Earnings Call Transcript - ZM Q3 2023

Tom McCallum, Head of Investor Relations

Thank you, Kelsey. Hello everyone. And welcome to Zoom’s Earnings Video Webinar for the Third Quarter of Fiscal 2023. I am 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 will 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 2023. Our expectations regarding financial and business trends; impacts from macroeconomic developments and the Russia-Ukraine war; our market position; opportunities; 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 risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar. And with that, let me turn the discussion over to Eric.

Eric Yuan, CEO

Thank you, Tom, and thank you everyone for joining us today. So last week, we hosted our first fully hybrid Zoomtopia using Zoom Events, and it was great. We unveiled new innovations like Zoom Mail and Calendar, which enable users to frictionlessly navigate across their email, calendar, and other Zoom products all within the same client. At Zoomtopia, many of our customers highlighted how they use our expanding platform to do more in the world of flexible work. At our first partner connect event, we hosted hundreds of channel partners who are very excited about working with us to drive adoption of the Zoom platform globally. And our developer partners showcased add-on apps that connect interrelated workflows to the Zoom client. As global organizations adapt to how, when, and where work happens, human connection remains paramount. Zoom is purpose-built to make all kinds of connections possible, effective, and meaningful. We have developed and launched more than 1,500 features and enhancements on the Zoom platform this year, advancing how people connect with each other, their organization, and their customers, ultimately opening the doors wide for creativity and collaboration. Of course, even as we celebrate our innovations and customers, we still face the backdrop of a challenging macroeconomic environment. We continue to see FX pressure and heightened deal scrutiny for new business, but we remain focused on delivering happiness to our customers by innovating our platform and expanding our go-to-market capabilities. Zoom provides a full suite of communications solutions at an attractive total cost of ownership that enables teams to do more with less, and our new products like Zoom Contact Center and Zoom IQ for Sales enable revenue generation and drive productivity. The continued strength of our Enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments. As we enable customers to drive greater efficiency, we also are focusing on our own efficiency. We have always been judicious with investments, prudent about spending, and we have commanded robust margins since our IPO, so this is not a major shift for us. We will continue to drive innovation, customer value, and platform expansion, balanced with an increasing emphasis on efficiency and profitability. We continue to see strong traction with customers spending greater than $100,000 in trailing 12 months revenue, which was up 31% year-over-year. What’s more, these customers are increasingly seeing value in buying the whole platform, with thousands of customers already buying Zoom One packages. From an industry perspective, the largest deals came from tech, media, and financial services, and we also had notable wins in retail, transportation, and pharma. On the tech front, let me first thank Qualtrics, the leader and creator of the Experience Management category, for expanding their partnership with us. Qualtrics recently upgraded to Zoom One Enterprise, which provides the full power of the Zoom platform to their users and allows them to make meaningful connections with Meetings, team chat, whiteboard, phone, and more in one offering. We are delighted to offer Qualtrics a broad set of communications products integrated into one secure and easy-to-use platform. Our Enterprise segment comprises not only large publicly traded companies but also many private companies of all sizes, who see great value in enhancing their Zoom implementations by moving towards our full UC platform. Let me give you a few examples. First of all, I’d like to thank Vensure Employer Services, a privately owned professional employer organization, for placing their trust in Zoom. In Q3, they added 5,500 Zoom Phone seats and 650 Zoom Contact Center seats, demonstrating the promise they saw in adopting a modern, integrated solution for their teams to interact. Let me also thank Chime Solutions for establishing and already expanding their partnership with Zoom, which includes Zoom One and Zoom Contact Center. Founded with an unwavering focus on bringing jobs and opportunities to underrepresented communities, Chime Solutions delivers high-touch Contact Center solutions for mid-sized companies and Fortune 500 corporations. After seeing how well Zoom Contact Center addressed many of their customers’ needs and gaining confidence in Zoom’s ability to deliver innovation at a rapid pace, they decided to replace their legacy solution with Zoom Contact Center. Executing our innovation roadmap for Contact Center will give us the opportunity to further enhance our partnership with Chime Solutions in the quarters and years to come. I also want to thank G-P, the number one SaaS-based global employment platform, for choosing Zoom Phone to transform their communication systems and support employees across their organization. G-P understood the value of our integrated platform of communication products from their experience using Zoom Meetings, Zoom Webinars, Team Chat, and Zoom Rooms. G-P ultimately opted for Zoom Phone as the missing piece in their UC stack in order to improve their customer’s experience while also enjoying the savings benefits of a cloud-based PBX solution integrated into a full communications platform. Also, I’d like to add that G-P is Zoom’s global expansion employment partner and has played a critical role in our growth strategy, giving us the agility and speed to enter new markets very quickly. Again, thank you Qualtrics, Vensure, Chime Solutions, G-P, and all of our customers worldwide. And with that, I will pass it over to Kelly. Thank you.

