ZM - NASDAQ

All right. Hello, everybody, and welcome to

Thank you, David. Hello everyone, and welcome to

Hey, thank you, Charles. Thank you everyone for joining us today. We had a strong quarter marked by broadening our

Thank you, Eric. I want to thank you and the entire

Thank you, Kelly. Qwe will now move into the Q&A session. [Operator Instructions] And our first question will come from Meta Marshall with Morgan Stanley. Meta?

Great. Thanks so much. Maybe just a quick question for Eric. Just where are you seeing kind of the most interest in the AI Companion products or kind of the most usage? And just how does it inform how you're kind of looking to invest going forward? Thank you.

Yes, great question. I think, first of all, I want to share with you and our customers really like

Great, thanks. Looking forward to it.

Thank you.

Okay, our next question comes from Arjun Bhatia with William Blair.

Hi, this is Chris on for Arjun. Real quick. And then in similar vein, I wanted to get a better understanding of what's helping drive some of the strong adoption you've seen recently in Workvivo, where are customers seeing the most value with that.

So in terms of Workvivo, I think, first of all, it's really helped employee engagement. In particular, given the flexible work in how to seamlessly engage your employees no matter where they are. This is very important, right? You cannot lever the meetings or phone or chat to do that. You have to have a new service. That's the reason why we acquired Workvivo and before, right? And that solution works very well. A lot of the companies, especially for very large enterprise customers, realize the value, right? And the experience works so well where for UI, and in order to mention recently Meta, right, they decided to retire their platform and

Okay. Our next question comes from William Power with Baird. William?

Okay. Great, thanks. And Kelly, thanks for all the great help here over the years. So like we'll still have it for a little while, though, which is great. I want to start, I guess, on macro, right? I mean, that's still kind of center stage of being kind of new concerns sort of the health of the consumer. And so I guess I wondered within the online segment, if you could comment on expectations and kind of what you're seeing real time in the market, I mean, the churn rate suggests that things are going relatively well there, at least okay. But we kind of what's baked in from a consumer macro standpoint. And then the other side of that is just be great to kind of hear what you're seeing on Enterprise in terms of sales cycles, down sales, on the video front, et cetera. Thanks.

Eric, do you want to say anything generally first?

You may dive in. Just go ahead. Yes, thank you.

So in terms of Enterprise, we continue to see growth there, and that's -- you've been to see that reflected in our guidance for the year. We've had a lot of stability in terms of our retention rates and this is going to show up eventually in our net dollar expansion that we expect to start to reaccelerate as we come to like the middle of next year. And when you have a chance to really look at the guidance, right, you'll see that we are forecasting, as we said that Q2 would be the low point this year in terms of year-over-year growth, and we would start to reaccelerate in Q3. And that's what's reflected in our guidance, which we're all very excited about. In terms of online, as you noted, we see ongoing improvement in our retention rates there, which I think is reflected about all the great progress we're making in the platform, including all of the

Okay, thank you.

Yes.

Okay thank you. Our next question comes from Siti Panigrahi with Mizuho. Siti?

Hi, can you hear me?

Yes.

Yes. Hi, Siti.

Great, great. Thanks for taking my question. And Kelly, it's great working with you. So my question about Contact Center. It's good to see some traction in the Contact Center side, but we are hearing from your peers about the macro pressure they are seeing in this market. So how do you see the

Yes, I can start, and Kelly feel free to chime in. I think -- first of all, you look at the key wins in Q2, right? And we closed the single largest deal in Q2, right? Look at it over the past few quarters, right? So we're making very good progress. Look at the large deals like in Q1, if I recall correctly, we closed around at 90 and then Q2 we closed about 117 and the large deals, right? And the reason why a customer -- they truly trust in

And remember, even now with our new pricing tiers that we've added in, we are still very, very price competitive against everyone else in the market. So from a total cost of ownership perspective, when you look at it, combined with this modern -- the most modern architecture out there. I think it's a very compelling reason for our customers to switch.

And also another thing is every time we made a commitment, we did deliver, that's another way to build trust. We make the FedRAMP in Q2 and the PCI components and so on and forth, right? We did deliver, so…

Great, thank you.

Thank you, Siti.

Thank you, Siti.

Our next question comes from Ryan MacWilliams with Barclays. Ryan?

