Earnings Call Transcript - ZM Q4 2020

Operator, Operator

Hello everyone and welcome to Zoom's Fourth Quarter Fiscal Year 2020 Earnings Release. I would like to remind everyone that this conference is being recorded. At this time, I would like to turn the floor over to Tom McCallum, Head of Investor Relations.

Tom McCallum, Head of Investor Relations

Thank you, Matt. Hello, everyone, and welcome to Zoom’s Earnings Webinar for the fourth quarter and full fiscal year 2020. Joining me today will be 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 on the Zoom.com website. 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, include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements about future financial performance and other future events or trends, including guidance. 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 can affect our performance and financial results and which we discuss in detail in our filings with the SEC, including today’s earnings press release and our latest 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 it over to Eric.

Eric Yuan, CEO

Thank you, Tom. Thank you and welcome everyone joining us on the Zoom Video webinar. At Zoom, we strive to empower our customers to accomplish more with our video-first unified communications platform. Our success toward achieving this goal is evident in our results with the fourth quarter capping off a strong year for Zoom, our first year as a public company. Kelly will discuss our Q4 results and outlook in detail in a moment, so let me give you a few key highlights for the full year. For FY20, we delivered a unique combination of high revenue, profitability and free cash flow growth. Revenue grew 88% to $623 million and we exited Q4 at an annualized run rate of $0.75 billion. We achieved a non-GAAP operating margin of 14.2%, up over 900 basis points year-over-year. We generated free cash flow of $114 million for the full year, up 397% year-over-year. This is our fourth straight year of positive free cash flow and non-GAAP operating income. Our customer metrics were also impressive for FY20, including 86% growth year-over-year for customers with $100,000 of trailing twelve months revenue. We also recently celebrated the one-year anniversary of the launch of Zoom Phone, a key component of the Zoom unified communications platform that has significantly expanded our TAM. Zoom Phone had an incredible start and we are excited about the continued momentum of the offering. Here are just a few of the key metrics to demonstrate some of the Zoom Phone accomplishments we had this past year: First, we are grateful to have existing customers who trust us and new customers who have looked to Zoom Phone to resolve their telephone challenges. These factors enabled us to close Zoom Phone deals with approximately 2,900 customers who have more than 10 employees. Second, we exited the year with a run rate of 230 million Zoom Phone minutes. Zoom Phone is a great opportunity to expand our footprint with existing customers and drive new logos for companies looking to modernize away from legacy PBX systems. Now let me discuss a few of our happy customers. We are thrilled to welcome Johnson and Johnson, the world’s largest and most broadly-based health care company, to the Zoom family. We are grateful that Johnson and Johnson chose Zoom to help modernize and consolidate on a unified communications platform with approximately 60,000 Zoom meeting users. As a global company they wanted a solution that would enable them to communicate reliably around the world including growing regions in Asia. Thank you Johnson and Johnson. I also want to thank VMware for trusting Zoom. VMware has been providing all employees, globally, access to Zoom meetings and digital workspace, and will soon utilize a large deployment of Zoom Phone. The easy, single sign-on access to Zoom from any device is enabled to leverage the VMware Workspace ONE platform, allowing employees to access all the applications they need from their device of choice while ensuring security and compliance. Together with Zoom, VMware Workspace ONE helps businesses support their distributed workforces by enabling a remote-first culture. Thank you VMware. Moving to a few recent business highlights: First, in the 2020 Gartner Peer Insights Customers’ Choice Award for Meeting Solutions, Zoom received the top overall rating in the “Voice of the Customer” category. Zoom was the only company to achieve Customers’ Choice Awards for meeting solutions serving all listed regions, company sizes, and industry verticals. Second, Okta published their annual Businesses @ Work 2020 Report, a premier study of how organizations and people are using technology in the enterprise. The report highlighted Zoom as a preferred video application, posting 876% growth in the Okta network over the past three years! Zoom is the only company to earn the distinction of being both the fastest growing and most popular app. Third, we announced an expansion of our Global Channel Partner Program to add new partnerships with industry-leading Master Agents for Zoom Phone. Fourth, Caring for our community is a core value for Zoom and we are conscious of our impact on the environment. We proudly announced our top ten Green Leader customers, who were estimated to avoid the most carbon dioxide emissions by replacing in-person meetings with Zoom video meetings. In a 90 day period, the top ten customers were estimated to have avoided the equivalent of the annual carbon dioxide emissions of 149,000 cars. Before turning the webinar over to Kelly, I’d also like to address the global impact we are seeing from the coronavirus. While this tragic situation is very fluid, Zoom is focused on using our resources to help alleviate some of the disruption and communication challenges as an alternative to in-person meetings for our employees, customers and community. I am happy to report that all of our employees in the affected areas are healthy. Given the recent emergence and growing number of coronavirus cases in the United States, we have directed our headquarters employees to work from home, unless there is a business-critical need for them to be in the office. We’re taking this step out of abundance of caution. Zoom is doing everything we can, especially for global educational institutions, to provide resources and support our customers and those navigating the coronavirus outbreak, including: We are proactively monitoring capacity globally to ensure maximum reliability amid usage increases. In China, we have removed the 40 minute limit on free meetings. And we are providing informational sessions and on-demand resources so anyone can learn how to use the Zoom platform with ease. With the reliability of our high-quality video platform, we have seen a large increase in the number of free users, meeting minutes and new video use cases. For instance, in China, healthcare workers under stressful conditions in affected areas are able to connect live on video with therapists. In closing, I’d like to thank the over 2,500 Zoom employees who are building Zoom into a great company through caring for our customers, community, company, teammates, and themselves. As we remain focused on creating a culture built around happiness and caring, I know we will position Zoom for future success. With that, let me turn things over to Kelly.