Kelly Steckelberg, CFO

Thank you, Eric. Let me now turn to the quarter’s results and guidance. In Q3, total revenue came in at $1.102 billion, up 5% year-over-year and 7% in constant currency. This result was approximately $2 million above the high end of our quarterly guidance. The growth in revenue was primarily driven by strength in our Enterprise business, which grew 20% year-over-year and represented 56% of total revenue, up from 49% 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. At Investor Day earlier this month, we introduced a new metric, Online Average Monthly Churn. In Q3, this metric continued to improve to 3.1% from 3.7% in Q3 of FY 2022 and 3.6% last quarter. We are pleased that this metric has now returned to pre-pandemic levels. The number of Enterprise customers grew 14% year-over-year to approximately 209,300. Our trailing twelve-month net dollar expansion rate for Enterprise customers in Q3 came in at a healthy 117%. We saw 31% year-over-year growth in the up-market as we ended the quarter with 3,286 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 27% of revenue, up from 22% in Q3 of FY 2022. Our Americas revenue grew 11% year-over-year. EMEA continues to be impacted by the stronger dollar, the Russia-Ukraine war, and Online performance, which combined led to a decline of 9% year-over-year. APAC, which was also impacted by the stronger dollar, declined 3% year-over-year. Now turning to profitability, I will focus on 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 Q3 was 79.5%, an improvement from 76% in Q3 of last year and 78.9% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co-located data centers. Given this, we expect our full-year gross margin to be approximately 79%. Research and development expense grew by 59% year-over-year to approximately $108 million. As a percentage of total revenue, R&D expense increased to 9.8% from 6.4% in Q3 of last year. This reflects our ongoing investments in expanding Zoom’s product portfolio and delivering on our customers' evolving needs. We expect to exit the year in the range of 10% to 12% of total revenue, consistent with our long-term target. Sales and marketing expense grew by 27% year-over-year to $301 million. This represented approximately 27.3% of total revenue, up from 22.6% in Q3 of last year. We continue to invest judiciously in sales capacity and channel partner expansion. G&A expense grew by 6% to $87 million or approximately 7.9% of total revenue, in line with 7.8% in Q3 of last year. Non-GAAP operating income was $381 million, exceeding the high end of our guidance of $330 million, as we continue to thoughtfully prioritize investments. This translates to a 34.6% non-GAAP operating margin for Q3, as compared to 39.1% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.07, $0.24 above the high end of our guidance. Due to our share repurchase program, our Q3 weighted average share count has decreased year-over-year approximately 4 million shares to 302 million. Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 14% year-over-year from $1.2 billion. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.2 billion, up 32% year-over-year from $2.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 67% in Q3 of last year, reflecting a shift towards longer-term contracts. As a reminder, our annual seasonality of renewals is front-end loaded and moderates over the rest of the year, reflecting the sequentially smaller renewal base. As such, we expect Q4 deferred revenue to grow at approximately 2% to 3% year-over-year. We ended the quarter with approximately $5.2 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Year-to-date, we have purchased $991 million of our own stock, representing approximately 11 million shares. We had operating cash flow in the quarter of $295 million, compared to $395 million in Q3 of last year. Free cash flow was $273 million, as compared to $375 million in Q3 of last year. Our margins for operating cash flow and free cash flow were 26.8% and 24.7%, respectively. As previously discussed, this year we have seen larger cash outflows from an increase in cash taxes starting in Q2, which relate to the depletion of our NOLs and the lower tax deductions for stock-based compensation caused by the stock price decline. We now expect free cash flow to be at the high end of our range of $1 billion to $1.15 billion. As a reminder, our range assumes that the Section 174 tax legislation requiring capitalization of R&D expenses will be repealed or deferred by Congress by the end of this fiscal year. Now, turning to guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our Enterprise business will grow in the low-to-mid 20s, while our Online business will decline approximately 8% for the year. For the fourth quarter of FY 2023, we expect revenue to be in the range of $1.095 billion to $1.105 billion, which at the midpoint would represent approximately 3% year-over-year growth or 5% in constant currency. We expect non-GAAP operating income to be in the range of $316 million to $326 million. Our outlook for non-GAAP earnings per share is $0.75 to $0.78 based on approximately 301 million shares outstanding. For the full year of FY 2023, we now expect revenue to be in the range of $4.37 billion to $4.38 billion, which at the midpoint represents approximately 7% year-over-year growth or 8.5% in constant currency. This represents a decrease of $15 million from our previous full-year guidance, of which approximately $14 million is attributable to the continued FX pressure in Q3 and Q4. We now expect our non-GAAP operating income to be in the range of $1.49 billion to $1.5 billion, representing a non-GAAP operating margin of approximately 34%, which is an increase of $50 million or 1%, respectively, as compared to our Q2 guidance. Our tax rate is expected to approximate the blended U.S. federal and state rate. Our outlook for non-GAAP earnings per share is $3.91 to $3.94, based on approximately 304 million shares outstanding. Zoom remains focused on thoughtfully balancing growth and profitability through platform innovation, customer value creation, and partner ecosystem expansion. Thank you to the Zoom team, our customers, our community, and our investors. Kelsey, please queue up our first question.

