory compliance to this large expansion, and Virginia Tech leveraged Zoom’s unified communications platform to build a next-gen solution integrated across meetings, phone, and contact center, to serve the entire university community. I would also like to thank Vensure Employer Services, which has grown its workforce significantly over the past few years through hiring and M&A. In Q1, Vensure expanded their existing footprint with us by adding approximately 10,000 Zoom Phone seats and 800 Zoom Contact Center seats, as well as our AI-powered Zoom Virtual Agent and Zoom IQ for sales. It is so exciting to see customers leverage our natively integrated Phone plus Contact Center solutions and invest in our next generation AI-enabled products across their businesses. Finally, I want to thank My Plan Manager, Australia's leading services provider for the National Disability Insurance Program. MPM chose Zoom Contact Center for its attractive total cost of ownership, the deep integration with Salesforce, and the vision and future roadmap for customer experience. And our journey did not end with Contact Center. Appreciating the value of the platform, they also decided to standardize on Zoom One. We are so happy to partner with MPM to help them deliver a world-class customer and employee experience to their clients and disability service providers. Again, thank you so much MLB, Virginia Tech, Vensure Services, MPM, and all of our customers worldwide. And with that, I’ll pass it over to Kelly. Thank you.
Kelly Steckelberg, CFO
Thank you, Eric, and hello, everyone. We are pleased that we beat our top-line and profitability guidance in Q1. Here are a few milestones: first, our non-GAAP gross margin of 80.5% exceeded our long term target; second, after adjusting for the three fewer days in the quarter, our Online revenue was slightly up sequentially; and last, the moment you have all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter. In Q1, total revenue came in at $1.105 billion, up 3% year-over-year and 5% in constant currency. This result was approximately $20 million above the high end of our guidance. Our Enterprise business grew 13% year-over-year and represented 57% of total revenue, up from 52% a year ago. As I mentioned in the quarterly milestones, our Online business improved meaningfully in the quarter as it benefited from many initiatives including the price increase and buy flow optimization. In addition, we saw Online average monthly churn decrease to 3.1%, from 3.6% in Q1 of FY ‘23 and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected. The number of Enterprise customers grew 9% year-over-year to approximately 215,900. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q1 came in at 112%. We saw 23% year-over-year growth in the up-market as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 24% in Q1 of FY ‘23 and span diverse industries such as healthcare, education, government, and more. As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our Americas revenue grew 8% year-over-year, while EMEA and APAC declined by 8% and 5%, respectively. The decline in EMEA was primarily attributable to the outsized impact of the headcount reduction due to local regulations prolonging the process, the Russia-Ukraine war, and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar. Moving on to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities, restructuring expenses, and all associated tax effects. Non-GAAP gross margin in Q1 was 80.5%, an improvement from 78.6% in Q1 of last year and 79.8% last quarter. We are pleased that we have achieved our long term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co-located data centers. For FY ‘24, we still expect non-GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies. Research and development expense grew by 25% year-over-year to approximately $106 million. As a percentage of total revenue, R&D expense increased to 9.6% from 7.9% in Q1 of last year, reflecting our investments in expanding our product portfolio including Zoom Contact Center, AI, and more. Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing expense grew by 4% year-over-year to $278 million. This represented approximately 25.2% of total revenue, up from 24.9% in Q1 of last year. G&A expense declined by 10% to $84 million or approximately 7.6% of total revenue, down from 8.6% in Q1 of last year, as we focused on achieving greater back-office efficiencies and savings. Non-GAAP operating income expanded to $422 million, exceeding the high end of our guidance of $379 million. This translates to a 38.2% non-GAAP operating margin, an improvement from 37.2% in Q1 of last year. Non-GAAP diluted earnings per share in Q1 was $1.16, on approximately 304 million non-GAAP diluted weighted average shares outstanding. This result was $0.18 above the high end of our guidance and 13% higher than Q1 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 3% year-over-year from $1.3 billion. This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.5 billion, up 16% year-over-year from $3 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 63% in Q1 of FY ‘23 and 56% in Q4 of FY ‘23. