ZM - NASDAQ

Hello, everyone, and welcome to

Thank you, Kelcey. Hello, everyone, and welcome to

Hey. Thank you, Tom. Thank you, everyone for joining us today. As we continue to execute on the strategic focuses, which I shared with you our last quarter, we are very grateful for the support, feedback and trust that we have received from our customers and investors. Last month, we closed our acquisition of Workvivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social intranet and employee app into one central hub, forming the heart of a company's digital ecosystem. Incorporating Workvivo's feature-rich technology into our all-in-one collaboration solution will allow us to offer

Thank you, Eric and hello, everyone. We are pleased that we beat our top-line and profitability guidance in Q1. Here are a few milestones: first, our non-GAAP gross margin of 80.5% exceeded our long term target; second, after adjusting for the three fewer days in the quarter, our Online revenue was slightly up sequentially; and last, the moment you have all been waiting for,

Thank you so much, Kelly. As Kelly mentioned, we will now move into the Q&A session. [Operator Instructions] And our first question will come from Goldman Sachs' Kash Rangan. Kash, go ahead and come on video for us and unmute if you would, please. All right. Well, hearing no response. We'll go ahead and move on to Meta Marshall with Morgan Stanley.

All right. I think I got mine to work. Perfect. Appreciate it. I noted that you were taking down kind of -- or not taking down, but giving back some of the gross margin upside that you saw in the quarter and noted that, that was for some of your AI investments. Eric, I guess I'm just wondering, how you're judging kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development that's going on versus investments that you want to make? Thanks.

Yes. Good question. I think it looks like everyone seem to have just woken up to AI. Actually, we have been busy on AI front for a few years, if you look at the past several – two of the largest acquisitions, right, Solvvy and Kites, right, all of the AI-based. Internally, we also have AI team as well because we understand the importance of AI in particular during recently by the generative AI momentum. I think, first of all, we do have our own AI team. We have our own internally developed AI models as well. We also will take up a very open approach. Essentially, we announced our federated approach to AI. We announced the collaboration with the Open AI, Enterprise Connect. We also doubled on our partnership with Anthropic recently as well and down the road maybe some open source AI models available, we are also going to embrace that. Again, we look at everything from end user perspective, right? First of all, we have a team really dedicated on AI. And also, when we sit down with the customers, some customers say, yes, really like Anthropic model. Yes, why not. We doubled on that partnership, we know we can leverage their API as well, right? So we are taking a federated approach which is to put a customer centric, right? That's why we are very, very excited about this AI momentum can truly improve our product experience.

All right. Thanks.

Thank you.

And moving on to Michael Funk with Bank of America.

Yes. Hi. Thank you, guys. Another question for you, Eric, if I could. Some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate SKU? And then how do you monetize AI within your platform?

It's a good question. I would say the answer is about both. You take our

Great. Thank you, Eric.

Thank you.

All right. So let's go to Kash again with Goldman Sachs. Kash, I think you're out there driving, so he's going to stay off video.

Exactly. Thank you very much. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human. I just will turn on that video very quickly on. So Eric, I'm curious to get your take. So I want you to, if you don't mind, drill a little bit deeper to generative AI and while a lot of software companies are announcing partnerships with LLMs based on the content and data that they uniquely process, we're also at a point where many companies are identifying very unique workflows and productivity scenarios that differentiate them going forward, right? So in that regard, just so there's a scenario everybody in UCaaS will ultimately have a generative AI strategy. So when you start to have these LLMs work with your core products and given the vast user base and behaviors that you've contained in your knowledge base, how do you think

Yes. Good questions. We have a great integration with the Tesla cars, right? If you use drive a Tesla, just one click and join the call. Even if you can’t come over the video, the audio will be always on anyway. So back to your AI question, I think, first of all, if you look at the generative AI, two things is very important, right? So first of all, if you do not start years back, just given what's going on in AI industry, AI world, you say, oh my god, a lot of things. However, we already started investing in AI, a few years back. We should understand that. The reason why our

Thank you so much Eric.

Thank you. Appreciate it.

So sorry, please continue. Okay. We'll move on to Tom Blakey with KeyBanc.