Operator, Operator

Thank you, Kelly. Our first question will come from Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Great. Thanks so much for the question and congrats on the quarter. Maybe just sticking with the Online business for a second and kind of the stabilization of that business. Clearly, you saw the churn statistics improve. But just wanted to get a sense of how you guys are thinking about stabilization there, how you guys are thinking about just initiatives on new adds, as well as just free to paid conversion? Thanks.

Kelly Steckelberg, CFO

We shared at Analyst Day a few weeks ago that we are pleased with the continued improvement in churn, which improved even further in Q3. Now, 70% of those cohorts have moved past the 16-month period where we really see stabilization, and we continue to observe this trend. Wendy and her team are focused on initiatives for conversion, including adding local currencies and payment options, as well as creating suitable packages. All of this is still in progress, and we previously mentioned that we expect Online to stabilize in dollar terms by Q2 of next year, which remains consistent with our most recent forecast.

Mark Murphy, Analyst

Thank you very much. I will extend my congratulations on a very strong free cash flow performance. I wanted to ask you, Eric, about the rapid pace of warranty activity at the moment. To what extent do you anticipate that some of the new product innovations, such as Zoom Mail, Calendar, Zoom Spots, and others, could potentially enhance user engagement and collaboration in a way that may benefit your dollar retention rates or possibly lead to increased adoption of premium plans?

Eric Yuan, CEO

Yeah. So, Mark, that’s a great question. That’s the reason why we had a very successful Zoomtopia because we announced so many innovations. Almost every innovation, when we look at that, what we can do to either add value to the existing paid customer to focus on stickiness or maybe the potential revenue opportunity, right? Look at area features, I think we always follow that principle. Look at Email and Calendar, look at Online paid users, the subscribers, and we do not offer to free users, right? For all those Online, the pro buyers give Email, Calendar for free; they can use the Email, Calendar full functionality, another great service, which is an added value, right? Look at all other features, like Spots and all those features certainly can help our integrated customers also make our services more sticky. Not only do they use Zoom for scheduled Meetings but also can use that to mimic the office environment. So for free users, right, with Email, Calendar, utilizing the Spots client, right? So every feature introduced, I think, for sure will add more value to our customers, either drive stickiness or drive potential revenue opportunity like Zoom IQ, virtual agent and the Contact Center and virtual agent, Zoom IQ like virtual coach, and a lot of features like that. So we are very, very excited, and again, the feedback from customers is very, very positive and they are very excited about adopting those new features and enhancements.