Hey, thanks for taking the question. So now that you're seeing more adoption, Kelly, of

So that's a great question. And our philosophy is we always look at everything from a customer perspective, right? Especially for given the macroeconomic environment, right? So every company try to save the money, consolidate the costs and so on and so forth. I think -- I do not think we should retire the customer for AI Companion. I mean, when we launched AI Companion, right? [Indiscernible] So we do not want to charge the customer. However, that's for the workplace for the business services like a Contact Center, all those new offerings. And I think for sure, we are going to monetize. As I mentioned in the previous earnings calls, new solutions or the billing services, AI, I think we are going to charge. They are AI Companion, right? But the workplace and our core you see offering and collaboration offering we do not want to charge. I want to see -- I really appreciate our AI team's great effort, right? And focus on the quality, focus on the cost reduction and so on and forth. I think that's the reason why some customers look at our offering, you look at the total cost of ownership in terms of the support cost, AI cost and also in the product stress, customers realize, wow, it's better double down on

And then, Kelly, maybe just on gross margins, like the impact of generative AI and maybe what you can do to alleviate some of that off there.

Yes. I mean we're guiding to 79% for this year, which we will reflects the prioritization of AI, but also the very strong discipline that we continue to apply. And we are holding to our long-term target for gross margins of 80%. But of course, we think at this point in time, it's very important to prioritize these investments as they really set us up for future growth.

I definitely think it makes sense to focus on it first. Excellent, thanks, guys.

Yes. Just one more thing. I also want to give a credit to our dev office team. On the right hand, for sure, we are going to buy more and more GPUs, right? And also level that have our team tried to save the money from other areas, fully automated and so on and so forth, right? So that's another way for us to save the cost, right, to make some room for AI.

Appreciate it. Thank you.

Thank you.

Thanks, Ryan.

Okay, our next question comes from Tyler Radke with Citi. Tyler?

Tyler, are you there?

Yes. Can you hear me, okay?

Yes. Very well.

Hi, Tyler. Yes.

Hey, good to see you. Thanks for taking the question. Kelly, I'm wondering if you could just -- it was great to see the stabilization or actually the record high in terms of the online renewal rate. I'm curious if you could speak to the new business side of the equation. And I know Wendy and team have been doing some initiatives to drive improvements there. But how do you sort of see the new business side of the equation relative to how you were thinking about it a couple of quarters ago?

Yes. So Wendy and team continue to do a great job of adding features, looking for additional offerings to continue to expand our growth there. I think in terms of our quarter, we certainly saw growth and are very pleased to be able to raise our guidance across the board. The one area that we have seen some headwinds, which I think is very consistent with what you're hearing from peers is in the SMB and the really small business area because everybody is concerned about the future of the economy and being very thoughtful about buying decisions. With that said, it's roughly in line with where we were expecting coming into the year, which is why you've seen us continue to execute against our guidance and be able to raise going forward.

Thank you, Kelly, and best of luck.

Thank you.

Okay, our next question comes from Parker Lane with Stifel. Parker?

Yes, guys. Hi, this is Jack on for Parker. Congrats on the nice quarter. Wanted to touch on that large win in the Contact Center. What kind of initiatives was this customer looking to accomplish? And why did they ultimately choose

But I think, for sure, this customer evaluated multiple and Contact Center offerings in the market and they really want to understand the road map and architecture, especially your AI initiative, right? And so -- and given the POC wise, they evaded multiple solutions and

Okay, thank you. Our next question comes from Michael Funk with Bank of America. Michael?

Hi, good evening. Thank you for the questions and Kelly, thank you again for the help for over the years. I know I'll see you next quarter as well. Another question on Contact Center, if I can. Just a clarification, the recent wins, are they more skewed towards internal or external Contact Center. So meaning employees versus customers?

For external, primarily external, right? They use that to engage with their customers and their partners, right? When we launched many quarters ago, right, some of the customer use our Contact Center for internal IT help desk, but now majority just for the external of PC and for the support team, customer engagement in the team, so…

That's very helpful. Thank you, Eric. And then -- and then Kelly, I think you mentioned earlier this year when I met with you that you expected contact center growth to ramp similar to phone growth that, that was a good precedent for growth expectation. Are you growing above those expectations for Contact Center or in line?

We're in line with that. So it was -- it hasn't changed dramatically. I mean, we're very pleased with how both Phone and Contact Center are continuing to drive growth, but it is more in line with what we had expected.

Great. Thank you, both.

Yes.

Thank you.

Thank you. Our next question comes from Mark Murphy with JPMorgan.

