Earnings Call Transcript - ZM Q3 2024

Operator, Operator

Well, hello, everyone, and welcome to Zoom's Q3 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 third quarter of FY ’24. 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 fourth 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 that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including the Annual Report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar. And with that, let me turn the discussion over to Eric.

Eric Yuan, CEO

Hey. Thank you, Tom. Thank you everyone for joining us today. In early October, we hosted Zoomtopia, our yearly customer and innovation-focused event, and it was awesome. Like last year, we ran it hybrid on Zoom Events, thousands joined us in person and many multiples of that virtually. Among the in-person attendees were 40 customer presenters such as JP Morgan, MIT, Boston Consulting Group, HubSpot and Kohls, who spoke about their amazing experiences on Zoom and excitement about the future. We also showcased newly-released innovations like Zoom AI Companion, as well as Zoom AI Expert Assist and Quality Management for the Contact Center. Zoom AI Companion is especially noteworthy for being included at no additional cost to our paid plans and has fared tremendously well with over 220,000 accounts enabling it and 2.8 million meeting summaries created as of today. Remarkable growth in less than three months. At Zoomtopia, I also had the pleasure of sharing the stage with Flex, a global manufacturing and supply chain leader, who spoke about how they use Zoom to connect their large, distributed workforce of 170,000 employees across 30 countries. Flex started using Zoom Meetings in 2017, quickly followed by Rooms and Team Chat. Since then, Flex increased Team Chat users by 200% and Zoom Rooms by 245%. They also became power users of Zoom Whiteboard, creating over 13,000 Whiteboards. And moving to Zoom Phone allowed them to eliminate 50 to 70% of circuits and infrastructure across the globe and reduce total cost of ownership. We were so happy to have Flex share their journey at Zoomtopia, and I can't wait for what is in store for our partnership next. Now moving on to some of our customer wins in Q3. First, let me thank Dropbox, who has been an amazing customer for many years starting with Meetings and then extending to Rooms, Phone and Events. In Q3, they selected Zoom Virtual Agent and Zoom Contact Center to provide world-class AI-enabled support to their global user base. Let me also thank Amynta Group, a premier insurance services company, who initially adopted Zoom Phone and Zoom Contact Center on a limited scale in Q1 of this year. Seeing how our modern solution offered superior agility, customization for CX flows and administrative functionality. In Q3, they decided to standardize their customer-facing sales support on the Zoom stack and add Workforce Management, leading to a nearly 5-fold increase in their monthly spend with us. I’d also like to congratulate the Virgin Group on their launch of Workvivo to bring together 60,000 employees across almost 40 Virgin companies on one platform. The Virgin Family Workvivo platform is helping to drive social connection, encourage collaboration and boost brand knowledge. It’s inspiring to see how the Virgin Group is bringing the platform to life and strengthening culture with Zoom’s Workvivo. These wins are a testament to the investments we are making in our customer experience offering, with the rapid pace of new innovations like Workforce Management, Quality Management, Zoom Virtual Agent and AI Expert Assist. They also highlight our progress with employee experience, especially with integrating Workvivo into the Zoom client. Thank you so much to Dropbox, Amynta and Virgin Group. I love you all. 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 Q3. Here are a few milestones: First, Zoom Phone reached approximately 7 million paid seats. Second, Zoom Contact Center reached approximately 700 customers as of quarter-end, while Zoom Virtual Agent customers nearly doubled quarter-over-quarter. And finally, the number of customers on Zoom One bundles that include Zoom Phone grew approximately 330% year-over-year. These proof points demonstrate our customers’ willingness to entrust us with their critical CX and EX processes, and their commitment to grow with us as we expand our platform. In Q3, total revenue came in at $1.137 billion, up 3% year-over-year and 4% in constant currency. This result was approximately $17 million above the high end of our guidance. Our Enterprise business grew 8% year-over-year and represented 58% of total revenue, up from 56% a year ago. We continued to see improvement in Online Average Monthly Churn, which decreased to 3.0% from 3.1% in Q3 of FY ‘23. This is the lowest churn we have ever reported. The number of Enterprise customers grew 5% year-over-year to approximately 219,700. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q3 came in at 105%. We saw 14% year-over-year growth in the up-market as we ended the quarter with 3,731 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 27% in Q3 of FY ‘23. Our Americas revenue grew 5% year-over-year, while EMEA and APAC declined by 2% each. On a constant currency basis, APAC grew slightly year-over-year. Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains or losses on strategic investments, and all associated tax effects. Non-GAAP gross margin in Q3 was 79.7%, an improvement from 79.5% in Q3 of last year, but slightly lower than the first half of this year. The strong performance in gross margin was primarily driven by the optimization of usage across the public cloud and our co-located data centers, partially offset by our additional investments in new AI technologies. For the full year, we expect non-GAAP gross margin to be approximately 80%. Non-GAAP operating income grew by 17% to $447 million, exceeding the high end of our guidance of $405 million. This translates to a 39.3% non-GAAP operating margin, a meaningful improvement from 34.6% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.29, on approximately 310 million non-GAAP diluted weighted average shares outstanding. This result was $0.20 above the high end of our guidance and $0.22 higher than in Q3 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.32 billion, down approximately 3% from Q3 of last year. This was roughly 1 percentage point better than the high end of the guidance we provided last quarter. For Q4, we expect deferred revenue to be down 6% to 8% year-over-year, partially driven by shorter billing frequencies on Enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, our RPO increased 10% year-over-year to approximately $3.6 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months, as compared to 59% in Q3 of last year, indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year. Operating cash flow in the quarter grew 67% year-over-year to $493 million. Free cash flow grew 66% year-over-year to $453 million. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management and higher interest income. Our operating cash flow and free cash flow margins expanded to 43.4% and 39.9%, respectively. Turning to guidance. For Q4, we expect revenue to be in the range of $1.125 billion to $1.13 billion, which at the midpoint would represent approximately 1% year-over-year growth. Adjusting for currency impact, this projection is slightly higher than the previously implied guidance from our Q2 call. We expect non-GAAP operating income to be in the range of $409 million to $414 million. Our outlook for non-GAAP earnings per share is $1.13 to $1.15 based on approximately 312 million shares outstanding. We are also pleased to raise our top-line and profitability outlook for the full year of FY ‘24. We now expect revenue to be in the range of $4.506 billion to $4.511 billion, which at the midpoint represents approximately 3% year-over-year growth. We expect our non-GAAP operating income to be in the range of $1.74 billion to $1.745 billion, representing an operating margin of approximately 39%. Our outlook for non-GAAP earnings per share for FY ‘24 is $4.93 to $4.95 based on approximately 308 million shares outstanding. Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support. Kelcey, please queue up the first question.