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent Enterprise deals arising from uncertainty in the macro environment. We expect Q2 deferred revenue to be down 2% to 4% year-over-year, which takes into account the recent trend of shorter durations on Enterprise deals and our renewal seasonality, which peaks in Q1 and declines throughout the year. We ended the quarter with approximately $5.6 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $418 million, as compared to $526 million in Q1 of last year. Free cash flow was $397 million, as compared to $501 million in Q1 of last year. Our operating cash flow and free cash flow margins were 37.9% and 35.9%, respectively. Due to a net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY ‘24. We now expect free cash flow to be in the range of $1.14 billion to $1.19 billion. In FY ‘24 and going forward, we expect our smallest cash tax payments to occur in Q1 and the largest to occur in Q2. Now, turning to guidance. For Q2, we expect revenue to be in the range of $1.11 billion to $1.115 billion, which at the midpoint would represent approximately 1% year-over-year growth, or 2% in constant currency. We expect non-GAAP operating income to be in the range of $405 million to $410 million. Our outlook for non-GAAP earnings per share is $1.04 to $1.06 based on approximately 307 million shares outstanding. As our Online business is stabilizing, we wanted to give you all some additional one-time color on how we see it playing out in the coming quarters. We expect our Online revenues to be approximately $480 million in Q2 and be relatively flat thereafter in FY ‘24. We are pleased to raise our top-line and profitability outlook for the full year of FY ‘24. We now expect revenues to be in the range of $4.465 billion to $4.485 billion, which at the midpoint represents approximately 2% year-over-year growth, or 3% in constant currency. We expect our non-GAAP operating income to be in the range of $1.63 billion to $1.65 billion, representing a non-GAAP operating margin of approximately 37%. Our tax rate is expected to approximate the U.S. federal and both state blended rate. Our outlook for non-GAAP earnings per share is $4.25 to $4.31, based on approximately 308 million shares outstanding. As we look to reignite growth and maintain strong profitability, we are committed to doing so in the right way. We are pleased to have recently issued our second ESG report, which includes additional data regarding our greenhouse gas emissions inventory, and recommits Zoom to achieving 100% renewable energy for our direct operations by 2030. Our core value of care is as important as ever. It’s embedded in how our product fosters emissions reductions, while supporting inclusiveness. It is also evident in our corporate and employee giving. You heard it from Eric. We are innovating extremely quickly to bring our customers the immense benefits of generative AI and empower modern collaboration. We are trusted and loved by our amazing and diverse set of customers. And we are fortunate to be one of the most recognized brands in the world. In Q1, we made some very tough decisions related to team size, structure, and incentives that have understandably caused distraction in the short term, but at the same time exemplify our commitment to long-term growth and profitability. With a focus on the future, we have refreshed our mission and vision: One platform delivering limitless human connection. Thank you to the entire Zoom team, our customers, our community, and our investors. With that, Kelcey, please queue up our first question.
Operator, Operator
Thank you, Kelly. As Kelly mentioned, we will now enter the Q&A session. Our first question will come from Kash Rangan at Goldman Sachs. Kash, please join us on video and unmute yourself. If there’s no response, we will move on to Meta Marshall with Morgan Stanley.
Meta Marshall, Analyst
I think I got mine to work. Perfect. I appreciate it. I noticed that you were giving back some of the gross margin upside you saw in the quarter and mentioned that it was related to some of your AI investments. Eric, I'm curious about how you're deciding whether to build or buy in relation to AI, and how you're planning to leverage the ongoing ecosystem of AI development versus the investments you want to make. Thanks.
Eric Yuan, CEO
Yes. Good question. I think it looks like everyone seems to have just woken up to AI. Actually, we have been busy on the AI front for a few years, if you look at the past several years, two of the largest acquisitions, right, Solvvy and Kites, right, all of the AI-based. Internally, we also have an AI team as well because we understand the importance of AI, particularly during recently by the generative AI momentum. I think, first of all, we do have our own AI team. We have our own internally developed AI models as well. We also will take a very open approach. Essentially, we announced our federated approach to AI. We announced the collaboration with OpenAI, Enterprise Connect. We also doubled down on our partnership with Anthropic recently as well and down the road, maybe some open-source AI models available, we are also going to embrace that. Again, we look at everything from the end-user perspective, right? First of all, we have a team really dedicated to AI. And also, when we sit down with the customers, some customers say, yes, I really like the Anthropic model. Yes, why not? We doubled down on that partnership, we know we can leverage their API as well, right? So we are taking a federated approach which is customer-centric, right? That's why we are very, very excited about this AI momentum can truly improve our product experience.
Meta Marshall, Analyst
All right. Thanks.
Eric Yuan, CEO
Thank you.
Operator, Operator
And moving on to Michael Funk with Bank of America.
Michael Funk, Analyst
Yes. Hi. Thank you, guys. Another question for you, Eric, if I could. Some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate SKU? And then how do you monetize AI within your platform?