Kelly Steckelberg, CFO

Thank you, Eric, and hello everyone. Let me start by reviewing our financial results for Q4, then discussing our outlook for Q1 and the full year of FY21. As Eric said, Q4 was a strong end to the year. We delivered another amazing quarter with continued traction for all offerings across all major geographies. For Q4 specifically, total revenue grew 78% year-over-year to $188 million. This top line result exceeded the high-end of our guidance range by $12 million due to our strong sales execution in the quarter. We delivered our Zoom Meetings, Rooms, and Phone solutions to new accounts while driving major expansions with existing customers. For the quarter, new customers accounted for approximately 59% of our year-over-year growth in subscription revenue while the remaining 41% was due to additional purchases from existing customers. Now, let me share some of the key customer metrics for Q4: We added approximately 7,800 customers with more than 10 employees quarter-over-quarter and exited Q4 with 81,900 customers. This is an increase of 31,100 new customers, or 61% year-over-year. Customers with more than 10 employees represented approximately 80% of revenue in FY20, compared to approximately 78% in the prior fiscal year. Our continued expansion in the up-market resulted in 641 customers with more than $100,000 in trailing twelve months revenue, up 86% year-over-year. This is an increase of 95 customers, a record number of adds in a quarter. The high level of satisfaction and trust customers have in Zoom was evident in our net dollar expansion rate that was over 130% for the seventh consecutive quarter and our Net Promoter Score which remained above 70 in Q4. Next, international expansion outpaced the high rate of growth in Americas revenue. In Q4, our combined APAC and EMEA revenue grew 84% year-over-year and represented approximately 20% of revenue. Revenue from the Americas was up 77% year-over-year and represented approximately 80% of revenue. International expansion will continue to be one of our key growth initiatives in FY21 and beyond. Now turning to profitability. Once again, we were net income profitable from both GAAP and non-GAAP perspectives, but I will focus on our non-GAAP results, which exclude stock-based compensation expense and related share-based equity taxes. Non-GAAP gross margin in the fourth quarter was 84.2%, compared to 82.1% in Q4 last year and 82.9% last quarter. This result was driven by the strong sales execution in the quarter and lower seasonal audio usage in Q4 due to the extended holiday season. Due to the coronavirus, we have already seen significant usage of our platform and accordingly we will expand our capacity to meet the increased demands of both paid and free users. For FY21, we believe our gross margins will be at the lower end of our long-term target of 80% to 82%. R&D expense in Q4 was approximately $16 million, up 60% year-over-year. As a percent of total revenue, R&D was 9%, which was slightly lower than Q4 last year. In FY21, we plan to continue investing in our highly efficient R&D model to drive innovation through adding engineering talent, especially in the first half of the year. Sales and marketing expense for Q4 was $84 million. This reflects an increase of 57% or $30 million dollars over last year with investments to drive further growth. As a percentage of total revenue, sales and marketing was 45%, lower than Q4 last year due to continued efficiency gains in marketing combined with slightly slower than expected sales hiring and the higher than forecasted revenue. We look to increase the pace of hiring in the up-market and internationally in FY21 with additional resources being added to recruiting. G&A expense in Q4 was $20 million, up 49% on a year-over-year basis. It represented 11% of total revenue, benefiting from efficiencies as we scale our administrative functions and lower our accrual for telco taxes. Non-GAAP operating income was $38 million, translating to a 20.4% non-GAAP operating margin for the fourth quarter. This compares to Q4 last year’s result of $10 million and 9.3% margin. The higher revenue plus expense efficiencies across all areas were the main drivers of this additional profit. Non-GAAP earnings per share in Q4 was $0.15, on approximately 293 million of non-GAAP, weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.08 higher than our guidance and $0.11 higher than Q4 of last year. Turning to the balance sheet. Deferred revenue at the end of the quarter was $231 million, up 83% year-over-year. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $604 million, up 94% from $312 million last year. We expect to recognize approximately 62% or $375 million of the total RPO as revenue over the next 12 months as compared to 67% or $208 million in Q4 last year. This is a result of the mix shift between current RPO which grew 81% year-over-year, while non-current RPO grew 120% year-over-year as we closed longer-term deals. The RPO results also reflect some expected seasonality benefits in Q4 due to our semi-annual quotas in the up-market segment of our business. We ended Q4 with approximately $855 million in cash, cash equivalents and marketable securities, excluding restricted cash. In Q4, operating cash flow was $37 million, up from $16 million or 129% year-over-year. Free cash flow was $27 million, up from $6 million or 368% year-over-year. As we previously discussed, these results reflect the use of cash for the purchase of shares via the Employee Stock Purchase Plan. Starting in FY21, we expect the cadence of benefits from contributions to the ESPP to occur in Q1 and Q3 and net outflows from purchases to occur in Q2 and Q4. Now turning to guidance, we are pleased to provide a strong outlook for the full year FY21 based on our view of the current business environment, our ability to gain market share and with the momentum we built in FY20. For the full year of FY21, we expect revenue to be in the range of $905 million to $915 million, which would be approximately 45% to 47% year-over-year growth. Non-GAAP operating income is expected to be in the range of $110 million to $120 million. We expect to deliver non-GAAP earnings per share of $0.42 to $0.45 for the full year FY21, based on approximately 301 million shares outstanding. For the first quarter, we expect revenue in the range of $199 million to $201 million. We expect non-GAAP operating income to be in the range of $25 million to $27 million. Our outlook for non-GAAP earnings per share is $0.10 based on approximately 297 million shares outstanding. In closing, we executed very well and are proud of the results we delivered in our first year as a public company. Our high growth outlook at this scale is truly unique. Given our ROI-focused business model, we continue to deliver a rare combination of strong profitability and free cash flow margins along with our top line growth. I would also like to thank the entire Zoom team for their hard work this past year and look forward to achieving additional market share gains and growth as we deliver happiness to our customers with our unified communications platform. With that, let's open it up for questions. If you have not yet enabled your video, please do so now for the interactive portion of this meeting. Matt, please queue up our first question.