Fred Lee, Analyst

All right. Thank you for taking my question. I was wondering if you could talk a little bit about the macro impact on Phone adoption and maybe give us an update on Zoom Phone adoption overall as you have over the past couple of quarters?

Kelly Steckelberg, CFO

Yeah. So we continue to see strength in Zoom Phone. As a reminder, we announced on the last call that we had crossed over the 4 million seat mark. We also added nine customers in Q3 that have purchased over 10,000 seats, and that brings us to a total of 64 customers in that category. So I think it shows continued strength, especially in the up-market even in these challenging economic times. So we’re excited about the prospects that we continue to see there, and as we keep promising you all, we will break it out when it gets to 10% of revenue. So you will be able to see that then a little more clearly.

Eric Yuan, CEO

Yeah. Fred, to add on to what Kelly said, more and more customers are increasingly looking at our Zoom platform, Zoom One UC platform, usually look at a standalone product, phone or Meetings or webinar or team chat. Now look at a full UC stack because that will give you a better experience in terms of the total cost of ownership and is also much better. That’s why more and more customers are moving towards our full Zoom One platform, and I am very excited about the opportunities there.

Michael Turrin, Analyst

Hey. Thanks. Good afternoon. Appreciate you taking the question. On the front-end loaded renewal seasonality, you had a useful tidbit on the deferred revenue growth you are expecting in Q4. Can you just maybe walk through how you gear up for that as a company given it’s a little bit outside the norm on general calendar cycles that we’re used to seeing? What kind of visibility do you have into that cohort currently, and is there anything you can do to shift that profile, or is it just kind of gradual as this rolls forward and you have gotten just accustomed to it internally thus far? Thank you.

Kelly Steckelberg, CFO

Yeah. So, as a reminder, this occurred due to the significant increase of customers we had during Q1 in the early stages of the pandemic. And what has happened is due to the practice that we have internally of making it easy for our customers, we co-term when they add on additional products or expand their seat count, for example, so it’s continued to actually exacerbate, if you will, when we’re upselling customers that front-end loaded phenomenon. So it will start to level out over time as we see customers in Q2 and Q4 being our largest seasonal quarters due to the six-month quotas of our upmarket reps. But as you say, we are used to it now internally; everybody knows this is how it works. We are coming into, I guess, our third renewal period, and we have seen strength in each of the last two cycles. So we are able to accommodate, we know how it works, and it’s just something we know that it’s not aligned with most of the rest of the industry, which is why we keep reminding you and trying to give you as much color as possible around that.

Kash Rangan, Analyst

Hello. Thank you very much. Happy Thanksgiving in advance. It's great to see you, Eric and Kelly. I have a question about the Enterprise business. I believe many of us on the call are anticipating when the strength of the Enterprise business will counterbalance the weakness in the Online business. While we wait for that, I'm interested in your insights on the expansion rate, which I think is around 117%. Additionally, the number of new customers has not rebounded as it did in previous quarters. Can you provide some perspective on how much of this is due to macroeconomic factors versus competition from platforms like Teams? Eric, how does this situation relate to the broader adoption of the Zoom platform? When can we expect to see these metrics turn around, validating your overall thesis that Zoom encompasses more than just video meetings but serves as a comprehensive communication platform? Thank you very much.

Kelly Steckelberg, CFO

Eric, do you want to talk about Zoom One first and then I will talk about the metrics after that?

