Earnings Call Transcript - ZM Q2 2024

Tom McCallum, Head of Investor Relations

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal 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 third quarter and full fiscal year 2024; our expectations regarding financial and business trends; impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations; and product initiatives and the expected benefits of such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, that we discuss in detail in our filings with the SEC, including the Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that 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 thanks to everyone for joining us today. I want to start by welcoming Dr. Xuedong Huang as our CTO. He comes to us after a successful career at Microsoft, where he most recently held positions as Azure AI CTO and Technical Fellow. Dr. Huang joins us at a crucial time in our AI development. Over the past few months, we have introduced several new AI innovations and announced an ambitious roadmap designed to help our customers work more efficiently and serve their clients better. As we create and implement AI solutions, we are committed to ensuring that technology fosters trust. We are grateful to have numerous customers rely on us for their communication needs, and we do not take this lightly. Earlier this month, we took an important step by stating that Zoom does not use customer content for training our AI models or those of third parties. I am proud of this approach. By prioritizing our customers' privacy, we are taking a leadership role in ensuring they can use our AI features with the confidence that their data is secure. Now, let me share some progress on our mission of delivering limitless human connection through a single platform. We launched Zoom Scheduler to simplify scheduling with external contacts, and Intelligent Director, which uses AI and multiple cameras to provide the best visuals for participants in a conference room. We also rolled out various new offerings, such as Zoom Clips, which allow for asynchronous video conversations. More customers are adopting Zoom Team Chat, fueled by increased usage of Zoom One and new features like Continuous Meeting Chat, which connects the temporary in-meeting chat feature to the persistent Zoom Team Chat product. Currently, we have two Fortune 15 companies, one major consulting firm, a global food and beverage brand, and a leading law firm using Zoom Team Chat as their main text-based communication tool. Our Contact Center product has grown to over 500 customers, and we are launching approximately 90 new features and enhancements each quarter. In early July, we introduced Workforce Management to help customers optimize their communications, manage agent needs, and enhance their customer experience all through a unified platform. WFM is already off to a strong start, and we anticipate adding more products to this suite to broaden our customer experience capabilities and revenue sources. We have made quick progress in integrating Workvivo. After implementing it internally, I am very impressed with the product and confident in the value it will add for our customers in fostering culture within a distributed workforce, aligning with our strategy to support hybrid work. A few weeks ago, we announced an organized hybrid work approach, asking our employees within commuting distance to come into their local office twice a week. Zoom is specifically designed for hybrid work, and it is our responsibility to understand our customers’ experiences and find out what works best for them. We believe this strategy will help us continue innovating for our customers and deliver what they need to thrive. Now, let’s move on to some of our customer achievements. We are thrilled to expand our relationship with the United States Postal Service, which recently added Zoom Team Chat for 21,500 users as part of their existing Zoom for Government setup. I also want to express gratitude to Brookdale Senior Living, the largest senior housing operator in the U.S. Brookdale began with Zoom Meetings in FY20, then evaluated Zoom Phone a year later and in Q2 upgraded to Zoom One to unify their communication needs under one product. I’d also like to thank Perdue Farms, whose journey with us began years ago with an initial deployment of Zoom Meetings. Last fall, they fully committed to Zoom One Enterprise Plus, and in Q2, they added Zoom Contact Center, benefiting from its integration with their existing Zoom Phone setup and our ambitious innovation roadmap. Additionally, we thank Valmont Industries, which became a Zoom customer a bit over a year ago with Meetings and Phone, later adopting Zoom One and Zoom Contact Center. In Q2, they incorporated Zoom Virtual Agent to improve customer and employee service through its accurate intent understanding and efficient issue routing. Finally, I would like to thank Dollar General for choosing Zoom’s Workvivo to connect its employees as the company's digital centerpiece. Dollar General will implement Workvivo’s employee engagement platform for around 190,000 employees to enhance the employee experience, encourage dialogue, and strengthen its culture. We are excited to welcome and expand our partnerships with USPS, Brookdale, Perdue Farms, Valmont, Dollar General, and all our customers globally. Now, I will hand it over to Kelly. Thank you.