Operator, Operator

Our first question is from Nikolay Beliov from Bank of America Merrill Lynch.

Nikolay Beliov, Analyst

Hi, thank you for taking my questions and congratulations on the strong results. I want to express my gratitude to Zoom for its significant role in addressing the challenges posed by the virus. My first question is for Eric. Do you believe that this viral situation is enhancing customer conversations and leading to a greater appreciation of your business model? Do you think this shift in spending intentions could be lasting or is it just a temporary trend? And for you, Kelly, did the virus have an effect on Q4 results, particularly regarding billings and RPO, and how did you factor any potential positive impacts into the guidance?

Eric Yuan, CEO

Nikolay, that's a good question. First of all, I like your voice and background, where are you now?

Nikolay Beliov, Analyst

You don't want to know where I'm now.

Eric Yuan, CEO

I think first of all, I don't think that's temporary. The reason why is, I mean, in terms of experience about using video conference like Zoom. Look at companies that are now operating without a physical office, like InVision, Zapier, or Gitlab. You really understand how we enable remote workers to work together? However, if you look at conference out, a part of the world or maybe you know, on the other side of California, quite often we need help. We knew in the future of communication that it unites video and as we needed to explain that. But given this coronavirus, I think overnight almost everybody understood that they needed a tool like this. This will dramatically change the landscape. I believe in the future, everyone will turn to video for remote collaboration.

Kelly Steckelberg, CFO

In terms of our results in Q4, we did not see any impact directly related to the coronavirus, and as a reminder, we have definitely seen an uptick in usage. But a lot of that is on the free side. So it's very early to tell whether or not that's going to convert long-term into paying customers. As we mentioned, we are seeing impact and if continue to build capacity to ensure that we can support this increased usage. So we are seeing impact on our gross margins, which is why we're guiding you toward the lower end of our range for next year.

Eric Yuan, CEO

By the way, I mentioned this to some of my friends. If I were to start a company, well, I'm not going to have a single physical office. A lot of people, as I mentioned, are you crazy? Now they realize that's reality now.

Operator, Operator

Next question is from Bhavan Suri with William Blair.

Bhavan Suri, Analyst

Hey guys, thanks for taking my question. I want to touch a little bit on the vertical sales effort. You've talked a lot, Eric, about sort of the adoption of Zoom or taking hold on a vertical by vertical basis. Just strategies, you think about the verticals strategy on the sales force that go to market and then the applications you are integrating. How do you think about that given sort of the increasing presence in enterprise?

