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Zoom Video Communications, Inc. (ZM) CEO on Eric Yuan on Q2 2020 Results - Earnings Call Transcript

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About: Zoom Video Communications, Inc. (ZM)
by: SA Transcripts
Subscribers Only
Earning Call Audio

Zoom Video Communications, Inc. (NASDAQ:ZM) Q2 2020 Earnings Conference Call September 5, 2019 5:30 PM ET

Company Participants

Tom McCallum - Head of Investor Relations.

Eric Yuan - Founder and Chief Executive Officer

Kelly Steckelberg - Chief Financial Officer

Conference Call Participants

Sterling Auty - JPMorgan

Matt Statler - William Blair

Heather Bellini - Goldman Sachs

Brad Zelnick - Credit Suisse

Kash Rangan - Bank of America Merrill Lynch

Alex Zukin - RBC Capital Markets

Phil Winslow - Wells Fargo Securities

Pat Walravens - JMP Securities

Alex Kurtz - KeyBanc Capital Markets

Meta Marshall - Morgan Stanley

Tom Roderick - Stifel, Nicolaus & Co.

Zane Chrane - Sanford C. Bernstein & Co.

Ryan Koontz - Rosenblatt Securities Inc.

Jonathan Kees - Summit Insights Group

Ryan MacWilliams - Stephens Inc.

Tom McCallum

Hello, everyone and welcome to Zoom's Earnings Webinar for the Second Quarter of Fiscal 2020. 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 maybe downloaded from the Investor Relations page on the zoom.com website. Also on this page, we are able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings press release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements about our future financial performance and other future events or trends, including guidance. 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 and which we discuss in detail in our filings with the SEC, including today’s earnings press release and our latest 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today’s call.

And with that, let me turn the discussion over to Eric.

Eric Yuan

Thank you, Tom. Thank you and welcome to everyone joining us on today’s Zoom webinar. I am very pleased to report that we had a remarkable second quarter and continued to deliver a unique combination of high growth with increased profitability and a free cash flow. As Kelly will discuss in a moment, the first half momentum in our business has enabled us to meaningfully raise our revenue and profitability outlook for the rest of the year.

Our strong second quarter results are evidence that organizations are turning to Zoom as a strategic technology partner to help them improve their communications and collaboration. While we continue to attract customers of all sizes and across several industry segments, let’s discuss one of our largest wins of the quarter. I am proud to the welcome HSBC to the Zoom family.

HSBC is one of the largest financial services organizations in the world with over 3,900 offices in 67 countries. HSBC will standardize on Zoom platform by deploying to 290,000 hosts and to 5,500 conference rooms. HSBC will consolidate onto Zoom’s video-first unified communications platform for both internal and external meetings.

By standardizing on Zoom, HSBC we will consolidate costs and create an enhanced, frictionless experience for end users. This enterprise-wide deployment represents one of the largest customer commitments to Zoom in our history and reflects our growing momentum with global customers. HSBC, I love you. My wife switched to HSBC credit card, so.

Now, let me discuss two more business highlights from Q2. First, we announced a new partnership with Verizon Business Group to offer Zoom to its global customers. Zoom's platform is available as a cloud service enabling a variety of HSBC customers to ensure reliable and innovative video communications. This agreement with Verizon is a great example of our strategy to partner with top global service providers to extend the reach of Zoom around the world. The new service is available on Verizon's network and their sales teams are already trained and enabled to sell Zoom.

And second, Ryan Azus joined Zoom as our Chief Revenue Officer. Ryan has already -- has nearly 20 years of selling experience and sales leadership in the communications industry. He spent the past nine years at RingCentral, where he was most recently the Executive Vice President of Sales and Services. Ryan was instrumental in building the company's field sales and channel organizations from the ground up. Prior to RingCentral, Ryan was a sales leader at Cisco WebEx for over nine years. I've had the pleasure of working with Ryan previously and he has an incredible acumen for building and leading world-class revenue organizations.

In closing, I would like to thank the 2,200 Zoom employees around the globe for their commitment to customer happiness, which sets the foundation for delivering the type of strong financial results that we are sharing for our second quarter and first half of fiscal 2020. We will continue to stay focused across the company on the happiness of customers and building trust with them. By helping our customers to succeed with a frictionless communications platform, we are very well positioned to increase our market share and deliver remarkable results.

