Earnings Call Transcript - ZM Q4 2023

Kelcey McKinley, Head of Investor Relations

Well. Hello, everyone, and welcome to Zoom's Q4 FY '23 Earnings Release Webinar. As a reminder, today’s webinar is being recorded. At now, I will turn 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 fourth quarter and full year of FY '23. 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 first quarter and full fiscal year 2024, our expectations regarding financial and business trends, impacts from the macro environment, our market position, opportunities, go-to-market initiatives, growth strategies, business aspirations, and product initiatives, and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discussed in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar. And with that, let me show you a quick video highlighting our exciting technologies before turning the discussion over to Eric. Kelcey, please queue up the video.

Eric Yuan, CEO

Wow, that's amazing. Thank you, Tom. And thank you everyone for joining us today. So FY23 was truly a pivotal period in our evolution into a full collaboration platform. As you saw in the video, we launched multiple innovations to help transform work and expanded our product portfolio to open new markets. Since Zoom Contact Center’s release early last year, we have worked hard to expand its features, functionality, and integrations. In Q4, we landed a 2,000 seat contact center deal, our largest to date, which truly demonstrated the rapid progress we have made towards becoming a full-fledged contact center solution. The success of our Zoom One bundle, which we launched last June, contributed to the strong performance of Zoom Phone, which in Q4 exceeded 5.5 million seats, making us a clear leader in the space. We closed out the fiscal year with the release of Zoom Virtual Agent, an intelligent conversational AI and chatbot solution that we believe will transform the way businesses assist their customers and employees. FY23 was not without its challenges. We experienced headwinds in terms of currency impact, online contraction, and deal scrutiny, which continued into Q4. And a few weeks ago, we made the very tough but necessary decision to reduce our team by 15% and say goodbye to around 1,300 hardworking, talented Zoom colleagues. I want to extend to them my heartfelt appreciation and deepest gratitude for their crucial contributions to Zoom. This painful exercise has been a tremendous learning experience for us. It allows us to look inward to reset ourselves so we can weather the economic environment with greater focus and agility, deliver for our customers, and achieve Zoom’s long-term vision. Now let me discuss our strategic focuses in FY24 and beyond. First, we’ll help redefine teamwork through offering new immersive experiences that improve employee engagement and modern collaboration tools for ideation across locations and modalities. And we will give teams everything they need through a single pane of glass. Second, the age of AI and large language models has arrived and we want to empower smarter experiences and workflows that truly enable our customers to benefit from these transformational tools. By embedding AI into more workflows, we can provide our customers with richer, more actionable insights that empower them to work smarter and serve their customers better. Zoom IQ, Zoom Virtual Agent, as well as our translation, captioning, and meeting summary tools are just the beginning. We will layer more AI technologies into our products to truly help our customers maximize their ROI on our platform and thrive in this new era of computing. Third, we will offer more and more departments tailored solutions to meet their nuanced digital transformation needs. We constantly solicit feedback not only from CIOs, but also heads of sales, customer experience leads, and many other leaders across various industries. Zoom IQ for Sales was built in this collaborative fashion and has already added tremendous value to many sales teams. You can expect additional industry-specific and department-specific applications developed both by us and our third-party partners. All of this comes together as a collaboration platform that unites people to unlock their potential, enables more dynamic and intelligent experiences, and allows us to reimagine productivity and work. As we navigate this period of technological and economic volatility, our role as a trusted partner providing best-in-class unified communications services has never been more crucial. Again, this is a tremendous opportunity in front of us, and we are very confident that our strong foundation, ambitious vision, and customer-centric culture will enable us to seize this opportunity and continue to lead the way in the unified communications and collaboration space. Now moving on to some of our customer wins. I want to thank Aramco, one of the world’s leading integrated energy and chemicals companies, for establishing a strategic partnership with Zoom. This is a landmark multi-year partnership where we will provide a full suite of collaboration services including Zoom Meetings, Team Chat, Phone, Events, and Zoom Rooms. In addition, we will work together to build a data center in the region and explore the joint development of innovative technology solutions. We are so grateful that Aramco has chosen to partner with Zoom on their digitization strategy. I’d also like to thank NASDAQ, my favorite company, who has been a Zoom customer for several years. Recognizing Zoom’s strong reliability, security, and ease of use, they expanded to Zoom One, our all-in-one unified communications and collaboration bundle. As part of this expansion, NASDAQ will be deploying Zoom Phone and also adding capabilities like Translation and Advanced Whiteboard to their Zoom Meetings. I want to also thank Raymond James, a leading financial services company, for expanding their relationship with us by integrating Zoom Phone into their Zoom Meetings implementation for a more complete communications package. We are excited to work with Raymond James to provide a highly reliable and secure system, enabling their employees to communicate, collaborate, and ultimately thrive in the hybrid work world. I want to also thank Barracuda Networks, which builds cloud-first, enterprise-grade security solutions, for expanding with Zoom. A longstanding Zoom Meetings customer, Barracuda saw the value of having a single platform for all their communications needs and upgraded wall-to-wall to Zoom One Enterprise Plus in Q4. In addition, Barracuda also chose Zoom IQ for Sales to enhance sales engagement and Zoom Contact Center to elevate the customer experience. Again, thank you Aramco, NASDAQ, Raymond James, Barracuda Networks, and all of our customers worldwide. And before closing, let me express my warm welcome to Cindy Hoots for joining our Board of Directors. Cindy brings a wealth of experience and currently is the Chief Digital Officer and Chief Information Officer at AstraZeneca. We are so excited to work with her. I also want to welcome our new Chief Product Officer, Smita Hashim, who joins us following a seasoned executive career at Microsoft and Google. We are also super excited to work with her. And with that, I'll pass over to Kelly. Thank you.

