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

Thank you, Matt. Hello, everyone, and welcome to Zoom's earnings video webinar for the second quarter of fiscal 2022. Joining me today will be Zoom’s Founder and CEO, Eric Yuan; and Zoom’s CFO, Kelly Steckelberg.

Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.com.

Also, on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements, including statements regarding our financial outlook for the third quarter and full fiscal year 2022, Zoom’s expectations regarding financial and business trends; Zoom’s growth strategy and business aspirations to drive evolution on multiple fronts as organizations and people reimagine work, communications and collaboration; and Zoom being well-positioned to be successful as a platform.

These statements are only predictions that are based on what we believe today, and actual results may differ materially.

These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar. In addition, as you all know, we announced our intent to acquire Five9 in July.

Clearly, we are excited about joining forces with Five9, but please note that we will not be discussing or addressing questions regarding the pending transaction at this time as we are in the process of regulatory review. And with that, let me turn the discussion over to Eric..

“Orchestrating a brighter world”. In order to enhance the productivity, collaboration and happiness of their global workforce, NEC deployed approximately 110,000 Zoom Meetings licenses. I also want to welcome Seagate Technology to the Zoom family.

Seagate is a global mass-data storage infrastructure leader innovating world-class, precision-engineered data storage and management solutions with a focus on sustainable partnerships.

Seagate recently decided to modernize and integrate their global communications infrastructure with over 14,000 Zoom Meetings licenses and over 17,000 Zoom Phone licenses. Next is a Zoom Phone upsell.

In Q2 of last year, we welcomed ExxonMobil, which develops and applies next-generation technologies to help safely and responsibly meet the world's growing needs for energy and chemical products, to the Zoom family. They began as a Zoom Video conferencing customer to enable their teams to collaborate globally.

We are grateful to have seen our partnership evolve over the past year and excited that ExxonMobil has recently decided to add Zoom Phone to further enhance the user experience for their global workforce leveraging a communications platform that is easy to deploy and manage.

In addition to these great customer wins, we also closed another strategic channel partnership with Telkomsel, the largest cellular operator in Indonesia, which is the world’s fourth largest country by population.

Telkomsel understands and wants to support their 170 million subscribers’ need for seamless and reliable virtual meetings to thrive in the digital workplace era.

They will be leveraging the power of Zoom’s Developer Platform and ISV Partner Program to deliver a fully integrated solution via their CloudX offering for the Enterprise segment and Zoom native apps for the Consumer segment.

The collaboration between Telkomsel and Zoom will bring communication to the next level by combining Zoom’s strong capabilities and feature-rich platform with Telkomsel’s best quality network and localized interface, together creating a powerful tool to improve customer productivity and collaboration.

Thank you NEC, Seagate, ExxonMobil, and Telkomsel. I love you all. Enterprises want digital platforms that combine meetings, phone, events, office technology, and developer solutions in a way that is simple, reliable, and frictionless.

This fundamental truth underpins our leadership position in video conferencing, and will help to drive further growth in Zoom Phone and Zoom Rooms, as we expand our platform and addressable market in the hybrid world. Today we are fortunate to be a leading global brand with over half a million customers having more than 10 employees.

Our internal innovation engine is strong, and bolstered by our growing Zoom Apps developer ecosystem and acquisitions such as Kites, that will strengthen our position in AI transcription and translation.

As organizations and people reimagine work, communications and collaboration, we are faced with a once-in-a-lifetime opportunity to drive this evolution on multiple fronts.

Thanks again to the hard work of our over 5,700 employees and the trust of our loyal customers, we are positioned well to be successful as a platform embracing and enabling hybrid work. I’m very excited about the future, the journey has only begun. And with that let me pass it over to Kelly..

We saw 131% year-over-year growth in the up-market as we ended the quarter with 2,278 customers generating more than $100,000 dollars in trailing twelve months revenue. We exited the quarter with approximately 504,900 customers with more than 10 employees, up 36% year over year and representing 64% of revenue.

In Q2, customers with 10 or fewer employees represented approximately 36% of revenue, in line with Q2 last year, but down from its high of 38% in Q3 of last year.

As we discussed previously, this cohort, which comprises SMBs and consumers who typically purchase online, is more volatile and we expect it to continue to decline as a percentage of revenue as customers adjust to the evolving environment.

Our Net Dollar Expansion rate for customers with more than 10 employees exceeded 130% for the 13th consecutive quarter as existing customers increased their spend with Zoom and upsells of Zoom Phone and Zoom Rooms picked up pace. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 50% year over year.

