ZM - NASDAQ

Okay. Hello, everyone, and welcome to

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

Hey. Thank you, Tom. Hey. Thank you everyone for joining us today. So before starting, I’d like to welcome Dr. Xuedong Huang as our CTO, who joins us after a successful career at Microsoft, where he most recently served as Azure AI CTO and Technical Fellow. Dr. XD joins us at an optimal moment in our AI journey. In the past few months, we brought several new AI innovations to the market and announced an aggressive roadmap aimed at empowering our customers to work smarter and serve their customers better. And, as we develop and deploy AI solutions, we strongly believe that technology should advance trust. We are privileged to have countless customers rely on us for their communications needs. We don’t take that for granted. Earlier this month, we took the additional step in stating that

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,

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

Well, thank you so much and congrats on solid execution in the quarter. Curious, if you can comment on the

Yes. So I can talk on the product side. Clearly, Kelly, feel free to tell on the revenue potential. I think, Mark, you're also right on. I guess probably you already tried it out is indeed very attractive. The reason why you look at the whole customers are -- including

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.

Thank you so much.

Thank you, Mark. Hopefully you try that. Thank you. Appreciate it.

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

Meta, we can't hear you.

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.

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

Great. Thanks.

David, next.

David, who is next?

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

Hi, Kash.

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

Yeah. So in terms of the Online segment, we were really pleased with the continued improvement that we're seeing in the [indiscernible] rates or the churn rates. They are really at historic lows. And so that's really great to see. And when the interim team continue to innovate, we just saw a little more volatility, and that's what we indicated in sort of tempered expectations for the rest of the year, but really pleased with the ongoing progress that we're seeing in that segment of the business. And then in terms of the pricing power -- I mean, Eric, feel free to chime in. But certainly, we continue to have a discussion with our customers when it comes up for renewals, looking for opportunities to potentially expand their usage of the portfolio, moving them from

Thank you.

Yeah. Just quickly, in terms of pricing power and most of the businesses, they still view employ experience as the number one priority, right? That’s why they really wanted to kind of give a customer the best service like a

Thanks so much.

Thank you, Kash. Appreciate. You bet.

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

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?

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 term 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 holiday. So I think the 3.2 number is a really great number. And we are going to continue and continuing 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,

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

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.

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

Thank you.

Our next question comes from James Fish from Piper Sandler.

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?

Kelly, you wanted to address the first one?

So in terms of the optimization of seats, what we've seen is, I think we talked about the sales motion before that our reps have the opportunity to really get in there and talk to our customers and they've done a great job about logo retention. And even if they are customers because they've had a dislocation in their employee base, taking that opportunity then to replace that revenue with an upsell of another product like

Yeah. Gross margin is very, very strong. Again, in terms of the impact, it's just a short term, not long term. The reason why -- when it comes to AI, it's becoming more and more important. Many of our customers told us, they rely on

Thanks, Eric. Thanks, Kelly.

Thank you.

Our next question comes from Matthew VanVliet, BTIG.

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?

Yeah, Matt. It's a great question. First of all, I can tell you, take a

Great. Thank you.

Thank you.

Our next question comes from Ryan Koontz with Needham

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.

Yeah. I think some of that, Ryan, points to the ongoing success we're seeing with

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

No, especially from Q1 to Q2, there were won't really significant changes. As I mentioned, there's still think lots of scrutiny around the yields, but no other real changes in the environment.

Got it. Real helpful. Thank you.

Our next question comes from Siti Panigrahi with Mizuho.

All right. Thanks for taking my question. My question on Contact Center again. That is -- that's a huge opportunity considering like 80% legacy still here to move to cloud. And you are starting from a clean slate, just building yourself in-house. So Eric, how are you trying to differentiate, I mean, among other cloud vendors right now in the Contact Center space. And Kelly, should you think about this Contact Center next leg of growth? Is this adoption should be like Phone what we have seen in the last few years?

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

And is that going to be similar like Phone kind of adoption? [Multiple Speakers]

Yes. Sorry, go ahead -- yes.

Only six quarters old today. So it's very relative, right, to the existing ARR base. It's small. It's growing very quickly, though. So it won't be visible to you probably for at least another four -- I don't know, four to five to six quarters, probably, but we’re really pleased with the growth. And then as Eric mentioned, when you start considering Workforce Management, of course,

[indiscernible]

Thank you.

Our next question comes from Rishi Jaluria with RBC.

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 noncore products, including

Yeah. That's a wonderful question. So look at the

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

Appreciate it. Thank you.

Our next question comes from Alex

Hey, guys. Thanks for taking the question. I guess, so when I sit back and look at the quarter, this quarter looks a little bit different than last quarter. You grew sequentially your revenue base on Enterprise and Online for the first time together in some time where both of those things happen. Your Enterprise billings actually grew as well. And so I look at the guidance, and it looks like we're taking a step back, and I appreciate the conservatism in the macroeconomic environment. I appreciate the fact that you've got changes you're still working through in the go-to-market. But help us understand, if we look at the trends as they -- as churn stabilized to a point where we can expect, for instance, on the Online business that this is a new floor we can count on. Because if I look at the exit rate for Enterprise revenue, I don't think it's at the rate that any of us sitting here would be jumping up and down about you mentioned NRR on the Enterprise side starting to -- I think you said in but maybe go back up in the first half of next year, what's the right way to interpret the Enterprise growth exiting this year and into next year? And then I've got a quick follow-up.