Kelly Steckelberg, CFO

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY '23 and the results for Q4 and then provide our outlook for Q1 and FY '24. We delivered solid results in FY '23. Here were some of the highlights: Our Enterprise business grew 24%. Our non-GAAP operating margin was 35.9%, and we achieved a free cash flow margin of 27%. In Q4, total revenue came in at $1.118 billion, up 4% year-over-year and 6% in constant currency. This result was approximately $13 million above the high end of our guidance. The growth in revenue was primarily driven by strength in our Enterprise business, which grew 18% year-over-year and represented 57% of total revenue, up from 50% a year ago. We expect Enterprise customers to comprise an increasingly higher percentage of total revenue over time. From a product perspective, we had strong growth in Zoom Phone, coupled with contributions from Zoom Rooms and other products. Online average monthly churn decreased to 3.4% from 3.8% in Q4 of FY '22 and increased slightly from 3.1% in Q3 as expected due to seasonality. The number of Enterprise customers grew 12% year-over-year to approximately 213,000. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q4 came in at a healthy 115%. We saw a 27% year-over-year growth in the upmarket as we ended the quarter with 3,471 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 28% of revenue, up from 23% in Q4 of FY '22 and span diverse industries such as healthcare, education, government, and more. Our Americas revenue grew 10% year-over-year. EMEA continues to be impacted by the stronger dollar, macro headwinds, and online performance, which combined led to a decline of 9% year-over-year. APAC, also impacted by the stronger dollar, declined 5% year-over-year. Now turning to expenses and margins. A quick note on our GAAP results. In Q4, they included a one-time stock-based compensation expense of $208 million due to the sunsetting of our supplemental grant program, which carries neither dilutive nor tax deduction impacts. 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, and all associated tax effects. Non-GAAP gross margin in Q4 was 79.8%, an improvement from 78.3% in Q4 of last year and 79.5% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our co-located data centers. For FY '24, we expect non-GAAP gross margin to be approximately 79.5%. Research and development expense grew by 43% year-over-year to approximately $103 million. As a percentage of total revenue, R&D expense increased to 9.2% from 6.7% in Q4 of last year, reflecting our investments in expanding our product portfolio. Looking ahead, innovation will remain a top priority for Zoom. Sales and marketing expense grew by 20% year-over-year to $301 million. This represented approximately 26.9% of total revenue, up from 23.4% in Q4 of last year. As part of our restructuring, we are optimizing our go-to-market strategy to better support our enterprise customers and drive additional productivity. G&A expense declined by 12% to $84 million or approximately 7.5% of total revenue, down from 8.9% in Q4 of last year as we focused on achieving greater efficiencies in our back office. Non-GAAP operating income was $405 million, exceeding the high end of our guidance of $326 million as we took actions to reprioritize our investments in Q4. This translates to a 36.2% non-GAAP operating margin for Q4 as compared to 39.2% in Q4 of last year. Non-GAAP diluted earnings per share in Q4 was $1.22, $0.44 above the high end of our guidance. Due to our share repurchase program, our Q4 weighted average share count has decreased year-over-year by approximately 5 million shares to 301 million. Turning to the balance sheet. Deferred revenue at the end of the period was $1.3 billion, up 11% year-over-year from $1.2 billion. This is above our guidance as we saw increased commitments from customers and extended contract durations. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.4 billion, up 30% year-over-year from $2.6 billion. We expect to recognize approximately 56% of the total RPO as revenue over the next 12 months as compared to 63% in Q4 of last year. As a reminder, our annual seasonality of renewals is weighted towards the first half of the year. We expect Q1 deferred revenue to be up 0 to 1% year-over-year, partially due to the strengthening of the dollar starting late in Q1 of FY '23. Since then, the major currencies we do business in are down 5% to 10% vis-a-vis the dollar. 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 $212 million, up from $209 million in Q4 of last year. Free cash flow was $183 million as compared to $189 million in Q4 of last year. Our margins for operating cash flow and free cash flow were 18.9% and 16.4%, respectively. Due to the Section 174 tax legislation requiring capitalization of R&D expenses was not repealed in FY '23, we incurred an additional cash tax payment in Q4. Despite this payment, we still exceeded the high end of our previously provided range by $36 million for a full year total of $1.186 billion. For FY '24, we expect free cash flow to be in the range of $1.2 billion to $1.25 billion. Now turning to guidance. For the first quarter of FY '24, we expect revenue to be in the range of $1.08 billion to $1.085 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 $374 million to $379 million. Our outlook for non-GAAP earnings per share is $0.96 to $0.98 based on approximately 304 million shares outstanding. This outlook reflects the three fewer days in Q1 versus all other quarters. For the full year of FY '24, we expect revenue to be in the range of $4.435 billion to $4.455 billion, which at the midpoint represents approximately 1% of year-over-year growth or 2% in constant currency. We expect our non-GAAP operating income to be in the range of $1.606 billion to $1.626 billion, representing a non-GAAP operating margin of approximately 36%. Our tax rate is expected to approximate the blended U.S. federal and state rates. Our outlook for non-GAAP earnings per share is $4.11 to $4.18 based on approximately 309 million shares outstanding. Zoom is dedicated to maintaining a careful balance between growth and profitability. We remain committed to innovating our platform, optimizing our go-to-market motions, and evolving our culture to meet the dynamic needs of the market. We are confident that our continued investment in innovation will enable us to provide an even greater value to our customers while also positioning us for sustained growth. Thank you to the Zoom employees, our customers, our community, and our investors. Kelcey, please queue up our first question.

