Zoom Video Communications, Inc.
Q2 2022 Earnings Call Transcript

Published: 30 Aug 2021

[Operator:]

Hello everyone, and welcome to zooms. Second Quarter of Fiscal Year 2022, earnings release. I'd like to remind everyone that this call is being recorded. At this time, I'd like to hand it over to Tom McCallum, Head of Investor Relations.

[Tom McCallum:]

Thank you, Matt. Hello everyone, and welcome to Zoom's earnings video webinar for the second quarter of FY22. Joining me today will be Zoom’s Founder and CEO, Eric Yuan and Zoom’s CFO, Kelly Steckelberg. Use of non-GAAP financial measures. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.Zoom.com. 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 2022, Zoom’s expectations regarding financial and business trends; Zoom’s growth strategy and business aspirations to drive evolution on multiple fronts as organizations and people reimagine work, communications and collaboration; and Zoom being well-positioned to be successful as a platform. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar. In addition, as you all know, we announced our intent to acquire Five9 in July. Clearly, we are excited about joining forces with Five9, but please note that we will not be discussing or addressing questions regarding the pending transaction at this time as we are in the process of regulatory review. And with that, let me turn the discussion over to Eric.

[Eric Yuan:]

Thank you and welcome to everyone joining us on today’s Webinar. I want to start by thanking our customers and partners for their trust and loyalty, which led to our continued strong revenue growth alongside remarkable profitability and free cash flow. We also want to thank our hard working employees for their dedication to delivering happiness to our customers and partners. I have been humbled by the stories of how finance professionals have leveraged Zoom to reimagine the way they work. Specifically, I’d like to thank Charlie Munger of Berkshire Hathaway for his remarks about how Zoom has added so much convenience to his life. We are so delighted to count Charlie as a happy user. And I nominate myself to be Charlie’s personal Zoom tech support if he ever needs it. In Q2, we also achieved several milestones, setting the foundation for us to thrive as a platform. In July, we launched Zoom Apps, which brings over 50 apps right into the Zoom meeting experience. And this is just the beginning. The beauty of our platform is it allows our ecosystem of developers to add even more functionality, by building apps where workflows are integrated with meeting interactions. This is a win-win because better integrations will boost our customer’s productivity and afford our developers exposure to our large user base. The Zoom Apps Fund, which has already invested in over a dozen startups in our Zoom Apps and SDK ecosystem, further aligns us with developers, enabling them to focus more on innovation. We are also excited to have launched Zoom Events in July. Zoom Events is an easy, yet powerful solution to produce and host company and public events. It acts as a layer above our existing Zoom Video Webinars and Zoom Meetings products. Zoomtopia will be virtual on Zoom Events in only two weeks and we hope to see all of you there. In Q2, we saw several large customer upsells. We were happy to expand with a leading tech firm who increased their Meetings licenses over sixfold to 95,000, and with a global financial services customer who added over 63,000 Zoom Phone licenses, making them our new largest customer. Both wins were displacements of legacy solutions that Zoom beat in terms of reliability, simplicity and integration. And let me recognize a few big wins for the quarter

[Kelly Steckelberg:]

Thank you, Eric. And hello everyone. We had an eventful Q2, with several highlights - the first of which was the strength in the enterprise. We were able to grow the number of enterprise customers spending more than $1 million dollars in ARR by 77% year over year. And the second highlight is the acceleration we have seen with Zoom Phone. We grew the number of customers spending more than $100,000 dollars in ARR on Zoom Phone by 241% year over year. In August, we will reach 2 million Zoom Phone seats sold, only 8 months after reaching our first million; We added 8 Zoom Phone customers with more than 10,000 seats in the first half of FY22, bringing us to a total of 26; And in Q2 we broke our record for the largest Zoom Phone deal to date twice in the same day. It is important to note that as we’ve just lapped our first full quarter year-over-year compare since the start of the pandemic, we have seen customers return to more thoughtful, measured buying-patterns. While revenue, profitability, and cash flow were strong in the second quarter and the first half, other metrics have begun to normalize, especially when compared to the unprecedented year-over-year comps. In Q2, total revenue grew 54% year over year to $1.02 billion dollars, marking our first billion dollar plus quarter - only five quarters after reaching a billion dollar annual run rate. The top-line result exceeded the high end of our guidance of $990 million dollars. We saw strength in our direct and channel businesses, which grew at twice the rate of our online business. Zoom Phone, Zoom Rooms and Asia Pacific growth also accelerated in the quarter. The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, where new customers accounted for approximately 74% of the incremental revenue, and existing customers accounted for 26% of the incremental revenue. Let’s take a look at the key customer metrics for the quarter

[Operator:]

Our first question is from Ittai Kidron with Oppenheimer.