Hey, thanks for taking my question. Arti on here from Mark Murphy, and Kelly, thanks for all the help you provided us. One question I had is when you're looking at

Yes. I mean the metrics that we've been talking about on here is account activation. So looking at how many -- it's not individual users, it's actual customer accounts that have activated it. And for -- you can imagine for larger enterprises, there's usually an approval process that we go through, they go through, but we watch that. And then internally, we're watching things like the number of meeting summaries produced. So some of the other like usage metrics is how we're evaluating usage and success.

And so very often, we never have EDCs with our customers. And also they share the stories like how

That’s great to hear. Thank you.

Thank you.

Okay, our next question comes from James Fish with Piper Sandler. James?

Hey, guys. Kelly, it's been great working with you. And my question is more directed at you. You had mentioned here, we're talking about 98% trailing 12-month retention rate. And it sounds as if we're starting to see the bottom of that. In fact, our math would imply actually above 100% today on the end period. So can you break down what you're getting across expansion mix between upsell of seats if you are starting to see upsell seats, again, across meetings or other products, any pricing changes, adoption of other products like Phone or Contact Center at this point in terms of how it's impacting that expansion? And I get rounding is involved, but should we not be interpreting that, that upmarket is accelerating at this point, but similar to what we saw from a dollar perspective, because if you run the math there would suggest like 9% potentially, if you just use the absolute number?

Yes. So -- when you think about -- the way that we're thinking about looking forward, certainly, the growth for the back half of this year and into next year is being driven by the upmarket. Very specifically, our direct segment, but even within that segment, the upmarket portion of it. If you look at the growth rate of our metrics with customers with greater than $100,000 trailing 12 months and you see that's growing at 7% year-over-year, which is higher than our overall revenue growth rate, which is a good indicator of that. And so what we see is similar to when we do the in-quarter calculation, we've started to see stabilization in our net dollar expansion, and we know that runs ahead of our externally reported metric. And that's why I said kind of middle of next year. We expect that to start reaccelerating again. And that's being driven by the ongoing performance of

Helpful. Thanks again.

Yes.

Okay, our next question comes from Peter Weed with Bernstein. Peter?

Hi, Peter.

Thank you. Oh boy, this is not going to be very pretty if I'm on that setting.

There you go.

There we go. No, you should have me in a normal mode on my camera.

You look great.

Hey, thank you very much. I appreciate it. And Kelly, we will miss you. I mean you've been very open and honest with us over time, and it's been very helpful. I'd love to follow-up that last question on expansion. And I think you've been talking about getting to stabilization about now. And kind of when we unpack that, that number, at least in our model, it does look like on a quarter-over-quarter basis, the upmarket definitely saw some strength. Whereas the kind of down market was a little bit flatter, which I think historically has always been the case because there's a little bit of cannibalization that comes out of that going into the upmarket. When you look forward from here, where are you seeing, I guess, those kind of early kind of accelerations going on? And how do you think about those kind of escalating over the coming quarters? Is it the type of thing where like we can start to see this building on itself like quarter-over-quarter? Or you just said middle of next year, which makes it seem like this is like one step up, and then you expect it to be flat, like how is that kind of shaping up?

Let me -- so let me clarify a couple of things. So what's going to stabilize and start to grow again in the middle of next year, is the net dollar expansion rate very specifically. That's because we're on this, it's a trailing 12-month metric. What we're seeing in terms of revenue when you look at the guidance is Q2 was, as we forecast the low point in year-over-year growth. And now given the strong contribution we're seeing from Contact Center, from Phone, from Workvivo, we are guiding to reaccelerating growth starting in Q3. And that combined with the stabilization in our retention rate in enterprise and ongoing improvements in online, all of that is what's leading to this reaccelerate and the strength that we see in the future.

And when you kind of look at the kind of underlying components then that are kind of driving that strength, I guess it's probably not seats. It's many of these additional, I guess, both products and versions that have pushed into the market. When you think about the balance between those, getting people to sign up for one versus adding a Contact Center or these types of things. Give us some color on the contribution of both of those as this kind of acceleration kind of moves forward.

Yes. We do see expansion -- land and expand being a motion that we see. Of course, historically, it's been the motion we've seen for meetings, but we also see it for Phone. We see it for Contact Center as well as especially as we keep adding more -- Eric touched on this is the right we've really expanded the features and functionality on Contact Center that allow it to really serve externally. So things like PCI compliance and FedRAMP and all the social integrations, which are a necessary component for any company to talk to its external customer base, and that's what's really led to some of this acceleration that we're seeing in Contact Center.

I appreciate the additional detail. Thank you, Kelly.

Thank you.

Okay, our next question comes from Peter Levine with Evercore. Peter?

Hi, Peter.