Our combined APAC and EMEA revenue grew 62% year over year to be approximately 33% of revenue, up from 31% a year ago. In recent quarters, we have made significant investments in our international teams. In Asia Pacific, our direct sales team drove several strong wins in the enterprise segment.

However, in EMEA, we saw some headwinds, which were predominantly driven by declines in the online segment. Now turning to profitability, which was strong from both GAAP and non-GAAP perspectives.

I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, acquisition-related expenses, net litigation expenses and gains or losses on strategic investments.

Non-GAAP gross margin in Q2 was 76.2%, compared to 72.3% in Q2 last year and 73.9% in Q1 of this year. The sequential improvement in gross margin is mainly due to new data center capacity coming online, and lower usage during the summer months, particularly with schools.

We now expect gross margin outlook to be higher than previously discussed at approximately 75% for the remainder of the fiscal year while we continue to support free K-12 education. Research and development expense grew by 89% year over year to approximately $54 million dollars.

As a percentage of total revenue, R&D expense was approximately 5.3%, an increase from Q2 of last year, demonstrating our commitment to building out our engineering teams globally and maintaining best-in-class product and innovation. Sales and marketing expense grew by 72% year over year to $211 million dollars.

Sales and marketing expense was approximately 20.7% of total revenue, an increase from Q2 of last year, mainly due to investments and hiring to drive sustainable future growth.

We plan to increase investment in global sales capacity, as well as digital marketing and events to drive additional leads for our sales team across Meetings, Phone, Rooms and Events.

G&A expense in the quarter grew by 73% to $89 million dollars, as we continued to scale these functions and invest in systems, automation and compliance to meet our new scale. G&A expense was approximately 8.7% of total revenue, a slight increase from Q2 of last year.

The revenue upside in the quarter carried through to the bottom line, with non-GAAP operating income of $425 million dollars, exceeding our guidance. This translates to a 41.6% non-GAAP operating margin for Q2, steady with both Q2 last year and Q1 this year.

Non-GAAP diluted earnings per share in Q2 was $1.36, on approximately 306 million non-GAAP weighted average shares outstanding. This result is 21 cents above the high end of our guidance and 44 cents above Q2 of last year. Turning to the balance sheet.

Deferred revenue at the end of the period was $1.2 billion dollars, up 59% year over year from $743 million dollars. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.3 billion dollars, up 66% year over year from $1.4 billion dollars.

We expect to recognize approximately 69% of the total RPO as revenue over the next 12 months, as compared to 72% in Q2 of last year, reflecting a shift back to longer term plans.

It is important to remember that because over 40% of our business is billed monthly and typically bought online, deferred revenue and RPO trends are not reliable predictors of future revenue growth.

As I mentioned last quarter, the timing of our renewals has increasingly shifted to the beginning of the fiscal year, with Q1 now representing our largest renewal quarter. This shift in seasonality is a result of the significant growth we experienced in the first half of FY21.

We expect this front-weighted seasonality will persist and potentially become even more pronounced given the scale of our base and practice of upselling coterminously with existing contracts. As such, we would expect total deferred revenue and RPO to be down modestly from Q2 to Q3.

We ended the quarter with approximately $5.1 billion dollars in cash, cash equivalents and marketable securities, excluding restricted cash. We had strong operating cash flow in the quarter of $468 million dollars, up from $401 million dollars in Q2 last year. Free cash flow was $455 million dollars, up from $373 million dollars in Q2 last year.

The increase is primarily attributable to the top-line growth and disciplined spending. Looking at the remainder of the fiscal year, we expect to increase our capital expenditures related to ongoing data center expansion to support our growth outlook. Now, turning to guidance.

Please note that the ever-changing nature of the global pandemic continues to impact our segments and regions in different ways. Our outlook is based on our current assessment of the business environment.

Specifically, our outlook assumes that our direct and channel business will continue to experience robust growth, while our online business will be a headwind in the coming quarters as smaller customers and consumers adjust to the evolving environment.

For the third quarter of FY22, we expect revenue to be in the range of $1.015 to $1.02 billion dollars. We expect non-GAAP operating income to be in the range of $340 to $345 million dollars. Our outlook for non-GAAP earnings per share is $1.07 to $1.08 based on approximately 309 million shares outstanding.

For the full year of FY22, we expect revenue to be in the range of $4.005 to $4.015 billion dollars, which would represent approximately 51% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately $1.5 to $1.51 billion dollars which would represent approximately 53% to 54% year-over-year growth.