[Ittai Kidron:]

Hey guys, thanks. Now don’t forget to unmute yourself. Great quarter again, guys. Kelly, I want to focus on this position, clearly, you are doing extremely well with Phone, just phenomenal, the growth that you're seeing over there. But can you give me a little bit more insights as to what is the growth in meetings right here right now, my math suggests a very significant deceleration in your expansion rate? And I would suspect that that's tied specifically to meetings decelerating. Help me think about the contribution of growth of those two elements and perhaps how would that change over the next 12 months?

[Kelly Steckelberg:]

So, I think in terms of the expansion that you're talking about the implied expansion rate that you calculated.

[Ittai Kidron:]

Yes.

[Kelly Steckelberg:]

Yeah. And I just wanted to remind you first of all, that when you calculate that it includes all of our customer bases. And as we mentioned, we are seeing headwinds in the online segment of our business for sure. So that's -- I would say that while we don't break out revenue, we see strength -- continued strength in the up-market enterprise in both meetings and phones, and where you're seeing that challenge in the implied metric is really coming from the online segment.

[Ittai Kidron:]

So, I interpret that to me that churn is now finally rising in that category. Is that the right way to think about this going forward now that the economy is slowly opening some businesses, I guess, scaling back on the usage here?

[Kelly Steckelberg:]

Yeah, remember the online business is primarily, not exclusively but primarily small business and individual, and I think what we've seen is the future of Delta is still unknown, unknown, we do see individuals especially moving around the world and feeling comfortable. I think we were talking about most of us are probably socializing in person now, doing fewer things like Zoom Happy Hours, and that's where we are starting to see some of the challenges. Though the net dollar expansion and the online segments are what are driving pulling that number down a little bit.

[Ittai Kidron:]

Very good. Thanks.

[Operator:]

Our next question is from Steve vendors with KeyBanc.

[Steve Enders:]

Okay. Great, thanks for taking my question here. I guess I just want to dig in a little bit more on kind of the trends you're seeing in the second half. It looks like you're gliding down a little bit. It was a downtrend or think before we're talking about an uptrend. Just want to get a better sense for what the biggest incremental change that you're seeing there on the Analog. And what changed in the past three months specifically.

[Kelly Steckelberg:]

Again, we continue to see strength in our upmarket. We're excited about what we're seeing in the enterprise. Phone international -- and international, we all saw growth accelerate in Q2. When we look out through what we have seen is a slowdown in the online segment of the business, which again, even though the pandemic seems to be far from over, we are happy that people are feeling more comfortable out traveling. And that's really where we're seeing the slowdown. And if you back all the way up to when we gave guidance at the beginning of the year, we had expected that towards the end of the year, but it's just happened a little bit more quickly than we expected. And we, of course, feel good that people are out moving around the world. but It's certainly creating some headwinds, as we've said, in the online segment of our business.

[Steve Enders:]

Okay, great. And is that creating any opportunities, then as companies getting to going back to the office, for Zoom rooms and incremental activity with that product.

[Kelly Steckelberg:]

Absolutely. So, we saw Zoom Rooms start to accelerate again in Q2, which is very exciting as our customers are planning and thinking about the tax rate more than doubled quarter-over-quarter from Q1 to Q2. So absolutely, companies are preparing and planning for welcoming their employees back to the Office.

[Steve Enders:]

Okay. Perfect. Thanks for taking my questions.

[Kelly Steckelberg:]

Yerah. Thank you, Steve.

[Operator:]

Our next question is from geology with Guggenheim. Hey Taz, you're on mute.

[Taz Koujalgi:]

Can you guys hear me now?

[Kelly Steckelberg:]

Yes.

[Taz Koujalgi:]

Sorry about that. Hi, I have a question about Zoom Phone, if you look at the numbers, you put tonight, you had about a million seats, I think in the last four months. Prior to that, you are adding about 500 million seats every quarter looks like a bit of a slowdown in the number of seats you're adding this quarter. Is that a fair comment?

[Kelly Steckelberg:]

Almost exactly the same time frame because I think we had announced in December that we hit a million, and then we announced 1.5 on our call-in April, and then 2 million on this call. So, it's almost exactly at the same pace.