Operator, Operator

Thank you, Kelly. As Kelly mentioned, we will now move into the Q&A session. Our first question will come from Ryan MacWilliams with Barclays.

Ryan MacWilliams, Analyst

Hey, guys. Thanks for taking the question. Just to start with Kelly, do you have any changes in the overall macro environment in the third quarter compared to the second quarter? And could you touch on how linearity did throughout the quarter for new bookings? Thanks.

Kelly Steckelberg, CFO

Yeah. Hi, Ryan. So the macro has been pretty consistent from Q2 to Q3. We continue to see similar trends in terms of deal scrutiny, back-end loaded. So the quarter from a direct perspective was fairly back-end loaded. As a reminder, the online segment of the business is typically pretty linear throughout the quarter. I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac that had – that was a fairly significant headwind for us, whereas Asia Pac would have at least been flat year-over-year, if not for that impact.

Ryan MacWilliams, Analyst

Thanks, guys.

Operator, Operator

Moving on to Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Great, thanks. Could you share what feedback you've received on the AI companion? It's impressive to see such a significant increase in customers using it. What features do they seem to appreciate most, and is it contributing to the free-to-paid conversion that you were aiming for? Thank you.

Eric Yuan, CEO

Yes, that's a great question. We are very proud of the progress our team has made since the launch of the Zoom AI Companion, which has seen many accounts enabled. Importantly, this feature comes at no extra cost for paying customers. One notable feature is the meeting summary, which is impressively accurate and saves meeting hosts a considerable amount of time. Our federated AI approach has significantly contributed to this success, as it allows us to avoid reliance on a single AI model. This approach has enhanced latency, accuracy, and response speed, further improving our AI capabilities. It's worth noting that free users do not have access to these features. Nonetheless, we continue to innovate with the AI Companion and have strong confidence in its differentiation from similar AI functionalities offered by our competitors.

Meta Marshall, Analyst

Great. Thanks so much.

Operator, Operator

Our next question on Kasthuri Rangan with Goldman Sachs.

Kasthuri Rangan, Analyst

Hi. Thank you very much. Happy to see the results, and happy Thanksgiving. I just had one question, if I could restrict myself to one. The SMB online churn 3% I don’t know it came down from 3.1%. Any initiatives that you are undertaking that could bring that number even down more significantly I would resume that, that would have big implications for your growth rate and margins, which are already quite good. Thank you so much.

Kelly Steckelberg, CFO

Wendy and her team are constantly working on initiatives. However, Eric's point about AI is likely going to be a crucial differentiator and a retention tool in the future. As a reminder, all of the AI companion features are included for our paid users. We are not only seeing it assist with conversion, but we also believe that it will support long-term retention. Regarding cash, I have been asked this question frequently. Currently, we are experiencing our lowest cash levels, but our platform has improved significantly. It is now much better than it was before the pandemic for our online users. We are modeling retention at this level, but over time, you should see continued improvement.