Yeah. So in terms of Online, I would say that we are very pleased with the performance that we're seeing in the churn rate itself. And I do think we're stabilizing around a new level that is back to historic levels. And I think that's a reasonable assumption to make going forward. And then in terms of Enterprise, we're obviously not in a place that we're going to comment on FY '25 yet. We're not going to do that on this call. But Enterprise, when you look at it from -- I don't say this for you. When you look at it in terms of the growth rate that you're expecting, you've been back into, right, what it is. And we are, as you say, still considering no improvement from the macro at this point. And as you said, continuing to have the sales force settle into our new structure. We're thrilled to have Graeme leading the organization. We -- some of the transitions took a little bit longer in EMEA and APAC than the rest of the world, as you've heard us talk about. But as we're coming into Q3, the pipeline is strong. It's stronger than it was as we were coming into Q2. So I think those are the factors you can take into consideration as you're looking for the growth rate for the rest of the year.

Okay. And then maybe, Eric, for you. Obviously, the evolution of

Yeah. I think

Thank you, guys.

Thank you, Alex.

Our next question comes from Peter Weed with Bernstein.

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

So one of the things I commented on is that we have seen some dislocation in our customers' own employee base and that our sales reps do a great job when they're talking to those customers about helping them potentially right size if they have downsize in their employee base, but upselling and retaining that revenue in other parts of our platform. So that -- as is there's still pressure in the macroeconomic environment, you're going to see that a little bit, right? So maintaining logos, even maintaining the same amount of revenue, but would have been an upsell, if not for a down sell due to seat. So part of it is just an ongoing potential change in the macro, which we have not factored into the guidance that we gave. And then the continued acceleration of all these new products that we keep talking about, right? Phone is obviously doing really well. And it's well hit its stride. But remember, that's taken three to four years to accomplish. And so Contact Center that we expect to follow the same is just -- it just needs a little more time. And then you heard about all the additions into the Contact Center platform itself with

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?

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

Yeah, I can take a little bit more, Peter. So the question you asked was very similar to what about

Thank you.

Thank you.

Our next question comes from Taz Koujalgi with Wedbush.

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?

Yeah. So it has been very effective in general in terms of maintaining strong retention rates and moving customers from monthly to annual as they continue to see value when we rolled out this price increase. And given that it's been in effect for the full time now, we're not going to break out, but it break it out separately, but it certainly is overall having a great impact including in the momentum for our Online and it is -- I believe it's live in every market at this point.

Got it. And then one follow-up on Contact Center. I know it's just pretty early you've just started -- you've just had your first early customers. But any comments on price points you're seeing and attach rate of seats. So let's say a customer has 100 seats of

Yeah. It's -- I mean it's very different, right, in terms of it's not anywhere near, like Phone, typically is near one to one and sometimes even more one to one attach rate. Contact Center is very different. It depends on the use case we're seeing of the customers. If it's an internal help desk, or if it's like -- one of our largest deals to date was a BPO, where it is their business, right, to drive Contact Center. So I don't think there's necessarily a standard ratio that you can look at because it varies so much based on use cases. And then in terms of pricing, as a reminder, our list price for Contact Center is highly disruptive. It's $70 per seat. And given -- comparing that, it's -- given comparing it to the other competitors in the market, it's a really -- I think it brings a lot of value to our customers. So while Enterprise customers and large customers are going to get discounts, we've certainly been able to manage to maintain price points, given how disruptive and competitive it is compared to others in the market.

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?

No. I don't mean to imply that at all. I just mean that I see laughing -- that over time, you started to see

Got it. Thank you guys. Thanks a lot.

Thank you.

Our next question comes from Matt Stotler with William Blair.

Hey. Thank you for taking the question. Maybe just a follow-up on

Yeah. I mean, actually, Matt, it's all of the above is what I would say. It's -- as we've taken -- as we are talking to our customers about renewals, taking the opportunity to talk to them about the value of

Yes. Just quickly, when we talk with our customers, they really like we have a both -- they deploy both

Got it. Thank you.

Thank you.

Our next question comes from Sterling Auty with Moffett Nathanson.

Hi, Sterling.

Hey, guys. All right. Kelly, for the Online outlook, how much of this is that -- because it seems like the Online guidance is a little bit worse than what we had before. How much of this is macro? How much of this is execution? And Eric, one for you. When we think about AI and all the innovation that you're driving, how much of that AI innovation is just going to be driving and differentiating the core

Eric, do you want to go first?

Yeah. So first of all, in terms of Online study. I know you have an account. Hopefully, you still have 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

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.

Makes sense.

Thank you, Sterling.

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

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?

Yeah. Great question. So yes, speaking of go-to-market, I think on product front, we have a high, high confidence innovation speed, we have so many features and Workforce Management, a lot of other features are being introduced every quarter. In terms of go-to-market, I think not like what we did before for Meetings, right, by and large, more like primarily driven by [indiscernible] business, Contact Center is different. For sure, we need to double down, triple down on the indirect channel, right, embrace all the sort of partners and master agent and so on so forth. And we need to invest more on that front. And essentially, this is one of the things why not like

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

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.

Thanks, everybody.

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.

Thank you.