Kelly Steckelberg, CFO

Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q2. Here are a few milestones. First, operating cash flow grew 31% year-over-year to $336 million. Second, Zoom Phone reached roughly $0.5 billion in annualized run rate revenue. And finally, we are excited that Zoom Contact Center has surpassed 500 customers in only six quarters. In Q2, total revenue grew 4% year-over-year to $1.139 billion, which includes $10 million of pressure from foreign exchange. This result was approximately $24 million above the high end of our guidance. Our Enterprise business grew 10% year-over-year and represented 58% of total revenue, up from 54% a year ago. We continue to see improvement in Online average monthly churn, which decreased to 3.2% from 3.6% in Q2 of FY '23. The number of Enterprise customers grew 7% year-over-year to approximately 218,100. Our trailing 12-month net dollar expansion rate for Enterprise customers came in Q2 at 109%. We saw 18% year-over-year growth in the upmarket as we ended the quarter with 3,672 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 26% in Q2 of FY '23 and include some of the amazing names that Eric highlighted earlier. Our Americas revenue grew 6% year-over-year, while EMEA and APAC declined by 1% and 3%, respectively. Absent currency impact, both EMEA and APAC would have been approximately flat year-over-year. On a quarter-over-quarter basis, all regions grew 3%. 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, restructuring expenses and all associated tax effects. Non-GAAP gross margin in Q2 was 80.3%, an improvement from 78.9% in Q2 of last year. We are pleased with the strength of our gross margins as we continue to optimize usage across the public cloud and our co-located data centers for both existing and emerging technologies. For the full year, we expect non-GAAP gross margin to be approximately 79.7% as we make additional investments in new AI technologies. Research and development expense grew by 6% year-over-year to approximately $104 million. As a percentage of total revenue, R&D expense increased to 9.1% from 8.9% in Q2 of last year, reflecting our investments in expanding our product portfolio, including Zoom Contact Center, AI and more. Looking ahead, investing in innovation will remain a top priority for Zoom. Sales and marketing expense decreased by 3% year-over-year to $276 million. This represented approximately 24.2% of total revenue, down from 26% in Q2 of last year. As a reminder, Zoomtopia will be held in Q3 of this year and will drive incremental marketing investment in the quarter. G&A expense declined by 19% to $73 million or approximately 6.4% of total revenue, down from 8.2% in Q2 of last year, as we continue to achieve greater efficiencies and experienced one-time savings in the quarter. Non-GAAP operating income grew by 17% to $462 million, exceeding the high end of our guidance of $410 million. This translates to a 40.5% non-GAAP operating margin, a meaningful improvement from 35.8% in Q2 of last year. Our effective tax rate in Q2 was 18.5%. For the remainder of the year, our tax rate is expected to approximate the blended U.S. and federal state rate. Non-GAAP diluted earnings per share in Q2 was $1.34 on approximately 306 million non-GAAP diluted weighted average shares outstanding. This result was $0.28 above the high end of our guidance and $0.29 higher than Q2 of last year. Turning to the balance sheet. Deferred revenue at the end of the period was $1.37 billion, down approximately 2% from Q2 of last year. This was in line with the high end of the expectations that we shared last quarter. For Q3, we expect deferred revenue to be down 4% to 5% year-over-year, partially driven by shorter billing frequencies on Enterprise deals arising from the high interest rate environment. Looking at both our billed and unbilled contracts, our RPO increased 9% year-over-year to approximately $3.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 61% in Q2 of FY '23 indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year. Operating cash flow in the quarter grew 31% year-over-year to $336 million. Free cash flow grew 26% year-over-year to $289 million. Both results include the approximately $60 million cash payment related to the legal settlement that we discussed last quarter. Our operating cash flow and free cash flow margins were 29.5% and 25.4%, respectively. We ended the quarter with approximately $6 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Given the strength in profitability and collections, we are increasing our cash flow outlook for FY '24. We now expect free cash flow to be in the range of $1.2 billion to $1.23 billion. Turning to guidance. For Q3, we expect revenue to be in the range of $1.115 billion to $1.12 billion, which at the midpoint would represent approximately 1% year-over-year growth or 2% in constant currency. We expect non-GAAP operating income to be in the range of $400 million to $405 million. Our outlook for non-GAAP earnings per share is $1.07 to $1.09 based on approximately 309 million shares outstanding. We are also pleased to raise our top line and profitability outlook for the full year of FY '24. We now expect revenue to be in the range of $4.485 billion to $4.495 billion. At the midpoint, this represents approximately 2% year-over-year growth or 3% in constant currency, which we expect to be neutral in the back half of the year. Our increased total revenue guidance reflects a consistent view on Enterprise, with tempered expectations for Online for the remainder of the year. We expect our non-GAAP operating income to be in the range of $1.685 billion to $1.695 billion, representing an operating margin of approximately 38%. Our outlook for non-GAAP earnings per share for FY '24 is $4.63 to $4.67 based on approximately 308 million shares outstanding. Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support. Before opening up for Q&A, we are excited about our premier user conference, Zoomtopia. It will be in person in San Jose as well as on Zoom Events. We look forward to sharing more about our expanding platform, new innovations and customer testimonials. Please join us at Zoomtopia on October 3 and 4.

Operator, Operator

Thank you, Kelly. As Kelly mentioned, we will now move into the Q&A session. Our first question will come from Mark Murphy with JPMorgan.