Kasthuri Rangan, Analyst

Thank you so much.

Eric Yuan, CEO

Let me add on to what Kelly said, also the happy Thanksgiving to you as well. So more and more customers realize, wow, Zoom even for online users, it's not only for Zoom Meeting. A lot of other features, right? And I take a Zoom Team chatter for example, this is a great position and it had a solution. It's part of the offering, even for free users as well, right? For the paid user for sure, a lot of other features, the more they spend time on the Zoom platform, really as well. This is pretty powerful, not only just for meetings but the entire platform.

Kasthuri Rangan, Analyst

Got it. Thanks so much, Eric and Kelly.

Operator, Operator

Wells Fargo is Michael Turrin. Please go ahead with your question.

Michael Turrin, Analyst

Hey, great. Thanks. Nice to see everyone. I guess as a complement to Kash's question, you're showing stabilization here on some of the major metrics, the enterprise expand metric took a step down to 105%. And so just wondering what it takes for that metric to similarly show stabilization as given in Q1 renewal cohort and kind of walking through that. Anything on the product side for us to consider or just any other commentary there is helpful. Thank you.

Kelly Steckelberg, CFO

Well, as a reminder, it's a trailing 12-month metric. So as we've seen our growth rates come down this year that's following behind it. But absolutely, we believe that AI Companion in general as well as the success that we are seeing in Zoom Phone, in Zoom Contact Center, Zoom Virtual Agent, all of those will be key contributors to seeing that metric start to reaccelerate again as we see our growth rate starting to decelerate as well.

Michael Turrin, Analyst

Thank you.

Operator, Operator

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

Michael Funk, Analyst

Yeah. Hi. Thank you for the questions toning. So just on the deferred revenue guidance for 4Q, Kelly, in the commentary on the macro and the rates affecting that. How should we think about growth rate in calendar year '24 given the decline in deferred revenue and impact on new deals in enterprise?

Kelly Steckelberg, CFO

There is notable growth in RPO, but a decline in deferred revenue suggests that while customers are entering into long-term agreements, they are opting to make payments in shorter increments to manage their cash flow and benefit from the current interest rate environment. Additionally, we anticipate a significant renewal cycle in Q1, which will peak and subsequently decline. In the current fiscal year, the majority of our customers are expected to experience some form of renewal, indicating we have addressed many customers affected by reductions. Our team has done a commendable job in maintaining spending, and we are assisting clients in adjusting from new meetings to the Zoom One bundle. Most of our customers have completed their renewal periods in the current fiscal year, and we hope to return to a more standard renewal cycle by FY '25.

Michael Funk, Analyst

Great. Thank you.

Kelly Steckelberg, CFO

Yeah.

Operator, Operator

And moving on to Karl Keirstead with UBS.

Karl Keirstead, Analyst

Hey. Great. Thank you. Hey, Kelly. The phone business has been a big part of the Zoom growth algorithm lately. So I'm wondering if you could elaborate on how that parties did in the quarter. On the surface, and I know that you round that seat number, but it looks like the sequential phone suggests that might have been a lot less than the last several quarters. Maybe that's rounding, but I wanted to give you a platform maybe to elaborate about that part of the business.

Kelly Steckelberg, CFO

Thank you. In Q3, as a reminder, our lower orders typically occur in Q1 and Q3 due to some of our enterprise representatives being on a six-month cycle. Historically, we've seen significant Zoom Phone adoption in Q2 and Q4. In Q3, however, we observed that customers with more than 10,000 seats grew by 9% compared to the previous quarter. This indicates strong performance in the higher segment of Zoom Phone, and I'm pleased with this, as it represents our largest increase so far this year. I also want to note that we haven't consistently provided this metric at the exact same time each quarter, which makes it a bit challenging to track trends. As we have in the past, we will continue to share updates on future milestones as appropriate.

Karl Keirstead, Analyst

Okay. Thank you.

Operator, Operator

George Iwanyc with Oppenheimer has the next question.

George Iwanyc, Analyst

All right. Well, thank you for taking my questions. So Kelly, maybe following up on Zoom Phones to give us a bit of extra color on the contact center and the customer traction you're seeing there?

Kelly Steckelberg, CFO

Yeah. So as we mentioned, we're up to over 700 customers on Zoom Contact Center and we saw our Zoom Virtual Agents product double the number of customers quarter-over-quarter. So we're really excited there. I mean, maybe Eric can talk about some of the features and functionality, but we're thrilled with the progress that we're making there so far.