With that, let me turn things over to Kelly

Kelly Steckelberg

Thank you, Eric, and welcome to everyone joining us today. Let me start by first reviewing financial results for Q2. And then I will discuss our outlook for Q3 and the full fiscal year.

Total revenue grew 96% year-over-year in the second quarter, to $146 million. This top line result exceeded the high-end of our guidance range and had a positive impact on our profitability and free cash flow. Similar to last quarter, we executed very well in a strong demand environment for the Zoom platform. This execution was represented broadly across our major geographies and offerings.

Key drivers of our revenue performance included both our acquisition of new customers and expansion of Zoom’s footprint within existing customers. Specifically, new customers accounted for approximately 61% of our year-over-year growth in subscription revenue while the remaining 39% was due to additional purchases from existing customers.

Here are some key customer metrics from Q2. We exited the quarter with over 66,300 customers with more than 10 employees, up 78% year-over-year. This is a record number of new customer additions in a quarter. One of our key verticals is the Financial Services sector.

I am pleased to share with you that we are experiencing strong success in this segment with firms like HSBC, Moody's and Morgan Stanley becoming Zoom customers in Q2. The combination of our land and expand strategy, along with our continued up-market focus, resulted in Q2 ending with 466 customers with more than $100,000 in revenue over the last 12 months, this is up 104% year-over-year.

This also led to a net dollar expansion rate that was over 130% for the 5th consecutive quarter as customers are deploying more Zoom products and adding more licenses within their organization. One example was a significant expansion with a large luxury brand. This customer began their relationship with Zoom last year and quickly deployed Zoom meetings to approximately 3,800 users to replace their legacy video conferencing provider. Because of their trust in Zoom, they then invited us to provide a modern solution for the phone service in their corporate offices and stores.

After a comprehensive evaluation, they selected Zoom Phone in Q2. They cited call quality, ease of use, cost savings, and the unified Zoom platform of meetings, chat and phone as important benefits to their organization. They have already begun the rollout of 4,700 Zoom Phone licenses within their organization. The customer also plans to roll out Zoom Phone to their 750 domestic retail stores starting in early 2020 and rest of the world soon thereafter. This is an exciting win for us and it demonstrates the potential to upsell technologies when you make existing customers happy and build trust.

Geographic expansion is another driver of our revenue growth as we continue to deliver strong growth internationally. In Q2, our APAC and EMEA revenue combined grew a 115% year-over-year and represented approximately 20% of revenue. Revenue from the Americas was up 91% year-over-year and represented approximately 80% of revenue. This high revenue growth and strategic customer wins are evidence that our investments to expand our global footprint are succeeding.

Now turning to profitability. Here you can see we were profitable from both a GAAP and non-GAAP perspective, but I will focus on our non-GAAP results, which exclude stock-based compensation expense, and related share-based equity taxes. Non-GAAP gross margin in the second quarter was 82.2%, compared to 82.8% in Q2 of year and 80.9% last quarter. For the full-year, we expect non-GAAP gross margin to be in the range of our long-term target of 80% to 82% as we continue to scale our infrastructure to support our growth.

R&D expense in Q2 was approximately $13 million, up 83% on a year-over-year basis. We expect to continue to invest in innovating our platform and see R&D returning to the range of 10% to 12% of revenue which is consistent with our long-term view. Sales and marketing expense for Q2 was $69 million. This reflects an increase of 70% or $28 million over last year with investments in initiatives to drive further growth. As a percent of total revenue, Sales and Marketing was 47%, lower than Q2 last year as we have seen some efficiency gains in marketing. Looking forward, we expect to continue to invest in this area especially to drive international and up market growth.

G&A expense in Q2 was $18 million and represented 12% of total revenue. This result represents our continued investment to support our status as a publicly traded company. Non-GAAP operating income was $21 million translating to a 14.2% non-GAAP operating margin for the second quarter. This was an improvement of 812 basis points as compared to Q2 of last year.

Non-GAAP earnings per share in Q2 was $0.08, on approximately 292 million of non-GAAP, weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.06 higher than the high end of our guidance and $0.06 higher than Q2 of last year due to the outperformance in the quarter.

Now turning to the balance sheet. We ended Q2 with approximately $755 million in cash, cash equivalents and marketable securities. Deferred revenue at the end of the quarter was $181 million, up 102% year-over-year. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $458 million, up 117% from $210 million last year.