Eric Yuan, CEO

Yeah. Sure. Absolutely. So, Kash, that is a good question. And you look at the customer projects, right? As we move towards the Zoom One platform, right? So, and leverage our full usage stack started from Meetings many years ago. They added a phone, webinar, team chat, and so on and so forth. I think the problem was that previously when it comes to Zoom, everybody probably assumed that it was all about video Meetings, and that’s not the case. That’s why we are doubling down our Zoom One marketing awareness, also talk to the customers that we understand, not only do we offer the best with content service, but also if you look at our other offerings, that’s a full UC stack and also have Contact Center as well. I think that will take a little bit of time. But as long as customers really see that Zoom has a full stack, Enterprise also has a very flexible team chat plus this is free, it works so well integrated with other UC solutions, I think customers are showing great excitement about adopting the full UC platform. And more and more customers are moving towards our full UC stack rather than just Meetings or Phone, and that’s why we are very excited. Because if you look at all those offerings working together seamlessly and in terms of total ownership cost, it’s much better, because many interested customers are trying to consolidate their full UC stack.

Kelly Steckelberg, CFO

And regarding your comment about renewals, I want to emphasize that in the Enterprise segment, renewals remain exceptionally strong. We actually exceeded our internal forecast for Q3. We continue to see growth and expansion in the enterprise sector. However, as you've mentioned, we are anticipating a stabilization in Online, as it is currently affecting the overall growth rate of the company.

George Iwanyc, Analyst

Hi. Thank you for taking my question. Eric, maybe with all the Enterprise progress you are showing. Can you give us an update on Contact Center and the adoption that you are seeing there?

Eric Yuan, CEO

Yeah. So, yeah, again, the Contact Center is a new service, and we are very excited in particular for those customers who deploy our full service who would like to consolidate the UC and CC together. And also, we found interesting use cases; well, not only do those traditional customer interaction departments start deploying the Zoom Contact Center, but also the internal IT desk as well, right? And again, the Contact Center seat cycle is a little bit longer like the Meetings. But, however, we showcase our platform capability and the speed of innovation, customers are very excited. And plus, you look at our own business, right? And we used to deploying other cloud Contact Center solutions, also with our own Contact Center solutions, our teams themselves are very, very excited. And a lot of potential pipelines and leads are right in the pipeline and also we are doubling down on that. And again, the product side, we have higher confidence. Go-to-market side, we are gaining traction as quickly as possible because, again, it takes some time plus also leverage channel and internal go-to-market investment. And I think that’s a future big revenue driver for us, especially customers who want CC and UC together, right, and with a much better experience and also the total ownership of costs is also much better.

Siti Panigrahi, Analyst

Thank you. Thanks for taking my question. Just wanted to ask about macro pressure; you talked about last quarter sales elongation on the Enterprise side. What kind of plans you are seeing, anything worsened, and also how does that impact your pipeline as well?

Kelly Steckelberg, CFO

So we certainly have seen impact, as I mentioned, from FX of the reduced guidance of $15 million; $14 million of that is coming from FX pressure, and you saw that certainly in our year-over-year growth in Europe and in APAC. In the Enterprise, again, renewals stayed strong, excitement about the products. But as we discussed, it’s continued in terms of additional deal scrutiny; I think all of my peer CFOs now are looking at deals, and that’s just causing elongation in general, not that things are losing; not that we are losing deals. They are just taking longer to get done and potentially some of them pushing over quarters. But we haven’t seen that have an impact. It’s just taking longer and longer, not that they are going anywhere else. It’s just taking longer to get those done. Now the good news is, right, especially with all of the new products, the consolidation that we offer is a really great value story for our customers in terms of elimination of additional vendors, getting rid of on-prem servers, and that continues to be a great story that our customers love.

Sterling Auty, Analyst

Thanks. Hi, guys. Kelly, maybe following on that, I want to understand the 20% growth in Enterprise in the quarter versus the guidance of low-to-mid 20% for the full year, does that mean that there’s a little bit of a back-end loaded hockey stick or a bump up that we will see next quarter? And specifically, I think investors are really interested in trying to gauge how should that business react as we move into next fiscal year in light of the concern about layoffs across all industries, and a lot of your Zoom Meetings, et cetera, are based on per employee per seat pricing?