Eric Yuan, CEO

Yes, that's a good question. So when we started, we did not know which vertical market we were going to focus on. Fortunately, we saw quite a few high-end customers who deployed Zoom. Stanford started its group as our first customer, which is why our first vertical market was higher education. Several years ago, we found a great use case which is healthcare customers because they were looking for a solution. They found Zoom and we also kept our compliance, the product is first and Epic, which I think is a very, very important vertical market. At the same time, we also, last year we got a federal certificate. We also expanded into the public sector market by focusing on enterprise, healthcare, public sectors and we also expanded into the financial institutions. I think all of those vertical markets, use cases are a little bit different, but our functionality, our features, and flexibility are truly amazing.

Bhavan Suri, Analyst

That's helpful. And I wanted to touch a little bit more on strategically, if we could take a step back. We've talked a lot about convergence and you've discussed this in the past, you've discussed it in calls, but it's convergence, video, voice, you've talked about that. We know collaboration is a piece and, again, your partner there. But as you think about this idea of remote, disconnected people, all of it ties into collaboration. How do we communicate and collaborate in word documents, PowerPoints, whatever you're using? How do you think about Zoom playing safe video? Sure, there is Zoom Phone. But if I have to fast forward, do you think ultimately that collaboration space converges? Where do you guys end up sitting in terms of the content piece? I'd love to understand how you think about the content part of the collaboration piece, not video and voice content obviously, but we're talking about the data piece. How do you think about that? I know you're going to say partnership but I'm talking ten years out as opposed to say the near term.

Eric Yuan, CEO

I think for the foreseeable future, video and voice and unified communications, that's a huge market, right, for this billion dollars market. I think we are going to be very busy like especially for enterprises migrating to the cloud, video and voice will be converted into web service. We are going to laser focus on video and voice. But, at the same time, we are also building a platform. Our marketplace has already over 200 applications. We like to integrate with other collaboration vendors focusing on the content, like Dropbox and Box, like Okta or Max Soft. I think that's the direction. While customers are looking for the best of breed of service, right, with intercoms video and voice, I think that's our game.

Operator, Operator

Our next question is from Sterling Auty with JPMorgan.

Sterling Auty, Analyst

So with the surging free users, are you actually developing programs that will work on conversion of these potentially temporary free users into permanent paid users?

Eric Yuan, CEO

Yes, that's a good question. First of all, we all feel sorry about those who have suffered from coronavirus in China and all over the world. We're super grateful to those doctors for fighting the war against coronavirus. I think that's why we really focus on how to help those companies and workers to connect, because in this critical time, I want to say empathy, humanity and support for each other is more important than revenue and growth. At this moment, we are laser focused on offering the best service to have the people in the world connect. We never even considered monetizing, because that's not our focus. That's not important. If you truly care about your customers and truly deliver value to the world, I think all of that will follow in the future.

Sterling Auty, Analyst

Got it. And then one follow-up on Zoom Phone. You talked about almost 3,000 Zoom Phone customers. Where are you finding the sweet spot in terms of the size of the companies that are really gravitating towards moving over to Zoom Phone? You mentioned VMware in your prepared remarks, but is there a sweet spot for where Zoom Phone is heading?

Eric Yuan, CEO

I think that in my view, I feel everybody is in the sweet spot now. Because you look at our installed base from SMB all the way to enterprise customers, when they talk about Zoom Phone, after they test it, they say, wow, that’s exactly what they are looking for. We see greater customer adoption from SAP customers, Zoom Phone VMR as well because the experience is very different. If you look at all other phone systems, no matter if it’s an on-prem phone system or cloud-based phone system, ultimately, you are just making a phone call. With Zoom Phone, it is very different. With one more click I can see you, I can share the content. That’s a totally different architecture. If you look at our install base after they test it, customers really like our experience. No other solutions can match that experience.

Operator, Operator

Our next question comes from Meta Marshall with Morgan Stanley.

Kelly Steckelberg, CFO

Matt, she is on mute still.

Operator, Operator

Hey Meta.

Meta Marshall, Analyst

You put out some announcements over the past couple of days on additional geographies as far as Zoom phone, just wanted to see whether we should consider you guys covered in the major regions you'd like to be deployed in as far as Zoom phone reach for now. And then, maybe Kelly you can address kind of the growth margin impacts should be mostly from capacity increases from some of the free usage right now. But should we consider some of that gross margin impact from Zoom Phone adoption as well as? That's it for me. Thanks.