Our outlook for the non-GAAP earnings per share is $4.75 to $4.79, based on approximately 308 million shares outstanding. Before concluding, I’d like to welcome everyone to join us in two weeks at Zoomtopia, our two-day immersive experience that is packed with exciting product updates, guest speakers and virtual networking opportunities.

And on day one of Zoomtopia, please join us for our Financial Analyst Briefing, where we will be providing you with greater detail on Zoom Phone, the platform, our channel partnerships and much more.

As always, Zoom is grateful to be a driving force enabling connection and collaboration worldwide with our high-quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors.

If you have not yet enabled your video, please do so now for the interactive portion of this meeting. Matt, please queue-up our first question..

Our first question is from Ittai Kidron with Oppenheimer..

Hey, guys, thanks. Now don’t forget to unmute yourself. Great quarter again, guys. Kelly, I want to focus kind of on this position, clearly, you are doing extremely well with Phones is phenomenal, the growth that you're seeing over there.

But can you give me a little bit more insights as to what is the growth in meetings right here right now, my math suggests a very significant deceleration in your expansion rate? And I would suspect that that's tied specifically to meetings decelerating.

Help me think about the contribution of growth of those two elements and perhaps how would that change over the next 12 months?.

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

Yes..

Yeah. And I just wanted to remind you first of all, that when you calculate that, it includes all of our customer bases. And as we mentioned, we are seeing headwinds in the online segment of our business for sure.

So that's -- I would say that while we don't break out revenue, we see strength -- continued strength in the up-market enterprise in both meetings and phones, and where you're seeing that challenge in the implied metric is really coming from the online segment of our business..

So, is it right to interpret that to me that churn is now finally rising in that category.

Is that the right way to think about this going forward now that the economy is slowly opening some businesses, I guess, scaling back on the usage here?.

Yeah. So remember, the online business is primarily, not exclusively, but primarily small business and individual. And I think what we've seen is while the future of Delta is still unknown, we do see individuals especially moving around the world and feeling comfortable.

I think we were talking about most of us are probably socializing in person now, doing fewer things like Zoom Happy Hours, and that's where we are starting to see some of the challenges. So the net dollar expansion in the online segment is what’s driving - pulling that number down a little bit..

Got it. Very good. Thanks..

Yep..

Our next question is from Steve Enders with KeyBanc..

Okay, great. Thanks for taking my question here. I guess I just want to dig in a little bit more on kind of the trends you're seeing in the second half. It looks like you're now guiding down a little bit. It was a downtrend or think before we're talking about an uptrend.

So just want to get a better sense for what’s the biggest incremental change that you're seeing there on the Analog and what changed in the past three months specifically?.

Yes. So, again, we continue to see strength in our upmarket. We're excited about what we're seeing in the enterprise, in Zoom Phone, in international -- and international, we all saw growth accelerate in Q2.

When we look out though what we have seen is a slowdown in the online segment of the business, which again, even though the pandemic seems to be far from over, we are happy that people are feeling more comfortably out traveling, and that's really where we're seeing the slowdown.

And if you back all the way up to when we gave guidance at the beginning of the year, we had expected that towards the end of the year, but it's just happened a little bit more quickly than we expected.

And I mean, of course, we feel good that people are out moving around the world, but it's certainly creating some headwinds, as we've said, in the online segment of our business..

Okay, great.

And is that creating any opportunities then as companies getting by going back to the office for Zoom Rooms and incremental activity with that product?.

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

Okay, perfect. Thanks for taking my questions..

Yes. Thank you, Steve..

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

Can you guys hear me now?.

Yes..

Sorry about that. Hi, I have a question about Zoom Phone. So if you look at the numbers you reported tonight, you add about 500 million seats, I think in the last four months. Prior to that, you are adding about 500 million seats – 500,000 seats every quarter. It looks like a bit of a slowdown in the number of seats you're adding this quarter.

Is that a fair comment?.

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

Got it.

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

It's a little bit of both. So as we mentioned, we specifically saw some challenges in certain regions like EMEA, where the world, at least for a period of time, was a little more open again, and people are moving around.

And that's where we see people taking advantage of being out in the world and seeing some slower top line bookings, as well as accelerated churn..

Thank you..

Our next question is from Meta Marshall with Morgan Stanley..

Great, thanks. Kelly, I just wanted to dig into your kind of commentary on more measured spending patterns that you're seeing and taking away from kind of the smaller business commentary that you've been giving and focusing that on the enterprise. And so just trying to get a sense.

Does that mean, normalizing the amount of seats that they're adding or that they are rationalizing kind of the seats that they've had, that they're rationalizing a number of video solutions that they're having in-house? Just what does that kind of commentary around, more measured patterns around the enterprise business mean? Thanks..