Operator, Operator

And our first question will come from Fred Lee with Credit Suisse.

Fred Lee, Analyst

Kelly, just a question regarding the full year operating margin guide, which looks like it's coming in around 5 percentage points above consensus. I was wondering if you could break down where those efficiencies are coming from, how much was coming from the RIF versus efficiencies in other operating expense line items.

Kelly Steckelberg, CFO

Yes. Thank you. So as I mentioned in the prepared remarks, we started really focusing on driving efficiencies across the business in Q4, as you saw in the results. This came from looking across all third-party spend and then as we moved into Q1, of course, the reduction. And so it's really a combination of that, as well as looking across all of our business processes, including go-to-market where there's a restructuring happening to really focus the resources on our enterprise customers and be as efficient as we can in our commercial and small business teams.

Fred Lee, Analyst

Got it. I have a quick question for Eric. With all the developments in AI and generative AI, you've mentioned some new product areas where you expect to see initial effects. How would you explain the uptake of generative AI to investors and us? Any additional thoughts on that would be greatly appreciated.

Eric Yuan, CEO

Sure. That's a great question about AI. It reminds me of the excitement during the Internet's early days in 1995 and 1996, which is why I moved to Silicon Valley. Since then, I've been focused on real-time collaboration. Speaking of AI, I feel just as excited now, if not more so, given my engineering and product experience. While AI presents challenges, there's also a significant opportunity ahead. Our strong culture of innovation positions us well to leverage AI to enhance Zoom's offerings. I believe Zoom could become an AI-first company. We've already made investments in AI beyond what some customers might notice, like noise reduction and background removal. Recently, we introduced the Zoom Smart Meeting Summary feature, which utilizes GPT-3 to enhance our machine learning. We're committed to expanding AI across various features, including Virtual Agent and Zoom IQ for Sales. I truly believe AI will empower our work and benefit our customers. Additionally, we are adopting an open approach by employing our own AI engineers and collaborating with other companies, including our recent partnership with OpenAI. I'm genuinely excited about the potential of AI.

Operator, Operator

And Michael Funk with Bank of America has the next question.

Michael Funk, Analyst

Okay. First for you, Eric. The cash balance is a significant strategic asset for Zoom, especially today when many of your competitors lack that flexibility. What do you believe is the reasoning against using that cash to enhance your advantage and boost your capabilities?

Eric Yuan, CEO

So when it comes to money, it's better to delegate it to Kelly, probably she is better to manage that.

Kelly Steckelberg, CFO

Thank you, Michael. I don't think there is any argument against deploying our cash, certainly to continue to advance our technology and customer base. As I said, we are constantly looking for opportunities. And as I've mentioned in the past, we have kind of three main criteria, of course, we look at. We look at the technology as we want to make sure that we would be providing our customers something that works as well as the core of Zoom does today. We look at the culture to make sure that the organizations could come together very well, very seriously. And Eric and the whole executive team have spent a lot of time focusing on building that. And last but certainly not least, is valuation. That has been tricky in the past. We've seen great assets that we love, but we just couldn't get there, unfortunately, as all of you know. And so we now see that becoming easier and easier. So I will tell you that Sanjay and his team have been very busy continuing to look for targets for us, and it certainly is a part of our strategy that we're considering for FY '24.