Hi, everyone. Thanks for taking my question. Kelly and Eric, good to see you guys. There are some - a large competitor of yours has been the news lately with Microsoft possibly needing to create a separate SKU for their teams -- Team's product in terms of debundling that product. I know how important the collaboration component is to

As we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is necessarily related to competition and more due to as we expected, some distraction internally due to the reorganization, but we feel great about the structure of our sales organization now with Graham, especially as our Chief Sales Officer; and Wendy leading the online team and that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. And we're just looking forward to seeing that come to light over the next couple of quarters.

Okay. Thank you.

Our next question will come from Parker Lane with Stifel.

Yeah, guys. Thanks for taking the questions. Kelly, I was hoping you could give us a better understanding of just how -- to what degree contract duration is actually compressed during the quarter? How much that will be an impact as we progress through the year? Is that more of a factor in any particular product set or was it pretty much across the board?

Yeah. It was pretty uniformly across our direct segment of the business, especially [Technical Difficulty] thing to be thoughtful about every decision, which is every buying decision, I should say, which is not new. It's just taking -- giving themselves time to make sure that they are getting the product deployed, and we expect it to be not long term in nature. But in order to reflect that, we updated our guidance based on, as we talked about deferred revenue as well for the coming quarter.

Got it. Appreciate the color. Thank you.

We will now hear from Peter Levine with Evercore.

Hi, Peter.

Thank you for taking my question. Maybe, Eric, one for you is when you think about the use case of AI and you think across like phone, video, contact center, where do you envision seeing the most kind of uplift in terms of client adoption of AI? Just curious to know where you're seeing that today.

I think on many fronts, right, like take Anthropic investing, for example, right? For sure, we are going to lever that not only for the entire portfolio, but we are going to start from a contact center, the virtual agent and the contracts and the related features. We also look at our core meeting platform, right, in meeting summary. It is extremely important, right? And it's also we have our team chat solution and also how to lever that to compose a chat. Remember, last year, we also have email candidate as well. How do we leverage the generative AI to understand the context, right, and kind of bring all the information relative to you and help you also generate the message, right? When you send an e-mail back to customers or prospects, right, either China message or e-mail, right? We can lever to generate is, right? I think a lot of areas, even like you like say, maybe you might be later to the meeting, right? 10 minutes later, you joined the meeting. You really want to stand in what had happened, right? Can you get a quick summary over the positive minutes. Yeah. You just also have to generate AI as well. You also can get that as well. It's kind of almost a lot of key use cases, right? I think will be empowered by those AI capabilities. That's why we are looking at almost every area, right, how to leverage generate to improve that experience. We take an Open AI, for example. This is a great company and also a lot of companies are leveraging their AI, not only bigger companies, small companies, we also announced the collaboration with them at Enterprise Connect, right? So that's why, as I said earlier, three things, right? You understand the large lung model, how to fine tune that with your own data and also revisit almost every feature you have -- are there any ways to empower those features? Are there any ways to monetize. That's why we take a holistic approach and also we like our federated approach to AI. By the way, internally, we do have AI team. It should understand the large language models. It's not something other companies just have work for AI.

Thank you.

Thank you.

I'm moving on to Rishi Jaluria with RBC.

All right. Wonderful. Thank you so much for taking my questions. Eric, I want to stay on the AI train for a little bit. You've obviously talked about some great use cases and feels like there's a big opportunity. I want to ask about maybe the potential to start to verticalize some of the AI solutions because it feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real-time signals, for example? And I'm sure that's one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize? And is that something that can make maybe direct monetization a little bit more easy because the value prop is very straight out of the box? Thank you.

That's a great question. By the way, I download the Open AI mobile iOS app, I should ask open ChatGPT to answer to another question. But anyway, you are so right on. When it comes vertical, I would say, the opportunity. There are two things. One is a departmental level, another one is a vertical industry, right? You look at our

Awesome. Thank you so much.

Thank you.

And our next question comes from Catharine Trebnick with Rosenblatt Securities.

I got it. Thank you. All right. In the last two years, a lot of changes has happened. First, everybody worked from home and now people are going back to the office. So has that actually changed any of your opportunities when you're looking at marketing, your products. I was thinking in terms of

Good questions. Good news is a question not about AI anymore. So you're so right. I think that during the COVID, right, as a lot of consumer use cases, right? Almost every family, you have with company account like a

All right. Thank you.

Thank you.

And William Blair's Matt Stotler has the next question.