We expect to recognize approximately 62% or $285 million of the total RPO as revenue over the next 12 months as compared to 68% or $143 million in Q2 of last year. This shift to a larger percentage being in non-current RPO represents longer contract lengths as we succeed with up market customers.

Operating cash flow was $31 million in Q2, up from $14 million in the same period a year ago. Free cash flow was $17 million in Q2, up from $8 million in the same period a year-ago. Both of these results are due to our higher profitability, the growth in deferred revenue and strong collections. In addition, we also had a benefit of approximately $7 million to operating cash flow related to employee contributions to our Employee Stock Purchase Plan. We would expect these contributions to scale with headcount and our first ESPP purchase will be made in Q4. Going forward we expect to see benefits from contributions in Q1 and Q3 and net outflows for purchases in Q2 and Q4.

Now turning to guidance. We are pleased to be increasing our outlook for Q3 and the full-year based on our view of the current economic environment, our ability to gain further market share and the momentum we achieved in the first half of FY20. For the third quarter, we expect revenue to be in the range of $155 million to $156 million. We expect non-GAAP operating income to be in the range of $6 million to $7 million. This forecast includes the impact of our premier user event, Zoomtopia which will take place in Q3.

Our outlook for non-GAAP earnings per share is $0.03 based on approximately 294 million shares outstanding. For the full fiscal year '20, we now expect revenue to be in the range of $587 million to $590 million, up from our prior guidance of $535 million to $540 million. We expect to generate positive non-GAAP operating income in all four quarters of the fiscal year. For the full-year non-GAAP operating income is expected to be in the range of $42 million to $45 million, up from our prior guidance of breakeven to $3 million. We expect to deliver non-GAAP earnings per share in the range of $0.18 to $0.19 for the full-year fiscal '20, based on approximately 293 million shares outstanding.

This reflects the meaningful profitability seen in Q2, combined with the fact that we remain focused on investing aggressively in the business. We believe we have the opportunity to expand our market share and continue delivering happiness to our customers. We are confident that our long-term business model will drive growth and profitability, which is further evidenced by our Q2 results.

In closing, our focus on customers led to rapid top line growth and increased profitability and positive free cash flow for the quarter and for the first half of FY20. I would like to thank the entire Zoom team for their hard work as Q2 was another quarter of strong execution, and positions us well for the full fiscal year.

With that, let's open it up for questions. 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.

Question-and-Answer Session

Operator

Our first question is from Sterling Auty from JPMorgan. Sterling, you are unmuted.

Sterling Auty

All right. Thanks. Hi, guys.

Eric Yuan

Hey, Sterling.

Sterling Auty

I like the background, I think it's better than last quarter. To get us started, can you just comment in terms of what are you experiencing in terms of initial deal sizes? What's the trend that you're seeing over the last couple of quarters?

Kelly Steckelberg

So, we can remain really focused on the strategy of land and expand. So even though we're seeing stronger growth in the upmarket customer base, you saw that grew more quickly than our total customer base. We are still focusing on smaller deal sizes to start and then continue expansion, which you see in the net dollar expansion rate continuously strong at that 130%. So we haven't really seen a dramatic change in our initial deal size.

Sterling Auty

All right. Makes sense. And then one follow-up in terms of Zoom Phone. What kind of attach rates are you seeing in the initial deals on Zoom Phone, or is it still too early, because I think a couple of the examples you gave was really kind of upsell Zoom Phone into existing customers?

Eric Yuan

Yes, Sterling that's a good question. So we launched Zoom Phone service earlier this year. Our kind of strategy is to upsell to other existing installed base. I think it's still too early to tell, but we do see a very good sign. Customers really want to understand what's the differentiation from a Zoom Phone side like a unified collaborating experience. As Kelly shared, one of our larger -- largest customers [indiscernible] deployed Zoom Phone in Q2 realize the ease of use. I think we can replicate that success in the future quarters.

Sterling Auty

That makes sense. Thank you.

Eric Yuan

Thank you, Sterling.

Kelly Steckelberg

Thanks, Sterling.

Tom McCallum

Next question, please, Matt.

Operator

Next question is from Matt Statler from William Blair. Matt, you're unmuted.