Michael Funk, Analyst

And Kelly, while I have you, back to the earlier question about the change in operating income from fiscal '23 to fiscal '24. We estimated about a $260 million benefit from the RIF. Is there a mistake in my calculations regarding that?

Kelly Steckelberg, CFO

We're not going to get into the specifics around the reduction. I will tell you, it was pretty consistently applied across the company, the 15% that Eric mentioned, across the organizations as well as the U.S. and some of our other locations outside of the U.S. So you can take that into consideration as you're calculating what you think the savings are.

Operator, Operator

We will now move on to Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Great. Maybe, Kelly, just for you to start with, maybe versus where we were 90 days ago when you were kind of talking about low to mid-single-digit potential for fiscal '24. Just trying to get a sense of is kind of the incremental conservatism? Is that more around the enterprise or the online business, particularly given that you did see some kind of stabilization in the online business in the quarter?

Kelly Steckelberg, CFO

Yes. I wouldn't say we were providing specific guidance on the Q3 call. We aimed to offer some visibility, but we were still in the process of our fiscal year '24 planning. As we collaborated with the go-to-market teams and made decisions regarding the team and the reductions, we reached the guidance we have now shared. We are still facing headwinds we previously mentioned, including challenges with currency. In Q1, we will experience some year-over-year impacts, particularly because the dollar strengthened significantly in the latter half of last year's Q1. Therefore, you can expect to see these year-over-year effects along with the adjustments in the go-to-market teams as we work on aligning everyone. All of these factors were taken into account when we established the fiscal year '24 guidance.

Meta Marshall, Analyst

Got it. And then maybe, Eric, in the past, you guys have wanted to have kind of this singular Zoom platform and let the third-party apps be where you would kind of do the departmental or industry use cases. It sounded like there was some departure from that. So I guess I just wanted to get a sense of are there going to be different Zoom editions for some of these different verticals? Or will it still kind of be largely third-party driven?

Eric Yuan, CEO

Yes, I think that's a good question. First of all, I don't think that we will depart from what we are trying to do before, so meaning more like an augmentation of whatever we're doing now. Because given a lot of new opportunities, I do not think everything should be done by our own developers, right? And that's why we also want to leverage the third party. I do not see this as a strategic shift; it’s just more of an augmentation of what we're doing today.

Operator, Operator

And we'll go ahead and move on to Mark Murphy with JPMorgan.

Mark Murphy, Analyst

So you've added so much value into the product. When we look at the amount of recording storage, the whiteboarding, you have email and calendar clients and so much more that's on the come. Could you update us perhaps on your pricing strategy and whether you think this could be the right time to perhaps increase prices a bit or even just go out and activate a CPI adjustment that would benefit you?

Eric Yuan, CEO

Yes, Kelly, please go ahead.

Kelly Steckelberg, CFO

We have announced a price increase for our online customers that will take effect on March 1, as we shared earlier this month. This increase applies only to monthly customers, not annual ones. We believe this change reflects the value we have created for our customers over the past few years, noting that it has been many years since the last price increase. Additionally, on the Enterprise side, we updated our pricing for Zoom One, the bundle introduced last year. We believe this pricing structure represents the best way for our customers to purchase and fully utilize the platform while considering all the included products, and we feel this is an appropriate price point at this time.

Mark Murphy, Analyst

Okay. But so nothing planned outside of Zoom One on the Enterprise side and nothing more material than what you had already announced?

Kelly Steckelberg, CFO

Yes. That's right.

Operator, Operator

Piper Sandler's James Fish has the next question.

Quinton Gabrielli, Analyst

This is Quinton on for Jim Fish. In terms of the longer-term vision for Zoom, how is the team thinking about the maturity of the core meetings and phone products at this point, especially following what was a really strong Phone quarter in Q4? Do we need adoption of emerging products like Contact Center and email or calendar to re-accelerate growth as we look to '25 and '26? Or are there catalysts that can help the core products kind of reaccelerate from the guided 2024 levels?

Eric Yuan, CEO

I believe we need to concentrate on both aspects. Taking Phone as an example, the market potential remains significant, and we are performing exceptionally well thanks to the product's reliability and strong innovation, which distinguishes us from other phone service providers. This is why I see a substantial growth opportunity in our core business. Additionally, new products such as Zoom Contact Center, Virtual Agent, and Zoom IQ for Sales, along with more department-specific applications, especially in AI, present a wealth of new opportunities. I think we will experience a transition period in the second half of this year, especially since we launched Contact Center early last year, similar to Zoom IQ for Sales. However, the new services and those in the pipeline will support us. It's essential to focus on both areas. Our model is designed as an all-in-one collaboration platform, allowing users to accomplish most of their work within the Zoom interface. This is the direction in which our business is evolving.