[Taz Koujalgi:]

Got it. And then just one follow-up, you said weakness in the online segment, is that coming from just increased churn, or are you seeing a slowdown in new customer acquisition in that line item?

[Kelly Steckelberg:]

It's a little bit of both. As we mentioned, we specifically saw some challenges in certain regions like EMEA, where the world, at least for a period of time, was a little more open again, and people are moving around. And that's where we see people taking advantage of being out in the world. And seeing some slower top-line bookings, as well as accelerated churn.

[Taz Koujalgi:]

Thank you.

[Operator:]

Our next question is from Meta Marshall with Morgan Stanley.

[Meta Marshall:]

Great, thanks. Kelly, I just wanted to dig into your kind of commentary on more measured spending patterns that you're seeing and taking away from kind of the smaller business commentary that you've been giving and focusing that on the enterprise. And so just trying to get a sense. Does that mean, normalizing the number of seats that they're adding or that they are rationalizing the kind of seats that they've had, that they're rationalizing a number of video solutions that they're having in-house? Just what does that kind of commentary around? More measured patterns around the enterprise business mean? Thanks.

[Kelly Steckelberg:]

Yes. Thank you, Meta. We saw the start a little bit in Q1 and now continue into Q2, where I think it's not necessarily measured in terms of how much they're buying, but more measured and thoughtful in how they are buying in that they want to take their time. They're doing more complete proof of concepts, for example, versus if you think about a year ago, they were in this sort of stage of trying to keep the lights on almost and buying grid Company and now they're taking the time to really be thoughtful. And it's back to kind of the way they used to buy pre-pandemic which is just much more normal buying patterns. So, I think that we're back to more normal, and for the four quarters - ish we saw last year was really the blip and now we're back to a more normal measured effect to customer's .

[Meta Marshall:]

And as part of that, just because there’s a couple of a decision by phone now, or just anything having to do with that.

[Kelly Steckelberg:]

I think that certainly, the phone is a different buying cycle, but usually about the time they get to a phone they already know Zoom. So, it's not that, that is necessarily slowing down and just that they're taking their time to think about the decisions that they're making.

[Meta Marshall:]

Okay, great, thanks.

[Operator:]

Our next question is from Matthew VanVliet with BTIG. BTIG.

[Matthew VanVliet:]

Hi, thanks for taking my question, I guess on the continued success on Zoom Phone here, called out a number of very large deals. Curious about how often you're being brought in where they're also contemplating a contact center upgrade, where do you stand? Obviously, the partnership with Five9 has been in place for a while, but just more generally speaking, how often is upgrading to Zoom Phone a part of a broader modernization across that could potentially include a contact center?

[Kelly Steckelberg:]

that. I actually don't know exactly off the top of my head the specifics around that. We obviously are having an integrated phone and contact center solution is really important to many companies, which is why we're excited about the deal that we're working on with Five9. And as you say, we've been partnering with them. We also have other partnerships in place as well. And so, there's nothing different about that, which has changed. I have to go back and look. I don't know exactly what the typical catch rate RBT knows too though. Eric, could you have a perspective on that?

[Eric Yuan:]

Sure, as you look at it, our installed base, by now I think they really wanted to migrate from an PBX system. to the cloud. They're huge opportunities as the comps fall. Also, since the pandemic, I think that we do see some of the enterprise customers. They also started asking about, "Hey, what's your cloud? " No context understanding because this started you know planning now. That's why we think this is kind of for the new opportunity for us, not only for the brand and new revenue stream for contact center, but also it might of you know further grow our Phone businesses, but because like about a year ago where a few lodging investment customers who really wanted to migrated on flat contacts Genesis. Now, given the digital transformation, for almost every Enterprise customer, reducing more and more customers, we are very interested, that’s why timing-wise, it's perfect for us to double down on the progress the contact center grows.

[Matthew VanVliet:]

Great. And then following up quickly on the education front, schools get back into session. Whether or not they're going to be in person or not is sort of a debate here, but I guess, what's the guess potential of monetizing more of that installed base is it's still going to be a relatively free solution or how is that strategy evolve? Thinks.

[Eric Yuan:]

So, Matt, before I answer that question, as you know, I'm accommodated body share. The number of R and C is read a couple of communities, right? To support K2 close, who's this? I will see that's a brainer for us. This is Paul that and at no cost, we feel where a cloud. We never thought about how to monetize our service for those who can go to schools right, now they all go back to school, right with that and having more resources, to think about how to monetize other installed bases. I'll give an example, like free users. Last year, we were extremely busy to have a reward to have people seek negative. We even do not have a bottom to think about how to monetize was previous. I mean, how to embrace with the consumer, right? We never thought about that before. Now it's the right time, right? How to think about embracing the consumer's credit. How to monetize. It's something we're very excited about. We do not want to monetize this throughout schools. more responsibility for habits as always.

