Earnings Call Transcript - ZM Q4 2024

Operator, Operator

Okay. Hello, everyone, and welcome to Zoom's Q4 FY '24 Earnings Webinar. As a reminder, today's webinar is being recorded. And now, I would like to hand things over to Tom McCallum, Head of Investor Relations.

Tom McCallum, Head of Investor Relations

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the fourth quarter and full fiscal year 2024. I'm joined today by Zoom's Founder and CEO, Eric Yuan; and Zoom's CFO, Kelly Steckelberg. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that along with our earnings release include a reconciliation of GAAP to non-GAAP financial results. During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first quarter and full fiscal year 2025; 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 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

Hey. Thank you, Tom. Thank you everyone for joining us today. In FY ‘24, we made a tremendous amount of progress towards our mission of one platform delivering limitless human connection. As Generative AI began to take the world by storm, we listened carefully to customers in order to deliver AI that can best serve their needs, with innovation that is responsible, empowering, and built from the ground up in a way that permeates and unifies our entire platform. Zoom AI Companion, our generative AI assistant, empowers customers and employees with enhanced productivity, team effectiveness, and skills. Since its launch only five months ago, we expanded AI Companion to six Zoom products, all included at no additional cost to licensed users. But we are far from done. Our future roadmap for AI is 100% guided by driving customer value. We are hard at work developing new AI capabilities to help customers achieve their unique business objectives and we'll have more to share in a month at Enterprise Connect. We hope to see you all there. Our expanding Contact Center suite is a unified, AI-first solution that offers tremendous value to companies of all sizes seeking to strengthen customer relationships and deliver better outcomes. The base product includes AI Companion and our newly launched tiered pricing allows customers to add specialized CX capabilities such as AI Expert Assist, workforce management, quality management, virtual agent, and omnichannel support. Bolstered by its expanding features, our Contact Center suite is beginning to win in head-to-head competition with legacy incumbents. Beyond that, it is competing on its own merits with customers completely new to Zoom, broadening the funnel to the Zoom platform. As Zoom becomes a full workplace solution, we are seeing customers migrate from other chat products onto Zoom Team Chat, very excited. Over the past year, Zoom Team Chat usage has increased 130% across our paid accounts. And our migration tool, designed to simplify the transition, has seen a 4x increase in downloads in the last six months. Customers across industries are moving to Zoom Team Chat including a global supply chain leader, who has migrated over 1,200 users, a major law firm who has migrated 1,500 users, and a financial payments leader, who has moved over 2,000 users. Customers appreciate the improved user experiences and enhanced collaboration driven by our Zoom Team Chat product as well as the cost efficiencies realized by consolidating their communications and collaboration solutions onto Zoom. Last April, we acquired Workvivo and its integration into the Zoom interface has strengthened its market position. In Q4, we upsold a Fortune 10 company and long-standing Zoom customer on Workvivo, making it Workvivo's biggest customer to date. And on the flip side, we also saw a global bank, who started as a Workvivo customer, adopt the broader Zoom platform. As you can see, adding new products both organically and inorganically creates a virtuous cycle, allowing us to sell more product into a larger base. We were very pleased to see Workvivo recognized as a leader by Magic Quadrant in its first report on Intranet Packaged Solutions. Similarly, Zoom Revenue Accelerator was recognized as a Strong Performer in The Forrester Wave in its first year of being covered, an amazing testament to its value as a powerful AI-enabled tool driving value for sales teams. FY ‘24 was a difficult year from a macro perspective and we faced those challenges head-on. We became more disciplined and focused, while continuing to prioritize growth opportunities. As a result, we are much better positioned than we were one year ago. Our platform moat is deeper, our contact center offering is more robust, and our go-to-market teams are primed with defined goals and sharpened expertise to drive growth and empower our customers. Now, let's talk about some of our amazing customers. First, I'm so excited to welcome Broadcom, a global infrastructure technology leader, to the Zoom family. Recognizing the simplicity and ease of use of our expanding platform, they opted for the Zoom One Enterprise bundle to modernize the way they communicate and collaborate. Let me also thank Diageo, a leading global beverage company, for doubling down on Zoom. Seeing strong value from their existing Meetings, Phone, and Rooms deployment, in Q4, they expanded to Zoom Contact Center and Zoom Virtual Agent. Let me also thank Community Financial Credit Union, a full-service financial cooperative, for investing in our broad Zoom One platform. They have chosen to modernize member engagement with Zoom Contact Center. Community Financial chose Zoom because of our one-platform, video-first approach to solving all their communications needs. Zoom's integrations with key banking solutions through our APIs and partnerships were core to their decision-making process. Finally, let me thank Convera, the World's FX payments leader. Zoom Phone was the foundation of their Zoom engagement and from there, they adopted the wider Zoom One platform in less than two years. Seeing the benefits of the tight integration of our products underpinned by AI Companion, they recently began to deeply leverage Zoom Team Chat in order to streamline their pre, during, and post-meeting communication all within the Zoom Platform. Everything we do here is rooted in our culture of delivering happiness. This is why our employees, this is why the customers' employees, this is why employees even more than IT departments are our biggest champions. And of course, happy employees are the most productive, so choosing Zoom becomes a win for everyone. We are laser-focused on our mission and could not be more optimistic about our future. The best is yet to come. And with that, I'll pass it over to Kelly. Thank you.