Operator, Operator

Rishi Jaluria with RBC has the next question.

Rishi Jaluria, Analyst

I just wanted to have one, which I wanted to dive a little bit deeper into some of the new features I think you're seeing. I know Mark brought out earlier, but if you think about chat, email calendaring. Just to the extent possible, I would love to hear what you've seen in terms of actual uptake rates of these features, right? Because it's available to anyone who's on Zoom One, but probably are actively using it. And if you think about those customers who are using these additional features or modules, what are you seeing from those customers in terms of anything like engagement, time spent on the platform retention, ARPU expansion rates, anything like that? Because I think that would really help us get some color in terms of your ability to expand into a broader Enterprise communication platform.

Eric Yuan, CEO

Yes, that's a great question. Last year, we developed over 1,500 features, and our team put in a tremendous effort. However, we recognize that we need to improve product adoption. While we completed the development of these features, it's essential to ensure customers are aware of them. This is a critical focus for us this year. Many customers are eager to find value in our new features. For example, NASDAQ wants to streamline meetings with a Whiteboard feature they really like. We also offer Team Chat, a precise chat solution that many enterprise customers have deployed, seeing its value and often paying for additional services. Zoom provides a very scalable and flexible solution, and once customers discover and test it, they tend to expand into other features like Zoom IQ for Sales. Although we have many innovations, we should prioritize product adoption and emphasize the value of the Zoom platform. Many, if not all, users utilize Zoom Team Chat, and I am confident that it’s significantly better, along with Whiteboard. Overall, we have numerous features and innovations, and our focus should be on adoption.

Operator, Operator

And we will now hear from Matt Vanvliet with BTIG.

Matt Vanvliet, Analyst

I guess on the last point, Eric, curious maybe if you could share a few details or some of the winning points around the Contact Center product. What's driving the adoption there? Are you seeing replacing existing Contact Centers? Or are some of these sort of net new where video is going to be a key component, whether it's field service or things of that nature where video really lends an extra help to it?

Eric Yuan, CEO

Yes, great question. So on the product front, we launched it early last year, right? and are almost at its one-year anniversary. I think we are going to keep innovating, and essentially, look at our current customer base. We just closed a 2,000 seat contact center solution. We’ve tested everything well. Zoom Contact Center works very well, not only as a tool for internal IT helpdesk support agents. A lot of features are already built-in. I think the product team is adding more and more features very quickly, and I have huge confidence in our product team. However, on the go-to-market side, I think we could have done a better job. The buyer is different, so that's been a learning experience for us. The good news is that over the past 12 months, we learned a lot. We are working on our go-to-market strategy to make sure that all those traditional customers deploying on-premise solutions or utilizing other cloud contact centers are aware that Zoom offers very scalable contact center solutions much like those provided by third-party resellers. We also need to adapt our go-to-market model for contact centers since the product delivers significant benefits. So that part, I think we need to focus on this year.

Operator, Operator

And our next question will come from Tyler Radke with Citi.

Tyler Radke, Analyst

So clearly, the profitability guidance was much stronger than consensus and you've talked about some of the hard decisions you've made with regards to restructuring. Kelly and Eric, I'm wondering just about your willingness to expand margins from here. Obviously, you're guiding to a pretty low revenue growth for the coming year of about 1%. But how do you just think about the puts and takes on future margin expansion from here in a scenario where you don't get a reacceleration in total revenue?

Kelly Steckelberg, CFO

Tyler, we are consistently striving to maximize our gross margin efficiency. As mentioned, we anticipate it to be 79.5% for next year, which is in line with our long-term margin goals. With regards to our operating margins, we always seek opportunities to invest in growth, and that is our focus. We will continue to evaluate and pursue opportunities throughout the year. If we identify chances to invest in go-to-market strategies or channel programs that can enhance our top-line growth, those will take precedence. However, as noted earlier, we will maintain a balance with profitability. We are committed to the guidance we've established, and I do not foresee us expanding beyond that at this point. Our primary goal is to enhance efficiency in go-to-market efforts and broaden our product range.

Operator, Operator

UBS's Karl Keirstead has the next question, but Kelly and Eric, he's on audio only. So he won't appear to you via video. Karl, go ahead.

Karl Keirstead, Analyst

I'm good. Thank you. Sorry.

Operator, Operator

No problem with that. In that case, we'll move on to Siti Panigrahi with Mizuho.

Sitikantha Panigrahi, Analyst

Thanks for taking my question, Kelly and Eric. So when you think about this year's growth, I know you're expecting some online segment to bottom at some point. So what's your expectation when you think about online segment versus enterprise? I know this is, again, renewal will come in Q1, Q2. And what are you now pushing to our customers during renewal? I know last few years, it's been Phone. So what other products are you currently promoting during renewal?