Eric Yuan, CEO

Yeah. So we are extremely excited about our contact center opportunity. And it feels like back to a few years ago when we announced the Zoom Phone, right? Quite often, a lot of people mentioned, wow, you would take many years to get recognized, deployed by large customers and look at what we have today in terms of the number of paid user phone. I feel like if we ask well, I think we are going to follow the similar journey and maybe even better because if you look at our content center and modern architecture, extremely stable and plus a lot of AI features and innovation speed. I think whenever a customer really takes a Zoom content center seriously and evaluates Zoom contact center, the feedback is very consistent. Wow, I did not realize you guys have such a powerful contact center, it's just amazing, right? I think that has further boosted our team's confidence to double down, triple-down our own contact center. Again, it's modern architecture, very scalable. I also shared quite a few customer cases during this call, and we are very, very excited. A lot of new AI features in virtual agent and workforce management and so on and so forth. And this is something that is very, very exciting.

George Iwanyc, Analyst

Thank you.

Eric Yuan, CEO

Thank you.

Operator, Operator

We'll now hear from Peter Levine with Evercore.

Peter Levine, Analyst

Great. Thanks for taking my question here. Maybe for Kelly, as I look at gross margins, how sustainable is it to keep at these levels? I know AI companion is being given away as part of the package, I guess, for paid users. But if you think about the cost to run these models, the margin profile of contact center in phone. How durable is it to kind of sustain these levels? And then second, as you think into next year, you have guided, but what's the best way to think about stock-based comp and dilution as you kind of manage through that?

Kelly Steckelberg, CFO

Yes. In terms of our gross margins, we will provide fiscal year 2025 guidance on our call next quarter. As we plan, our DevOps team is doing an excellent job of optimizing our data centers and maximizing capacity to support our AI innovations. We will invest as needed based on the assessment from XT and the team, as we see strong long-term returns from this investment for our customers, growth, and retention. However, we anticipate some impact on our gross margins moving forward. While we don't expect it to be significant due to the team's focus on operational efficiency, we do foresee some effects on our gross margins as we progress. Eric, do you want to add anything?

Eric Yuan, CEO

Yes. So you are right on. Just to echo what Kelly said, led by our CTO, XT and his team, our federated AI approach, as I mentioned earlier, really contributes a lot. So for sure, and there's a cost impact, but it's extremely manageable, right? And our team is really, really, I think has a very smart architecture. That's why I think in terms of cost, it's very manageable, but also the quality is pretty good. So we continue innovating on that.

Peter Levine, Analyst

Thank you both.

Kelly Steckelberg, CFO

Peter, regarding stock-based comp, about a third of our expense this year is related to the supplemental grants. So as a reminder, those best along with how the underlying grants are vesting. So there's a couple more years for that to just start to bleed off, if you will. If you're going to model that out.

Peter Levine, Analyst

Thank you.

Operator, Operator

And we will now hear from Patrick Walravens with JMP Securities.

Patrick Walravens, Analyst

Great. Thank you. Hi. So Eric, what is your ideal customer profile on the contact center side of the business?

Eric Yuan, CEO

That's a great question. First, I want to clarify that our focus is on architecture and AI features. We're targeting medium-sized businesses because, for very large customers, even when our architecture is fully ready, they often feel it's still too early for them to engage, which is why we occasionally do not reach out to them. These large companies can have tens of thousands of customers, and are more selective. We believe our sweet spot is medium-sized companies, typically those with hundreds to thousands of agents. However, I want to emphasize that we are not abandoning large companies; when they evaluate our contact center solution seriously, we are confident we can win their business. But right now, our focus remains on medium-sized companies.

Patrick Walravens, Analyst

Okay. Thank you, Eric.

Kelly Steckelberg, CFO

All right. I could give you an example, Patrick. We have a customer called Venture, which provides payroll and HR services. And they became in the last year, they doubled their Zoom Phone seats. They've doubled their contact center seats into four digits now. They also have deployed workforce management as well as quality management and Zoom Virtual Agent. So really taking advantage of the whole suite of Zoom products, not only the contact center and its extensions, but the full suite of Zoom. And I think when they start to deploy like that, they really see the power, and it's been very exciting to see them grow.

Patrick Walravens, Analyst

Okay. Thank you both.

Eric Yuan, CEO

Thank you.

Operator, Operator

Our next question comes from Arjun Bhatia with William Blair.

Arjun Bhatia, Analyst

Perfect. Thank you. Can you just touch on the international business a little bit? It seems like it's certainly trailing the U.S. but what gets that business to turn around? And maybe talk about some of your new growth drivers, how they're faring there with Zoom Phone and contact center? Thank you.

Kelly Steckelberg, CFO

Unfortunately, both EMEA and APAC over the last year have been impacted both by currency and then EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New Zealand. So we’re very excited about the team. And since we did the reorganization earlier this year, those regions have just taken a little bit longer than the U.S. but we’re starting to see that momentum build again and really excited about what they’re going to contribute and watching their success in the future.

Arjun Bhatia, Analyst

Perfect. Thank you.

Kelly Steckelberg, CFO

Yeah.

Operator, Operator

Our next question will come from Alex Zukin with Wolfe Research. His video is not on, so he may just be audio only.

