ZM - NASDAQ

Well, hello, everyone, and welcome to

Thank you, Kelcey. Hello everyone, and welcome to

Hey. Thank you, Tom. Thank you everyone for joining us today. In early October, we hosted

Thank you, Eric and hello, everyone. We are pleased that we beat our top-line and profitability guidance in Q3. Here are a few milestones: First,

Thank you, Kelly. And as Kelly mentioned, we will now move into the Q&A session. [Operator Instructions] Our first question will come from Ryan MacWilliams with Barclays.

Hey, guys. Thanks for taking the question. Just to start with Kelly, do you have any changes in the overall macro environment in the third quarter compared to the second quarter? And could you touch on how linearity did throughout the quarter for new bookings? Thanks.

Yeah. Hi, Ryan. So the macro has been pretty consistent from Q2 to Q3. We continue to see similar trends in terms of deal scrutiny, back-end loaded. So the quarter from a direct perspective was fairly back-end loaded. As a reminder, the online segment of the business is typically pretty linear throughout the quarter. I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac that had – that was a fairly significant headwind for us, whereas Asia Pac would have at least been flat year-over-year, if not for that impact.

Thanks guys.

Moving on to Meta Marshall with Morgan Stanley.

Great. Thanks. Maybe just a question on kind of what feedback you're getting on the AI companion and that's a pretty big jump in kind of customers using it. So just what features are they really liking -- and is it kind of helping with some of the free-to-pay conversion that you guys were hoping for? Thanks.

Yes. It's a great question. I think we are very, very proud of our team's progress since it launched the

Great. Thanks so much.

Thank you.

Our next question on Kasthuri Rangan with Goldman Sachs.

Hi. Thank you very much. Happy to see the results, and happy Thanksgiving. I just had one question, if I could restrict myself to one. The SMB online churn 3% I don’t know it came down from 3.1%. Any initiatives that you are undertaking that could bring that number even down more significantly I would resume that, that would have big implications for your growth rate and margins, which are already quite good. Thank you so much.

Well, Wendy and her team are always working on initiatives. But I think what Eric was just mentioning about AI is probably really going to be a key differentiator and a retention -- retention tool in the future because as a reminder, all of the AI companion features come included for our three -- sorry, for our paid users. So we're seeing it not only help with conversion, but we really believe that for the long term, it will help with retention as well. And cash, I've gotten this question many times, and I would say like, this is the lowest we've ever seen, but also our platform is so much better. It's infinitely better than where it was on a pre-pandemic basis for our online users. And so I think we will -- this is how we're modeling it at this level. But I think over time, you should continue to see retention just continue to improve.

Thank you so much.

Let me add on to what Kelly said, also the happy Thanksgiving to you as well. So more and more customers realize, wow,

Got it. Thanks so much, Eric and Kelly.

Yeah.

Wells Fargo is Michael Turrin. Please go ahead with your question.

Hey, great. Thanks. Nice to see everyone. I guess as a complement to Kash's question, you're showing stabilization here on some of the major metrics, the enterprise expand metric took a step down to 105%. And so just wondering what it takes for that metric to similarly show stabilization as given in Q1 renewal cohort and kind of walking through that. Anything on the product side for us to consider or just any other commentary there is helpful. Thank you.

Well, as a reminder, it's a trailing 12-month metric. So as we've worsely seen our growth rates come down this year that's following behind it. But absolutely, we believe that AI Companion in general as well as the success that we are seeing in

Thank you.

Our next question will come from Michael Funk with Bank of America.

Yeah. Hi. Thank you for the questions toning. So just on the deferred revenue guidance for 4Q, Kelly, in the commentary on the macro and the rates affecting that. How should we think about growth rate in calendar year '24 given the decline in deferred revenue and impact on new deals in enterprise?

Yeah. So I mean what's very interesting, if you look at, right, you see growth in RPO, but you're seeing a decline in deferred revenue, which implies customers while they're committing for long-term agreements, they are preferring to pay in shorter-term increments to keep their cash and take advantage of the interest rate environment. So the other thing, as a reminder, right, we're going to have a big renewal cycle in Q1, and then that's the peak and it's going to come down. And we believe that in FY '24 that we're currently in, we had -- the majority of our customers had some sort of renewal period during FY '24, which means that we believe that we've moved through a lot of our customers that were impacted themselves by a reduction. And we've talked in the past about how our team has been doing a great job of preserving that spend. But to the extent we're helping them right-size or transition from new meetings to say, a

Great. Thank you.