Yes. Thank you, Meta. We saw this start a little bit in Q1 and now continue into Q2, where I think it's not necessarily measured in terms of how much they're buying, but more measured and thoughtful in how they are buying in that they want to take their time.

They're doing more complete like proof-of-concepts, for example, versus if you think about a year ago, they were in this sort of stage of trying to keep the lights on almost and buying very quickly and now they're taking the time to really be thoughtful.

And it's just – it’s back to kind of the way they used to buy pre-pandemic, which is just a much more normal buying patterns. So, I think that we're back to more normal. And for the four quarters, I guess, we saw last year was really the blip and now we're back to a more normal measured approach the customers are facing..

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

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

Okay, great. Thanks..

Our next question is from Matthew VanVliet with BTIG..

Yes. Hi, thanks for taking my question. I guess on the continued success on Zoom Phone here, called out a number of very large deals. Curious on how often you're being brought in where they're also contemplating a contact center upgrade? Where have you stood? Obviously, the partnership with Five9 has been in place for a while.

But just more generally speaking, how often is upgrading to Zoom Phone a part of a broader modernization across that could potentially include contact center?.

Well, hi, Matt. I actually don't know exactly off the top of my head the specifics around that. We obviously are having an integrated phone and contact center solution is really important to many companies, which is why we're excited about the deal that we're working on with Five9. And as you say, we've been partnering with them.

We also have other partnerships in place as well. And so, there's nothing different about that, that has changed. I have to go back and look. I don't know exactly what the typical cap rates are between those two, though.

Eric, if you have – do you have a perspective on that?.

Yes, sure. So, Matt, if you look at our installed base, right, by now I think they really wanted to migrate from on-prem PBX system to the cloud, right? That’s where the huge opportunities that comes from. Also, since the pandemic, I think that we do see some of the enterprise customers.

They also started asking about, "Hey, what's your cloud contact center strategy because they started at planning now, right? That's why we think this is kind of the new opportunity for us, not only for the brand and new revenue stream for contact center, but also it might have - further grow our Phone business as well.

Because like about a year ago, right, where a few large invest customers they really wanted to migrate on-prem contact center to us. Now, given the digital transformation for almost every enterprise customers, we do see more and more customers that are very interested.

That’s why timing-wise, it's perfect for us to double down on the progress the contact center grows..

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

So, Matt, before I answer to that questions, as you know, our company values care. The number one we’re seeing is really about our community, right? For us to support K-12 schools, this – I would say that’s a no-brainer for us to support that at no cost, right? We feel very proud.

We never thought about how to monetize our service for those K-12 schools, right? Now they all go back to the school, right? With that, we’re having more resources to think about how to monetize other installed bases. I give an example, like free users. Last year, we were extremely busy to have the world - to have people stay connected.

We even did not have banners to think about how to monetize those free users, right, I mean, how to embrace with the consumer, right? We never thought about that before. Now it's the right time, right? How to think about embracing the consumer's credit. How to monetize those free users. It's something we're very excited.

We do not want to monetize those K-12 schools. It’s our responsibility to have with us as always..

Thank you..

Thank you, Matt..

Our next question is from Pat Walravens with JMP Securities..

Great. Thank you. Hi, guys. I mean, I don't think there's ever been a company that has grown so fast and realistically pulled a lot of demand forward, right? Because everyone needed to get their video conferencing solutions in place very quickly. And now, as I look at 54% this quarter, Kelly, your guidance suggests 30%, 31% in Q3 and 15% in Q4.

So, all that is just a lead-up for Eric. What is your top one or two priorities in the next 12 months as you go from this hyper growth to a much more reasonable growth period? If you could just sort of contrast those for us, I think that would be really helpful..

Sure. I would say, Patrick, that’s a great question. First of all, you look at it prior to the pandemic, look at our growth, always focused on the enterprise customers, right? We’re the first service videoconferencing. We introduced a second revenue stream, Zoom Phone, both of them are doing well and how to introduce the third one or fourth one.

How to double down on that? But there's always our thought, right? If – we did not realize this is due to pandemic crisis, otherwise several years ago, probably, we should have planned sort of hospice services beforehand.

Now, actually, now this indeed can get our strategy, right, how to introduce more and more revenue stream, new services to support our enterprise customer. That's always part of us. Essentially, this is a part of our overall platform strategy, right? I mean, aside from that, also, there's a new opportunity ahead of us.