Mark Murphy, Analyst

Well, thank you so much and congrats on solid execution in the quarter. Curious if you can comment on the Zoom Scheduler product. It looks like a very attractive add-on option and a clear efficiency gain. I understand that it's going to be free for some period of time and that looks like $6 per month for certain users. I understand it's going to be included in some of the other bundles. But can you just comment on how that's going to work or maybe Eric, you can touch on the efficiency gains from that product? And Kelly, any type of a framework for the revenue potential out of that particular product?

Eric Yuan, CEO

I can discuss the product side. Kelly, please share your thoughts on the revenue potential. Mark, you are correct. You've likely tried it already, and it is indeed quite appealing. When considering our customers, including those using Zoom, scheduling a meeting can be quite complicated. Coordinating with your calendar makes it difficult. We aimed to simplify that experience for our customers, which is why we introduced Zoom Scheduler. There are other startup solutions available, but customers prefer using the Zoom platform since they already utilize Meetings, Phone, and Team Chat. With just one more click, they can schedule meetings with people outside their organization, enhancing their experience. That's why we developed this feature. We also offer a free trial, and it will be part of Zoom One in the future. It's performing well and significantly streamlines the process of scheduling meetings with anyone in your organization. We are excited about this opportunity.

Kelly Steckelberg, CFO

Yeah. I think in terms of its overall contribution, Mark, it’s at a very attractive price point and will grow over time, certainly. But also, we think that what it does is make the product continue to be where you live and make, especially our larger enterprise customers that much more retentive as it continues to spread the platform and how you spend your day.

Mark Murphy, Analyst

Thank you so much.

Operator, Operator

Okay. Our next question comes from Meta Marshall with Morgan Stanley.

Meta Marshall, Analyst

Because I'm on mute. So one of the questions that I had was just, what you're seeing in terms of the environment? I know that your upside kind of came from the Enterprise. Just wanted to get a sense of how the environment changed during the quarter, if there were any changes during the quarter? And just whether kind of that upside came as a result of kind of better upsells or just more deals kind of getting closing in shorter order? Thanks.

Kelly Steckelberg, CFO

Yeah. Thank you, Meta. So I would say in terms of Q2 versus Q1, the environment has been pretty consistent. We continue to see momentum in Zoom One, in Zoom Phone. There are still, I would say, lengthened sales cycles out there and customers really making sure that they take advantage of doing their full due diligence. But we're really excited about the vision that we can take for them not only around, obviously, the existing platform but what's also coming from an AI perspective. And I think our customers are finding that very attractive, as you’ve heard from the customers that Eric talked about seeing a lot of momentum of customers that were originally Meetings customers really moving either into Zoom One or adding on Zoom Phone and considering Contact Center as well.

Meta Marshall, Analyst

Great. Thanks.

Operator, Operator

Apologies. Our next question comes from Kash Rangan from Goldman Sachs.

Kash Rangan, Analyst

It looks like the Enterprise business is seeing stability with respect to attrition, et cetera. I'm curious to get your thoughts on the Online business. So it's still a substantial part of the revenue and anything that you have identified that could help stabilize the attrition levels? And also, just while we're at it, what is the pricing power of Zoom? Like you talked about customers worried about inflation and doing shorter-term contracts, that I guess on the flip side means that you could raise prices. So wondering how much leverage we have at that. Thank you so much.

Kelly Steckelberg, CFO

We are pleased with the continued improvement in churn rates within the Online segment, which are at historic lows. This is encouraging to see. The interim team continues to innovate, although we've experienced some volatility, leading us to temper our expectations for the remainder of the year. However, we remain satisfied with the ongoing progress in this part of the business. Regarding pricing power, we are having discussions with customers during renewals about opportunities to expand their usage of our portfolio. A common trend is moving customers from Zoom Meetings to Zoom One, and we are considering whether there might be an opportunity for a price increase at renewal, given the value they find in the platform.

Kash Rangan, Analyst

Thank you.

Operator, Operator

Our next question comes from Michael Funk with Bank of America.

Michael Funk, Analyst

Yeah. Hi. Thank you for taking the question today. So congratulations on new logo additions, good momentum there and the Phone adds as well. Just wondering, Kelly, I mean, what has to happen with some of the other metrics, it did decelerate during the quarter. India decelerated sequentially. Online churn up sequentially. Enterprise customer additions also slowed sequentially. So thinking about the acceleration in revenue growth we've been expecting or hoping for, which of those metrics is going to turn first? And how much visibility do you have into that turn?

Kelly Steckelberg, CFO

Yeah. So a couple of things. Let me just comment on a couple of the metrics that you called out specifically. First of all, the Online churn metric. As a reminder, we expect Q2 and Q4 to be seasonally higher than Q1 and Q3. So while it was up over Q1, it was down over Q4, and that's because of summer and winter holidays. So I think the 3.2 number is a really great number. And we are going to continue to focus on opportunities to improve that. In terms of the Enterprise, we're really focusing on some of the approach as we've talked about earlier. Certainly, Zoom Phone is one of the key drivers in terms of expanding our customers' use to the platform. That doesn't necessarily result in new customers, but you could see that in the Enterprise customer metric as that starts to expand also the success of Zoom One is going to drive that expansion of more customers in the $100,000. So I think those are the metrics that you should watch as great indicators as our Enterprise team continues to innovate. Phone in One in Contact Center. And then, of course, as AI becomes more front and center, you'll get to see that as well.