Yeah. Thank you for taking the question. Maybe just one on the contact center side. So you obviously continue to innovate on the product front for contact center. But last time, we got a deep update. There was still some honing that was needed on the go-to-market front. We'll just get an update on what you're seeing on that front, overall adoption of the Contact Center product suite? And then what you think are the keys to driving further adoption going forward?

Kelly, do you want to take it?

Yeah. So our contact center leader is Scott Brown. He is a great addition to our team. And we are focusing from a go-to-market perspective now in the same way that we took

Got it.

Thank you.

Moving on to William Power with Baird.

Great. Thanks. Yeah. I want to ask a question on Online. It's great to see that segment play stabilizing. Maybe kind of two parts tied to that. Any early color with respect to the price increases and what you're seeing out of that? And as you look forward for the guidance for online, maybe just some broader framework for how you're thinking about both churn and top of funnel what gives you the confidence on both those fronts that this really is going to stabilize here?

Yeah. So we've seen a very positive reaction to the price increase. The -- when we came into the year and we were modeling it, we've actually seen better-than-expected retention rates in response to that. So that's been really great. As well as -- when he's done a lot of work around the online buy flow, which has also seen a very positive response. And then we've talked about it in the past, but there's a whole road map of other initiatives that are being worked on and continues to be added, including things like additional payment currencies, additional payment types and additional offerings. So those are all the top-of-the-funnel items you're referring to. And then they've also done a lot of work to the flow when people -- the cancellation flow when people come through, which is also contributing to the improved retention rates, and we feel great about them. Now they've been, it was 3.1% in Q3, 3.4% in Q4 and now 3.1% again or maybe -- yeah, 3.4% and we were born now back to 3.1% again in Q1. And as we said, we expect Q2 and Q4 to be seasonally higher quarters due to the holidays in those periods and the flexibility we give our customers to come and go as they need the product. So the churn we're very pleased with, and we've seen the behavior expect exactly as we expected it coming back down in Q1. So that gives us confidence that it's going to be within that range for the foreseeable future.

By the way, just quickly to add on what the Kelly said, right? So as we add more and more new services also can help us more upsell opportunities even for online segment. take the

Thanks, William. And moving on to Siti Panigrahi with Mizuho.

Thanks for taking my question. Eric, when you -- I just want to dig into this Workvivo acquisition. Do you see that more of a long-term opportunity or do you see that something that we can think of, this is some sort of technology that you can cross-sell into their base in near term? And what sort of -- is there some particular vertical or in a segment where you can see more traction there? Could you give some little bit elaborate in terms of revenue opportunity from that?

Yes. Good question. So first of all, if you look at our collaboration platform, right? We really want to offer a unified communication and collaboration platform. Customers I can leave it in the room platform, right? I think today is one of the problems we are facing customer also mention for us as well, right? Quite often, we send all kind of message either to e-mail, it's really hard to find, not scalable or you send message to chat, bar all those public channels, right? Customers also wanted to essentially like see a video message, right? I want to share to the entire employee base and a maybe a department of news, right? All those kind of accounting, right? Are there any other better ways to share and engage these employee, right? I think that's the reason why we think Workvivo can play a bigger role right to put on those kind of use cases, right? It's not only for the short term, is a key missing element of our entire product portfolio, but also in the long run, also is will help us a lot because of the AI, right, because how do you make sure you have more data, right, and really collaborating communication-related data, right? It's Workvivo for sure. Every day we use engaged with our employees, we are -- what we platform, you will generate lots of data, right? All those are very, I would say, is relevant and meaningful, right? How to lever the AI, right? That's why in the long run, certainly it can help us more.

Great. Thank you.

Thank you.

Next question will come from George Iwanyc with Oppenheimer.

Thank you for taking my question. Kelly, maybe building on the stabilization you've seen on the online side. Can you give us a sense of what your expectations are from an expansion rate on the enterprise side as you look out over the next couple of quarters?

Yeah. We don't guide specifically around the expansion rate. But as a reminder, it is a trailing 12-month metric. So given that it's at 112% and you can look at where the enterprise growth rate is that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect gold online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that.

Thank you.

Wolfe Research’s' Alex

Hey, guys. Can you hear me, okay.

Hi, Alex.

So I guess I'll try kind of a two-parter. One is just a simple how do you plan to monetize generative AI functionality in the product rather than making it making it a part of the overall experience? And the second is from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-20s last year in the first half to just over 5% of the second quarter guidance implied. That's a much larger rate of diesel than I think we all contemplated or thought. So how do we -- like is it an upsell? Is it cross-sell? Is it new products that are launching? Is it later revenue recognition? Like what is it that's driven that rate of decel? And how do you reaccelerate obviously, but how do you get back to a double-digit growth rate in that regard because it seems like that's where a lot of the valuation oomph is coming from for the stock?