As I mentioned earlier, right, we never realized there are so many consumers, right, and who are so loyal to our - the platform, right? The usage is still pretty healthy, how to embrace the consumer's credit is also something on top of our minds as well, right? We never thought about that before. it's the right time.

For those two things, enterprise platform and also consumer, those two things will drive our future growth..

That's great. Thank you..

Thank you, Patrick..

Our next question is from Shebly Seyrafi with FBN Securities..

Yes. So thank you very much. So, I look at your implied guide for Q4. It seems like you're guiding it to decel to around 12% or so, plus or minus from 30% or so in Q3 with a similar compare I would argue. Now, it seems like it'll actually be down potentially sequentially from Q3.

So, can you elaborate on why that might be the case? You talked about online issues.

How long do they last, for example? And if we go to like 10% to 12% growth in Q4, should we accelerate afterward if we -- the compares get easier, how should we think about next year?.

Yes. So, in terms of what you're seeing in Q4, it is continued uncertainty around headwinds in the online segment, absolutely, it’s driving that. And we're -- in terms of what that implies for next year, we're not ready to give FY'23 guidance today, unfortunately.

So we will be prepared to do that when we get on the Q4 earnings call and, of course, we'll have a lot more earnings at that point to share with you, but that is what - exactly what continues to drive that in Q4..

Okay.

Is there any reason why the online issues would be bigger in EMEA than in the Americas, in Asia?.

Well, that is like the pandemic question, right? Because it really what we've seen is this varies depending by region and by segment depending on where each of those countries or markets is in their pandemic lifecycle. And we've seen it ebb and flow over the last 18 months by market.

And so that's the challenge even I think that all businesses are having right now. And thinking about the future with uncertainty - so much uncertainty around the pandemic right now, it's just difficult to forecast exactly..

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

Okay. Thank you..

Thank you..

Our next question is from Ryan Koontz with Needham..

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

Yes. Ryan, I would say, first of all, with our top two market is not education and healthcare is pretty strong and also will bring us more opportunities when we expand it into the international market like APAC.

And also, like those telco, Telkomsel, right? Those kind of a telco partnership will further help us for us to penetrate into each of those APAC countries, right, and to most of the new opportunities. Recently, we launched Zoom Apps.

And also, like some of the partners, they build new solution upon our platform, like fast technologies, right? I think a lot of new opportunities, right, we do not need to go build up by ourselves, right? And those sort of party customers, they can leverage our either API or SDK, or Zoom App to build all kinds of new the solutions to focus on all those vertical markets, or even at the department as well, right? That's where the opportunities are coming from..

So, you're seeing some opportunities to upsell into the Cfast-type applications in the enterprise?.

Yeah, both, actually.

Yes, because in those third-party partners, a little bit of very healthy business also bringing the Zoom to the installed base and also by establishing a trust, right? We also obviously are in most stock, right? Essentially, it’s a very healthy channel, not only for their own business and whatever, but also it's a greater channel for us..

Helpful. Thanks, Eric..

Thank you, Ryan..

The next question is from Siti Panigrahi with Mizuho..

Hey, guys, thanks for taking my question. Just wanted to dig into the enterprise segment. Q1, Q2, those are two big renewal quarters now that's behind now.

So what sort of changes you are doing on your go-to-market strategy, mainly increasing quoto carrying sales save, or any changes that you are doing for this normalized environment? And Phone used to be one of the big cross-sell opportunities for you, and how should we think about the Phone as you get into a more normalized renewal environment?.

We are absolutely continuing to invest in our sales capacity. We are focused on certain regions, especially where we see lots of opportunities like Asia-Pac. We recently hired a new leader there, and are really excited about the progress we're already seeing with his leadership. And then we are continuing to invest in marketing.

So as we've moved post-pandemic era a little bit in terms of not hoping that, but sort of what we saw from last year with the lift in brand awareness, we're continuing now to think about how do we invest more in specific product marketing around Zoom Phone, around Zoom Rooms as well as digital marketing campaign.

So, helping the community drive additional leads for all of our teams on a global basis. And then also the channel has continued to be a really important aspect of our go-to-market. So the channel was responsible for approximately 27% of our Zoom Phone sales in Q2. We added six additional master agents, partners during Q2.

So really excited about continuing to invest in the channel on a global basis..

Thanks, Kelly..

Our next question is from Alex Zukin with Wolfe Research..

Hey, guys, thanks for taking the question. So I think I'm going to -- I'll probably touch on a topic that's been mentioned here before. Because I think a lot of people that are investing in the Company at this point, they really are investing in the non-online story of the Company, right, the enterprise story, the large business.