Eric Yuan, CEO
It's a good question. I would say the answer is about both. Take our Zoom IQ for sales, for example. It's extremely important. When salespeople work remotely, we need to find ways to enhance their productivity. That's why we announced Zoom IQ for sales even before the generative AI trend began. Our internally developed large language models help us, and we can monetize this AI-driven Zoom IQ for sales product. At the same time, we have a feature-rich collaboration portfolio, including meeting summaries, email composition, chat messages, Zoom Contact Center, and Virtual Agent, with a Workforce Management Solution recently in beta. All these features are enhanced using AI. We utilize AI to improve nearly every feature we offer, enhancing the overall product experience for customers. There are numerous monetization opportunities from this approach. Zoom IQ for sales is just one example of the potential we see. We believe AI presents significant opportunities for us because our focus is on communication. For instance, our recent acquisition of Workvivo in the employee communication and engagement space illustrates another way we plan to use AI to improve product experience. There are many opportunities available at Zoom with AI.
Michael Funk, Analyst
Great. Thank you, Eric.
Eric Yuan, CEO
Thank you.
Operator, Operator
All right. So let's go to Kash again with Goldman Sachs. Kash, I think you're out there driving, so he's going to stay off video.
Kasthuri Rangan, Analyst
Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human. I just will turn on that video very quickly on. So Eric, I'm curious to get your take. So I want you to, if you don't mind, drill a little bit deeper to generative AI and while a lot of software companies are announcing partnerships with LLMs based on the content and data that they uniquely process, we're also at a point where many companies are identifying very unique workflows and productivity scenarios that differentiate them going forward, right? So in that regard, just so there's a scenario everybody in UCaaS will ultimately have a generative AI strategy. So when you start to have these LLMs work with your core products and given the vast user base and behaviors that you've contained in your knowledge base, how do you think Zoom is uniquely qualified to get productivity scenarios that are very unique to Zoom? Sorry for using the same word again, that could be more enduring as a source of competitive advantage because the first chapter of UCaaS was all about providing the core capability of the technology, which you did an amazing job of but I'm curious about the next leg of productivity growth and how you can take this company forward? Thanks so much.
Eric Yuan, CEO
Yes, those are great questions. We have a strong integration with Tesla cars. If you drive a Tesla, you can join the call with just one click. Even if you can’t use video, the audio will always be available. Regarding your question about AI, two points are important. First, if you haven't started investing in AI years ago, the current state of the AI industry can be overwhelming. However, we began our AI investments a few years back, which is crucial. Our Zoom IQ for sales was built on our internally developed large language models. Two key aspects are important: the model itself, as seen with OpenAI, Anthropic, Facebook, and Google, and more importantly, how to leverage these models by fine-tuning them with your proprietary data. This is vital for collaboration and communication. For instance, Zoom employees are involved in numerous meetings daily, especially our Sales team who connects with customers via Zoom calls. We collect a significant amount of internal meeting data, and it's essential to fine-tune our model with this data. This not only helps the AI model evolve but also allows us to enhance it with our proprietary data tailored to our industry. Take meetings, for example; we have accumulated more data than anyone else based on our extensive experience over the years, which is critical for model fine-tuning. This is our unique strength that enables us to provide a distinctive experience to our customers. While other companies may possess advanced AI models, fine-tuning them requires substantial effort. This is why we believe we have a unique position to truly leverage AI for delivering a differentiated experience to our customers.
Kasthuri Rangan, Analyst
Thank you so much Eric.
Eric Yuan, CEO
Thank you. Appreciate it.
Operator, Operator
So sorry, please continue. Okay. We'll move on to Tom Blakey with KeyBanc.
Thomas Blakey, Analyst
Hi, everyone. Thanks for taking my question. Kelly and Eric, it's great to see you both. A major competitor has recently been in the news regarding Microsoft possibly needing to create a separate SKU for their Teams product, particularly in relation to debundling. I understand how crucial the collaboration aspect is to Zoom's vision of being the communications operating system for large enterprises. With Kelly's update indicating that the Online business is stabilizing, which is positive, the implied guidance for the enterprise segment suggests a notable slowdown in the second half of the year. I'm curious how Zoom is considering the potential impact or opportunity in this situation and how significant the collaboration feature is to your overall product. Thank you.
Kelly Steckelberg, CFO
As we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is necessarily related to competition and more due to as we expected, some distraction internally due to the reorganization, but we feel great about the structure of our sales organization now with Graham, especially as our Chief Sales Officer; and Wendy leading the online team and that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. And we're just looking forward to seeing that come to light over the next couple of quarters.