Kelly Steckelberg, CFO

We have discussed this in previous quarters and noticed an increasing trend of deals closing at the end of the quarter, returning to a more traditional cycle that we have not experienced since early in the pandemic. We have adjusted our Q4 forecast to reflect this pattern. We continue to see strong performance in our renewals, which I attribute to concerns about layoffs being countered by the ongoing demand for flexible work arrangements. Many people want to maintain their current work habits, and as long as employers are accommodating this, it means that everyone requires a Zoom license. Even if someone is out of the office just one day a week, they need a Zoom license for calls, Meetings, and for Zoom One. This presents a strong rationale for organizations to keep renewing their contracts with us.

Michael Funk, Analyst

Hi. Thanks for the question. Most of might have been asked, but I did actually want to ask on the Enterprise sales investment that we have been talking about the last couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps over the last few years really had the advantage of an easier sales cycle with Meetings especially? Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point? Thanks.

Kelly Steckelberg, CFO

We are continually exploring ways to enhance the productivity of our sales representatives. As we discussed earlier, we've made numerous hires over the past few years, but looking ahead to FY 2024, we'll be significantly reducing the number of new hires. Our focus is on enabling our reps and ensuring that we have the appropriate support teams in place for them. We have specialists dedicated to selling Contact Center and Phone services, which is crucial for aligning our efforts to serve our customers effectively. This will remain a major focus for us.

James Fish, Analyst

Hi. Thanks for the question. I did want to ask on the Enterprise sales investment that we have been talking about the last couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps over the last few years really had the advantage of an easier sales cycle with Meetings especially? Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point? Thanks.

Kelby Steckelberg, CFO

We are always seeking ways to enhance the productivity of our representatives. Over the past few years, we have made numerous hires, but as we approach FY 2024, we plan to significantly reduce our hiring. Our focus is on enabling our representatives and ensuring that we have our support teams strategically placed to assist them. We have specialists dedicated to selling Contact Center and Phone services, which is crucial for aligning our efforts to best serve our customers. This remains a top priority for us.

Matthew Niknam, Analyst

Hey. Thank you for taking the question. I wanted to ask, you mentioned the greater value that customers are seeking out from the broader platform. I am just wondering, are there specific areas where you see maybe more room to strengthen the platform and with the compression we have seen in market valuations, how are you thinking about potential inorganic opportunities? Thanks.

Kelly Steckelberg, CFO

So Eric, do you want to talk about the platform and the value they see?

Eric Yuan, CEO

Yeah. Sure. Absolutely. I think for those customers who deploy Zoom One platform, right? They really like it. The reason why you look at the conference room; right, this used to be like you look at the conference room, right, most of the usage were used internally, right, for internal cost. Now look at the Zoom Rooms, that’s not the case. A lot of customers are leveraging Zoom, right, talk to customers and partners, right? That’s one difference because that’s the reason why customers like Zoom, right? When you talk with customer partners, you want to make sure I have the best experience, right? And another thing even for those companies who might think about laying off employees and reduce the number of the employees. Guess what? Less taxes, but more conference rooms. Then otherwise, what can you do, right, to double down on our customer and partner, right? And that’s why we still see the great opportunity ahead of us.

Alex Zukin, Analyst

Hey, everyone. I have a question that might be a bit challenging. Looking at Shebly’s point, the guidance for Enterprise revenue next quarter suggests a growth of around 15% to maintain the low 20s for the full year. If we consider what’s ahead, it seems that growth next year will likely be in the low-to-mid single digits, assuming the Online business normalizes or stabilizes and that macro conditions continue to worsen. With operating expenses rising nearly 30% this year, what is Zoom's strategy for a potential recession? We've seen some companies taking significant measures regarding their workforce and increasing business efficiency. What is the plan for both you and Eric regarding a recession?