There's a lot of metrics there. There's a lot of kind of pollution and noise in these metrics.

How do we think about the growth of the important part of the business for investors, meaning the over 10 employee-customer bases, either from an incremental bookings perspective, from an incremental revenue perspective? And when does the headwind or anchor on the business from the pandemic, from the once in a generation SMB buying pattern.

When does that trough? And so, when do we see a normalized kind of normalized growth rate for the Company?.

Yes. So thank you, Alex. First of all, we agree with you that really, we want everyone focused on the long-term potential of the up-market. As a reminder, in Q2, that segment of the business grew at twice the rate of the online business. So that gives you some indication of how those two segments are diverging a little bit.

And then as we look forward, I guess the best way to help you think about it is you want to look at the net dollar, the implied net dollar expansion rate that we were talking about earlier, right? You can think about what's happening there is the net dollar expansion rate for the online segment is under one, right? That gives you some idea of what's happening, again, how to think about those two different segments of our business.

In terms of where is, is there a trough? I think that it's back to kind of trying to predict the pandemic, which is a difficult thing for obviously anybody in the world to do right now.

And as much as we are excited about vaccines being more widely distributed, unfortunately, as we see delta continuing to grow in certain parts of the world, we have even in the last few weeks, like seeing certain pockets of strength.

So, I think that that's going to depend on really what we continue to see in terms of the spread of variants around the world..

Got it. And I guess maybe for Eric, you mentioned the seasonality, the vacations in Europe. Is there a way to kind of get a sense for the delta upon about just EMEA SMB versus the U.S.

SMB just so we can get some sense of that magnitude change?.

I think overall, I think our up-market are doing, especially look at in North America [being in a swipe] [ph] In EMEA, I think the mass-market online SMB I think it did not do well last quarter. Seasonality, COVID situation, for sure, made things a little bit worse because they're longer vacation [Indiscernible].

Here, look at our North America market, I think, the upsell Phone and also the Zoom Rooms because every Company, I think, they're starting to go back to the office. The new opportunities are coming. They're also doing very well. That's why I say even if a little bit of challenge on SMB, by and large, we did not see the big profit.

And because offset by the hybrid of work opportunities, right? I think if you look at APAC. APAC, we did not see that at all, right, in the last quarter, it’s still doing very well. I think overall, we - as you mentioned earlier, we’ve got to go back to our enterprise.

Because the last year, I think the online business used to be just a marketing channel, right? But, however, not only marketing channel, but also contribute a lot to our revenue from a percentage perspective. Now, it came with that, that percentage is going down for online.

In a balance, it’s very healthy for our rates, right? With that, we can focus on our core enterprise customer. And plus, given that, we've become a household name, it will bring a new opportunity to monetize, used to be the monetization for online loan and users, just the online subscription.

I would say that may not be the sustainable strategy, right, to further online users’ monetization. We’ve got to have other ways, right, monetize those online – the installed base. That's why we are very excited about our future..

Thank you, guys..

Thank you, Alex..

Our next question is from James Fish with Piper Sandler..

Hey, guys, thanks for the question.

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

James, that's a great observation. You are so right. I think one year ago we really did not see that. Normally we buy more licenses and as Bob probably alluded to our sales, and also for the existing installer base, the upsell of Phones.

For the brand-new customers, because of the cost of looking at one platform on both video and voice, we understand video and voice are converging into one platform, plus in our Zoom [Indiscernible] is very mature now, every quarter being very well [Indiscernible], it is not like this is something brand new. They do not want to take any risk.

Is very mature, plus the integrated screen, both video and [Indiscernible], Essentially, from now, I would say probably I don't know, but I guess probably more and more customers who view is going to deploy video for us and it didn't deploy.

Today on the last biggest both given the dynamics of each business, sometimes probably they wanted to deploy more Zoom seats than the [Indiscernible]..

Thanks..

Thank you, James..

The next question is from Will Power with Baird..

Great. Thanks for taking the question. I guess, Check the question probably for you Kelly. As we think about the 10 plus employee cohort, your upmarket segment, how do we think about one, customer growth from here? And two, as you think about that net expansion, they've been above a 130%.

What's the sustainability of that, right? Because you've gotten a number of growth drivers and you've got the law of large numbers working against you.

How do we think about the outlook on that front?.

In terms of net dollar expansion, we expect it to stay above 30 certainly for Q3. And then in terms of Q4, we expected to be in at least in that range, not is a quarter out. We don't know exactly, but we are going to be right in that same range still for Q4.

And then in terms of the customer growth, I think that what you are going to continue to see is ongoing growth driven by large deals.