Thomas Blakey, Analyst
Okay. Thank you.
Operator, Operator
Our next question will come from Parker Lane with Stifel.
Parker Lane, Analyst
Thank you for taking the questions. Kelly, could you provide more insight into the extent to which contract duration has been compressed during the quarter? How will that affect our progress through the year? Is this more pronounced in any specific product area, or is it a widespread issue?
Kelly Steckelberg, CFO
It was fairly consistent across our direct business segment, particularly as customers are being cautious with every purchasing decision, which is not a new trend. They are taking the necessary time to ensure proper product deployment, and we do not anticipate this being a long-term issue. However, to account for this, we have adjusted our guidance based on deferred revenue for the upcoming quarter.
Parker Lane, Analyst
Got it. Appreciate the color. Thank you.
Operator, Operator
We will now hear from Peter Levine with Evercore.
Peter Levine, Analyst
Thank you for taking my question. Maybe, Eric, one for you is when you think about the use case of AI and you think across like phone, video, contact center, where do you envision seeing the most kind of uplift in terms of client adoption of AI? Just curious to know where you're seeing that today.
Eric Yuan, CEO
I think we have many opportunities, particularly with our investment in Anthropic. We plan to leverage this not only across our entire portfolio but also to enhance specific areas such as our contact center, virtual agents, and relevant features. Our core meeting platform is critical, especially in providing meeting summaries. Additionally, we have a team chat solution that can be used to assist in composing messages. Last year, we also introduced an email candidate, and we aim to use generative AI to grasp context and help generate messages for emails or chat communications with customers or prospects. There are several use cases, like when someone joins a meeting late and needs a quick summary of what happened. Generative AI can create that summary for them. We see numerous key applications that can benefit from these AI capabilities, which is why we are exploring how to leverage generative AI to enhance user experience across the board. For instance, OpenAI is a notable company, and many organizations, both large and small, are utilizing their AI. We announced our collaboration with them at Enterprise Connect. As I mentioned earlier, we are focusing on three main areas: understanding large language models and how to fine-tune them with our own data, revisiting each of our features to see how they can be improved or monetized, and taking a holistic approach alongside our federated AI strategy. Additionally, we have an internal AI team dedicated to understanding large language models, and our efforts in AI are not limited to what others have.
Peter Levine, Analyst
Thank you.
Eric Yuan, CEO
Thank you.
Operator, Operator
I'm moving on to Rishi Jaluria with RBC.
Rishi Jaluria, Analyst
All right. Wonderful. Thank you so much for taking my questions. Eric, I want to stay on the AI train for a little bit. You've obviously talked about some great use cases and it feels like there's a big opportunity. I want to ask about maybe the potential to start to verticalize some of the AI solutions because it feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real-time signals, for example? And I'm sure that's one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize? And is that something that can make maybe direct monetization a little bit more easy because the value prop is very straight out of the box? Thank you.
Eric Yuan, CEO
That's a great question. By the way, I downloaded the OpenAI mobile iOS app; I should ask OpenChatGPT to answer to another question. But anyway, you are so right on. When it comes vertical, I would say, the opportunity. There are two things. One is a departmental level, another one is a vertical industry, right? You look at our Zoom IQ for Sales specifically targeted sales use case or sales department, right? Contact Center is for supported part. You're so right; down the road HR department in marketing, almost every department, they all use Zoom, right? How to leverage AI to build a differentiated solution, right? That is the opportunity. That's one opportunity. Another opportunity really is about the vertical industry. Take healthcare, for example. Zoom by far is number one on telemedicine, right? How to leverage that, right? And with those proprietary data, right, and also working together with the customers, right, and fine-tune this AI model, right, this is one example. Another example is a lot of law firms are also using Zoom as well, right? And how to leverage the AI to truly empower those use cases is also another opportunity. I think as I said earlier, AI truly brings tremendous opportunities to us. So we got to leverage that. The good news, we're already heavily invested in this area for a few years.
Rishi Jaluria, Analyst
Awesome. Thank you so much.
Eric Yuan, CEO
Thank you.
Operator, Operator
And our next question comes from Catharine Trebnick with Rosenblatt Securities.
Catharine Trebnick, Analyst
I got it. Thank you. All right. In the last two years, a lot of changes have happened. First, everybody worked from home and now people are going back to the office. So has that actually changed any of your opportunities when you're looking at marketing your products. I was thinking in terms of Zoom Room and then some of the areas where you want everybody to be equal in your Zoom Room viewing. So has that changed anything? Have you seen anything different from that?