Kelly Steckelberg, CFO

Hi, Alex. Hey, Alex. Do you want to go ahead.

Unidentified Participant, Analyst

This is Ethan Brock on behalf of Alex. Thank you for taking my question. I have two quick inquiries. First, at what level should we anticipate the net revenue retention of the enterprise cohort to bottom out? Additionally, can you provide any insights into the factors affecting enterprise revenue this quarter? It exceeded your expectations and showed sequential growth, similar to RPO and CRPO, which also saw increased bookings. Is it reasonable to expect that next year's enterprise growth rate will surpass what is indicated in the fourth-quarter guidance? Lastly, if you could offer more details about the fourth-quarter numbers and your expectations regarding online churn, that would be appreciated. Thank you.

Kelly Steckelberg, CFO

We observed strong direct bookings, particularly towards the end of Q3, which aligns with the ongoing macro trends we've discussed. Looking ahead to Q4, we expect the usual impact of year-end customer activities, as their fiscal year ends on December 31, with our year-end following on January 31. Additionally, our quota-carrying representatives are nearing the completion of their quarter, which should help them maximize their incentives. We foresee similar patterns, with a potential boost at the end of December likely being back-loaded, continuing into January. Regarding net dollar expansion, we are not providing guidance on that. However, since growth rates have slightly declined, we could see further reductions until they stabilize and potentially start to accelerate again next year.

Unidentified Participant, Analyst

Thank you. I have a quick follow-up regarding your comment in the prepared remarks about the shorter billing duration. Can you provide any qualitative insights compared to the third quarter, particularly regarding the shift towards shorter payment terms? How should we interpret this relative to what’s implied in the fourth quarter guidance? Thank you.

Kelly Steckelberg, CFO

Yeah. We first noticed this trend in Q2, as we mentioned in our prepared remarks. With interest rates remaining high, I don’t expect this situation to change soon. The good news is that our underlying business is healthy; customers are opting for longer-term contracts but prefer to pay on shorter terms. We also had very strong cash flow during this period, so I don’t think it's something to be concerned about.

Unidentified Participant, Analyst

Got it. Thank you very much. Congrats on the results.

Kelly Steckelberg, CFO

Thanks.

Operator, Operator

And our next question is going to come from Mark Murphy at JPMorgan. Mark will be audio only.

Unidentified Participant, Analyst

Hi, everyone. This is someone filling in for Mark Murphy. Thank you for taking my question and congratulations on the quarter. You mentioned the Virgin Group and the launch of Workvivo for 60,000 employees, along with various workforce-related innovations you've introduced recently. Can you discuss the adoption of those products and the momentum you are experiencing in that area? Thank you.

Kelly Steckelberg, CFO

Yeah. Eric, you go ahead.

Eric Yuan, CEO

We are very excited about Workvivo. They are continuing to operate as a separate unit, and we are supporting them in their ongoing momentum. We previously discussed Dollar General and their impressive adoption. We are thrilled with the Workvivo team. After they joined us, we welcomed them and set an ambitious bookings target, which they are successfully meeting. We are really pleased to have them and to see their continued success.

Unidentified Participant, Analyst

Great. Thank you.

Operator, Operator

Our next question is going to come from Catharine Trebnick with Rosenblatt.

Catharine Trebnick, Analyst

Thanks for taking my question. Nice quarter. Has your appetite for M&A changed at all in the last year? All day long on CNB they kept saying, we're looking for growth, reacceleration of growth. So I'm just wondering if you're looking at $6.5 billion and your attitude towards M&A? Thank you.

Kelly Steckelberg, CFO

Yes. Thank you, Catharine. M&A is something that we evaluate and think about as a potential strategy all the time. I have a core dev team that looks at opportunities on a daily basis. And we have a very strong lens that we look through in terms of evaluating that is, first of all, the technology and what does it bring to our customers. We would always want to make sure that our customers continue to enjoy a really high-quality product like they do with Zoom today. We look at the culture to make sure that it's something that we think will work well with Zoom. It's usually a really good indicator of the success of integrating two companies. And then, of course, we look at the lens of valuation and does it make sense? Is it a price that we are willing to pay? And because we have such a high bar, it honestly has been hard to find companies that we love that make it through all three of those tests. It doesn’t mean that we wouldn’t love to find someone that did. There are some really great companies out there. And for one reason or the other to date, we just haven’t found the right match, but it doesn’t mean that we won’t. And that is why we have purposely retained the flexibility of having that cash on our balance sheet so that if we do see something interesting, we’re able to act on it.

Operator, Operator

Moving on to KeyBank of Tom Blakey.