Michael Funk, Analyst

So just quickly then, so the NDRR for Enterprise that should improve as we exit the year, is that expectations of 109 just should improve off that number?

Kelly Steckelberg, CFO

You remember, it's a trailing 12-month number. It may come down a little bit more yet, but then start to inflect potentially at the back half of the year, but it might be into early of FY '25.

Michael Funk, Analyst

Okay. Thank you, Kelly. Thank you, Eric.

Operator, Operator

Our next question comes from James Fish from Piper Sandler.

James Fish, Analyst

Hey, guys. Thanks for the questions. Kelly, for you or Eric, are you seeing optimizations on your seats showing a slowdown or a similar pace to what you've seen more recently? Is there any way to talk about the linearity in general? And Eric, we get the investment behind AI, and it seems like it's causing gross margins to drop a couple of points and guide sequentially. I guess what can you say that gives confidence that this isn't just further price degradation or just a higher level of conservatism on the other side of the coin?

Eric Yuan, CEO

Kelly, you wanted to address the first one?

Kelly Steckelberg, CFO

In terms of optimizing seats, we have seen that our sales representatives have effectively engaged with our customers, leading to strong logo retention. Even when customers experience changes in their employee base, we take the opportunity to replace that revenue through upselling additional products like Zoom Phone, demonstrating great ROI and cost savings for them. Our sales team has been very successful in this area. Although there is still some shifting of seats, we are experiencing significant momentum with upsells during the renewal period. I want to emphasize that our gross margin for this quarter was 80.3, compared to our guidance of 79.7, reflecting less than 100 basis points of degradation. Eric will explain the reasons for this and our investment strategy.

Eric Yuan, CEO

Gross margin is very strong. The impact is short term rather than long term. AI is becoming increasingly important. Many of our customers have told us they rely on the Zoom platform and appreciate features like Meeting Summary. It allows someone to take notes from a meeting, and we're figuring out how to leverage AI to improve productivity and efficiency. We certainly need to invest more in this area, but the good news is we made investments two to three years ago, which is why some features are already in place. We are looking to build on that investment. We hired Dr. XD and invested in a significant amount of GPUs with high confidence that these AI features will resonate with customers. Our strategy is distinct; we adopt a federated AI approach and focus on how these features help customers enhance their productivity. Customers like us and value our innovations compared to others who might offer free services with costly AI features. We prioritize customer value and continue to innovate. We see opportunities not only in generating revenue through incremental innovations but also in developing entirely new services that deliver unexpected value to customers. That’s how we will monetize our AI technology and why we are committed to investing further. We aim to introduce groundbreaking AI services alongside Zoom and other innovations in the future. Stay tuned for Zoomtopia.

James Fish, Analyst

Thanks, Eric. Thanks, Kelly.

Operator, Operator

Our next question comes from Matthew VanVliet, BTIG.

Matthew VanVliet, Analyst

Good afternoon. Thanks for taking the question. I wanted to dig in a little bit more on the trends you're seeing in the Contact Center. Can you help us with what situations you're seeing the most success in or the most sort of Meetings and Phone? And then sort of within that, are you seeing more sort of internal help desk-type situations? Or are you seeing kind of higher volume customer-facing deployments as well?

Eric Yuan, CEO

It's a great question, Matt. To give you an example, we've had Zoom Phone deployed for some time now and our support team is very pleased with its performance. The integration with the Contact Center has been very effective due to the continuous innovations we offer. While brand recognition may take a bit longer to establish, existing customers are likely to integrate Zoom Contact Center with Zoom Phone for various applications, including internal help desks. We also have Contact Center clients who use our services without Zoom Phone or Zoom Meetings, as they find value in the Contact Center alone. Given the pace of our innovations, we're confident that not only small to medium businesses but a growing number of customers are recognizing the value of both Zoom and Zoom Contact Center. Similar to what we witnessed with Zoom Phone, existing customers are starting to appreciate the benefits and are likely to explore testing Zoom Contact Center as well. This is the direction we're heading to further develop our Contact Center business.

Matthew VanVliet, Analyst

Great. Thank you.

Operator, Operator

Our next question comes from Ryan Koontz with Needham.

Ryan Koontz, Analyst

Hi. Thanks for the question. I wanted to ask about the healthy growth we're seeing here in the $100,000 accounts. Is that primarily displacement of legacy vendors that we're still seeing, or are these other kind of competitive wins, greenfield-type wins? And can you share anything about kind of the effective playbook you're using up market there to expand these big logo wins? Thanks.