Kelly Steckelberg, CFO

We are not providing guidance for FY 2024 on this call, but we will do so at the Q4 call. Your understanding of the topline growth aligns with our current perspective. Regarding operating margins, as we develop our FY 2024 plan, we are being very careful about prioritizing our investments. As you pointed out, we have increased our expenses and made significant hires this year, so it’s important to ensure that our focus is on the right internal priorities. We remain dedicated to innovation, addressing our customers' needs, and expanding our go-to-market strategies. These are our main priorities, and we want to allocate our resources effectively in these areas.

Ryan Koontz, Analyst

Thanks for the question. Can unpack the strength in Enterprise and how to think about that revenue growth across different product categories, if not quantitative; can you kind of give us an idea where phone stacks up versus expanded meeting license and any other products look like they can become meaningful in the next 12 months as you look at that on the Enterprise side? Thanks.

Kelly Steckelberg, CFO

We are very pleased with the progress we have made with Zoom One, Zoom Phone, and the strength of Zoom Rooms in Q3. We also see potential in the Contact Center, although it is still in its early stages. While their contribution to revenue is minimal at this time, we are noticing growth in quarter-over-quarter expansion for those products, which is very encouraging to see.

Catherine Trebnick, Analyst

Thank you for taking my question. Appreciate it. One of mine is on your partner program. You brought in a new partner executive last July. Could you specify any particular areas that he’s going to concentrate on to drive more revenue? He just interviewed one of the CRM magazines and said he wants to get to 50% revenue through the channel, and can you just address some of the ideas that he has to implement?

Kelly Steckelberg, CFO

So, yeah, Todd, Catherine is referring to Todd, who joined us, I think, a couple of quarters ago, he’s great. At Zoomtopia, he hosted our first partner connect with over 400 partners who were there. So that was super exciting to see. And while there are lots of opportunities, I think one of the biggest areas of opportunity is international partner expansion. We have done a good job over the last few years of building up master agents and carriers here in the U.S., but it’s still relatively nascent outside the U.S. So that will be a big area of focus for sure.

James Fish, Analyst

Hi. Thanks for the question. Most of might have been asked, but I did actually want to ask on the Enterprise sales investment that we have been talking about the last couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps over the last few years really had the advantage of an easier sales cycle with Meetings especially? Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point? Thanks.

Kelly Steckelberg, CFO

We are always seeking ways to enhance the productivity of our sales representatives. As we discussed, we have significantly increased our hiring over the past few years, but looking ahead to FY 2024, we plan to reduce the number of new hires. Our focus is on how we can better equip the reps and ensure that our support teams are strategically positioned to assist them. We have specialists dedicated to selling Contact Center and Phone solutions, which is crucial for aligning our efforts to serve our customers effectively. This remains a primary area of focus for us.

Ryan MacWilliams, Analyst

Thanks so much. hey. Follow up on Matt’s question. Kelly, can you hear me? Thanks so much. hey. Follow up on Matt’s question. Kelly, can you hear me? Thanks so much. hey. Follow up on Matt’s question. Kelly, can you hear me?

Parker Lane, Analyst

Yeah. hi. Thanks for taking the question. Kelly, you referenced thousands of customers that have signed up for Zoom One since it launched, I believe, about five months ago. Can you help me understand the profile of those customers a little bit better? The majority of them tend to be existing customers that have been migrated onto Zoom One new packaging, or are you seeing a big net new cohort as well? And then two, is it skewing more Enterprise for customers that are thinking about going with Zoom One, or are you also seeing a pretty decent spread across all different size organizations? Thanks.

Kelly Steckelberg, CFO

So Eric, I know you love to talk about Zoom One. Do you want to talk about it for a second just...

Eric Yuan, CEO

Yes, I think regarding our Zoom One, which we launched several months ago, it's evident that customers of all sizes, from Enterprise to SMB, recognize its value. This is reflected in the shift towards the Zoom One package across various markets, which aligns with our expectations.