So Kelly, I'll address the first one, you take the second one. I think in terms of how to monetize generative AI. I think first of all, take

And then in terms of the enterprise outlook, as I mentioned earlier, we expected the distraction in Q1 as there was impact to the sales or not only from the reduction, but also reorganization. And we feel really good about the structure of the sales organization now. And we've also, as I mentioned, we are prioritizing where we want to continue to invest and just recently committed to adding more reps in the contact center team for example. We hired a leader in Europe, which we haven't had before. So really excited to have Frederic join us. And all of these put us -- to bring us to be very well positioned to execute for the rest of the year. And now we're looking to the sales team to do exactly that. And they -- we talked about we have an amazing platform that's there for them to sell, and we're all rallying behind them to support them to see them execute.

Perfect. Thank you, guys.

Thank you.

And moving on to Michael Turrin with Wells Fargo.

Hey, there. Thanks. Good to see everyone. Kelly, on the billings deferred revenue side, you came in a little bit ahead of what you were guiding for a few percentage points from last quarter despite some duration impact. So I'm wondering, if there's any way you can help us quantify those duration impacts either on Q1 or the Q2 guide? And anything else you can provide just to help us think through seasonality as you've now passed the heavier renewal period, but mentioned maybe some sales transition impacts still out there. Just help us think through just what's contemplated in the guide from a few different levels. Thank you.

Yeah. So I think on the billing duration impact. As I said earlier, we don't expect this to be a long-term impact. We think it's just indicative of some of the uncertainty that's in the macro environment today. And just watching and being thoughtful about the impact that it's having on deferred and then you also heard it in terms of RPO. But we've seen this impact before, and we've also seen customers come back then. And I think especially as we continue moving towards more bundles,

Thank you.

And Ryan MacWilliams with Barclays has the next question.

Great. Appreciate it, guys. And congrats on

No. So our enterprise renewals, as you know, Q1 is our highest seasonal quarter and the renewals were exactly in the range of where we expected them to be for the quarter, so that was really great to see. And then in terms of Online, where we've seen strength that we've already talked about, I think it's increasing the top of the funnel. We've also continued to see strength in annual plans, which is great. And this is due to the -- just as a reminder, when we did the price increase, we didn't increase the price for the annual plan. So it just shows customers committing to the amazing value that they see in

Thanks for the color. Thank you.

Patrick Walravens with JMP Securities has the next question. I'm not sure he's out there, Patrick, do you want to come off mute and start your video for us? All right. Hearing no response...

I'll come off mute. I'm going to turn off the video and you can see why? Eric, can you talk to us a little bit about sort of the [Technical Difficulty] and what part of that is appealing to investors?

Patrick, so sorry, your audio is cutting out for us. Will you try one more time? And unfortunately, we might have to skip you if it doesn't improve, but try again, please.

Eric, can you just talk a little bit more about Anthropic and what they believe come with it?

Sure.

I heard Anthropic.

Yeah. I think Anthropic is a great partner, and this is a great team. And when we look at the AI landscape, I think why not double down on that partnership, right? And given our federal AI approach, right, internally we discussed that happened to be in the middle of using another round of financing, right? That's why how to solidify our partnership, right? Again, they are a great team, greater technology. And I think this is no brainer for us, we invest in them to further solidify the partnership. And yeah, so that's pretty much because look at our contact center, right, we will further empower our contact center offering, right, and also download applied to an entire product portfolio. Again, this is very important to our federated approach to AI, and that's the reason why you invested in them.

Thanks, Patrick. We'll go ahead and move on to Matthew Niknam with Deutsche Bank.

Hey. Thanks for taking the question. Just two quick ones on cash flow maybe for Kelly. First, accounts receivable the last two years, it's been about a drag of $80 million this quarter, much better, only about $29 million, wondering what changed there in terms of cash collections? And then secondly, in terms of this legal settlement, if you can just quantify and let us know maybe when we should anticipate that? Thanks.