So, the customer count may slow, but as you're going to continue to see growth driven by these big deals, as we see opportunities to continue to cross-sell with Zoom Phone, as you heard, right? We beat our two largest deals records on the same day this quarter. So really seeing opportunities there.

And then as we were planning to go back to the office, also opportunities for Zoom Rooms. And then think about doing an event. We're going to start to see opportunities for larger and larger, bigger customer wins. And I think the other thing to note, we talk about in the quarter, but just want to make sure we understand.

We had a deal this quarter that now became our new largest customer. So that's our new customer, an existing now with their up-sale right to begin the largest customer so we're continuing to see these really significant large bins. And that I expect to continue..

Right, thank you..

Our next question is from Matthew Niknam with Deutsche Bank..

Hey, thanks for taking the question. You talked a little bit about some more measured behavior from customers in terms of buying patterns.

I'm just wondering, can you talk a little bit about the competitive backdrop, whether you've seen peers, maybe getting more aggressive, especially larger enterprise customers, really take their time to reevaluate the future of work Post COVID. Thanks..

Eric, you want to talk about --.

Sure.

I think we look at it, the churn, the future work, hybrid work for short that will be the mainstream, right? And however, and because of the cost of embracing hybrid work, a lot of employees like a student working from a home, or maybe work the remitted locations, and another [Indiscernible], the prior to pandemic crisis quite often, and you might have deployed loosen.

This is good enough, right? And giving employees now to support the hybrid work, the best way to service will do very well. Look at our employees, they do not have, I just part, you know, sitting next to them, right? And approximately you need to worry the productivity if you do not give the best for tools.

That's why in the good enough services, we're not doing well. Every business we would like to deploy the best-of-breed service.

But always give the employees much better tools to improve their productivity, to help employees because to support a hybrid world is not that straightforward, right? I'll give you one example, like a complement solution, we're producing [Indiscernible] feature.

All of which, customers, they do not care to have a meeting by somebody assisting in the conference room, some join remotely, that experience is not as good as the big, the webinar on me too right. That's why I think the hybrid work, certainly we'll have Zoom by even some of sometimes our competitors the mile of evidence of price.

I think the good news is the customer really wants to have a very reliable fixing us the platform, you know very easy to use. I think that's the reason why I think that Zoom is positioned much better than any of our competitors..

Thanks, Eric..

Thank you, Matt..

Our next question is from Boyoung Kim with Citi..

Hi, Tyler Radke, earlier in the Q and A, you showed some progress around the master agent program and also had cited some really large international phone deals. So, I wanted to hear about what you're seeing in terms of the productivity of the channel partners and international markets relative to what you're seeing from channel partners in the U.S.

and to what extent is that impacted by the nascent stage of the master agent program in international markets, as well as the nascent state of the broader market in a cloud-based phone. Thanks..

So, I think we are seeing strength in our channel partners globally. But as you say, it's a much newer program and much smaller internationally. So excited to really -- this is one of the main focuses for our channel team, which is expanding outside of the U.S., it's focused for the rest of the year.

In terms of productivity, I don't think that it really varies. I mean we were really excited about the Telkomsel deal, which is one of our largest channel partner deals, ISP deals with date, so that's really exciting. But we've had significant wins in the U.S. as well. So not seeing dramatic differences in productivity on a global basis..

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

Hey guys, thanks for taking the question. I think just -- just one for me. Obviously, as you guys have spoken to so far, the enterprise opportunity here is really kind of the which was really exciting and compelling going forward.

But given the commentary around finding other ways to monetize the base, whether that's a consumer or otherwise, we'd love to maybe get an update, or whatever color you can provide on the level of premium usage that you're seeing today, now outside of the seasonality with education, Just the level of premium users from the platform, how that's changed over the past 4 or 5 quarters, thoughts on the back half there, and then any commentary on what conversion you've seen there or you expect you could see if you decided to really try and monetize that..

Yeah..

Go ahead..

We still see free users. A large, they've really grown over the last 18 months and they're about 30% of our minute usage today as compared to like 10% pre-pandemic. That gives you an idea of the number -- we don't talk about the number of users, but that at least gives you a relative understanding of how they grow over time.

And like we always say, as Eric mentioned about our share value of care, our core value of care we really care about all those [Indiscernible] specially to keep people connected during these more difficult times.

And there's always a hope that they continue to invert or that they have the opportunity to give you a new [Indiscernible] more new users to the power of Zoom..

Got it, thank you..

Our next question is from Chaim Siegel with Elazar Advisors..

Hi, Kelly and Eric.