Kelly Steckelberg, CFO

Yeah. I think some of that, Ryan, points to the ongoing success we're seeing with Zoom One. Customers really like the ability to buy the bundle, which meets all of their needs. And it's a great opportunity to see the value, especially previously existing Meetings customers seeing that opportunity. We do continue to see greenfield, especially Eric just highlighted Contact Center. Sometimes it's a way that they're coming in the door now, which is amazing. And then also, we still have a lot of customers that are Meetings customers that are upgrading to Phone as well. So it's a combination of both new customers that come in at that level as well as customers that grow up to that level over time.

Ryan Koontz, Analyst

Got it. Any general changes in the pricing environment market?

Kelly Steckelberg, CFO

No, especially from Q1 to Q2, there were no significant changes. As I mentioned, there is still a lot of scrutiny around the yields, but no other real changes in the environment.

Ryan Koontz, Analyst

Got it. Real helpful. Thank you.

Operator, Operator

Our next question comes from Siti Panigrahi with Mizuho.

Sitikantha Panigrahi, Analyst

Thank you for taking my question. I'd like to ask about the Contact Center again. There's a significant opportunity since about 80% of legacy systems still need to transition to the cloud. You are starting fresh and developing in-house. Eric, how are you differentiating yourself from other cloud vendors in the Contact Center space? Kelly, do you believe the next phase of growth for the Contact Center will resemble the adoption we've witnessed with phones in recent years?

Eric Yuan, CEO

Yeah. So speaking of differentiation, first of all, we built the Contact Center service from ground up, right? This is the new architecture and also video is part of that as well. AI as AI components, we invested in AI and also, at the same time, a seamless integration with other products as well. That's why we have a high confidence, right? And all like some other vendors there for a long, long time, right? And the architecture may not be modern and the performance, the quality and so on and so forth, right? However, how to make sure every Enterprise customer during their RV process, right? They do look at Zoom. When they look at Zoom, we have a higher confidence, we can compete. And also, we just had a lot of innovations around the Workforce Management platform as well and essentially Zoom Contact Center to become our full Contact Center suite. Not just one part, right? It's targeted SMB and Enterprise and also with AI, I think we are innovating very fast, right, to compete against any other cloud-based or on-prem based Contact Center vendors.

Kelly Steckelberg, CFO

Only six quarters in, so it is quite relative to the current ARR base. It's small but experiencing rapid growth. You might not see its impact for another four to six quarters, but we are really pleased with the progress. Additionally, as Eric mentioned, when you consider Workforce Management along with the upcoming Zoom Virtual Agent and Quality Management, it begins to establish itself as a platform that could be a significant growth driver over time.

Sitikantha Panigrahi, Analyst

Zoomtopia.

Eric Yuan, CEO

Thank you.

Operator, Operator

Our next question comes from Rishi Jaluria with RBC.

Rishi Jaluria, Analyst

Wonderful. Hey, Eric. Hey, Kelly. Thanks so much for taking my question. Two quick ones. First, look, I appreciate a lot of the investments you're making around generative AI. And I know it's early, but I want to think about how do you think longer term about your strategy around monetizing generative AI? Is it around specific modules and discretionally charging for them? Is it about gatekeeping them behind higher tiers and using that to drive upgrades? And maybe alongside that, you're starting to see better adoption, I think, of your non-core products, including Zoom Phone $0.5 billion in ARR. Eric, you called out some great customer wins on Zoom Chat. How do you think about using generative AI as kind of a connective tissue to drive more usage of non-core products and maybe even of the entire Zoom One pricing packaging? Thank you.

Eric Yuan, CEO

That's a great question. When we look at the Zoom platform, we recognize that we are more than just a Meeting company. For instance, we have deployed Zoom Team Chat for many customers, along with Zoom Phone, Whiteboard, Zoom Contact Center, Scheduler, and Zoom Clips. As we continue to expand our services, our focus is on adding value from the customer's perspective. Take Zoom One, for example. Customers appreciate the platform and have already invested in it. We're introducing generative features like Meeting summaries and leveraging GenAI for Team Chat and meeting inquiries. For example, if you arrive late to a meeting, you can quickly get a real-time summary of what was discussed in the past few minutes. These GenAI features enhance the platform's value and make it more engaging. Some customers suggest charging for these features, as some competitors do. However, we believe that by adding more value, customers are more inclined to embrace our comprehensive platform. This doesn’t mean we can't monetize AI; rather, we aim to utilize AI to create new services. Looking back to the mid-1990s when the internet emerged, businesses didn’t increase prices for online purchases but instead used the internet for new services and innovations. Our approach is distinct from competitors who may offer free AI services while charging exorbitantly for access. We aim to provide greater value by incorporating GenAI for our existing customers while focusing on future advancements and developing entirely new AI services for monetization. That’s our goal, direction, and differentiated pricing strategy. I hope this clarifies my response, and we can discuss further at Zoomtopia if needed.