[Matthew VanVliet:]

Thank you.

[Eric Yuan:]

Thank you, Matt.

[Operator:]

Our next question is from Pat Walravens with JMP Securities.

[Patrick Walravens:]

Great. Thank you. Hi, guys. And then I don't think there's ever been a Company that has grown so fast and realistically pulled a lot of demand forward, right? Because everyone needed to get their video conferencing solutions in place very quickly. And now, as I look at 54% this quarter, Kelly, your guidance suggests 30%, 31% in Q3, and 15% in Q4. So, all that is just a lead-up for Eric, what are your top 1 or 2 priorities in the next 12 months as you go from this hyper growth to a much more reasonable growth period? If you could just contrast those for us, I think that would be really helpful.

[Eric Yuan:]

Sure. I would say, Patrick, those are great questions. First of all, you look at it prior to the pandemic, look at our gross, always focus on the enterprise costs. The to beat the conversely, we introduced a second revenue stream, Zoom Phone, both of them are doing well. And how to introduce the third one or fourth one. How to double down on that. But there's always our whole acquired within our realizes we acquired pandemic crisis all of us as several years, so probably we should have planned. Sort of hospice services we will have. Now, actually, you can get out by how to introduce more and more revenue stream, new services to support our in-device cost that's always . Essentially, this is a part of our overall platform straight. And inside of that also, there's -- there's a new opportunity ahead of us. As I mentioned earlier, we never realized there are so many consumers and who are so loyal to the platform. The usage is still pretty . And how to embrace the consumer's credit is also something on top of our minds as well. We never thought about that before. it's the right time. It looks into enterprise platforms. and also, the consumer. Those continue to drive our future growth.

[Patrick Walravens:]

That's great, thank you.

[Eric Yuan:]

Thank you, Patrick.

[Operator:]

Our next question is from Shebly Seyrafi with FBN Securities.

[Shebly Seyrafi:]

Thank you very much. So, I'm looking at your implied guide for Q4. It seems like you're guiding it to the sale to around 12% or so, plus or minus from 30% or so Q3 with a similar compare I would argue. Now, it seems like it'll actually be down potentially sequentially from Q3. So, can you elaborate on why that might be the case? You talked about online issues. How long do they last, for example, and if we go to like 10% to 12% growth in Q4, should we accelerate afterward if we -- the compares get easier, how should we think about next year?

[Kelly Steckelberg:]

So, in terms of what you're seeing in Q4, it is continued uncertainty around headwinds in the online segment absolutely driving that. And we're net -- in terms of what that implies for next year, we're not ready to give FY'23 guidance today, unfortunately. We will be prepared to do that when we get on the Q4 earnings call, and of course, we'll have a lot more earnings at that point to share with you. But that is exactly what continues to drive that in Q4.

[Shebly Seyrafi:]

Okay. There was any reason why the online issues would be bigger in EMEA than in the Americas, in Asia?

[Kelly Steckelberg:]

Well, that is the pandemic question, right? Because it really what we've seen is this varies depending by region and by segment depending on where each of those countries or markets is in their pandemic lifecycle. And we've seen it Evan flow over the last 18 months by market. And so that's the challenge even I think that all businesses are having right now. And thinking about the future, with so much uncertainty around the pandemic right now, it's just difficult to forecast exactly.

[Eric Yuan:]

To add to what Kelly has said. of our user base in EMEA. Seasonality also is a factor, particularly in the summertime, not to mention that COVID situation and the user there might have had a little bit longer vacation, right? It's seasonality for sure in the key center, and that's another big difference compared to our user base here.

[Shebly Seyrafi:]

Okay. Thank you.

[Eric Yuan:]

Thank you.

[Operator:]

Our next question is from Ryan Koontz with Needham.

[Ryan Koontz:]

Thanks for the question. Great to hear the progress in the enterprise. Clicking along there. Sounds like some real strength in APAC. Why don't you share with us any additional color on particular market verticals or applications you're seeing that are kind of key to penetrating and getting these big, large global 2,000 tech wins. Thank you.