Eric Yuan, CEO
Good questions. Good news is a question not about AI anymore. So you're so right. I think that during the COVID, right, as a lot of consumer use cases, right? Almost every family, you have with company account like a Zoom account, right? After the COVID, I think if you look at the usage, right, consumer-centric usage, I think, less and less. But however, to support hybrid work, enterprise customers, they are going to leverage the video content more and more, not only just to support remote work. When you try to support hybrid work, how to reserve a desk, all those basic features, right? How to make sure when you join the meeting from the company room, right, remote people, they can't see you, right? Not only just big square, right? So everyone who is sitting in the company room equally, we have a square as well as Zoom Square, right? So those kinds of experiences are extremely important, right? A lot of features are built upon enabling hybrid work, right? Even Workvivo is an example, right? During hybrid work, right? Quite often, you can chat, you use the e-mail or use the phone call, meetings. But sometimes also want to announce a very exciting news and record a video how to distribute those to employees and sometimes even to customers, that's the reason why we acquired Workvivo as well. I think hybrid work is going to stay. That's the reason why a lot of new use cases, right? How to double down on that. Take video conferencing, for example, we have the smart gallery view feature, right? Customers like that. However, in some cases, customers are still down to work. I have a huge conference room, how do you support that? That's the reason why we are working on supporting three cameras, right? That's another way to embrace hybrid work. I think the hybrid work does bring another kind of huge opportunity to us, especially it's hard to convince everyone back to the office five days a week. Even for us, even if I talked with many CEOs. Everyone wanted, right, sometimes you want these employees more. But however, this is kind of to let employees work anywhere, it sort of becomes a fashion. It's hard to force employees back at home. That's why you have to embrace hybrid work. That's the reason why Zoom can play a much bigger role to support the hybrid work.
Catharine Trebnick, Analyst
All right. Thank you.
Eric Yuan, CEO
Thank you.
Operator, Operator
And William Blair's Matt Stotler has the next question.
Matthew Stotler, Analyst
Yeah. Thank you for taking the question. Maybe just one on the contact center side. So you obviously continue to innovate on the product front for contact center. But last time, we got a deep update. There was still some honing that was needed on the go-to-market front. We'll just get an update on what you're seeing on that front, overall adoption of the Contact Center product suite? And then what you think are the keys to driving further adoption going forward?
Eric Yuan, CEO
Kelly, do you want to take it?
Kelly Steckelberg, CFO
Yeah. So our contact center leader is Scott Brown. He is a great addition to our team. And we are focusing from a go-to-market perspective now in the same way that we took Zoom Phone. We are hiring. We have some on board already, but we are hiring additional contact center specialists, who will act as an overlay team and be there to support the account executives to go in, as it's more of a technical sale and give them the opportunity to eventually over time, all become versed in how to sell Contact Center. So we're in the process of that today. And as I said, we've approved more reps. So we're excited about making the investment there.
Matthew Stotler, Analyst
Got it.
Kelly Steckelberg, CFO
Thank you.
Operator, Operator
Moving on to William Power with Baird.
William Power, Analyst
Great. Thanks. Yeah. I want to ask a question on Online. It's great to see that segment play stabilizing. Maybe kind of two parts tied to that. Any early color with respect to the price increases and what you're seeing out of that? And as you look forward for the guidance for online, maybe just some broader framework for how you're thinking about both churn and top of funnel that gives you the confidence on both those fronts that this really is going to stabilize here?
Kelly Steckelberg, CFO
We've observed a very positive response to the price increase. At the beginning of the year, we anticipated certain outcomes, and we are actually seeing better-than-expected retention rates as a result. This has been fantastic. Additionally, we've worked extensively on enhancing the online buy flow, which has also received a positive reception. We've mentioned in previous discussions the numerous initiatives we are pursuing, such as introducing new payment currencies, payment types, and offerings. These elements are all part of the early customer engagement strategies you referenced. Furthermore, changes have been made to the cancellation process, which has also contributed to improved retention rates, and we are very pleased with that progress. Our retention rates were 3.1% in Q3, 3.4% in Q4, and now we're back to 3.1% in Q1. We also expect Q2 and Q4 to show seasonal increases due to the holidays, along with the flexibility we offer our customers to use the product as needed. We are delighted with the churn levels, which have behaved as we anticipated, decreasing in Q1. This gives us confidence that we will remain within that range for the foreseeable future. Additionally, as we introduce more services, we see increasing upsell opportunities in the online segment. For example, with the introduction of Zoom Schedule, customers who already use other scheduling services are expressing interest in integrating it with Zoom. This represents significant upsell potential in our online segment.