Hi, Kelly. All right, thank you for taking my question. Maybe just on capital allocation. Eric or even Kelly, if you think about -- sit down and think about strategy, like and you want to retain your competitive advantage, you have $7.5 billion in cash. We've seen you move into Contact Center, Phone. You productivity apps as well. What's the best way for investors to think about how you plan on deploying that capital? You have the buyback in place, but it's been a while since we've seen any larger activity, but maybe help us understand the strategy in terms of what you're thinking in terms of -- to help reaccelerate top line if it's new product? Is it tech? Just help us understand how you're thinking about that.

Yes. So from a high level, so we look at everything from a customer perspective, right, quite often when we talk about innovating together, right? And sometimes, customers -- they really -- they better needed this feature and they take a Workvivo, for example, like customers say, yes, I really like employee engagement tools. We know we cannot build that a timely manner. We have to go through the M&A. And as we look at our platform play and also plus AI plus billing services, there's so many opportunities out there. I do not think we can build everything organically, even if we want to, right, sort of what a culture before. But now we are more aggressive and go to, hey, how to quickly and added those new services or features, right, to beef up our existing offering, and that's kind of one of the top priorities here we are working on. And of course, especially given the AI era, right, and you have to move faster. I think in my view, it's more like a lot of M&A opportunities down the road. So -- and that's kind of our strategy.

And then Kelly, if you're willing to share a number with Contact Center, can you share the revenue number or at least the target in terms of -- because we roll hit 10%, you gave us that milestone. Is there an internal plan on when you think contact center will hit 10%?

When we hit 10%, we, of course, we'll start disclosing it. But remember, it was in like

Thank you very much.

Yes.

Okay, our next question comes from Rich Magnus with Wolfe Research. Rich?

Hey guys, it's Rich on for Alex. Just wanted to come back to the large ads for contact center you were highlighting and the top 10 wins being displacements. You said 40% were from legacy migrations. So of the six that were not replacing the first gen solutions, what were the biggest drivers of those wins? Was it pricing, AI functionality or something else that we're missing? Thanks.

So I just want to be super clear about it for a second. So of the top 10 wins, all were displacements, six of them were replacing on-prem existing legacy; and four, we're replacing other cloud [Technical Difficulty]. So I think, again, all of them -- I mean, Eric, you feel free to chime in now, but it just highlights the modern architecture, the contact center that's built with AI at its core from the very beginning.

And also so Rich, believe it or not, actually quite often customer mission, the stability also plays a very important role because comes Contact Center is very important, we constantly engage with their customers, you have reverse stable, right? And some of when customers is just a number of things they just do not like the stability from other solutions, right? And they know actually

Okay. Thank you. our next question comes from Catharine Trebnick with Rosenblatt Securities. Catharine?

I'm always late. Sorry, guys. Good to see you both. So my question has to do with Contact Center, RingCentral -- not RingCentral -- NICE just released their $5 phone. And I was wondering, when you talk about contact center, it's pretty much in this bucket. But what's your pipeline looking for UC and Contact Center? How is that progressing?

Yes, Kelly, feel free to chime in, I can comment on the UC offering.

Yes. Why don't you do that first, please.

Yes. So again, it's hard to comment on our competitors' move, right, into the UC and the timing will tell. In my view, I set mistake -- because how could they compete against the others like

Yes. And we see Contact Center driving new leads of Contact Center driving need and desire for

So just in essence, back to the UC piece, there is no disruption whatsoever even though it was a $5 price?

You mean, $4 lot of, you know, if customer see, why we want to do that. Why do I want to take the risk, deploy something new. And it's more like today, you already have an iPhone and Android phone, you want to introduce a new phone, who's going to deploy that? Who's going to buy that. So that's my view.

No, I had to ask the question. Thank you.

Yes, great question. Thank you.

Thank you, Catharine.

Okay, thank you. Our next question comes from Matthew VanVliet with BTIG. Matthew?

Hey, guys. Can you hear me?

Yes.

Hey, it’s Spencer on for Matt. Thank you for taking our question and congrats on the quarter. I apologize if this was already asked. But how are the AI products and the key functionalities driving expansion with existing customers? How much of it is like premium tiers or upselling the premium tiers of the existing footprint versus selling to new phones, Contact Center or just other cross-selling products? Thank you.

I think if you look at existing installed base, right, for the Workplace customers, right? They look at the value. They see -- they already use

Thank you, guys.

Thank you.

Thank you.

Our next question comes from Samad Samana with Jefferies. Samad?