[Eric Yuan:]

Yes. I would say, first of all, with our topic to market is not education and healthcare is pretty strong and also will bring us more opportunities when we expand into the international markets like . And also, like are those are Telkom, Telkomsel, Lose ten of our chemical partnership? Will further help us for us penetrated into each of those countries, right? Into most of the new opportunities. Recent enable launched Zoom ads. And also, like some of the partners, they build a new solution app for the iPhone, like fast technologies. I think a lot of new opportunities we do not need to build up by ourselves. And those sort of party customers, they can leverage our use our API or UK, or Zoom app to build all kinds of new solutions to -- hopes on all those vertical markets, or even at the department as well, right? That's where the opportunities are comfortable. So, you're seeing some opportunities to upsell into the type applications in the Enterprise? Yeah, both, actually. Because in those part of healthy business also bringing the Zoom to the installer base and also, they buy We also obviously are in most stock, right? Essentially is a very healthy channel, not only for their own witness to wherever but also is a greater channel for us.

[Ryan Koontz:]

Helpful

[Operator:]

The next question is from Siti Panigrahi with Mizuho.

[Siti Panigrahi:]

Hey guys, thanks for taking my question. Just wanted to dig into the enterprise segment. Q1, Q2, those are to bigger renewal quarters. Now that's behind. So what changes you are doing on your go-to-market strategy, mainly increasing quarter carrying sales save, or any changes that you are doing for this normalized environment. And for news to be one of the big cross-sell opportunities for you, and how should we think about the phone as you get into a more normalized renewal environment?

[Kelly Steckelberg:]

We are absolutely continuing to invest in our sales capacity. We are focused on certain regions, especially where we see lots of opportunities like Asia-Pac. We recently hired a new leader there, and are really excited about the progress we're already seeing with his leadership. And then we are continuing to invest in marketing so as we've moved post-pandemic era a little bit in terms of not hoping that, but sort of what we saw from last year with the lift in brand awareness. We're continuing now to think about how we invest more in specific product marketing around Zoom Phone, around Zoom Rooms as well as a digital marketing campaign. So, helping the community drive additional leads for all of our teams on a global basis. And then also the channel has continued to be a really important aspect of our go-to-market. So that channel was responsible for approximately 27% of our Zoom Phones sales in Q2, we added 6 additional master agents, partners during Q2. So really excited about continuing to invest in the channel on a global basis.

[Siti Panigrahi:]

Thanks, Kelly.

[Kelly Steckelberg:]

Same.

[Operator:]

Our next question is from Alex Zukin with Wolfe Research.

[Alex Zukin:]

Hey guys. Thanks for taking the question. I think I'm going to -- I'll probably touch on a topic that's been mentioned here before. Because I think a lot of people that are investing in the Company at this point, really are investing in the non-online story of the Company, the enterprise story, the large business. There's a lot of metrics there. There's a lot of pollution and noise in these metrics. How do we think about the growth of the important part of the business for investors, meaning the over 10 employee-customer bases, either from an incremental booking’s perspective, from an incremental revenue perspective? And when does the headwind we're anchor on the business from the pandemic, from the once in a generation SMB buying pattern? When does that ? And so, when do we see a normalized kind of normalized growth rate for the Company?

[Kelly Steckelberg:]

Yes, so thank you, Alex, first of all, we agree with you that really, we want everyone focused on the long-term potential of the up-market. As a reminder, in Q2, that segment of the business grew at twice the rate of the online business. So that gives you some indication of how those two segments are diverging a little bit. And then as we look forward, I guess the best way to help you think about it is you want to look at the net dollar, the implied net dollar expansion rate that we were talking about earlier, right? You can think about what's happening there is the net dollar expansion rate for the online segment is under 1, right? That gives you some idea of what's happening, again, how to think about those two different segments of our business. In terms of where is, is there a trough? I think that it's back to trying to predict the pandemic, which is a difficult thing for obviously anybody in the world to do right now. And as much as we are excited about vaccines being more widely distributed, unfortunately, as we see delta continuing to grow in certain parts of the world, we have even in the last few weeks, like seeing certain pockets of strength. So, I think that that's going to depend on really what we continue to see in terms of the spread of variants around the world.

[Alex Zukin:]

Got it. And I guess maybe for Eric, you mentioned the seasonality, the vacations in Europe. Is there a way to kind of get a sense for the delta upon about just EMEA SMB versus the U.S. as ambiguous so we can just so we can get some sense of that magnitude change?