Kelly Steckelberg, CFO

So regarding our expectations for online this year, they remain in line with what we have communicated over the past few quarters. We anticipate stabilization in mid-next year in terms of dollar amounts, as we have seen a declining trend quarter-over-quarter for about five or six quarters. By the second and third quarters of next year, we expect that to begin stabilizing, which is promising. In terms of our initiatives, while renewals haven't been strong, there is an opportunity to engage our Enterprise customers with Zoom One, our platform bundle. We believe this can help prospects and customers fully understand the platform's features, especially during the renewal period. As we indicated, we expect strong renewals in the first quarter. However, we are still facing the currency impact we have encountered from the second to fourth quarters. Unfortunately, we have one more quarter to compare against last year's results, which will bring some challenges and headwinds.

Operator, Operator

And Sterling Auty with SVB MoffetNathanson has the next question.

Sterling Auty, Analyst

Kelly, maybe just to clarify on that last answer, now that we're in fiscal '24 on that online answer you just gave, you meant that we'd see the turn Q2, Q3 of this fiscal year, correct?

Kelly Steckelberg, CFO

Yes, this fiscal year, yes. For FY '23.

Sterling Auty, Analyst

I just want to make sure people didn't think fiscal '25.

Kelly Steckelberg, CFO

Not FY '25. No. Thank you, Sterling.

Operator, Operator

You're welcome. So in terms of questions, I want to take the other side of it and go to the enterprise. What's built into the expectation for full year revenue around the enterprise and maybe dive into at least some qualitative commentary around net retention and what you expect on renewals from customers and what you're expecting from the contribution of new customers. So what needs to happen for the enterprise to deliver that side?

Kelly Steckelberg, CFO

We anticipate that renewals will continue at a similar rate to what we've seen over the past year. We’ve observed some reductions in seat counts as organizations globally are undergoing cutbacks, and we are addressing that situation. However, there's a considerable opportunity to provide substantial value to our customers through our total cost of ownership, which involves expanding our entire portfolio. As you may have noticed, our Phone product has performed exceptionally well in this economic climate. While the Contact Center segment is small in terms of absolute values, it saw a doubling of annual recurring revenue from the third quarter to the fourth quarter. Again, it may be modest in terms of overall dollars, but it’s exciting to see its growth. We expect this upward trajectory to continue throughout this year and really begin to pick up speed in fiscal year 2025, and I specifically mean fiscal year 2025 with that statement. Additionally, Zoom IQ for Sales is following a similar growth path in the contact center space, contributing small amounts now but showing overall growth acceleration.

Operator, Operator

We'll now hear from Matt Stotler with William Blair.

Matthew Stotler, Analyst

Maybe just one on a follow-up on Zoom One. You mentioned some strength there, obviously, relatively early days; a couple of quarters in. I would love to get some color on maybe the portion of new customers that are going with the Zoom One bundle versus other paths to buying Zoom products? And then what the characteristics are that you're seeing of those early adopters, right? both in terms of customer size, whether they're adopting that for specific departments and rolling that out like you've seen with the core meetings product historically. Any color there would be helpful.

Kelly Steckelberg, CFO

I find it remarkable and intriguing that with Zoom One, it's not only new customers purchasing the bundle but also existing clients that are upgrading. This bundle includes Zoom Meetings and Zoom Phone, along with Team Chat and Whiteboard. We're beginning to see customers fully embrace the capabilities of the platform. For instance, we have a Fortune 10 customer, a long-time client of ours, who has transitioned to the Zoom One bundle and standardized on Zoom Team Chat, which we are thrilled about. This illustrates what can happen when customers recognize the full value we offer. I don't have the exact breakdown for Q3 or Q4, but it's clear that this offering is becoming a key focus for our enterprise sales teams. Eric, do you have anything to add?

Eric Yuan, CEO

No, that's great.

Operator, Operator

Moving on to Kash Rangan with Goldman Sachs.

Kasthuri Rangan, Analyst

Good to see you guys, Eric and Kelly. I just wanted to understand how we should reconcile the guidance going forward vis-a-vis what seems to be pretty close to the anniversary effect of the SMB attrition and then we should start to really mirror the growth of the so-called enterprise business, but the guidance still seems to be quite conservative. And just help us understand what might have happened at a higher level, incrementally relative to this anniversary effect and what we should be seeing by this time, a real acceleration of the business.