Kelly Steckelberg, CFO

We are very excited to have added 11 new countries to general availability for Zoom Phone, bringing the total to 18 countries, with an additional 25 in beta. We are getting close to our goal of being in nearly 50 countries by the end of this year. We are still working on key markets like India and China. As for the gross margin impact, we haven’t seen any significant effects from Zoom Phone yet, as its usage remains small in relation to the overall figures. The changes in gross margins are primarily attributed to the global increase we noticed over the last month, mostly related to the coronavirus.

Operator, Operator

Our next question is from Heather Bellini with Goldman Sachs.

Heather Bellini, Analyst

I just wanted to follow up on Zoom Phone. I mean, in a really short period of time, you've obviously had some great success with that rollout. Eric, knowing that you're constantly listening to customer feedback, what are the top R&D priorities for Zoom Phone, if you look ahead over the next 12 months? And also do you see any benefit on the horizon by Avaya's decision to partner with Ring Central instead of kind of going down their own path? So as those customers look to migrate, do you see an opportunity there? Thank you so much.

Eric Yuan, CEO

Heather, thank you. I know you are probably traveling. So next time we can see you and that's a good question. In terms of Zoom Phone effort, we don’t assume that's a brand new application but possibly a platform. The first application that is built upon the platform is to do conference. The second obligation is Zoom Phone. Many of us share lots of the components when we build the Zoom Phone system. Having said that, there are some features missing and also international coverage as well. We are making very, very good progress as Kelly just shared. In terms of this year, we are adding a little bit more features like recently we can also SMS, right? And also add a lot of features. All those features, I do know things, I could assess, really just a partition level of work. The harder part is already done, right? That's why we have high confidence we can deliver a much better solution than any of our potential competitors. Regarding the Avaya-Ring Center deal, I think from our perspective, we really focus on our installed base and focus on video and voice convergence. That's our region. Today, looking at some of the customer take VMware, right? They deployed on-premise solutions and some other customers also deployed maybe the on-prem Avaya solutions. When they evaluate which cloud-based PBX solution to go for, if they do the test, they will know that Zoom experience is better. It's better than any other cloud-based PBX vendors. We have high confidence as long as customers try our solutions, that's a solution to go.

Operator, Operator

Our next question is from Brad Zelnick with Credit Suisse. Brad, you are unmuted.

Brad Zelnick, Analyst

I don't know if you guys can see me, but it was nice to see you. Fantastic, great. So, congrats on all the success thus far with phone. We've seen some of your competitors really leverage the channel to drive success and I was wondering how should we think about your willingness to do the same?

Kelly Steckelberg, CFO

Yes. So we're really excited to announce that we just launched our master agent program for phones specifically and we've signed up two big partners in Mphasis and Avant. The more formal launch will be next week at the channel conference. Yes. Thank you.

Brad Zelnick, Analyst

Great. Thank you, Kelly. And maybe just to follow up on that expansion, it remains above 130%, but based on our math, it would seem to be the lowest level of expansion that we've seen thus far. How much of the deceleration is due to large lands and how should we think about expansion rates from here?

Kelly Steckelberg, CFO

So there's a couple of things that contribute to our net dollar expansion rate. It's land and expand as you touched on as well as Zoom Phone. We really see great opportunity for that number to be influenced by Zoom Phone as well as land-and-expand is a critical part. It does vary quarter-over-quarter depending on the size of the initial deals. But we're confident for the long term that it'll stay at about 130.

Operator, Operator

Our next question is from Tom Roderick with Stifel.

Tom Roderick, Analyst

Hi everyone. Thank you for having me on. Thanks for taking my question. So Eric, apologize, I jumped over and I think you were talking about this right as I jumped over, but obviously your customers are very excited to be able to use Zoom during a challenging time. At the same time, obviously you have a pretty nice sized workforce over there in China as well. I would love to hear just a little bit more about how you're able to still communicate what your procedures are with your R&D staff? And as you talk about building up more R&D dollars in the year 2020, help us understand where geographically you're thinking about that in spite of all of the challenges we're facing globally right now with the coronavirus taking place. Thank you.

Eric Yuan, CEO

Yes. Good question. If you look at our R&D resources, the core R&D is here, our headquarters in San Jose. We also have a team in China and of course, I met at a WebEx engineer team before. I'm very familiar with that process, how to manage the offshore team. Inside of that, we are using Zoom Video every day. Every engineer is available anytime, anywhere, working under a secured process. We are already familiar with remote working practices for a long time. During the coronavirus, many other businesses have to work from home; however, we had no impact on our operations. Most of our employees already know how to perform their jobs remotely. Over the past several weeks, most of them have been back to work. There’s been no impact whatsoever, and we continue to work together with our team effectively by using Zoom. I think the impact on us is minimal. This year, over the next two years, I think we’re going to hire more and more resources, especially for new services, a lot of artificial intelligence features, and core capabilities. Of course, the core IP R&D is still developed here because that's why we further expand our R&D team here at our headquarters this year and beyond.