Operator, Operator
Thanks, William. And moving on to Siti Panigrahi with Mizuho.
Sitikantha Panigrahi, Analyst
Thanks for taking my question. Eric, I'd like to explore the Workvivo acquisition further. Do you view it as more of a long-term opportunity, or is it something that can be leveraged for cross-selling into their customer base in the near term? Are there specific verticals or segments where you anticipate gaining more traction? Could you elaborate on the potential revenue opportunities from this?
Eric Yuan, CEO
Yes, that's a great question. First and foremost, we aim to provide a unified communication and collaboration platform. Customers are often frustrated with how we send messages, whether through email or chat, as it can often be difficult to locate and not scalable. They also express a desire to share video messages with the entire employee base or specific departments for updates. We're exploring better ways to engage employees, which is where we believe Workvivo can significantly contribute. It's not just a short-term solution; it addresses a crucial gap in our product lineup and will be beneficial in the long run, especially with the integration of AI. Ensuring we gather more communication-related data is essential, and Workvivo will help us achieve that. Our daily engagement with employees on this platform generates a wealth of relevant and meaningful data, which we can leverage with AI. This positions us well for future growth.
Sitikantha Panigrahi, Analyst
Great. Thank you.
Eric Yuan, CEO
Thank you.
Operator, Operator
Next question will come from George Iwanyc with Oppenheimer.
George Iwanyc, Analyst
Thank you for taking my question. Kelly, maybe building on the stabilization you've seen on the online side. Can you give us a sense of what your expectations are from an expansion rate on the enterprise side as you look out over the next couple of quarters?
Kelly Steckelberg, CFO
Yeah. We don't guide specifically around the expansion rate. But as a reminder, it is a trailing 12-month metric. So given that it's at 112% and you can look at where the enterprise growth rate is that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that.
George Iwanyc, Analyst
Thank you.
Operator, Operator
Wolfe Research’s Alex Zukin will have the next question.
Alex Zukin, Analyst
Hey, guys. Can you hear me, okay?
Operator, Operator
Hi, Alex.
Alex Zukin, Analyst
I have a two-part question. First, how do you intend to monetize the generative AI features in the product instead of including them as part of the overall experience? Second, regarding enterprise revenue growth, the expected slowdown from the mid-20s last year in the first half to just over 5% in the second quarter guidance is significantly greater than anticipated. What factors are contributing to this deceleration? Is it due to upselling, cross-selling, new product launches, or delayed revenue recognition? Additionally, how do you plan to reaccelerate growth and return to a double-digit growth rate, as that seems crucial for the stock's valuation?
Eric Yuan, CEO
So Kelly, I'll address the first question, and you can take the second one. In terms of monetizing generative AI, let's consider Zoom IQ for Sales as an example; this is a new service aimed at the sales department. The AI technology it utilizes is based on generative AI, allowing us to monetize it. Additionally, we have features that existed even before generative AI gained popularity, such as a live transmission feature, which is a paid service behind a paywall. There are also significant features like the Zoom meeting summary for enterprises. If customers deploy Zoom One, they can access these features. However, many SMB customers that didn't deploy Zoom One may miss out on them. This serves as another reason for us to monetize. I believe there are several avenues for monetization.
Kelly Steckelberg, CFO
In terms of the enterprise outlook, we anticipated some disruption in Q1 due to changes in the sales organization, both from staff reductions and reorganization. However, we are now confident in the structure of our sales team. We are focusing on areas where we want to invest, and we have recently decided to add more representatives to the contact center team. We also hired a leader in Europe, which is a new position for us, and we are thrilled to welcome Frederic to the team. All of these developments position us well to execute effectively for the remainder of the year. We expect the sales team to meet these objectives, and we believe we have a strong platform to support their efforts, with everyone committed to helping them succeed.
Alex Zukin, Analyst
Perfect. Thank you, guys.
Eric Yuan, CEO
Thank you.
Operator, Operator
And moving on to Michael Turrin with Wells Fargo.