Tom Blakey, Analyst

Thank you very much. Good to see you, Eric, and hi, Kelly. Just wondering quickly on the stability that we were talking about a couple of quarters ago in online. It's pretty impressive that we went back and forth on that a little bit here and very stable. I mean obviously talked about the churn. Can you just maybe update us that on that in terms of should we expect the same type of stability in online into fiscal 4Q and maybe even similarly into fiscal '25, that would be helpful. Thank you.

Kelly Steckelberg, CFO

The team has accomplished a great deal this year in various aspects of our online efforts. Firstly, we have stabilized retention, and you're seeing the positive effects of that now, in addition to focusing on converting free users to paying customers. It's crucial for us to keep filling the top of the funnel with initiatives like force brakes. As Eric mentioned earlier, we are also working on offering additional online products, such as whiteboard and scheduler, which align well with our online buyers' strategies. These initiatives are what our team has been dedicated to and will continue to prioritize. We hold ourselves to high standards and aim for stabilization, specifically looking for consistent dollar stabilization quarter-over-quarter. While we are very close, it's not quite there yet, and I anticipate a slight decline in Q4. However, as we plan for fiscal year 2025, we are optimistic about initiatives that will drive stabilization or even some growth.

Tom Blakey, Analyst

Very helpful. Thank you, Kelly.

Kelly Steckelberg, CFO

Yeah.

Operator, Operator

The next question is from Shebly Seyrafi with FBN Securities.

Shelby Seyrafi, Analyst

Yes. Thank you very much. You guided deferred revenue to decline 6% to 8% in Q4. Do you sort of billing frequencies with enterprise customers. The question I have is what kind of decline would that have been without that billing frequency change? And related to this, you're going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up meaningfully in Q1?

Kelly Steckelberg, CFO

Yes. So as a reminder, the way the deferred revenue trends about the year is it's always the highest in Q1 and then it declines throughout the year. And there's two things that are happening. First of all, Q1 is the largest renewal period. So if the bucket gets filled up, and then that’s getting amortized through the rest of the year. But also the subsequent renewal cycles are lower than Q1. So it’s the inverse of probably every other SaaS company in the world where usually you’re adding higher renewals every single quarter, we are actually adding a lower number – a lower dollar amount of renewals every single quarter. So as Q1 is getting amortized down, what’s coming into refill at the top of that bucket is coming down every single quarter. And that’s why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter-over-quarter.

Shelby Seyrafi, Analyst

Okay. Thanks.

Kelly Steckelberg, CFO

Yeah.

Operator, Operator

We'll now hear from James Fish with Piper Sandler.

James Fish, Analyst

Hi, guys. Thanks for the questions here. Appreciate all the details around some of the product lines. But building off of a few prior questions with that contact center customer count up to about 700 versus the 500 last quarter. If my math is right, given kind of what you guys have talked about with price points kind of seems like we're nearing $100 million of ARR now or how should we think about that average seat count at this point? And then, Eric, for you, look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of penetration with the contact center installed bases, is that acting as sort of a consolidation function underneath for especially that small mid-market. Thanks, guys.

Kelly Steckelberg, CFO

Go ahead, first.

Eric Yuan, CEO

I think if you look at the contact center, right? So not only just all fast to offer the core contact center capabilities, we want to offer a full platform, right, including workforce management, right? This is based on modern architecture, not something like, hey, you have an on-premise solution for a long time, you just put it into the cloud, that's not the case. We built it everything from ground up. It's tied to integrated with our core contact center solutions. That's the reason why when you look at our customers right from SMB, minimum size, all the way to a lot of enterprise, I think we are ready. And however, as I mentioned earlier, sweet spotters should be the major, right. However, one thing is realized, customers do have one seamless experience for everything contact center and workforce management, virtual agent AI feature call engine, right, so we are trying to offer all of them. So that's kind of our strategy. In terms of our workforce management contribution, it really helped because we tell them, hey, we offer everything to you. We are not going to let you deploy other third-party workforce management solutions. We offer all the services, all the functionality to you with one platform.

Kelly Steckelberg, CFO

Yeah. And James, in terms of your ability to kind of understand how those products are progressing themselves, we'll do done with others and announced milestone metrics as we start to see them emerge. They're just so new right now that doesn't really sense, but we will do that over time.

James Fish, Analyst

All right. Thanks, Kelly. Thanks, Eric.

Eric Yuan, CEO

We are not ready to share with the number, exact number yet about how many customers deploy the workforce management, so we’ll state in the future quarters.

Operator, Operator

And our next question will come from Matt VanVliet fleet with BTIG.

Matthew VanVliet, Analyst

Yes. Good afternoon. Thanks for taking the question. I guess following up one more on sort of the contact center and Zoom Phone. In terms of overall customer mix, you're well below 1% penetration on contact center here. Is there a target that you think is sort of the next few years of the customers you're going to go after? How high do you think of roughly 200,000 customers you have an existing contact center that you've maybe identified and comparably work your way into? And then sort of following up on that, what percentage, if you can share the over 100,000 customers, 100,000 revenue customers have Zoom Phone or Zoom Contact Center as an attachment there?