Tom Roderick, Analyst

Great. And a quick follow-up for you, Eric, just thinking about the disruptive moments in tech. This is clearly a disruptive moment in the global economy. When you think about your conversations with your biggest customers out there, how are they talking about the way that they want to expand with their key partners over the next one to three years? Do you think of this as an opportunity to really shift some of those into a big digital transformation as they reevaluate how they spend their money coming out of this situation?

Eric Yuan, CEO

Yes. That's a good question. Today, we also have our Annual Analyst meetings as well. In addition to talking with our customers, I think this is a very critical moment. Meaning, I believe we are going to leverage video conferencing services like Zoom to drive productivity, no matter where those employees are; they still want to get the job done. The key to video conferencing is that it has to work anytime, anywhere, and on any device. Otherwise, they are not going to use it. Because of this coronavirus, a lot of businesses have removed employees, and after they tried Zoom for the first time, many users expressed that it just works. I think this is a very exciting time in terms of how to further drive video conferencing adoption. I believe this trend is very sustainable.

Operator, Operator

Our next question is from Pat Walravens with JMP.

Pat Walravens, Analyst

So Eric, looking forward to having the COVID-19 result and when we get there, I wonder if you could help us think a little bit about what the long-term opportunity is like for Zoom in China. And maybe just to put a couple ideas there. How might pricing be different? How might the competition be different and how might user behavior be different?

Eric Yuan, CEO

Yes, that's a good question. Our revenue from Asia, including China, is relatively small. It's still primarily driven by North America and Europe, as well as Japan and Australia. Due to the coronavirus, I believe China has recognized the need for more tools, not just Zoom but also B2B tools to enhance productivity. Previously, it was common to have meetings with 10 people in person, but now, since gathering everyone together is not feasible, many have returned home. This situation will likely increase the adoption of B2B SaaS applications in China. I am confident that video conferencing is a tool that everyone understands. While we do have some local competitors, the market holds significant potential, and we are currently evaluating several options. Our goal is to establish a sustainable strategy to expand into China while providing local benefits.

Pat Walravens, Analyst

And if I could ask, since we're all starting to have to work from home remotely a lot more, do you have one or two key pointers you'd give us on how to do it effectively? Does the camera have to be on all the time?

Eric Yuan, CEO

First of all, I did not realize you were at home. I didn't know.

Kelly Steckelberg, CFO

Yes. That's the first one is get a virtual background. That helps a lot.

Eric Yuan, CEO

I think that's pretty much actually. In terms of we have all the features built-in, right? If you just learn some features, you will see that like, I think a sample, my favorite feature is touch up my appearance. Also, we have great features for breakout sessions. Many features have been built over the past several years. I think finally, our customers realized it's time to clear on all the features we will build further.

Operator, Operator

Our next question is from Ryan MacWilliams with Stephens. Ryan, you are unmuted.

Ryan MacWilliams, Analyst

So how do you see the market trending for cloud voice pricing going forward? Is there a temptation on your end to reduce pricing for Zoom Phone, especially given the fact some of your competitors have started offering their own video capabilities for free?

Kelly Steckelberg, CFO

Well, we believe that we were already very competitively priced from both Zoom Phone and Zoom Meetings perspectives against the market. We haven't seen price pressure beyond the normal discounting that we typically do. We feel really good about where we're sitting. The way that we have historically brought value to our customers is by adding more features to both meetings and phone, and we will continue to do that across all of our product lines.

Eric Yuan, CEO

In terms of a comment about some vendors offering free video conferencing, it's very easy to create a basic video conferencing solution using open source. However, achieving global scale with security, reliability, and five-minute availability is extremely challenging. I've been in the real-time collaboration space for almost 23 years, and if you look at where we are now, there are still many gaps that need to be addressed. Free options will not be sufficient; customers expect a higher level of service.

Ryan MacWilliams, Analyst

Great. I just want to add to that point, with 230 million Zoom Phone voice minutes and video minutes also expanding with Zoom Phone or zoom customer growth, how do you see the AI opportunity for Zoom to add features around transcription around this influx of usage?

Eric Yuan, CEO

So voice and video are on the same platform, but there are certain process which make it secure. We are working on what a customer key means to improve based on the key offered by customers. But sometimes, voice is a little bit different. With Zoom, we can offer a very secure service. However, if you want to dial someone else, through the traditional PSTN network, it’s really hard because it's out of our control.

Operator, Operator

Our next question is from Zane Chrane with Bernstein. Zane, you're unmuted. We will come back to Zane. The next question is from Will Power with Baird.