Yeah.

And moving on to Karl Keirstead with UBS.

Hey. Great. Thank you. Hey, Kelly. The phone business has been a big part of the

Thank you. So Q3 cyclically, just as a reminder, Q1 and Q3 cyclically are our lower orders, given that our enterprise reps -- some of our enterprise reps are on six month quarter. So we've historically seen the big

Okay. Thank you.

George Iwanyc with Oppenheimer has the next question.

All right. Well, thank you for taking my questions. So Kelly, maybe following up on

Yeah. So as we mentioned, we're up to over 700 customers on

Yeah. So we are extremely excited about our content center opportunity. And it feels like back to a few years ago, when we announced the

Thank you.

Thank you.

We'll know hear from Peter Levine with Evercore.

Great. Thanks for taking my question here. Maybe for Kelly, as I look at gross margins, how sustainable is it keeping at these levels? I know AI companion is being given away from as part of the package, I guess, prepaid users. But if you think about the cost to run these models, the margin profile of contact center in phone. How durable is it to kind of sustain these levels? And then second, as you think into next year, you have guided, but what's the best way to think about stock-based comp and dilution as you kind of manage through that?

Yes. So in terms of our gross margins, we'll obviously give FY '25 guidance on our call next quarter. But as we are working on our planning, our DevOps team is doing an amazing job of continuing to optimize around the data centers and being very thoughtful about leveraging capacity to its highest and best use and making room for all of this AI innovation. So while we are going to invest, and we're actually -- we're going to invest to the extent that XT and the team really believe that we need to and that for the long term, it's an amazing ROI when you look at what it's going to do for our customers, for our growth and for our retention. But we do expect there's going to be some impact on gross margins. I mean we -- I don't think it's going to be significant because the team will continue to work to operate, the very efficient manner that they do and run our colors that way, but we do expect there's going to be some impact to our gross margin as we move forward. Do you want to add anything, Eric?

Yes. So you are right on. Just to echo what Kelly said, led by our CTO, XT and his team our federated AI approach, as I mentioned earlier, really contribute a lot. So for sure, and there's a cost impact, but extremely manageable, right? And our team is really, really, I think I had a very smart architecture. That's why I think in terms of cost, very manageable, but also the quality is pretty good. So and we are keep innovating on that.

Thank you both.

Peter, regarding stock-based comp, about a third of our expense this year is related to the supplemental grants. So as a reminder, those that best along with how the underlying grants are vesting. So there's a couple more years for that to just start to bleed off, if you will. If you're going to model that out.

Thank you.

Yeah.

And we will now hear from Patrick Walravens with JMP Securities.

Great. Thank you. Hi. So Eric, what is your ideal customer profile on the contact center side of the business?

That's great question. I think first of all, again, this is based on architecture and AI features. I think [indiscernible] medium-sized because the reason why for very, very large customers, even if our architecture, everything, ever ready, but sometimes they just want to look at, hey, you are still too early, but even product fully ready. That's the reason why sometimes even we do not reach out to them. It's very large, let's say tens of thousands in customers, if they take our certain series. [Technical Difficulty]

Is it Eric freeze or did I freeze.

I think Eric is -- Okay.

Okay. Let me -- sorry for that. Eric, we lost you for a minute there.

Yeah. I'm sorry. And so given the new solution is sort of a modern architecture and all the new AI features those, let's say, like 20,000, 10,000 agent customers, if they look at our solutions, they have confidence. Because of that, we want to be a little bit of practice to focus on medium-sized companies, like form of hundreds agent to thousands of agents. That's our obviously a sweet spot. But not me, I'm going to stop here, as I mentioned earlier, any when, very big large companies, when you look at our contact center solution seriously, we have a confidence about to win. But however, to get there, they focused on the medium-sized companies.

Okay. Thank you, Eric.

All right. I could give you an example, Patrick. We have a customer called Venture, which provides like payroll and HR services. And they became in the last year, they doubled their

Okay. Thank you both.

Thank you.

Our next question comes from Arjun Bhatia with William Blair.

Perfect. Thank you. Can you just touch on the international business a little bit? It seems like it's certainly trailing the U.S. but what gets that business to turn around? And maybe talk about some of your new growth drivers, how they're faring there with

Yeah. So Unfortunately, both EMEA and APAC over the last year have been impacted both by currency and then EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New

Perfect. Thank you.