[Eric Yuan:]

I think overall, I think our up-market has been well. And especially in the look at North America being in a swipe, in the earlier, I think a mass-market on the SMB I think I t at the past quarter, more seasonality, COVID situation for sure, maybe is seeing a little bit worse because they're longer we us wants to first here, look at our North America market, I think. The upsell Phone and also the Zoom Rooms because every Company, they're starting to go back to the office. New opportunities are coming. They're also doing very well. That's why I say EMEA is very timely on SMB, Enterprise, and the large and we did not see a big profit. And because upset by the hybrid work of the politics. I think to look at the APAC, APAC we did not see that at all last quarter, assuming we're about. I think overall as emission earlier regarding go back in all to our enterprise. Because the last year, I think the online venous used to be just a marketing channel. But however, not only marketing channel but also contribute a lot of our revenue from a percentage perspective. Now, the game is out of that percentage is going to adapt or on how Parkway like with that we can focus on our call-in device customer. And plus, given that, we've become a household name, , will bring a new opportunity to monetize usually the monetization for an online loan and users and just the honest that description. I would say that. I mean, all of you got a sustainable strategy like to fall online. I users’ monetization, to monetize use the online installed base. That's why we are very excited about our future.

[Ittai Kidron:]

Thank you, guys.

[Eric Yuan:]

Thank you, Alex.

[Operator:]

Our next question is from James Fish with Piper Sandler.

[James Fish:]

Hey, guys, thanks for the question. On the win with Seagate as an example here, how often are you seeing it that phone is leading to a greater number of seats at existing customers, or really, how can we think about that potential uplift within just to install base today, are selling a phone with meetings that create a greater number of seats at current accounts, not just meetings seats, but overall, employees, they can actually cell phone into? There's the two times opportunity that we just don't have as many meetings seats because you can have more -- you can have fewer hosts than you do employees.

[Eric Yuan:]

James, that's a great observation. You are so right. I think one year ago we really did not see that. Normally we buy more licenses and as Bob probably alluded to our sales, and also for the existing installer base, the upsell of Phones. For the brand-new customers, because of the cost of looking at one platform on both video and voice, we understand video and voice are converging into one platform, plus in our Zoom is very mature now, every quarter being very well , it is not like this is something brand new. They do not want to take any risk. Is very mature, plus the integrated screen, both video and , Essentially, from now, I would say probably I don't know, but I guess probably more and more customers who view is going to deploy video for us and it didn't deploy. Today on the last biggest both given the dynamics of each business, sometimes probably they wanted to deploy more Zoom seats than the .

[James Fish:]

Thanks.

[Eric Yuan:]

Thank you, James.

[Operator:]

The next question is from Will Power with Baird.

[Will Power:]

Great. Thanks for taking the question. I guess, Check the question probably for you Kelly. As we think about the 10 plus employee cohort, your upmarket segment, how do we think about one, customer growth from here? And two, as you think about that net expansion, they've been above a 130%. What's the sustainability of that, right? Because you've gotten a number of growth drivers and you've got the law of large numbers working against you. How do we think about the outlook on that front?

[Kelly Steckelberg:]

In terms of net dollar expansion, we expect it to stay above 30 certainly for Q3. And then in terms of Q4, we expected to be in at least in that range, not is a quarter out. We don't know exactly, but we are going to be right in that same range still for Q4. And then in terms of the customer growth, I think that what you are going to continue to see is ongoing growth driven by large deals. So, the customer count may slow, but as you're going to continue to see growth driven by these big deals, as we see opportunities to continue to cross-sell with Zoom Phone, as you heard, right? We beat our two largest deals records on the same day this quarter. So really seeing opportunities there. And then as we were planning to go back to the office, also opportunities for Zoom Rooms. And then think about doing an event. We're going to start to see opportunities for larger and larger, bigger customer wins. And I think the other thing to note, we talk about in the quarter, but just want to make sure we understand. We had a deal this quarter that now became our new largest customer. So that's our new customer, an existing now with their up-sale right to begin the largest customer so we're continuing to see these really significant large bins. And that I expect to continue.

[Will Power:]

Right, thank you.

[Operator:]

Our next question is from Matthew Niknam with Deutsche Bank.

[Matthew Niknam:]

Hey, thanks for taking the question. You talked a little bit about some more measured behavior from customers in terms of buying patterns. I'm just wondering, can you talk a little bit about the competitive backdrop, whether you've seen peers, maybe getting more aggressive, especially larger enterprise customers, really take their time to reevaluate the future of work Post COVID. Thanks.