Will Power, Analyst

I guess first question is, as we think about the coronavirus impacts, any color you can provide in terms of the geographic spread of traffic, how much of the traffic increase was in China versus in other geographies? And I'd love to hear anything more on some of the more unique use cases you've seen.

Eric Yuan, CEO

I'm going to start and feel free to chime in, Kelly. I think over the past several weeks, first of all, we see very significant growth from users in China. The good news is we have very flexible banking architecture. We can auto-scale our servers. That’s why within several days, we added a lot of capacity. Our customers there have been very happy. Afterwards, we see the usage growing not just in China but also in Vietnam, Singapore, Japan, and other countries in the APAC region. Last week, we also saw similar increases from Europe and here as well.

Kelly Steckelberg, CFO

We discussed various use cases, including doctors receiving therapy. Additionally, many educational institutions have halted study abroad programs or moved to remote learning for their students. We've also noticed some of our clients transitioning to a work-from-home requirement for their employees. This trend indicates a growing demand in that area.

Will Power, Analyst

In virtual events too.

Kelly Steckelberg, CFO

Yes. A lot of virtual events.

Eric Yuan, CEO

Why use case service not only do we offer video, but we also offer video web in a platform. It’s quite powerful. We have doctors for a long time, struggling with depression and anxiety, and the number one university in China, with some other psychologist, they used Zoom to help treat the doctors there. That’s a good use case and it really made those doctors in Wuhan very, very happy.

Will Power, Analyst

Okay. Then if I could just get one question in on Zoom Phone. As you look across the broader unified communication space, there seems to be increased interest in bundling contact center. I wonder if you look at your 2,900 customers, any comments as to how many are taking contact center? How do you think about the partnership model there long-term versus having your own platform?

Eric Yuan, CEO

Yes, you're correct. We concentrate on our voice and video capabilities regarding the contact center, and we view it as a distinct market. However, customers are seeking seamless integrations. That's why we have partnered with Five9, Twilio, and Genesys, particularly with Five9. Steve Rowe is an exceptional leader in collaboration, and both teams collaborate effectively. Similar to Zoom, we utilize our Zoom phone system along with Five9, and the solution performs exceptionally well. I believe there is significant potential for collaboration between Zoom and Five9. Ultimately, we aim to partner with various contact center solutions.

Operator, Operator

Next question we are going back to Zane Chrane with Bernstein.

Zane Chrane, Analyst

So I wanted to dig into the non-business customers a little bit. I know that only about 20% of your revenue at the time of IPO, but it's important group in some ways just because it had a much higher annualized churn rate than I think your business customers typically do. Can you give us a sense of what portion of the revenue non-business customers comprise now and what that should look like over the next couple of years?

Kelly Steckelberg, CFO

Yes. It's actually been really steady at that same 20% of revenue for FY20. I think over time as we continue to focus more and more on the upmarket, we'll see that overall percentage decrease, but it's been pretty steady and consistent over the last year.

Zane Chrane, Analyst

And just a follow-up to that, have the renewal rates, the contract renewal rates either on a customer or dollar basis changed over the last year? I know you've talked about the net expansion rate before, including upsell and seat expansion, how should we think about the trend for just contract renewals?

Kelly Steckelberg, CFO

Yes. We haven't seen any trade changes. It's been pretty consistent. It's holding pretty steady.

Operator, Operator

Our next question comes from Alex Zukin with RBC.

Alex Zukin, Analyst

Hey guys, thanks for taking my question. Congratulations on another very successful quarter. Maybe first for Eric, how important, particularly in the larger deal opportunities as you think about the future of work and the compression of that adoption curve given something like the coronavirus, how important from a go-to-market perspective and some of those larger deals are your relationships with partners like Slack, like Dropbox that enable your customers to create an entire experience around this area?

Eric Yuan, CEO

Yes. That's a good question. I think, first of all, I'd like to take a step back into the service. What’s happening in this part of the decision-making process for lots of investments? Because over the term of 10 or 20 years, nobody was able to find these connections. Today is very different. Almost 50% of the workforce considers adopting work from home. Many have grown up with a smartphone. If you do not like your service, no matter what, they are not going to use it. This shapes their habits and experiences. Having said that, I think land and expand influenced the bottom-up users extremely critically, right? Quite often, they already use Dropbox and Slack. They want to find the best way to integrate with our services. That is why we have very, very tight integration with Dropbox. Within the Dropbox interface, you can log into Zoom. With Slack, it also integrates with Zoom. I think that’s a trend; the service will drive the adoption which will truly deliver happiness to our customers.