Yeah.

Our next question will come from Alex

Hi, Alex. Hey, Alex. Do you want to go ahead.

This is Ethan Brock (ph) on for Alex. He said he is in [indiscernible] right now. Thank you for taking my question. I just had two quick questions. Just how do we think at what level should we expect or when for the NRR of the enterprise cohort to trough? Just any kind of puts and takes around enterprise revenue in the quarter, right, above your expectations, it grew sequentially. And it was also -- it was probably like RPO, CRPO. CRPO bookings has all accelerated. I guess, is it fair to think that for next year's enterprise growth rate would be above what's implied in the 4Q guide? And just if you can give any more kind of color around the 4Q numbers and kind of what you're expecting in the online churn, that would be helpful. Thank you.

Yeah. So we did see strength in the direct bookings, they were very back-end loaded in Q3, which just continues the theme that we've been talking about in terms of the overall macro. And as we look forward to Q4, we have typically, we have the benefit of having year-end where customers are having their year-end on 12/31 and then we have our year-end on January 31. And of course, we have our six-month quota-carrying reps that are coming to the end of their quoter cycle. So hopefully taking advantage of their accelerators. But we are expecting similar behavior in terms of even if we have a 12/31 sort of bump expecting that to be back-end loaded and then January 31 on as well. In terms of your question around net dollar expanding, we're not going to give -- I mean, we don't guide on that. I expect that given your growth rates have come down a little bit more that there might be a little bit more room for that to come down even further until it starts to stabilize and probably reaccelerate sometime next year.

Okay. Thank you. And then just a quick follow-up. Just on the comment you made in your prepared remarks around the shorter billings duration. I guess, is there just any way to qualitatively think relative to 3Q, if there's any change, just how to think about obviously, people moving to a more different -- shorter payment terms. So just how we think about that in terms of what's implied in the 4Q guide? Thank you.

Yeah. We -- so we commented first time, in seeing this trend was in Q2. If you remember, we also talked about this in our prepared remarks, we saw this happening. And given the interests rates are high, I don't expect it's going to change any time soon. I think -- the good news is from the health of the underlying business, right, customers are committing to longer-term duration contracts, they just are preferring to pay on shorter term. And yet, we obviously had very strong cash flow in the period. So I don’t think it’s something you should be worried about.

Got it. Thank you very much. Congrats on the next results.

Thanks.

And our next question is going to come from Mark Murphy at JPMorgan. Mark will be audio only.

Hi, guys. This is [indiscernible] on for Mark Murphy. Thanks for taking the question and congrats on the quarter. You guys called out the Virgin Group and the launch of Workvivo across 60,000 employees and a number of the workforce-related innovations you've launched recently. Can you just speak to the adoption of those products and what kind of momentum you're seeing on that front? Thank you.

Yeah.

Kelly you go ahead.

Yeah. I mean we're really excited about Workvivo. They -- first of all, in terms of operating, they're continuing to run as an operating unit, which -- we're making sure that we support them and their continued momentum, and we've already talked about -- we talked about Dollar General on the last quarter and their amazing adoption. So we're really excited about that team. They -- when they joined us, we said, welcome to the family and gave them an accelerated bookings target, and they are running and achieving against that. So really thrilled to have them and watching that continue to succeed.

Great. Thank you.

Our next question is going to come from Catharine Trebnick with Rosenblatt.

Thanks for taking my question. Nice quarter. Has your appetite for M&A changed at all in the last year? All day long on CNB they kept saying, we're looking for growth, reacceleration of growth. So I'm just wondering if you're looking at the $6.5 billion and your attitude towards M&A? Thank you.

Yes. Thank you, Catharine. M&A is something that we evaluate and think about for as a potential strategy all the time. I have a core dev (ph) team that looks at opportunities on a daily basis. And we have a very strong lens that we look through in terms of evaluating that is, first of all, the technology and what does it bring to our customers. We would always want to make sure that our customers continue to enjoy a really high-quality product like they do with

Moving on to KeyBank of Tom Blakey.