Kelly Steckelberg, CFO

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY ‘24. We were pleased with our strong finish to the year with Enterprise Revenue growing 9%, and free cash flow up 24%. We also achieved a non-GAAP operating margin of 39.2%, up 326 basis points from 35.9% in FY ‘23. In Q4, we saw traction in our emerging products, including a nearly 3x increase in Zoom Contact Center licenses as we not only added a significant number of new customers but also expanded average deal size. Zoom Phone customers with 10,000 or more seats grew 27% year-over-year to 95. And Zoom AI Companion has grown tremendously in just five months with over 510,000 accounts enabled and 7.2 million meeting summaries created as of the close of FY ‘24. We are excited about the strong growth across these new products and the benefits they drive for our customers. Now, let's dive into the financial results. In Q4, total revenue came in at $1.146 billion, up 3% year-over-year. This result was approximately $16 million above the high end of our guidance. Our Enterprise revenue grew 5% year-over-year and represented 58% of total revenue, up from 57% a year ago. We continued to see improvement in Online Average Monthly Churn, which decreased to 3% from 3.4% in Q4 of FY ‘23. This is consistent with the previous quarter and the lowest churn we have ever reported. The number of Enterprise customers grew 3% year-over-year to approximately 220,400. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q4 came in at 101%. We saw 10% year-over-year growth in the up-market as we ended the quarter with 3,810 customers contributing more than $100,000 in trailing 12-month revenue. These customers represented 30% of revenue, up from 28% in Q4 of FY ’23. Our Americas revenue grew 4% year-over-year, while EMEA was flat and APAC declined by 3%. The international performance was partially due to the FX headwinds in APAC as well as the impact from our sales reorganization in early FY ‘24 that took longer to complete internationally than domestically. 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, income tax benefits from discrete activities, and all associated tax effects. Non-GAAP gross margin in Q4 was 79.2%, which was slightly lower than 79.8% in Q4 of last year, mainly due to our investment in AI Companion. In FY ‘25, we expect our gross margin to be approximately 79%, reflecting focused investments in our AI features. Over the course of FY ‘25, we expect to directionally improve gross margin towards our long-term target of 80% as we continue to optimize our data center strategy and grow some of our higher ASP products like Zoom Contact Center. Non-GAAP income from operations grew by 10% year-over-year to $444 million, exceeding the high end of our guidance of $414 million. This translates to a 38.7% non-GAAP operating margin for Q4, an improvement from 36.2% in Q4 of last year. Non-GAAP diluted net income per share in Q4 was $1.42, on approximately 313 million non-GAAP diluted weighted average shares outstanding. This result was $0.27 above the high end of our guidance and $0.20 higher than Q4 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.27 billion, down approximately 3% from Q4 of last year. This was roughly 3 percentage points better than the high end of the range we provided last quarter. For Q1, we expect deferred revenue to be down 4% to 5% year-over-year. Looking at both our billed and unbilled contracts, our RPO increased 4% year-over-year to approximately $3.57 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months, as compared to 56% in Q4 of last year. Operating cash flow in the quarter grew 66% year-over-year to $351 million. Free cash flow grew 81% year-over-year to $333 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 30.6% and 29%, respectively. We ended the quarter with approximately $7 billion in cash, cash equivalents, and marketable securities, excluding restricted cash. Turning to guidance. As we consider our view for Q1 and FY ‘25, we have not assumed any changes in the macroeconomic outlook. For Q1, we expect revenue to be approximately $1.125 billion. This incorporates two fewer days in Q1 and would represent approximately 1.8% year-over-year growth. We expect non-GAAP operating income to be in the range of $410 million to $415 million. Our outlook for non-GAAP earnings per share is $1.18 to $1.20 based on approximately 316 million shares outstanding. For the full year of FY ‘25, we expect revenue to be approximately $4.6 billion, which represents approximately 1.6% year-over-year growth. We expect Q2 to be the low point from a year-over-year growth perspective and to accelerate from there. We expect our non-GAAP operating income to be in the range of $1.72 billion to $1.73 billion representing an operating margin of approximately 37.5%. Our outlook for non-GAAP earnings per share for FY ‘25 is $4.85 to $4.88, based on approximately 321 million shares outstanding. For FY ‘25, we expect free cash flow to be in the range of $1.44 billion to $1.48 billion. We believe that our strong cash flow generation and financial discipline coupled with responsible capital allocation is a powerful combination. As indicated in our earnings press release today, our board has authorized a $1.5 billion share repurchase program that we will start executing this quarter. This not only underscores the confidence our board and management team have in the future of Zoom, but also allows us to leverage our strong profitability, cash flow and balance sheet to drive shareholder returns, while also allowing us the flexibility to consider M&A options to accelerate growth and deliver for our customers. As a note, the share count and EPS metrics in our guide do not account for the impacts from this repurchase program. To echo what Eric said, we are optimistic about where we are now and where we are going. Our competitive position, innovation engine, and customer base set us up for success in FY ‘25 and beyond. Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support. Before closing, I would like to thank just one more person for their support over the years. Our head of IR, Tom McCallum has decided to retire this Summer after a seasoned 25-year IR career. Tom, it's been an honor and a pleasure to work with you. You have contributed tremendously to Zoom's success since before our IPO and will be dearly missed. Thank you so much for all you have done and congratulations. I am pleased to announce that Charles Eveslage, who has worked with Tom and me for several years now, will assume the role. With Charles at the helm, we are confident that the investment community will continue to receive a high level of service from Zoom's IR team. Please hold your goodbyes for Tom for now as he will be with us until mid-year to ensure a smooth transition.