Rishi Jaluria, Analyst

Yeah. Very helpful. I’m looking forward to it. Thank you.

Operator, Operator

Our next question comes from Alex Zukin with Wolf Research.

Alex Zukin, Analyst

Thank you for taking my question. When I reflect on this quarter, it seems quite different from the last. For the first time in a while, both your Enterprise and Online revenue bases grew sequentially. Additionally, your Enterprise billings have increased. However, the guidance suggests a step back, which I understand considering the conservative approach in the current macroeconomic climate and the adjustments you're making in the go-to-market strategy. Could you clarify whether we can expect a stabilization in churn for the Online business, establishing a new baseline? Looking at the exit rate for Enterprise revenue, it seems below expectations. You mentioned that the net revenue retention for Enterprise might improve in the first half of next year—how should we interpret the Enterprise growth as we close this year and move into the next? I also have a quick follow-up.

Kelly Steckelberg, CFO

We are very pleased with the performance in the churn rate and believe we are stabilizing at a new level that reflects historic figures. This seems to be a reasonable outlook moving forward. Regarding Enterprise, we are not ready to comment on FY '25 during this call. However, when evaluating the growth rate you anticipate, it’s clear we are still facing no improvements from the macro environment. Additionally, our sales force is still adjusting to the new structure, and we are excited about Graeme leading the organization. Some transitions in EMEA and APAC took longer than anticipated, as mentioned previously. As we approach Q3, the pipeline looks strong and better than it was at the start of Q2. These factors should be considered when assessing the growth rate for the remainder of the year.

Alex Zukin, Analyst

Okay. And then maybe, Eric, for you. Obviously, the evolution of Zoom from a point solution to a platform is nice to watch. You've talked about Zoom One. You've now given us that $500 million annualized number for Zoom Phone. What's the penetration today for Zoom One within the Enterprise base? And what's the penetration for the Phone product in the Enterprise base? And where does it go from here in your mind, like what does success look like for you?

Eric Yuan, CEO

I believe Zoom Phone penetration is performing quite well. However, there is still a significant opportunity for Zoom One. Zoom One encompasses not just Zoom Meetings and the Phone, but also Team Chat, which customers can deploy as a free solution, along with Whiteboard and numerous other services. This presents a substantial opportunity, especially for medium and larger-sized customers, and we need to effectively communicate the value of these offerings. Additionally, the GenAI features and other capabilities that are part of Zoom One can enhance our market share. While Zoom Phone is doing well, there's still a vast potential for Zoom One's growth. For instance, when I mentioned I took USPS as an example, they were impressed to find that our advanced Team Chat solution is included in Zoom One and is available for free. This realization can encourage many more customers to adopt Zoom One. I believe it's essential for us to highlight the complete value of the Zoom One platform.

Alex Zukin, Analyst

Thank you, guys.

Operator, Operator

Our next question comes from Peter Weed with Bernstein.

Peter Weed, Analyst

Thank you. And maybe this kind of follows up a little bit of what Alex just getting at. But first off, I want to say it's really exciting to see the progress on Zoom Phone and Contact Center. It's been amazing to watch that and all the checks I do with folks are very positive on things that are going there. I think, Kelly, you commented a few minutes ago and were to think with Alex here, that NRR may come down a bit before it starts reaccelerating maybe by the end of this fiscal year and maybe the beginning of next year, we start to see some line of sight to some benefit there. I'd really love to kind of dig into like what will drive that improvement? And kind of when split the customer base, you do a really nice job of reporting bolt-on greater than 100,000 and less than 100,000, like some quick math suggests where it's been really painful recently is on the greater than 100,000 customers. And I tried to figure out like on that reacceleration is it about kind of reigniting those greater than 100,000 is the opportunity with the less than $100,000, like growing them up because they're less mature. And like really what is it that you are going to be delivering with these customers to reignite that between those customer bases?

Kelly Steckelberg, CFO

One of the things I mentioned is that we've observed some disruptions in our customers' employee bases. Our sales representatives excel in assisting these customers with potentially right-sizing after downsizing their workforce while also upselling and retaining income from other areas of our platform. Given the ongoing pressures in the macroeconomic environment, you may notice this trend. Maintaining existing accounts, and even keeping the same amount of revenue that would have otherwise increased due to upselling, has been affected by employee reductions. This is partly due to the continuous changes in the macro landscape that we have not included in the guidance we provided. Additionally, the growth of our new products continues to accelerate. Our Phone product is performing exceptionally well and has achieved stability, which has taken three to four years. We anticipate that the Contact Center will experience a similar trajectory, although it may require more time. We've added many features to the Contact Center platform, such as ZDA, Workforce Management, and Quality Management, all of which will contribute to growth over time. Eric also hinted at the potential of AI to assist with retention and create opportunities for increasing revenue. Some of these developments will need time and maturation before they can contribute significantly.