Kelly Steckelberg, CFO

Sure. One thing to remember, Kash, is that while we are expecting the online portion of the business to stabilize from a dollar perspective during the year, it is still down year-over-year because of what happened in FY '23, where it was much higher. The dollar amounts were much higher in those earlier quarters as it came down. So we still have the unfortunate impact of the online segment of the business tamping down the growth of the Enterprise business. That’s what you’re seeing reflected there. The stabilization that occurs this year will really help as we look forward to next year, which we've always said is sort of a re-acceleration to the back half of this year into FY '25. That’s what we see in our internal models today.

Kasthuri Rangan, Analyst

Got it. I'm curious, Kelly, why does it take until fiscal '25 to see the net effect, which will be positive? Can you help us understand the timing of why it takes another year from now?

Kelly Steckelberg, CFO

There’s a combination of factors at play. Online performance is still down compared to the same period last year. We expect to see some stabilization in year-over-year online metrics in the second half of this year. While the dollar amounts are beginning to stabilize, the year-over-year comparisons remain negative until late this year. We have seen positive momentum with Zoom One and Zoom Phone, but part of the anticipated growth is linked to newer products that are still at an early stage. If we recall, Zoom Phone in its second year was similar to where Zoom Contact Center and Zoom IQ for Sales are now. Now that Zoom Phone is nearing its fourth year, we see its significant contribution. We just need a bit more time for these new products to mature and start making a solid impact.

Operator, Operator

We'll now hear from Bernstein's Peter Weed.

Peter Weed, Analyst

Maybe I'll follow up on that and kind of reinforce what appears to be a reasonably conservative revenue guide this year when we start to think about some of the things you've chatted about earlier in this conversation, everything from stabilization in the online business, which may even do better than that, perhaps, hopefully, with some of the pricing increases that go on and all of the product that you've been shipping. When we take into account the fact that a year ago, on the top line, this business was even a little bit smaller than what we're anticipating in quarter one, this upcoming year might be. Help me understand why we would do as poorly as only a 1% year-over-year, like what's the downside case that gets us there? Or is this more of an opportunity to perhaps start to see some of the lift coming out of here?

Kelly Steckelberg, CFO

So remember, for Q1, there is the definite impact of being three fewer days, which has real impact as compared to three fewer days of revenue recognition as well as the impact of currency, which we didn't have last year. So that year-over-year impact is going to definitely be visible in Q1 of FY '24. We continue to see in the Enterprise elongated sales cycles, deal scrutiny. I was chatting with a fellow CFO; this is the year of the CFO because I have received more invitations to speak at sales kickoffs this year than you can imagine because every sales team is learning how to sell to the CFO, including ours. This means it’s taking a little bit longer and everyone is being very thoughtful about their purchases. All of that was taken into consideration as we set our full year guidance.

Peter Weed, Analyst

I guess many of those things are stuff, I guess, in the second half of the year. You have been addressing and are carrying forward, so they're not kind of brand new. I would think that some of this unless you are anticipating another leg down for some reason. Are there any additional legs down relative to things you have been already seeing in the business? Or is this just conservatism on like we just don't know how long this stuff is going to really be impacting? And we can't really say how much people are going to be purchasing the Zoom One bundle, which is kind of the standard thing that you're putting out, really how well people are going to react to price increases this year, so that it's really created a floor on which we hope to do better than.

Kelly Steckelberg, CFO

I definitely think there is a question as to the state of the economy. When it comes to investments, while we think we are incredibly well positioned with our total cost of ownership and the value we bring to our customers, everybody is being very cautious until there's better visibility about the potential of a recession or not and where we're going to come through this. We expect that could impact us at least through the rest of this year.

Operator, Operator

Taz Koujalgi with Wedbush has the next question.

Imtiaz Koujalgi, Analyst

Two questions, one for Eric. Eric, when you spoke about the traction of Zoom One in the quarter. I understand that it's still pretty early, but when you sell a customer Zoom One from Zoom Meetings, what is the typical uplift you're seeing in the deal sizes? Let's say somebody has Zoom Meetings today and that were to Zoom One, what is the kind of the uplift you get in deal value there?

Eric Yuan, CEO

Yes. Normally, it is a great question. It comes from upmarket opportunities. A lot of our SMB customers do not use features like Whiteboard and others. As Enterprise customers, given the economic uncertainty and the drive for cost reduction, they wish to consolidate into one platform. When corporates investigate the Zoom product, they explore what other services and features they can leverage, including Whiteboard, Team Chat, Contact Center, and Zoom IQ for Sales — which offer significant upsell opportunity. It is an excellent time for those upmarket customers, especially commercial and enterprise, right? They’re already trusting our brand, aware of the service improvements, so why not deploy Zoom Whiteboard? That’s a prime example.

Imtiaz Koujalgi, Analyst

What has been the increase in revenue you've experienced from the initial deals? Typically, what kind of growth do you notice when a customer transitions from using just Zoom Meetings to adopting Zoom One? What is the increase in deal value that you see?