Thank you very much. Good to see you, Eric, and hi, Kelly. Just wondering quickly on the stability that we were talking about a couple of quarters ago in online. It's a pretty impressive that we went back and forth on that a little bit here and very stable. I mean obviously talked about the churn. Can you just maybe update us that on that in terms of should we expect the same type of stability in online into the fiscal 4Q and maybe even similarly into fiscal '25, that would be helpful. Thank you.

Yeah. So the team has done a lot of work this year to -- on many fronts around online. First of all, stabilizing retention, which you're seeing the benefits of that today as well as focusing on free-to-pay conversion because it's really important that we're continuing to fill the top of the funnel, and those are things like force brakes. And as Eric mentioned earlier, also being able to procure additional products online, things like whiteboard and scheduler are very well aligned to the strategy of our online buyers. So those are all of the initiatives that went in our team are continuing to focus on. In terms – I mean, we hold ourselves to a very high standard. We say stabilization. What we really want to see is dollar stabilization quarter-over-quarter. And while it’s very, very close, it’s not quite there. And I expect it will be slightly down, just very, very slightly down again in Q4. But as we’re working on FY ‘25 planning with the team, really looking forward to initiatives that drive stabilization and if not, some growth into FY ‘25.

Very helpful. Thank you, Kelly.

Yeah.

The next question is from Shebly Seyrafi with FBN Securities.

Yes. Thank you very much. You guided deferred revenue to decline 6% to 8% in Q4. Do you sort of billing frequencies with enterprise customers. The question I have is what kind of decline would that have been without that billing frequency change? And related to this, you're going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up meaningfully in Q1?

Yes. So as a reminder, the way the deferred revenue trends about the year is it's always the highest in Q1 and then it declines throughout the year. And there's two things that are happening. First of all, Q1 is the largest renewal period. So if the bucket gets filled up, and then that’s getting amortized through the rest of the year. But also the subsequent renewal cycles are lower than Q1. So it’s the inverse of probably every other SaaS company in the world where usually you’re adding higher renewals every single quarter, we are actually adding a lower number – a lower dollar amount of renewals every single quarter. So as Q1 is getting amortized down, what’s coming into refill at the top of that bucket is coming down every single quarter. And that’s why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter-over-quarter.

Okay. Thanks.

Yeah.

We'll now hear from James Fish with Piper Sandler.

Hi, guys. Thanks for the questions here. Appreciate all the details around some of the product lines. But building off of a few prior questions with that contact center customer count up to about 700 versus the 500 last quarter. If my math is right, given kind of what you guys have talked about with price points kind of seems like we're nearing $100 million of ARR now or how should we think about that average seat count at this point? And then, Eric, for you, look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of penetration with the contact center installed bases, is that acting as sort of a consolidation function underneath for especially that small mid-market. Thanks, guys.

Go ahead, first.

I think if you look at the contact center, right? So not only just all fast to offer the core kind of contact center of capabilities, we want to offer a full platform, right, including workforce management, right? This is the -- based on modern architecture, not something like, hey, you have on-premise solution for a long time, you just put it into the -- in the cloud, that's not the case. We built it everything from ground up. It's tied to integrated with our core contact center solutions. That's the reason why when you look at our customers right from SMB, minimum size, all the way to lot enterprise, I think we are ready. And however, as I mentioned earlier, sweet spotters should be the major, right. However, one thing is realized, customers do have one seamless experience for everything contact center and workforce management, virtual agent AI feature call, engine, right, so we are trying to offer all of them. So that's kind of our strategy. In terms of our workforce management contribution, it really helped because we tell them, hey, we offer everything to you. We are not going to let you deploy other third-party workforce management solutions. We offer all the services, all the functionality to you with one platform.

Yeah. And James, in terms of your ability to kind of understand how those products are progressing themselves, we'll do done with others and announced milestone metrics as we start to see them emerge. They're just so new right now that doesn't really sense, but we will do that over time.

And our next question will come from Matt VanVliet fleet with BTIG.

Yes. Good afternoon. Thanks for taking the question. I guess following up one more on sort of the contact center and

So I guess the way that I think about contact center and its progress is that it's so far is very, pulling in a very similar road map, if you will, than that

And also, if you look at opportunity, very similar as well. Many years ago, a lot of our enterprise customers, their phone you see deployment is still on-prem. Today, you look at most of our enterprise customer contact center still on track. So that’s why a lot of opportunity ahead of us, in particular, in our model architecture is very scalable.

Great. Thank you.

Needham’s, Ryan Koontz has the next question. Ryan, please go ahead.