Operator, Operator

Thank you, Kelly. As Kelly mentioned, we will now move into the Q&A session. When I call your name, please turn on your video and unmute. As a reminder, in an effort to hear from everyone please limit yourself to one question. And our first question comes from William Power with Baird.

William Power, Analyst

Okay, thanks. Tom wanted to express his gratitude for your support over the years. Kelly, could you start by discussing the factors that give us confidence in year-over-year growth potentially reaching its lowest point in Q2? What are the key drivers that could help enhance year-over-year growth in the second half of the year and into fiscal '26? Additionally, how should we view that growth trajectory over the next 18 months as we move beyond that point?

Kelly Steckelberg, CFO

Yeah. So when you think about your coming down in Q2, but then accelerating in the back half. This is the culmination of what we've been talking about for a while, which is the growth being driven by Zoom Phone, by Zoom Contact Center, which we've seen continue to mature by the effect that AI and adoption of Team Chat are having on the overall retention metrics of the company. So, all of those factors are what gives us that confidence that we're going to see it come down in Q2, but then start to reaccelerate after that. And then I mean, it's very early to comment on FY '26, but that would be an indicator that exit-rate for FY '25 would be an indicator for FY '26.

Meta Marshall, Analyst

Thanks. Just wanted to ask maybe just in terms of, on the deferred revenue in the past quarter, you mentioned that deferred revenue would kind of be down this quarter or we saw it come down. And just wondering, last quarter you talked about the terms that you were seeing, people extending their deals come in a little bit, just any trends that you're seeing just in terms of renewals. And what you're kind of seeing in terms of renewal there in terms of products that they're adding but just also maybe term compression they might be seeing. Thanks.