Peter Weed, Analyst

And how high do you anticipate NRR being able to get once all that stuff works out? I mean, obviously, you've seen some of those headwinds. So you kind of know how much you're like I lost this and it would have been so much better. Like if you're looking forward, like what should we aspire to be getting NRR back to? And like how soon do you think we can get there?

Kelly Steckelberg, CFO

Yes. Peter, we'll talk about that more when we're ready to give FY '25 guidance, but not today.

Eric Yuan, CEO

Yeah, I can take a little bit more, Peter. So the question you asked was very similar to what about Zoom One. Actually, today, the problem is Zoom is a too strong brand on Meetings side, right? Many of the customers unfortunately, they even did not realize we have a lot of other services, not to mention a Zoom One platform, right? That's the number one challenge that we are facing. How to make sure all those – even existing – even for existing customers. They also think Zoom just a meeting, that’s not the case, right? When we and share a greater story, make sure most of our customers are publicly realize our Zoom not only just the meetings had a full platform, I think the inflection point will not happen until then.

Peter Weed, Analyst

Thank you.

Operator, Operator

Our next question comes from Taz Koujalgi with Wedbush.

Imtiaz Koujalgi, Analyst

Hey, guys. Thanks for taking my question. Two questions. First one for Kelly. I think you had a price increase for the Online business in Q1, and that was being phased out, I think, in different geos at different times. Has that been rolled out across the globe? And if you can comment on any tailwind you saw from that price increase in the Q2 Online business?

Kelly Steckelberg, CFO

It has been very effective in maintaining strong retention rates and moving customers from monthly to annual as they continue to find value since we implemented this price increase. Now that it has been in effect for the full period, we won't be breaking it out separately, but it is certainly having a significant overall impact, including momentum for our Online business, and I believe it is live in every market at this point.

Imtiaz Koujalgi, Analyst

Got it. I have a follow-up regarding the Contact Center. I understand it's early, and you've just begun onboarding your first customers. However, could you share your insights on the price points you're observing and the attach rate of seats? For example, if a customer has 100 seats of Zoom Meeting, what kind of attach rate are you witnessing for those early customers who purchase the Contact Center?

Kelly Steckelberg, CFO

It's very different compared to Phone, which typically has a one-to-one or sometimes even higher attach rate. Contact Center varies significantly depending on the use case. For example, one of our largest deals was with a BPO, where driving the Contact Center is their core business. Therefore, there's no standard ratio because it greatly depends on the specific use cases. Regarding pricing, our list price for Contact Center is highly disruptive at $70 per seat. When compared to competitors in the market, it offers substantial value to our customers. While larger Enterprise customers may receive discounts, we have managed to maintain our price points due to how competitive and disruptive our offering is in the market.

Imtiaz Koujalgi, Analyst

Guys, sneaking just one more clarification. Kelly, you mentioned that we won't have visibility into Contact Center revenues for another four to six quarters. It's still very early. Were you implying that it will be close to 10% of revenues in four to six quarters?

Kelly Steckelberg, CFO

No, I don't mean to imply that at all. I just mean that I've observed that over time, we've started to see Zoom Phone and discussed more milestone metrics and its contributions. That would be the best growth rate if it were to happen.

Eric Yuan, CEO

Thank you, guys.

Operator, Operator

Our next question comes from Matt Stotler with William Blair.

Matthew Stotler, Analyst

Thank you for taking the question. I wanted to follow up on Zoom Phone. This quarter, it's at $500 million in annual recurring revenue, and last quarter, it contributed 10% of revenue. This suggests we might see around 10% or slightly more sequentially in terms of growth for Zoom Phone's annual recurring revenue. I'm curious about what's driving that growth. Is it due to the success of Zoom One? Is that a sign of improved go-to-market effectiveness? Are any large customers, like the BPO you mentioned, increasing their usage? Is there anything specific you would like to highlight?

Kelly Steckelberg, CFO

I would say it's a combination of factors. As we engage with our customers about renewals, we are also discussing the value of Zoom One and how we can assist them. Every CFO and CIO globally is focused on increasing efficiencies within their organizations, and Zoom Phone offers a compelling ROI, particularly when compared to on-prem solutions. Additionally, the Contact Center plays a significant role, and Zoom Phone fits naturally alongside it. Overall, these elements will continue to foster synergies, especially as Zoom Contact Center evolves.