Kelly Steckelberg, CFO

It really depends on the customer. However, I would highlight that it's not just the increase in the dollar amount; it's the retention we experience that is crucial for us. Customers who use more than one product tend to have significantly improved retention rates, as we demonstrated on Analyst Day, showing that retention rates increase by more than 50% when multiple products are deployed. The advantage of having a more comprehensive platform, including services like Zoom Chat and Zoom Phone, offers substantial value to us.

Operator, Operator

And we will now hear from Matthew Harrigan with Benchmark.

Matthew Harrigan, Analyst

I'm sorry, I tried to take myself out of the queue. I sent the message.

Operator, Operator

No problem at all. Thanks, Matthew. All right. Well, we'll go ahead in that case and move on to William Power with Baird.

William Power, Analyst

Great. A lot of my questions have been answered, but I did want to ask about Zoom Phone. It looked like a particularly strong quarter. I think the push around Zoom One is probably helping. But it would be great to get any other perspective on what seems to be a nice acceleration there in Zoom Phone adoption? And any color you're able to provide just around pricing trends? And when does this become a 10% revenue component?

Kelly Steckelberg, CFO

In terms of when it's going to become 10%, we anticipate that early in FY '24, in September. We are excited about the momentum. We had a 100% year-over-year growth in the product. You get it's back to even in this economy and especially in this environment, companies are looking for opportunities to standardize on one vendor. There is a lot of value gained by eliminating those on-prem servers and utilizing our competitively disruptive price point. It's all proving to be very attractive. As Eric mentioned, there's still a lot of opportunity in the market available. We expect that to continue. Just to remind everybody, Q2 and Q4 tend to be our peak quarters for Zoom Phone adds. While we had an amazing number of additions in Q4, I don't expect that to be the new bar. We expect to see some seasonal dip in Q1, but still very excited that the momentum continues to trend up.

Operator, Operator

JMP Securities' Patrick Walravens has the next question.

Patrick Walravens, Analyst

Great. I have a really fun question for Eric. So Eric, in 2021, you guys invested in Cvent, before their deal you also invested in Monday. So how do you feel about those two spaces today? How do you feel about the event technology space? And how do you feel about collaborative work management?

Eric Yuan, CEO

Given this is a Phone question, maybe I should launch ChatGPT to answer your questions; it’d be better. So I might give you a fun answer. Well, anyway, I think monday.com is interesting, right? Because the reason why I invest in them is a lot of our customers, especially in Europe, also deploy the service. They would like to integrate with us; they’re also Zoom customers as well. I think, as far as I know. And I think it’s all about customer perspective, working together to integrate with them. That's the reason we invested in them. For Cvent, during COVID, a lot of customers deployed our Zoom for more webinars and Zoom Events. Especially for those hybrid events, we are more like a pure technology platform, right? We’re also involved in some components to ensure we have streamlined your event management. That's why we partnered with Cvent. We see the opportunity to further solidify our leadership; why not invest in them? I think now it's more about ensuring support for hybrid work. I think Cvent will do well. That's the essence, yes. So that's pretty much my analysis.

Operator, Operator

We do have time for one additional question that will come from Ryan MacWilliams with Barclays.

Ryan MacWilliams, Analyst

My question is kind of in the same spirit as Pat's question. But Kelly, looks like you filled the remaining amount of your share repurchase authorization this quarter? I guess, how are you thinking about a new authorization for a buyback? And in terms of M&A, would Zoom potentially look at acquisitions where you already have a competing product today? Or are you generally looking at adjacent solutions?

Kelly Steckelberg, CFO

In terms of M&A, we look at both. We've been very successful in the past by acquiring technology tuck-ins to accelerate our development, as you've seen with the Saudi acquisition, which has been a great accelerant for us in terms of Contact Center and continues to look at those but also looking at areas where there might be leaders in the space that makes sense for us. We're still looking at both. Every quarter, we discuss our capital allocation strategy with our Board. Of course, M&A is at the top of the list. We do not, as you indicated, have a buyback authorization in place today. We will continue to look for opportunities to deploy our capital in the best way possible for our investors. Right now, as I said earlier, our #1 focus is re-accelerating top-line growth and making sure that we have the flexibility to pursue opportunities as they arise. That’s why, for now, we’ve decided to hold off on requesting a buyback authorization.

Operator, Operator

And again, everyone, that does conclude our Q&A for today. I'll go ahead and pass it back to you, Eric, for any closing or additional comments.

Eric Yuan, CEO

Thank you, all. Really appreciate your time. Love you all. Thank you. Take care.

Kelly Steckelberg, CFO

Bye, everybody.

Operator, Operator

Thank you. And again, everyone, this does conclude today's earnings release. As always, we thank you all for your participation, and we look forward to seeing you again in the spring and summer. Until then, take care and enjoy the rest of your day.