Kelly Steckelberg, CFO

We've continued to see strength in renewals, and I want to give huge thanks to our renewals team for doing an amazing job in Q4 by exceeding their targets. We've noticed a trend where customers are preferring shorter payment terms as they hold onto their cash. This was something we discussed in Q3, and it contributes to the decrease in deferred revenue. Additionally, customers are initiating discussions about renewals well before their actual renewal periods. For instance, I reviewed a proposal today for a customer who won't renew for another six months. This forward-thinking approach from customers about their contracts creates variability in both the remaining performance obligations and deferred revenue, as it is sensitive to the timing of these discussions.

Ethan Bruck, Analyst

Hey, guys. Congrats on these results, and I'm asking a question on behalf of Alex here.

Kelly Steckelberg, CFO

Hi, Ethan.

Ethan Bruck, Analyst

So. I guess my question would just be a little bit back on the guidance for fiscal '25, just if you can give some puts and takes, I know you said you're not factoring macro improvement. But how should we think about both the enterprise and online piece, I know you guys are rolling out some pricing increases. So maybe how to factor that going into numbers for next year. And just also the NRR piece, maybe roughly when you're expecting that to trough, Is there any color on that would be great?

Kelly Steckelberg, CFO

Yeah. So in terms of the enterprise of the direct sales organization, we kind of touched on this in the prepared remarks, but they're off to a fast start this year, we're really excited about that. If you remember last year, we had not only the overall reduction in the company, but the sales reorganization, which took a lot of time for the organization to recover from frankly and so, seeing them well-positioned to start off this year strong is really exciting to see. And that's certainly going to contribute to the overall growth that we're expecting to see, especially in the back half of the year. And then from an online perspective, really pleased for example with the Q3 churn metric. I think considering that we typically see seasonally higher churn in Q2 and Q4, that churn rate falling from Q3 to Q4 at that lowest rate of 3.0 is really indicative of all the improvements that the team has made to the platform, the ongoing initiatives they put in place. And so all of those considerations is what gives us confidence around the FY '25 guide.

Ethan Bruck, Analyst

Got it. That makes sense. Just a quick follow-up is just around some of the AI, like you are successfully embedding it across the platform. I'm just curious, as we think about kind of the monetization angles over the next few years. I mean if you were to stack rank where you think the combination of moving users to higher SKUs matching price-value, you guys are obviously already doing or getting folks to adopt more products on the upsell side in the contact center, for example, curious how you guys are thinking about that right now.

Eric Yuan, CEO

We are exploring various monetization strategies. For instance, our Zoom AI Companion provides significant value to our current customers through features like meeting summaries and queries, which is why we do not charge for those aspects at this time. However, there are several areas where we can monetize, particularly by customizing our AI Companion for enterprise clients and leveraging their specific data. Additionally, we are focusing on services like the Zoom Virtual Agent within our Zoom Contact Center product. Recently, we introduced three pricing tiers, with the highest tier charging $149 per agent per month, which includes advanced features powered by AI, such as Zoom Expert Assist. This year, we plan to enhance the customization of the Zoom AI Companion and prioritize monetization efforts.

Ethan Bruck, Analyst

Got it. Thank you, guys, and congrats on the results.

Eric Yuan, CEO

Appreciate it. Say hello to Alex.

Tyler Radke, Analyst

Thank you for taking the question and apologies for the quality, I'm in transit at the moment. Wanted to ask you about the recently announced buyback $1.5 billion is impressive, 7% of your shares outstanding. But, I guess how did you kind of come up with that number, and does that signal anything about the size of potential M&A that you're hoping to do, anything that you can just share in terms of why now, and the decision process would be helpful. Thank you.

Kelly Steckelberg, CFO

We've discussed capital allocation with our Board regularly. With $7 billion on our balance sheet and a strong cash flow outlook for FY '25, we believe having an authorization in place gives us the flexibility to pursue M&A opportunities we find appealing. We're looking for opportunities that could offset most of the dilution for FY '25. While there's variability in the execution of these programs, we plan to set an approximate amount for acquisitions each quarter and evaluate our progress throughout the year.

Tom Blakey, Analyst

Thanks everyone. Good to see you, Eric, and Kelly and congratulations on the, I'll say, early retirement, Tom. Just point of clarification first, Kelly, on I think Meta was asking about 2Q in the guide. And you mentioned something about being that, were you implying just point of clarification that fiscal 2Q would be down quarter-on-quarter from fiscal 1Q?