Hi. Happy Thanksgiving. From

So you're right. So speaking of the opportunity, you're also right. We never, customer, for many year, they right deployed the

That’s great. Thank you.

Thank you, Ryan.

Thanks, Ryan.

Now we'll move on to Peter Weed with Bernstein.

Thank you. I think for the first time, at least as far as I can look at in the model, it looks like the kind of large enterprise was greater than $100,000 enterprise customers were roughly flat quarter-over-quarter. But we're hearing the great stories about customer expansions and the number of those customers has continued to increase, which would imply there's a whole another set of customers that are either shrinking or churning and it appears that got more pronounced this quarter than perhaps we've seen recently. How should we think about those effects, and is that more churn or is it downgrades? And when customers are churning or downgrading, where they're going? And is this something that is kind of temporary and you see it kind of ending? Or is it something where we may have some pain for a bit of time before we get through some effects?

Yeah. So I think we've talked about this the last couple of quarters. We certainly have seen impact in our customers having retraction in their own businesses in their own employee count. So we -- if that's the situation that we are working with them, we -- the good news is we've not seen a lot of logo churn. It has been more down selling in terms of rightsizing, their meeting license numbers. And yet even in that situation, our team is doing a great job of taking the opportunity to transition them from potentially meetings to one of our

But it sounds like you're not seeing an uptick in churn. This is mostly just that kind of reduction in force. And once we do that, then you set a four in so that the expansions can kind of work going forward on all the great things people are buying, which even us at -- great customers love the product.

Yeah, I mean that, we're not giving FY '25 guidance, just to be clear. But yes, that's in general what we anticipate, just knowing that we've worked through most of our customer renewals this year, and I assume that they've gotten through their reductions. Now it depends on what has overall with the macro, but that's what we leave to be the case. Yes.

Thank you.

Yes.

Our next question will come from Imtiaz Koujalgi with Wedbush.

You are on mute.

Sorry, can you guys hear me now?

Yeah.

A question on

So as a reminder, you can buy

And just one follow-up. Is that similar to what you're seeing in the contact center or versus your I think the list price was 70 for contact center. Any comment on how the discounting in contact center compares to what you've seen in

Yeah. No. I don't think if you can correlate them. They're very different products with different sales cycle and approach. So I don't think I can try to take a percentage discount necessarily from one product and expected to apply to a different one.

Thank you.

Yeah.

We will now hear from Tyler Radke with Citi.

Hi, Tyler.

Yeah. Hi. Good evening. So Kelly, if I look at the midpoint of your guidance for Q4, it's about 1% growth in others. Some currency in there. But how should we be thinking about that as a jumping off point for fiscal year '25? What are kind of the puts and takes that would cause growth to be higher than that, and also lower. It does sound like you're starting to see some stabilization in parts of the business. But just help us frame for how we should be thinking about that trajectory beyond Q4.

Yeah. So we will obviously give FY ‘25 guidance on the Q4 call. However, I do think that the Q4 implied extra rate and considerations around the macro? And if it is stabilizing or improving over time are important considerations. We do see -- we’ve talked about many great aspects of our business today, growth in

Thank you.

We'll move on to William Power with Baird.

Great. Thanks. Maybe a couple of quick follow-ups. I guess, Eric, to an earlier question on AI companion, can you just talk about where you're seeing the greatest usage. I mean what are customers most focused on? And what's the early feedback look like? And what are customers asking for in AI? Where can you continue to add more value there?

Yeah. It's a great question. First of all, AI combining includes a lot of features. Like if you are related to the call, you want to instead of what's going on, what kind of the point I missed, and so you can ask, right, all those kind of features. And also when you use our team chat, you can have a composer chat solution and a lot of features built upon that, right? So -- and one of the key features customer-like is very for sure

Thank you.

You enable meeting summary and explore so many features, I'm pretty sure you'll love that. So we've got a lot of very positive feedback from those early adopter.

And our last question is going to come from Stephen Bersey with HSBC. Steven, if you want to go ahead -- I believe, Stephen, just disconnected. Stephen, are you still out there? If you are not, I don't think he's -- no longer with us. So what, Eric, I'll just turn out to you for closing remarks.

Yeah. So first of all, thank you all for your time to join our Q3 earnings call, I really appreciate wish you all and your families have a wonderful holiday season. Thank you again for your great support. Thank you.