Michael Turrin, Analyst
Hey there. Thanks. Good to see everyone. Kelly, on the billings deferred revenue side, you came in a little bit ahead of what you were guiding for a few percentage points from last quarter despite some duration impact. So I'm wondering if there's any way you can help us quantify those duration impacts either on Q1 or the Q2 guide? And anything else you can provide just to help us think through seasonality as you've now passed the heavier renewal period but mentioned maybe some sales transition impacts still out there. Just help us think through just what's contemplated in the guide from a few different levels. Thank you.
Kelly Steckelberg, CFO
I believe the impact of billing duration won't be long-lasting. It's primarily a reflection of the current macroeconomic uncertainty. We're monitoring how this affects deferred revenue and RPO. We've experienced similar situations before, and customers have returned in the past. As we shift towards more bundled offerings like Zoom One, Contact Centers, and Zoom Phone, customers are likely to make longer-term commitments to these products. As we see more of these options in our pipeline and being sold by our enterprise team, the duration impact should begin to improve. We're pleased that enterprise has stabilized sooner than anticipated. Given the timing within the quarter, we provided a more detailed outlook, as assessing the rest of the year can be complex. Our guidance takes into account our pipeline and the initiatives our online team is pursuing, along with the stabilization of our direct sales efforts.
Michael Turrin, Analyst
Thank you.
Operator, Operator
And Ryan MacWilliams with Barclays has the next question.
Ryan MacWilliams, Analyst
Great. Appreciate it, guys. And congrats on Zoom Phone reaching 10% of sales. So just thinking back a few years, pretty amazing that this metric only came after reaching 5 million phone sales, so quite the run. Look, I love all that questions so far, but I guess I'll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to the Online segment versus the Enterprise segment? And have you seen any changes at renewal on the enterprise side, maybe from an enterprise logo like churn standpoint? Thanks.
Kelly Steckelberg, CFO
No. Our enterprise renewals in Q1, which is our peak seasonal quarter, met our expectations for the period, which was encouraging. Regarding Online, we’ve noted consistent strength that we've previously discussed, contributing to an increase at the top of the funnel. Additionally, we have maintained strong annual plans, which is positive. This is largely because we did not raise the price for annual plans during our price increase. This reflects customers recognizing the significant value they receive from Zoom and the savings they benefit from committing to long-term plans. This is advantageous for us, as the lifetime value of these annual customers is considerably higher.
Ryan MacWilliams, Analyst
Thanks for the color. Thank you.
Operator, Operator
Patrick Walravens with JMP Securities has the next question. I'm not sure he's out there, Patrick, do you want to come off mute and start your video for us? All right. Hearing no response...
Patrick Walravens, Analyst
I'll come off mute. I'm going to turn off the video and you can see why? Eric, can you talk to us a little bit about sort of the business and what part of that is appealing to investors?
Operator, Operator
Patrick, so sorry, your audio is cutting out for us. Will you try one more time? And unfortunately, we might have to skip you if it doesn't improve, but try again, please.
Patrick Walravens, Analyst
Eric, can you just talk a little bit more about Anthropic and what they believe come with it?
Eric Yuan, CEO
Sure. I think Anthropic is a great partner, and this is a great team. And when we look at the AI landscape, I think why not double down on that partnership, right? And given our federated AI approach, right, internally we discussed that happened to be in the middle of using another round of financing, right? That's why how to solidify our partnership, right? Again, they are a great team, greater technology. And I think this is a no-brainer for us, we invest in them to further solidify the partnership. And yeah, so that's pretty much because look at our contact center, right, we will further empower our contact center offering, right, and also download applied to our entire product portfolio. Again, this is very important to our federated approach to AI, and that's the reason why you invested in them.
Operator, Operator
Thanks, Patrick. We'll go ahead and move on to Matthew Niknam with Deutsche Bank.
Matthew Niknam, Analyst
Hey. Thanks for taking the question. Just two quick ones on cash flow maybe for Kelly. First, accounts receivable the last two years, it's been about a drag of $80 million this quarter, much better, only about $29 million, wondering what changed there in terms of cash collections? And then secondly, in terms of this legal settlement, if you can just quantify and let us know maybe when we should anticipate that? Thanks.
Kelly Steckelberg, CFO
In regard to the settlement, Matthew, we are uncertain about the exact timing for its completion in terms of payment. That's why we mentioned that for the full year, we're providing an update; it could be in Q2, or it might also be in Q3. We wanted to give you clarity on that. Regarding your first question about collections, part of the improvement we’re observing is due to the ongoing enhancements within our team related to collections and our decreasing days sales outstanding (DSOs). Additionally, as we have noted, an increase in online transactions, especially annual ones, which are primarily paid via credit card, contributes positively to our DSOs. Typically, online DSOs are about three days. Does that clarify things?