Yeah. In terms of the settlement, Matthew, we -- it's not clear exactly when that will be completed in terms of the payment. That's why we said for the full year, we're updating it could be in Q2, it could also be in Q3. That's why we just wanted to give you visibility into that. And then, in terms of your first point about collections. I think part of that, honestly, is just the continued improvement that we're seeing in our team around collections and our ongoing DSOs and also, as we've seen online, when there's more online, especially annual, that is the online is mostly paid via credit card. So that is an improvement in terms of our DSOs usually as that's growing because the DSOs on online are about three days. Does that help?

And the legal settlement, if you could just quantify how much that is?

It's exactly the amount of the difference between our previous guidance. Let me say it this way, there was no other change to our cash flow outlook other than the anticipated potential net legal settlement.

All right. Thank you.

Yeah.

Shebly Seyrafi with FBN Securities has the next question.

Yeah. Thank you very much. So you're implicitly guiding for your enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. It was only double-digits in the past. So I know you have a lot of changes this year with the sales force, et cetera. After this year, or do you target double-digit growth in enterprise or is it like an upper single-digit growth rate? And also related, the Online business is stabilizing for the next few quarters, it looks like Q4, that means zero growth versus negative growth. Is it a growth business afterwards as well? So I'm just looking after this year is online a growth business is enterprise low double-digits or upper single-digit growth rate business.

All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both online and the direct business. So that's innovation. It's expanding our platform. It's focusing on investing in the go-to-market teams in terms of what we've talked about earlier, like the contact center, adding a leader to Europe, really focusing on marketing in the right way. And we haven't obviously given FY '25 guidance, but the goal is, and we've talked about before, starting to see reacceleration of growth as we exit FY '24 and having that continue into FY '25. And we're so early in the year of FY '24, but lining up everything to anticipate reacceleration as we exit the year.

And the enterprise?

Across -- potentially...

I'm just saying the enterprise is it upper single digits or low double-digit growth rate, the way you're targeting it, not guiding, just targeting?

Yeah, I'm not going to get that specific, especially this early. We'll be prepared more great to talk about that later this year.

Okay. Thank you.

And we'll move on to Karl Keirstead with UBS.

Okay. Great. Hey, Kelly. Just to follow on that conversation about driving for acceleration next year. And earlier on, you talked about innovation being a huge priority, that seems to me like there's the potential to shift a little bit the growth margin trade-off as you invest to drive growth. next year. I'm wondering if you're intending to signal that high 30s, 40% margins, everybody on the call should consider sort of a peak. And then if I could ask a clarification, did Workvivo impact at all your guidance for this year? Thank you.

Yes. Thank you, Karl. So as a quick reminder, our long-term target operating margin is lower, much lower than where we are operating today. And that is, as we've said in the past, to give us the opportunity as we see opportunities for investment to do so. We are really focused on doing everything we can to drive top line growth and continue to take market share. In the period of time where we've had slower growth, we've been focused on balancing that with profitability. But as we see opportunities, we absolutely could bring our margins down. So yes, I think we're at probably the peak of where our margins are. But again, we're always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, given they're amazing, and we're really excited about bringing them into the family, but they're having really, I would say, minimal impact on both the top line and the bottom line today.

Okay. Thank you.

Yes.

We have time for one additional question, which will come from Sterling Auty with Moffett Nathanson.

Great. Thanks, guys. Hopefully, my connection holds up. Just wondering back on the enterprise. Given the online $40 million a quarter stabilization. It implies the enterprises revenue is well below Street consensus. Did we analysts just have the mix model [Technical Difficulty] wrong or was the disruption or something having a bigger impact on the line -- on the enterprise business for the rest of the year?

I think there's two things. I think first of all, we've seen online stabilize much more quickly than we anticipated or than we had been indicating to all of you. So I think the overall mix for the year is probably shaving up to be a little bit different than you anticipated and even a that we anticipated at the beginning of the year. And then we're doing -- as I said, we're doing everything we can to focus on supporting our direct sales organization. The distraction in was not de minimis, right? It was -- as I said, it was across not only the reduction but also a reorganization and some changes to incentives and comp plans. And so we're very happy that that's all behind us now, and we're all looking forward to do everything we can to support them and regain momentum there.

Sounds good. Thank you.

Yeah.

And again, this does conclude our question-and-answer session. So I'll pass it back to you, Eric, for any closing or additional remarks.

Well, thank you all for your time. Really appreciate all your support, and thank you, as you all in our next meeting. I appreciate it. Cheers.

Bye everyone.