[Kelly Steckelberg:]

Eric, you want to talk about --

[Eric Yuan:]

Sure. I think we look at it, the churn, the future work, hybrid work for short that will be the mainstream, right? And however, and because of the cost of embracing hybrid work, a lot of employees like a student working from a home, or maybe work the remitted locations, and another , the prior to pandemic crisis quite often, and you might have deployed loosen. This is good enough, right? And giving employees now to support the hybrid work, the best way to service will do very well. Look at our employees, they do not have, I just part, you know, sitting next to them, right? And approximately you need to worry the productivity if you do not give the best for tools. That's why in the good enough services, we're not doing well. Every business we would like to deploy the best-of-breed service. But always give the employees much better tools to improve their productivity, to help employees because to support a hybrid world is not that straightforward, right? I'll give you one example, like a complement solution, we're producing feature. All of which, customers, they do not care to have a meeting by somebody assisting in the conference room, some join remotely, that experience is not as good as the big, the webinar on me too right. That's why I think the hybrid work, certainly we'll have Zoom by even some of sometimes our competitors the mile of evidence of price. I think the good news is the customer really wants to have a very reliable fixing us the platform, you know very easy to use. I think that's the reason why I think that Zoom is positioned much better than any of our competitors.

[Matthew Niknam:]

Thanks, Eric.

[Eric Yuan:]

Thank you, Matt.

[Operator:]

Our next question is from Boyoung Kim with Citi.

[Boyoung Kim:]

Hi, Tyler Radke, earlier in the Q and A, you showed some progress around the master agent program and also had cited some really large international phone deals. So, I wanted to hear about what you're seeing in terms of the productivity of the channel partners and international markets relative to what you're seeing from channel partners in the U.S. and to what extent is that impacted by the nascent stage of the master agent program in international markets, as well as the nascent state of the broader market in a cloud-based phone. Thanks.

[Kelly Steckelberg:]

So, I think we are seeing strength in our channel partners globally. But as you say, it's a much newer program and much smaller internationally. So excited to really -- this is one of the main focuses for our channel team, which is expanding outside of the U.S., it's focused for the rest of the year. In terms of productivity, I don't think that it really varies. I mean we were really excited about the Telkomsel deal, which is one of our largest channel partner deals, ISP deals with date, so that's really exciting. But we've had significant wins in the U.S. as well. So not seeing dramatic differences in productivity on a global basis.

[Operator:]

Our next question is going to be from Matt Sauler with William Blair.

[Matt Stotler:]

Hey guys, thanks for taking the question. I think just -- just one for me. Obviously, as you guys have spoken to so far, the enterprise opportunity here is really kind of the which was really exciting and compelling going forward. But given the commentary around finding other ways to monetize the base, whether that's a consumer or otherwise, we'd love to maybe get an update, or whatever color you can provide on the level of premium usage that you're seeing today, now outside of the seasonality with education, Just the level of premium users from the platform, how that's changed over the past 4 or 5 quarters, thoughts on the back half there, and then any commentary on what conversion you've seen there or you expect you could see if you decided to really try and monetize that.

[Kelly Steckelberg:]

Yeah.

[Eric Yuan:]

Go ahead.

[Kelly Steckelberg:]

We still see free users. A large, they've really grown over the last 18 months and they're about 30% of our minute usage today as compared to like 10% pre-pandemic. That gives you an idea of the number -- we don't talk about the number of users, but that at least gives you a relative understanding of how they grow over time. And like we always say, as Eric mentioned about our share value of care, our core value of care we really care about all those specially to keep people connected during these more difficult times. And there's always a hope that they continue to invert or that they have the opportunity to give you a new more new users to the power of Zoom.

[Matt Stotler:]

Got it, thank you.

[Operator:]

Our next question is from Chaim Siegel with Elazar Advisors.

[Chaim Siegel:]

Hi, Kelly and Eric. How are you?

[Kelly Steckelberg:]

Hi. Nice to see you.

[Chaim Siegel:]

I had a couple of questions if you have time, but since obviously, the focus is on enterprise, I just wanted to know how fast the sales forces growing and when the efficiency for that Salesforce starts to kick in. I guess that's one. And also, just related to that on operating expenses. So, I'm not sure how long you expect flattish sequential growth, but on the operating expense, it seems like maybe it will start to grow faster than revenues. And just wondering with relation to focusing on getting the enterprise is going, how fast expenses will grow versus revenues.