How are you?.

Hi. Nice to see you..

I had a couple of questions if you have time, but since obviously, the focus is on enterprise, I just wanted to know how fast the sales forces growing and when the efficiency for that Salesforce starts to kick in. I guess that's one. And also, just related to that on operating expenses.

So, I'm not sure how long you expect flattish sequential growth, but on the operating expense, it seems like maybe it will start to grow faster than revenues. And just wondering with relation to focusing on getting the enterprise is going, how fast expenses will grow versus revenues..

So, as we've been saying for the last several quarters, there are areas that we were not able to hire and invest in as quickly as revenue grew last year.

And so, what we've been doing on the last couple of quarters is focusing on reaccelerating investment, especially in the areas of R&D, as well as for the carrying [Indiscernible], and we are absolutely continuing to do that.

We still are underinvested in R&D at a little over 5% of revenue, and the long-term target is 8% to 10%, so we're continuing too higher as quickly as we can.

And then similarly in terms of quota-carrying heads, we're being very thoughtful about the segments and the regions in which we're hiring a fair number, like slipping back for a minute, there is a huge chum and it's a huge opportunity out there.

And we want to continue to add quota-carrying heads in sales capacity into our system to take advantage of that. As long as we continue to see an opportunity for growth, we will continue investing in quota-carrying heads.

We are also, as I mentioned earlier, accelerating our spend in marketing as we were able to pull back a little bit on that last year. But we think now is the right time to continue reinvesting there. And then the two areas that we always look to be as efficient as we can, our G&A and COGS.

And G&A is right in the range of where we would want to be for the long term. Over time, we do expect COGS to decrease as we continue to move more and more of our services out of the public cloud into the data center, our own data centers. I mean, we're always going to have a hybrid approach there.

But also, eventually at some point when K-12 schools are freer to go back to campuses, we do expect to see improvement in our gross margin. But we will absolutely continue to support those students in schools as long as we think it's needed..

Is there a general timing of efficiency where you would to tick in for the enterprise, for sales [Indiscernible] on the enterprise? I know you've been growing it.

And I know it takes time, I was just wondering if there's timing where if they [Indiscernible] going to start really performing for you?.

No, I mean -- I would say is we are continuing to hire quota-carrying heads quickly and we will continue to do so. So that means there's a constant state of having a ramping rep in the system. And since we have no plans to stop hiring quota-carrying heads in the near future.

But I can't say when all of a sudden, they're going to necessarily be more efficient..

Thank you very much..

Our next question is from Rishi Jaluria with RBC..

Hey, Eric, Kelly, Tom. Thanks so much for taking my questions. Good to see you all. I wanted to just ask about Zoom Events.

I know initially when you've talked about the product, it was kind of pitches a little bit of a monetization factor for the Prosumer segment, right? Helping fitness instructors, yoga instructors who run class online, but clearly, it seems like there are much grander ambitions, right? The fact that you're going to run Zoomtopia on that, I think tells us there's maybe a bigger enterprise opportunity, even as companies are looking at doing in-person conferences again, they don't want to have a strong virtual and hybrid component to it.

So, can you maybe talk a little bit about what you see as a longer-term vision with Zoom Events, especially Enterprise and maybe let's go on that? Thanks..

Rishi that's a great question. So, remember last year, last October, at a Zoomtopia we reduce resuming events, you know, we started from on Zoom. And we thought about how to have the people working from home who still can't get it streaming live like filling these online classes, Zoom all those classes.

That's the reason why we decided to build the Zoom Events ever. Again, we always listen to other customers, in particular, our enterprise customers. And they all told us, there are more opportunities around the carpet events in the corporate and probably not assume a focus on the all told us, hey, we've [Indiscernible] in either better than here that.

We ought to have an EBITDA platform, they wanted us to extend that, and I didn't know how to expand it into an even bigger Annual User Conference like Zoomtopia, that's why we [Indiscernible] to our [Indiscernible], right? And a [Indiscernible] above-corporate, which is rebranded as Zoom Events. We do see a huge opportunity.

And besides that, the consumer learns. It's not a card or zoom you miss anymore. This is more like on Zoom website.

We still were g aggregate all those consumer-driven events right like on fitting in a cost and [Indiscernible] plus, but if I know, if you look at our short of opportunities, assuming you went there because many of our existing customers told us we need a platform like that because it already does. They do not want to go to any other platform.

They are very patient. That's the reason why they shift over our spending the database since the last ASM problem..

Right. Wonderful. Thank you..

Thank you..

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

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

anything else Eric?.

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

Thank you..

Thank you..