Kelly Steckelberg, CFO

I believe the progress we're making with the contact center is quite similar to that of Zoom Phone. Internally, we have good visibility just like we did with Zoom Phone, but when it comes to annual recurring revenue, it will take some time for that to become apparent to you. So far, its trajectory resembles that of Zoom Phone, which is encouraging. We expect that in a couple of years it will become a significant growth driver. It starts small but then accelerates quickly, and that’s what we’re observing.

Eric Yuan, CEO

And also, if you look at the opportunity, very similar as well. Many years ago, a lot of our enterprise customers, their phone usage deployment is still on-prem. Today, you look at most of our enterprise customers' contact center still on track. So that’s why a lot of opportunity ahead of us, in particular, in our model architecture is very scalable.

Matthew VanVliet, Analyst

Great. Thank you.

Operator, Operator

Needham’s, Ryan Koontz has the next question. Ryan, please go ahead.

Ryan Koontz, Analyst

Hi. Happy Thanksgiving. From Zoomtopia, we're really impressed with the Zoom Rooms and what you're doing there. The innovation really seems years ahead of the market. I wanted to know your updated perspective on the rooms opportunity for the company. Do you believe it is strong enough to function as a nearly stand-alone product? Do you see the market opportunity more favorable for you with that product? I'm curious about your go-to-market strategy in that regard. Thank you.

Eric Yuan, CEO

So you're right. So speaking of the opportunity, you're also right. We never, customer, for many years, they right deployed the Zoom Rooms for more and more customers. I mean they try to invest hybrid work. They need to have a modern solution for their conference rooms, they have multiple solutions, Zoom Rooms indeed stands out is indeed years ahead of any other competitors. However, sometimes for customers when they try to support hybrid work right now, they're in the middle of embracing hybrid work, right? What’s the new layout of the entire workplace and how many conference rooms they needed to support and so on and so forth, right? That's why a lot of opportunities. At the same time, we need to work together with customers and not only for conference room innovation, but also entire workplace, the management, what's the new layout. I think there is a lot of opportunity, not only for conference room itself, like how to reserve a desk, right? All those things we all build in as a part of the Zoom Room, like an example, like digital signage and also part of Zoom Rooms as the full as the conference room or workplace solution, and that’s why we needed to make sure to focus on marketing side to share with the customer. Again, Zoom Rooms is not only just for your conference room solution, but it’s for hybrid work and also for the entire workplace as well.

Ryan Koontz, Analyst

That’s great. Thank you.

Eric Yuan, CEO

Thank you, Ryan.

Kelly Steckelberg, CFO

Thanks, Ryan.

Operator, Operator

Now we'll move on to Peter Weed with Bernstein.

Peter Weed, Analyst

Thank you. I think for the first time, at least as far as I can look at in the model, it looks like the kind of large enterprise was greater than $100,000 enterprise customers were roughly flat quarter-over-quarter. But we're hearing the great stories about customer expansions and the number of those customers has continued to increase, which would imply there's a whole another set of customers that are either shrinking or churning and it appears that got more pronounced this quarter than perhaps we've seen recently. How should we think about those effects, and is that more churn or is it downgrades? And when customers are churning or downgrading, where they're going? And is this something that is kind of temporary and you see it kind of ending? Or is it something where we may have some pain for a bit of time before we get through some effects?

Kelly Steckelberg, CFO

We have discussed this in previous quarters and have observed that some of our customers are reducing their workforce and overall business activities. However, the positive aspect is that we haven't experienced significant logo churn; instead, there has been more of a reduction in the number of meeting licenses. Our team has effectively used this opportunity to help transition customers from meetings to our Zoom One bundles, which include Zoom Phone. As we mentioned, the adoption of these bundles has grown over 300% year-over-year in terms of customer usage, which is beneficial for retention since having multiple products deployed is advantageous for keeping customers. This year, we have worked closely with many customers to ensure they have the right package tailored to their needs. Additionally, as I mentioned earlier in the call, most of our customers are going through a renewal period in fiscal year 2024. We are hopeful that as we approach the end of this year, we will have navigated through most of the adjustments necessary following their internal reductions and that they will have aligned their licenses accordingly.

Peter Weed, Analyst

It seems that you are not experiencing an increase in churn. This is primarily due to the reduction in force. Once we implement that, we can focus on enabling expansions that will move forward based on the positive feedback from customers who appreciate the product.

Kelly Steckelberg, CFO

Yeah, I mean that we're not giving FY '25 guidance, just to be clear. But yes, that's in general what we anticipate, just knowing that we've worked through most of our customer renewals this year, and I assume that they've gotten through their reductions. Now it depends on what happens overall with the macro, but that's what we believe to be the case. Yes.

Peter Weed, Analyst

Thank you.