Standard, Analyst

Thank you.

Ryan MacWilliams, Analyst

Thanks so much. hey. Follow up on Matt’s question. Kelly, can you hear me?

Siti Panigrahi, Analyst

Thank you. Thanks for taking my question. Just wanted to ask about macro pressure; you talked about last quarter sales elongation on the Enterprise side. What kind of plans you are seeing? Is anything worsened and also how does that impact your pipeline?

Kelly Steckelberg, CFO

So we certainly have seen impact, as I mentioned, from FX of the reduced guidance of $15 million; $14 million of that is coming from FX pressure, and you saw that certainly in our year-over-year growth in Europe and in APAC. In the Enterprise, again, renewals stayed strong, excitement about the products. But as we discussed, it’s continued in terms of additional deal scrutiny; I think all of my peer CFOs now are looking at deals, and that’s just causing elongation in general; not that we are losing deals. They are just taking longer to get done and potentially some of them pushing over quarters, but we haven’t seen that have an impact. It’s just taking longer and longer; not that they are going anywhere else. It’s just taking longer to get those done. I would mention that another impact we can’t predict is foreign exchange. This is more significant in the Online segment than in Enterprise. As we noted in our guidance, we estimate around $14 million of our adjustments are due to foreign exchange. Overall, the fundamentals of our business remain stable. Our Enterprise division and sales team are functioning consistently. The improvement in churn within the Online business, along with the majority of it now extending beyond the 15-month mark, is beneficial for our forecasting. The visibility remains unchanged, though there are different reasons for the various components you mentioned.

Karl Keirstead, Analyst

Thank you for taking my question, Kelly. I'd like to discuss your views on the billings number. Typically, we consider that figure a good indicator of business momentum. However, with the decline of 10% in the fourth quarter and just a 1% increase for the entire year, I assume you might see it as an inaccurate reflection of Zoom's momentum. Can you share your thoughts on that, as I believe there are concerns regarding the negative 10% and 5% in billings?

Kelly Steckelberg, CFO

Thank you, Karl. I should have mentioned this earlier. As a reminder, we don’t provide guidance on billings because we believe they aren’t an effective indicator for us. A significant portion of our customers, particularly in the Online segment, are on monthly contracts. Since they bill and pay us on a monthly basis, their figures don’t appear in that total, which is why billings aren’t a reliable measure for you to consider. Nothing significant. It’s really more about the timing; you are talking about the deferred revenue specifically.

George Iwanyc, Analyst

Hi. Thank you for taking my question. Eric, maybe with all the Enterprise progress you are showing. Can you give us an update on Contact Center and the adoption that you are seeing there?

Eric Yuan, CEO

Yeah, so again, the Contact Center is a new service, and we are very excited in particular for those customers who deploy our full service who would like to consolidate the UC and CC together. And also, we found interesting use cases; well, not only do those traditional customer interaction departments start deploying the Zoom Contact Center but also the internal IT desk as well, right? And again, the Contact Center seat cycle is a little bit longer like the Meetings. But, however, we showcase our platform capability and the speed of innovation, customers are very excited. And plus, you look at our own business, right? And we used to deploying other cloud Contact Center solutions, also with our own Contact Center solutions, our teams themselves are very, very excited. And a lot of potential pipelines and leads are right in the pipeline and also we are doubling down on that. And again, the product side, we have higher confidence. Go-to-market side, we are gaining traction as quickly as possible because, again, it takes some time plus also leverage channel and internal go-to-market investment. And I think that’s a future big revenue driver for us especially customers who want CC and UC together, right, and with a much better experience and also the total ownership of costs is also much better.

Kelly Steckelberg, CFO

And I think that’s a future big revenue driver for us, especially customers who want CC and UC together.

Eric Yuan, CEO

Thank you.

Operator, Operator

Thank you, Eric. And again, this does conclude today’s earnings release. We thank you all so much for your participation. And from our family to yours, may you have a safe and happy holiday season. Enjoy the rest of your day, and again we will see you next quarter. Good-bye.