Eric Yuan, CEO

When we engage with our customers, they appreciate that we offer both Zoom Meetings and Zoom Phone together. The Contact Center presents a new opportunity for these customers, as they typically prefer not to implement a standalone solution. Having only a phone business makes it challenging to establish a sustainable customer base for both Phone and Meetings, as they are closely integrated. For example, with a simple phone call, one more click allows a transition to a video meeting. This seamless experience has significantly contributed to our Phone growth. Offering just a standalone solution is not scalable or sustainable. Looking ahead, more customers are likely to adopt a platform approach like Zoom.

Matthew Stotler, Analyst

Got it. Thank you.

Operator, Operator

Our next question comes from Sterling Auty with Moffett Nathanson.

Sterling Auty, Analyst

Hey, everyone. Kelly, regarding the Online outlook, it appears the guidance is slightly worse than before. Can you clarify how much of this is due to macroeconomic factors and how much is related to our execution? And Eric, I have a question for you as well. When we consider AI and the innovations you're implementing, how much of this AI innovation will enhance the core Zoom products, and how much will contribute to developing a premium pricing model or specific AI offerings?

Kelly Steckelberg, CFO

Eric, do you want to go first?

Eric Yuan, CEO

Yeah. So first of all, in terms of Online study. I know you have an account. Hopefully, you still have an account. And for sure, it can contribute to our Online growth. So speaking about AI, I think we are taking a different approach. As I said earlier, from an architecture perspective, it's different, federated AI. In terms of monetization, right, again, we look at it how to leverage GenAI to improve our core Meeting experience and deliver more value, make the services more sticky Zoom always offer more and more features values. And at the same time, we do not kind of charge price, increase the price a lot at all, right? That's right, we build a trust. They want to go to for Zoom Phone platform. At the same time, GenAI does bring huge opportunity like in terms of monetization, in terms of the new service. As I said earlier, how to leverage GenAI to build some branded new services, you cannot only turn on low-hanging fruits. You already deployed this service. I have a GenAI feature now, you need to pay crazy price. I do not think that's sustainable. A customer do not like it. right? And we are taking a different approach and more value to leverage GenAI to our existing customers focus on the future improvements to leverage GenAI. At the same time, given our speed of innovation, how to leverage GenAI to build some brand new AI services to monetize.

Kelly Steckelberg, CFO

Thank you, Eric. And Sterling, in terms of Online, I would say we're pleased with the execution and where you see that is the ongoing stabilization in the churn rate. That, I think, has been really, really well done and stabilized over the last 4 quarters now. And I think that's a really great indication of the ongoing improvements of the platform, the buy flow, the movement of customers from monthly to annual where we do see some ongoing headwinds is in the overall macro, which is driving more for the top of the funnel. And that's where when the team continue to focus on new pricing packages, new payment currencies, things they can focus on to expand the top of the funnel so that over time and then eventually starting to add new products as well that can be sold online. That's what will eventually drive this. Ideally, we want it to not only be stable but to be a growth driver as well.

Sterling Auty, Analyst

Makes sense.

Operator, Operator

Okay. We have time for one more question. And that last question goes to William Power with Baird.

William Power, Analyst

Okay. Great. Thanks for taking me in. Maybe one more question on Contact Center. Great to see the traction there. I wonder if perhaps, Eric, if you can update us on where you are with respect to go to market? I know that has been a big focus. How much more room and opportunity is there on that front? And then I guess the second part of that is it feels like there's a big opportunity with respect to AI Contact Center being a new entrant, how do you think about the opportunity for whether it's virtual or other capabilities to help you be even more disruptive in that market?

Eric Yuan, CEO

Great question. Regarding go-to-market, we have high confidence in our innovation speed, with many features in Workforce Management being introduced each quarter. Our approach is different with the Contact Center compared to what we did with Meetings. We really need to focus on expanding our indirect channel and working with partners and master agents. This is crucial for our investment strategy. Unlike Zoom Phone, which accelerated revenue, we're concentrating on enhancing our Contact Center product. As we make progress on the go-to-market side, I believe we'll see excellent results. When it comes to AI, we recognize its significance. While other vendors have had Contact Center solutions for a long time, our flexible architecture allows us to integrate AI effectively. We are not only developing our own AI features but have also acquired companies like Solvvy and the Virtual Agent, which aids our product innovation. Both organic growth and acquisitions are beneficial for us. AI will play a significant role in the Contact Center, and I am confident we will excel in that area.

William Power, Analyst

Thank you.

Operator, Operator

Okay. This concludes our Q&A. I would now like to pass things back to Eric for closing comments.

Eric Yuan, CEO

Thank you all for joining us for the Q2 earnings call. I really appreciate for your great support and very, very beautiful. And thank you. Appreciate.

Kelly Steckelberg, CFO

Thanks, everybody.

Operator, Operator

We thank you all for your participation, and we look forward to seeing you again. This concludes today's conference. Enjoy the rest of your day.

Eric Yuan, CEO

Thank you.

Operator, Operator

Good-bye.