Matthew Niknam, Analyst
And the legal settlement, if you could just quantify how much that is?
Kelly Steckelberg, CFO
It's exactly the amount of the difference between our previous guidance. Let me say it this way, there was no other change to our cash flow outlook other than the anticipated potential net legal settlement.
Operator, Operator
Shebly Seyrafi with FBN Securities has the next question.
Shebly Seyrafi, Analyst
Yeah. Thank you very much. So you're implicitly guiding for your enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. It was only double-digits in the past. So I know you have a lot of changes this year with the sales force, et cetera. After this year, do you target double-digit growth in enterprise or is it like an upper single-digit growth rate? And also related, the Online business is stabilizing for the next few quarters, it looks like Q4; that means zero growth versus negative growth. Is it a growth business afterwards as well? So I'm just looking after this year is online a growth business is enterprise low double-digits or upper single-digit growth rate business.
Kelly Steckelberg, CFO
All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both online and the direct business. So that's innovation. It's expanding our platform. It's focusing on investing in the go-to-market teams in terms of what we've talked about earlier, like the contact center, adding a leader to Europe, really focusing on marketing in the right way. And we haven't obviously given FY '25 guidance, but the goal is, and we've talked about before, starting to see reacceleration of growth as we exit FY '24 and having that continue into FY '25. And we're so early in the year of FY '24, but lining up everything to anticipate reacceleration as we exit the year.
Shebly Seyrafi, Analyst
And the enterprise?
Kelly Steckelberg, CFO
Yeah, I'm not going to get that specific, especially this early. We'll be prepared more great to talk about that later this year.
Shebly Seyrafi, Analyst
Okay. Thank you.
Operator, Operator
And we'll move on to Karl Keirstead with UBS.
Karl Keirstead, Analyst
Okay. Great. Hey, Kelly. Just to follow on that conversation about driving for acceleration next year. And earlier on, you talked about innovation being a huge priority, that seems to me like there's the potential to shift a little bit the growth margin trade-off as you invest to drive growth next year. I'm wondering if you're intending to signal that high 30s, 40% margins, everybody on the call should consider sort of a peak. And then if I could ask a clarification, did Workvivo impact at all your guidance for this year? Thank you.
Kelly Steckelberg, CFO
Yes. Thank you, Karl. So as a quick reminder, our long-term target operating margin is lower, much lower than where we are operating today. And that is, as we've said in the past, to give us the opportunity as we see opportunities for investment to do so. We are really focused on doing everything we can to drive top line growth and continue to take market share. In the period of time where we've had slower growth, we've been focused on balancing that with profitability. But as we see opportunities, we absolutely could bring our margins down. So yes, I think we're at probably the peak of where our margins are. But again, we're always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, given they're amazing, and we're really excited about bringing them into the family, but they're having really, I would say, minimal impact on both the top line and the bottom line today.
Karl Keirstead, Analyst
Okay. Thank you.
Kelly Steckelberg, CFO
Yes.
Operator, Operator
We have time for one additional question, which will come from Sterling Auty with Moffett Nathanson.
Sterling Auty, Analyst
Great. Thanks, guys. Hopefully, my connection holds up. Just wondering back on the enterprise. Given the online $40 million a quarter stabilization. It implies the enterprise revenue is well below Street consensus. Did analysts just have the mix model wrong or was the disruption or something having a bigger impact on the enterprise business for the rest of the year?
Kelly Steckelberg, CFO
I think there are two points to consider. First, we have observed that online has stabilized more quickly than we expected or communicated previously. As a result, the overall mix for the year is likely shaping up differently than anticipated. Additionally, we are making every effort to support our direct sales organization. The recent distractions were significant, involving not only reductions but also a reorganization and changes to incentives and compensation plans. We are pleased that this is now resolved, and we look forward to doing everything we can to support our team and regain momentum.
Sterling Auty, Analyst
Sounds good. Thank you.
Kelly Steckelberg, CFO
Yeah.
Operator, Operator
And again, this does conclude our question-and-answer session. So I'll pass it back to you, Eric, for any closing or additional remarks.
Eric Yuan, CEO
Well, thank you all for your time. Really appreciate all your support, and thank you, as you all in our next meeting. I appreciate it. Cheers.
Kelly Steckelberg, CFO
Bye everyone.
Operator, Operator
Sorry, Kelly. And again, this does conclude today's earnings release. We thank you all for your participation. So go enjoy your summer, and we will see you next quarter.