[Kelly Steckelberg:]

So, as we've been saying for the last several quarters, there are areas that we were not able to hire and invest in as quickly as revenue grew last year. And so, what we've been doing on the last couple of quarters is focusing on reaccelerating investment, especially in the areas of R&D, as well as for the carrying , and we are absolutely continuing to do that. We still are underinvested in R&D at a little over 5% of revenue, and the long-term target is 8% to 10%, so we're continuing too higher as quickly as we can. And then similarly in terms of quota-carrying heads, we're being very thoughtful about the segments and the regions in which we're hiring a fair number, like slipping back for a minute, there is a huge chum and it's a huge opportunity out there. And we want to continue to add quota-carrying heads in sales capacity into our system to take advantage of that. As long as we continue to see an opportunity for growth, we will continue investing in quota-carrying heads. We are also, as I mentioned earlier, accelerating our spend in marketing as we were able to pull back a little bit on that last year. But we think now is the right time to continue reinvesting there. And then the two areas that we always look to be as efficient as we can, our G&A and COGS. And G&A is right in the range of where we would want to be for the long term. Over time, we do expect COGS to decrease as we continue to move more and more of our services out of the public cloud into the data center, our own data centers. I mean, we're always going to have a hybrid approach there. But also, eventually at some point when K-12 schools are freer to go back to campuses, we do expect to see improvement in our gross margin. But we will absolutely continue to support those students in schools as long as we think it's needed.

[Chaim Siegel:]

Is there a general timing of efficiency where you would to tick in for the enterprise, for sales on the enterprise? I know you've been growing it. And I know it takes time, I was just wondering if there's timing where if they going to start really performing for you?

[Kelly Steckelberg:]

No, I mean -- I would say is we are continuing to hire quota-carrying heads quickly and we will continue to do so. So that means there's a constant state of having a ramping rep in the system. And since we have no plans to stop hiring quota-carrying heads in the near future. But I can't say when all of a sudden, they're going to necessarily be more efficient.

[Chaim Siegel:]

Thank you very much.

[Operator:]

Our next question is from Rishi Jaluria with RBC.

[Rishi Jaluria:]

Hey, Eric, Kelly, Tom. Thanks so much for taking my questions. Good to see you all. I wanted to just ask about Zoom Events. I know initially when you've talked about the product, it was kind of pitches a little bit of a monetization factor for the Prosumer segment, right? Helping fitness instructors, yoga instructors who run class online, but clearly, it seems like there are much grander ambitions, right? The fact that you're going to run Zoomtopia on that, I think tells us there's maybe a bigger enterprise opportunity, even as companies are looking at doing in-person conferences again, they don't want to have a strong virtual and hybrid component to it. So, can you maybe talk a little bit about what you see as a longer-term vision with Zoom Events, especially Enterprise and maybe let's go on that? Thanks.

[Eric Yuan:]

Rishi that's a great question. So, remember last year, last October, at a Zoomtopia we reduce resuming events, you know, we started from on Zoom. And we thought about how to have the people working from home who still can't get it streaming live like filling these online classes, Zoom all those classes. That's the reason why we decided to build the Zoom Events ever. Again, we always listen to other customers, in particular, our enterprise customers. And they all told us, there are more opportunities around the carpet events in the corporate and probably not assume a focus on the all told us, hey, we've in either better than here that. We ought to have an EBITDA platform, they wanted us to extend that, and I didn't know how to expand it into an even bigger Annual User Conference like Zoomtopia, that's why we to our , right? And a above-corporate, which is rebranded as Zoom Events. We do see a huge opportunity. And besides that, the consumer learns. It's not a card or zoom you miss anymore. This is more like on Zoom website. We still were g aggregate all those consumer-driven events right like on fitting in a cost and plus, but if I know, if you look at our short of opportunities, assuming you went there because many of our existing customers told us we need a platform like that because it already does. They do not want to go to any other platform. They are very patient. That's the reason why they shift over our spending the database since the last ASM problem.

[Rishi Jaluria:]

Right. Wonderful. Thank you.

[Eric Yuan:]

Thank you.

[Operator:]

Okay. Well, thank you to all of our analysts, that's all the time for questions that we have for today. And then to Tom. Let's bring you back to Tom.

[Tom McCallum:]

Great. Thank you, everybody. And we hope to speak to you more of the rest of the quarter and see you at Zoomtopia. anything else Eric?

[Eric Yuan:]

Yes. Thank you all for you come today. Hope you all join the next mass at Zoomtopia, September 13th, and 14th. I really appreciated all your support as far as always. Thank you.

[Tom McCallum:]

Thank you.

[Kelly Steckelberg:]

Thank you.