Kelly Steckelberg, CFO

We're indicating that the year-over-year growth rate in Q2 will be lower compared to the year-over-year growth rate in Q1. It will still be positive and not go into negative territory based on our current outlook, but it will be less than the growth rate in Q1.

Tom Blakey, Analyst

Sorry for the handholding there.

Kelly Steckelberg, CFO

No, it's okay.

Tom Blakey, Analyst

My key question would be on CCaaS, it sounds like you're off to a great start. There's a lot of demand out there. Hearing from your peers, I'd love to give you the opportunity to talk about pricing, uptake of some of the Virtual Agent, Agent Assist functionality, and any insights you have regarding fiscal '25 as you come out strong in the fourth quarter of fiscal '25. Thank you.

Kelly Steckelberg, CFO

Eric, do you want to talk about the Contact Center in general for a minute first?

Eric Yuan, CEO

Sure, absolutely. I think Tom you may not know actually, recently I got a new job here at Zoom, I become the Contact Center General Manager of the product management team engineers and our go-to-market team, sales, marketing, they all reporting to me directly. That means huge opportunity ahead of us, why I want to wear another head of GM of Contact Center. Seriously, but anyway, so based on customer feedback, very, very positive. We're doing extremely well in every quarter, and Q4 number is amazing and plus the reason why we have confidence introduced like three tiers of pricing, because a lot of customers told us, right. They probably needed a basic contact solutions. The $69 per agent, very competitive, all of the features, or if they want some social channel maybe outbound dialer, they can pay another $30 more per agent. And for a huge enterprise customer want to buy 1,000 agents, and we give them Zoom Expert Assist and also Workforce Management and Employee Management all of the features, you can see Zoom has become a full suite of Contact Center offering. We can compete head-to-head with the legacy incumbents. I'll give one example, in Zoom, we internally we deployed our Virtual Agent, guess what, every month, we saved 400,000 agent hours. And more than 90% inbound inquiries can be done by our Virtual Agent driven by the AI technology, I'm very excited about everything we're doing. And the feedback are very positive. Again we're going to be doubling down, tripling down on our Contact Center offering because that's a modern solution, AI empowered, video-first and also we build a full suite. That's why we're so excited.

Kelly Steckelberg, CFO

Based on your enthusiasm, Eric, I am going to raise your quota.

Eric Yuan, CEO

Yeah. I raise the quota to the system every day. So there's no difference, so.

Tom Blakey, Analyst

And Kelly, what kind of outlook are you considering regarding the strength and visibility for fiscal '25? Is this only for enterprise at the moment, and there is no self-service online yet?

Kelly Steckelberg, CFO

Correct.

Eric Yuan, CEO

Not yet, but you are correct. Thank you for helping us to find other ways to monetize the Contact Center.

Kelly Steckelberg, CFO

We analyzed the trends regarding customer numbers, growth rates, and the increasing size of deals we've observed over recent quarters. Additionally, we factored in our sales capacity and the implementation of new pricing tiers. This information helped us establish our outlook for fiscal year 2025.

Matthew VanVliet, Analyst

Hey, good afternoon, and thanks for taking my question. I guess one more on the Contact Center. Curious in terms of how the mix is maybe different with channel involvement and partners being involved in those deals over the last couple of months as you really invested in the channel program. And then secondarily, what is the mix of I guess, the contact center sales into existing customers especially existing Zoom Phone customers, is that any different than the early days of Zoom Phone in terms of mix? Thanks.

Eric Yuan, CEO

Sure, Kelly, feel free to add your thoughts. For our core meeting product, it is primarily driven directly while Zoom Phone is a combination of direct and channel-driven efforts. Regarding the Contact Center product, we have specialized agents but much of the growth comes from well-established third-party agents who are our channel partners and already have strong relationships in place. We need to invest in this area, which is why many deals come to us through these channel partners, some of whom are new to our services and have not used Zoom Meetings before, yet they are becoming our first Zoom Contact Center customers. This illustrates both our channel strategy and the role of Zoom Contact Center specialists. Furthermore, because Zoom Phone and Zoom Contact Center are well integrated, we are also training our Zoom Phone specialists to become proficient in the Contact Center to enhance our internal sales capacity. Overall, if we look at revenue trends, they appear to be very much aligned with the growth of Zoom Phone. Hopefully, once I take on the GM role, we can further develop this area. That's the current situation.