Alex Zukin, Analyst

That's great. And then maybe Kelly one for you, if I think about current RPO and RPO, I think we're looking at the current RPO bookings of 58%, compare that roughly to the 46% guide for revenue growth next year. Help us bridge that a little bit. And then in the script you also mentioned some seasonality benefits to RPO from semi-annual quotas in the up-market segment. Can you maybe unpack that and explain that a little bit?

Kelly Steckelberg, CFO

Yes. Just a quick reminder that RPO is not an absolute directional metric for us due to a significant percentage of our customers who both buy and pay monthly, so it doesn't correlate the way you would expect it to run for other enterprise customers. In terms of seasonality, if you remember when we talked about this in Q3, we noticed some seasonality where it was somewhat flatter Q2 to Q3, and now we’re seeing that benefit in Q4 due to the fact that our up-market teams are on six-month plans. As we approach the end of their six-month plans, they have the opportunity to overachieve and then go into accelerators, and that’s what you’re seeing in some of that increase for the RPO for Q4.

Operator, Operator

Our next question is from Phil Winslow with Wells Fargo. Phil, I unmuted you.

Phil Winslow, Analyst

Just want to focus in on Zoom Phone. Obviously you guys continue to do great traction there. I remember when you first launched it, you said it would take a while to get some of these bigger customer wins and knock down. It seems like you've done that. If we think about just the functionality of the offerings, is this for the 80/20 rule, we've got 80% of the functionality you need to actually knock down some of these big accounts, and the 20% is just for maybe a small percentage of the base. Maybe help us think about the functionality right now and how that affects the types of customers you can address and where you see this going forward.

Eric Yuan, CEO

Yes, Phil, that's a good question. So maybe I'd like to share with you a little bit of an analogy about what's going on in the smartphone industry. The first time I saw the Blackberry, I knew that all the feature phone era was over; all of those feature phones would die because the Blackberry offered something new that other feature phones could not. I fell in love with Blackberry for many, many years until I saw the iPhone. When I saw the iPhone, I knew Blackberry was over because they had a marketplace with all kinds of applications; the iPhone offered something that Blackberry never could: apps. Something similar is happening in the PBX market. On the other hand, you are so right. We lack some features; customers look at our product first. With one more click, they can screen share and engage in a video call, and they say, wow, that’s the future. That’s something very critical. I think in the near term, we can handle most features and we can still keep improving customer experience.

Operator, Operator

Yes. Our next and final question is from Jonathan Kees with Summit Insights Group.

Jonathan Kees, Analyst

Great. Well, glad I made it in. Thank you for picking my questions and I'll add my kudos to your strong numbers. My questions are, I guess if you can update us in terms of your partnership with Ring Central, Five9, the apartments where you're white label — basically any of the partners were there the lead-in to a deal they bring you in; in the past, you've talked about how that's trending and trending well; if you could update us on that and quantify anything for us, that would be great. I have one other question.

Eric Yuan, CEO

Yes. Thank you, Jonathan. By the way, we have a very good feature called a virtual background, if you want to try.

Jonathan Kees, Analyst

I'm still learning it, so maybe I will confirm to stay in the background. Right now I have a couple of home offices.

Tom McCallum, Head of Investor Relations

I'm happy to follow up with you, Jonathan. Make sure you can get it. Not a problem.

Jonathan Kees, Analyst

I/itsupport. Great.

Tom McCallum, Head of Investor Relations

Yes, and sales.

Eric Yuan, CEO

Yes, speaking of partnerships, taking Five9 for example, I think this year we’ll achieve more because the two teams enjoy working together. I know Rowan Trollope is a great leader. I think more customers will say, hey, I want to deploy Zoom Phone, I also want to pick up a contact center solution — Five9 is a great partner. Along with some other contact center partners as well. In Ring Central, they're all very good partners. Over the past several years, I think very smartly they partnered with the best services available. That’s why we build solutions for them; which is really the central meetings, and these partnerships have greatly enhanced our position in the unified communication market. However, we like to focus on our customer experience rather than building competitive elements. Overall, revenue from customers would be relatively small, right? We would like to deploy the unified solution from other vendors. We do voice and the same architecture. You'll see more overlap. It will ultimately just between Zoom and Ring Central, especially after they announced they would employ our conference service; I’m pretty sure that experience would not be as good as Zoom.

Tom McCallum, Head of Investor Relations

Great. Do you want to have some closing remarks and just thank everyone, Eric?

Eric Yuan, CEO

First of all, thank you all for your time. I really appreciate your support, and we will do all we can to deliver much better service to our customers. Thank you.

Tom McCallum, Head of Investor Relations

Thank you everyone.

Kelly Steckelberg, CFO

Bye everybody. Thank you.

Tom McCallum, Head of Investor Relations

Appreciate it. Thank you.