Kelly Steckelberg, CFO

Yes.

Operator, Operator

We'll now hear from Imtiaz Koujalgi with Wedbush.

Kelly Steckelberg, CFO

You are on mute.

Imtiaz Koujalgi, Analyst

Sorry, can you guys hear me now?

Kelly Steckelberg, CFO

Yeah.

Imtiaz Koujalgi, Analyst

A question on Zoom Phone. So Kelly, you give us the ARR last quarter, we have the Zoom Phone seat this quarter. Further, if I do a rough math on the ASP, it comes down to like $7 to $8 something per month, which seems like almost half or even more of the list price. If you can just confirm that and has that come gone down or gone up?

Kelly Steckelberg, CFO

So as a reminder, you can buy Zoom Phone either for $10 per license per month if you have metered calling on top or $15, if you get unlimited long distance. So the ASP is going to depend on which version of that, which of the SKUs the customers are buying and how they come together. And then, if you think about some of our largest enterprise customers, we do discount not just for obviously for Zoom Phone, but the overall value of their purchases or their value of being a customer for longevity in terms of length of cycles, willingness to pay upfront. So all of those things contribute, but it sounds like you're right in the ballpark. We have not seen a dramatic shift in those discounts up or down.

Imtiaz Koujalgi, Analyst

And just one follow-up. Is that similar to what you're seeing in the contact center or versus your I think the list price was 70 for contact center. Any comment on how the discounting in contact center compares to what you've seen in Zoom Phone?

Kelly Steckelberg, CFO

Yeah. No. I don't think if you can correlate them. They're very different products with different sales cycles and approaches. So I don't think I can try to take a percentage discount necessarily from one product and expect it to apply to a different one.

Imtiaz Koujalgi, Analyst

Thank you.

Kelly Steckelberg, CFO

Yeah.

Operator, Operator

We will now hear from Tyler Radke with Citi.

Kelly Steckelberg, CFO

Hi, Tyler.

Tyler Radke, Analyst

Yeah. Hi. Good evening. So Kelly, if I look at the midpoint of your guidance for Q4, it's about 1% growth in others. Some currency in there. But how should we be thinking about that as a jumping off point for fiscal year '25? What are kind of the puts and takes that would cause growth to be higher than that, and also lower. It does sound like you're starting to see some stabilization in parts of the business. But just help us frame for how we should be thinking about that trajectory beyond Q4.

Kelly Steckelberg, CFO

We will provide guidance for fiscal year 2025 during the Q4 call. However, it's important to consider the implied growth rate for Q4 and how the macroeconomic situation is either stabilizing or improving. There are many positive aspects of our business that we've discussed today, such as growth in Zoom Phone, growth in the contact center, and stabilization in online services, all of which could contribute to FY 2025 growth being slightly higher than the implied exit rate for Q4. For now, please take into account the growth rate and the macroeconomic factors when you're modeling.

Tyler Radke, Analyst

Thank you.

Operator, Operator

We'll move on to William Power with Baird.

William Power, Analyst

Great. Thanks. Maybe a couple of quick follow-ups. I guess, Eric, to an earlier question on AI companion, can you just talk about where you're seeing the greatest usage? I mean what are customers most focused on? And what's the early feedback look like? And what are customers asking for in AI? Where can you continue to add more value there?

Eric Yuan, CEO

That's a great question. AI integration encompasses a variety of features. For instance, if you're involved in a call and want to catch up on what you missed, you can ask about it. There are many features related to this. Additionally, when using our team chat, there's a chat composer solution with numerous features built around it. One key feature that customers appreciate is the Zoom Meeting summary. After a meeting, a summary is automatically generated. Unlike before, you don’t have to worry about recorded meetings anymore; it simply provides a summary. This feature is highly effective and we've noticed strong adoption among many customers. I think it's definitely a standout feature because it's user-friendly and we've made it easy to access. There are many other features as well. Personally, I also use the Zoom Client for various services, including composing emails. There are numerous capabilities available. Looking ahead, we're also considering incorporating AI companionship into the whiteboard feature. Almost every service across our platform will benefit from AI integration. There are many features and advancements planned with the AI Companion.

William Power, Analyst

Thank you.

Operator, Operator

Our last question was from Stephen Bersey with HSBC. It seems Stephen has disconnected. If he's not able to continue, I'll turn it over to you, Eric, for your closing remarks.

Eric Yuan, CEO

Yeah. So first of all, thank you all for your time to join our Q3 earnings call, I really appreciate wish you all and your families have a wonderful holiday season. Thank you again for your great support. Thank you.

Operator, Operator

Thank you so much, Eric. I apologize, Kelly. Again, everyone, this concludes today's earnings release. As Eric and Kelly mentioned, we thank you all for your participation and from our family to yours. May you and yours have a safe and happy holiday season. Enjoy the rest of your day.