Kelly Steckelberg, CFO

I would like to mention that we are very excited about hiring Chris Morrissey in November. He brings valuable experience to our team at Zoom. Additionally, we have noticed an interesting trend with the Zoom Contact Center, as we are seeing new customers interested in this service. This provides us with an opportunity to introduce our modern technology to new prospects and customers, who are enthusiastic about what we offer in the Zoom Contact Center.

Siti Panigrahi, Analyst

Thanks for taking my question. So I wanted to talk about another growth driver you have, phone. From the phone side, so help us understand, like what's your penetration right now within the installed base on the phone side. And any update in terms of whether a number of states or revenue you have by end of this fiscal year.

Kelly Steckelberg, CFO

We are very enthusiastic about the continued strength and growth of Zoom Phone. Internally, the deal attach penetration rate is still below 20%, indicating that there is significant opportunity even within our existing customer base. This quarter, we reported that the number of customers with more than 10,000 seats grew by 11% quarter-over-quarter and 27% year-over-year, reaching a total of 95. We are seeing strong demand from this segment of our customer base, which is very encouraging. While we didn't provide a seat count this quarter, we plan to include that information in the next quarter or two.

Arjun Bhatia, Analyst

Eric, thank you. Maybe going back to the Contact Center piece and trying to loop in the AI Expert Assist side, when you're when you're seeing customers come in, are they adopting the premium tiers off the bat and do you have a sense of whether the usage of Expert Assist is picking up as a result or is this something that we should think of as a future upsell driver as customers kind of land maybe at the low-end, and then expand over time.

Eric Yuan, CEO

That's a great question. We introduced the multi-tier structure in the Contact Center because we've noticed that customers have expressed a decrease in their demands and sometimes don't prioritize social media channels. They mainly require essential functionalities, such as basic assistance, and many do not need comprehensive solutions like Workforce Management or Quality Management. That’s why we now offer three tiers. Typically, small and medium-sized business customers find that our Zoom Contact Center essentials meet their needs. However, discussions with larger customers, especially those with over 1,000 agents, indicate a strong interest in features like AI Expert Assist, Workforce Management, and Quality Management. This multi-tier approach was built in response to customer demand, allowing us to cater to various segments, including both SMB and enterprise customers, which has proven to be successful. We may consider introducing more tiers in the future based on customer needs.

Kelly Steckelberg, CFO

And just further to what Eric said, the packages are off to a really great start. We've had approximately 3,700 licenses sold in those upper tiers and the ASP for those is double what our existing ASP was before we introduced those additional tiers. So it really shows you how this is going to not only address the broader market, but also accelerate our revenue growth here.

Imtiaz Koujalgi, Analyst

Hi. How are you? Thanks for taking my question. I've a question on the guide for next year. Kelly, how do we think about the breakdown between enterprise growth and online for next year, should we see online start growing year-over-year in '25?

Kelly Steckelberg, CFO

We aren't going to provide specific guidance for the segments. However, we are focused on achieving stabilization in the online segment. It's encouraging to note that both segments saw a slight increase in Q4, which is great to see. Our initiatives will primarily aim to ensure stabilization for the online segment in FY '25.

Peter Weed, Analyst

Thank you very much. I really appreciate all the detail and it's obviously pretty exciting news to see all the expansion opportunities going on with the enterprise customers, along with kind of maybe a fore coming in with the Online customer groups. I guess two follow-ups, got around the enterprise customers. I don't think you commented on how churn is evolving with those customers. And obviously, with continued tailing NRR. I'm trying to unpack what portion of that coming from churn versus what portion of that is coming from the kind of continued refresh cycle you have with like long-tenured customers that are still coming down on seats. And then the second part is kind of you look through on that NRR and you're talking about some acceleration going on later this year and I think that's starting to mixed in and customers that no longer those long tenure that has seats coming down and it's really being replaced by those that expansion is really in functionality is coming in. If you look at those customers that are kind of past their seat readjustment how expansive are those customers that we can maybe look forward to out a year or so being a greater portion of the mix.