Hi, good evening and thanks for taking my questions. So maybe first, just on CCaaS. Is there anything you give us in terms of the mix of those 1,100 customers. How many of those are maybe like 100-plus seat deployments versus under that? Just any sense of SMB versus Enterprise in the mix there? And kind of related, what's the attach rate of CCaaS into the 100,000-plus installed base that the company has?

Let me think about this. So we've certainly seen growth in the 100,000 customers for Contact Center. We're up to 117,000 that we disclosed. So you can see that they're moving into that realm for sure. And we've been working in the channel and working with partners to also think about how we help these customers with their digital transformation. In terms of the disbursement across that -- the size of our deals is what I would say is they are definitely getting larger. They're getting larger for a couple of reasons because as we talked about, this added functionality, allowing them to use it externally as well as we talked about this either last quarter or the quarter before, that was the introduction of the pricing tiers. If you remember, we started with one pricing tier. We eventually added two more and the AI agent is like that Eric was speaking about earlier, is in the highest tier. We actually saw our ASPs for Contact Center almost double quarter-over-quarter because it's such a premium feature. And when I look at the Q2 deals, the majority of them were purchasing in one of the top 2 tiers, so all of that is contributing to what I would say is not only expansion in terms of seat count but expansion in terms of value being derived from the product.

Got you. And then maybe just on the online retention, it's great to see that improvement there. I'm curious how much of that is due to either the new features that you released versus moving further away from the tightening of the grace period and it's even better than it was before that slight uptick last quarter, right? So is this like the new durable assumption that we should make? Is that pretty reasonable? Just how are you thinking through that?

Yes. So I mean this is a great question. I guess it's question all the time, I can turn keep getting better. I will tell you that we are modeling it to stay at about 3%. I think that's a really positive rate. But we continue to see improvements on the platform, and I think that's what you're seeing in this quarter because we did see a little bit of the pull forward, if you will, last quarter for the change in the dunning period, as you mentioned. But this is a clean quarter, right, meaning that it should really reflect. And if you remember, historically, Q2 is a larger -- typically, a large seasonally high churn period because of summer holidays. Typically, for online, we see higher churn rates in Q2 and in Q4 because of summer and holiday breaks, winter holiday breaks, and we don't put friction in the cancellation cycle because we want customers to use the product as they need. So I think it's very costly to see this down this record low churn rate in a seasonally high quarter.

Great. Thank you both so much.

Yes, thank you.

Our next question comes from Matthew Harrigan with Benchmark. Matthew?

Thank you. Are you seeing anything in the broad sweep of AI regulation in the U.S. or Europe that you think can dampen innovation? It sounds like you've modulated some of your data set, gathering activity in Europe in response to some political concerns. What's your view there?

I think it comes with AI. We are taking a very responsive approach, right? That's the reason why we launch AI Companion, we already mentioned, we are not going to use any of our customer data to train our AI models, right? And we take customers data very, very seriously, right? And as a customer, they know that they trust our brand and trust of what we're doing. And so far, I do not see any impact in terms of like regulation. And again, this AI is moving rapidly, right? So almost the EMEA here and we all look at the potential regulation. But so far, impact actually to us, to our business, I think it's extremely limited. So like meeting summary, and it's a very important feature, a customer like that. I think we do not use our customer data to turn our AI model. And why not keep using it, I think there's no impact so far.

Great. Thanks, Eric. I guess one more brilliant presentation to come from you, Kelly. Thank you.

Yes. Thank you, Matthew.

Our next question comes from Patrick Walravens with JMP Securities. Patrick?

Hey, this is Austin Cole on for Pat. Just wanted to touch on international, if I’m not mistaken, Kelly, you mentioned EMEA shrank 1% in constant currency, and those revenues declined last year as well. And if I just look at where we're at this year, looking like maybe on track to shrink again. Just wondering if you could talk about what your presence is there and kind of how you're seeing demand in those international regions.

Yes. We've certainly seen the economy in EMEA, especially continue to be impacted by the ongoing wars that are happening in that continents. And -- so that, in general, I think all of our peers are facing as well. We are -- we have been in the process. We have a new leadership team that's coming into place there. So looking forward, to that. And we also are really focused on investing in the region. We just last quarter, opened up our London Executive Briefing Center, which is amazing. It's a great opportunity to bring customers and partners and prospects all together and really see the entire expanded

Great. Thank you.

Yes.

Okay, thank you so much, everyone. This concludes our Q&A session. I'll now pass it back to Eric for closing comments. Eric?

Yes. First of all, thank you all for asking about all those great questions. We are very, very grateful. And also thank you for every

Bye, everybody.