Kelly Steckelberg, CFO

It's a great point. We've discussed this several times, but in fiscal year 2024, most of our customers experienced a renewal event, allowing them the chance to adjust their seat count as needed. Our renewals team has effectively engaged with them about upgrading to Zoom One, adding Zoom Phone, or incorporating additional products, which helps maintain their spending. Although there has been some shifting in our overall portfolio, our focus on sustaining that spend puts us in a strong position as these customers begin to grow again. They are now using different SKUs that are likely more retentive and priced higher, which they can expand into as they add more seats. We anticipate a lower percentage of our customers will be up for renewal this year compared to last, as most had the opportunity to address their needs in fiscal year 2024. Thus, we expect a smaller impact in fiscal year 2025.

Shelby Seyrafi, Analyst

Thank you very much. Adjusting for the two fewer days in Q1, you're projecting a growth of 3.6% to 4% in Q1 and about 1.5% growth for the year. I understand that you're expecting to bottom out in Q2, but it seems that with a reasonable projection, growth will be around 2%, which is roughly half of the 4% growth in Q1. In the latter half of the year, you will have new products like the Phone and the Contact Center AI ramping up. I'm trying to grasp why you don't anticipate an acceleration in adjusted revenue growth in the back half, instead of the implied deceleration that I'm seeing in my model.

Kelly Steckelberg, CFO

We are projecting a growth rate of 1.8% for Q1. That is our outlook. The guidance we are providing is 1.8%, and for the entire year, we expect a growth rate of 1.6%, considering the decline we anticipate in year-over-year growth for Q2.

Catharine Trebnick, Analyst

Hi. Thanks for taking my question. Much appreciate it.

Kelly Steckelberg, CFO

Hi, Catharine.

Catharine Trebnick, Analyst

So back to the Contact Center, it seems like there's a significant push for light contact centers, and Zoom appears to fit this well with your pricing model. By "light," I'm referring to non-agents versus agents. I'm wondering if you could share the split for the quarter regarding the numbers of agents versus non-agents. I'm trying to understand the growth potential outside the traditional agents for a license, as there appears to be a good opportunity there.

Eric Yuan, CEO

I believe you are correct about the direction we are heading. On one hand, companies still require a modern contact center solution to replace outdated vendor options or other cloud-based services for human agents. On the other hand, there is a growing demand from customers who prefer not to use human agents anymore and would rather have virtual agents. This is why we also offer Zoom Virtual Agent. While we might be ready to share details in the next few quarters, we are not prepared to disclose specific numbers at this time. We are focusing on both sides of the equation—whether customers opt for AI instead of additional agents or choose to purchase agents, both options are valid. That is our strategy.

Peter Levine, Analyst

Well, great, thanks for squeezing me. And I'll just give you a quick. Kelly, your comments on M&A, can you share with us what you're thinking in terms of inorganic contributions, but what area would you consider is at CCaaS, is it like workflow optimization, you have got collaboration, but any sense on kind of where you're thinking or how you're thinking about adding to the portfolio. Thank you.

Kelly Steckelberg, CFO

Yeah. We've been exploring opportunities actually across all of those areas, Peter, we look for opportunities to either accelerate what we already have, which would obviously be in the CCaaS space and a good example is, what we did in the past with Solvvy around our Zoom Virtual Agent product or something that sits a little bit next to it which Workvivo is a great example of that as well. So we're continuing to look in areas both within our current portfolio as well as around us with things like productivity tools. That's how we're thinking about. Eric, is there anything you want to add?

Eric Yuan, CEO

Yeah. You're just right on, just either technology-driven or just expand on the cap or maybe double down on our existing services. Pretty much those three things. We're interested in all three.

George Iwanyc, Analyst

Thanks for taking me. Kelly, maybe expanding on your comments on the sales side and the reorg, how do you feel about your productivity in North America and internationally, and when you look at investing this year, where are you putting the most effort?

Kelly Steckelberg, CFO

Yeah. So you saw in our results for Q3 and Q4 that we had reacceleration and sales productivity in the back half of FY '24, and again, off to a really fast start for FY '25. So excited about that. We are investing in both direct and channel on a global basis, as it's really important that we keep fueling the growth driver that we have here in North America, but also reinvesting and reinvigorating our international markets as well.

Eric Yuan, CEO

Well, thank you all for your support and thank you all for your time. Really appreciate it. And see you next quarter. Thank you.

Operator, Operator

Again, this concludes today's release. We thank you all for your participation, from our family to yours. Thank you.