Matt Statler

Hey, great quarter and thanks for taking my questions. So first on the Verizon partnership. Obviously, you announced that back in June, with Verizon using Zoom's as a solution for I think small and medium businesses and maybe still reselling WebEx enterprise level. Any feedback just on the initial traction that you're seeing with that partnership and thoughts about establishing similar, similar partnerships with Verizon or others to resell Zoom in the up market as well?

Eric Yuan

Yes, so Verizon partnership, you're right. We set up the Verizon partnership recently. I think we are already gaining momentum. So they are one of the top channel partners and our team really enjoy working together with the Verizon team. We see the great result already. I think -- I think Verizon partnership help us more and this is a great partner.

Matt Statler

Great. Great. Okay. And then just one more for me on the gross margin front. As you spoke in the prepared remarks, gross margins were strong in the quarter. A little about the high-end of your long-term model. Can you just refresh us on what drove strong performance in the quarter and what you expect to bring that number down a little bit as we look forward? Thank you.

Kelly Steckelberg

Yes. So the increase in the quarter-over-quarter gross margin was really driven by the increased revenue and the performance on the top line. Going forward, we continue to add more data centers as well as building capacity for all of our customer bases around the globe. And as we continue to invest in this infrastructure, we expect it to continue to be in the range of 80% to 82%.

Matt Statler

Great. Thank you very much.

Tom McCallum

Thanks, Matt. And Matt, another question please.

Operator

Our next question is from Heather Bellini from Goldman Sachs. Heather, your line is unmuted.

Heather Bellini

Great. Thank you so much for taking the question. I just had two. I was wondering Zoom Phone, I know it's a new launch, but I'm wondering how you would benchmark the ARR that you've generated to date versus your expectations at the time you launched it. And also kind of where your wins are, kind of who you're seeing your wins coming from, if you could share with us that. And then also just the other question would be related to the cadence of the expansions you are seeing, given the value that customers start to see pretty quickly from the adoption of your solution. Are you actually starting to see the expansions of those deals starting to happen at a faster pace? Thank you.

Kelly Steckelberg

Yes. So thanks, Heather. We certainly are. Given that we are selling Zoom Phone into our existing customer base, they already are on the Zoom platform. And so that has accelerated the rollout of Zoom Phone. We’ve seen that in Q1, we talked about Ciena, and they've already continued to roll out to over 5,000 Zoom Phone users around the globe. So that's super exciting. And as you saw the customer that signed in Q2 has already started to roll out their Zoom Phone licenses as well. And interesting to note, they bought more Zoom Phone licenses, than they have with meetings, which we think is a trend will expect to see as well. And then sorry I'm just looking at …

Heather Bellini

Just benchmarking the ARR. The ARR that you've generated to date from it, how is it doing versus your initial expectations?

Kelly Steckelberg

Yes, it's doing well. We've seen traction in Zoom Phone across all segments of the business, which we think is really exciting. And approximately 50% of Zoom Phone is coming from customers with AR greater than 100K or more.

Eric Yuan

So to add on to what Kelly said, you look at it today's enterprise market, most of the enterprise customers are still using the on-prem phone system. Over the past several years, SMB customers might have moved to the cloud-based solution. We do see the huge opportunity for the large enterprise segment to go to the cloud based PBX system. They want to have a unified solution. Heather, by the -- yes, Heather by the way, we miss you on video.

Heather Bellini

Oh, yes, I know. Sorry about that. Next time.

Eric Yuan

No worry. Thank you.

Heather Bellini

Thank you.

Tom McCallum

Thank you. Next question please, Matt.

Operator

Our next question is from Brad Zelnick from Credit Suisse. Brad, you're unmuted.

Tom McCallum

Thanks, Brad.

Eric Yuan

Hey, Brad.

Kelly Steckelberg

Hi, Brad.

Brad Zelnick

Great. Hi. Hi, Eric. Hi, Kelly. Hey, Tom. Nice to see everybody. Congratulations on another great quarter. And congrats on adding Ryan as your new Chief Revenue Officer. It's good to hear the long standing relationship that you have with him. What might we expect his priorities might be and what else can he do to help even drive more happiness for Zoom employees and Zoom customers? And I've got a follow-up as well.

Eric Yuan

Yes, that's a good question. By the way, is that a real background or virtual [ph] background? It's so nice. It's better than us. Thank you. So long story short, Ryan and I've been known each other for many, many years, even before Ryan left Cisco to join RingCentral. We already talked about that. Hey, in the future Ryan let's work it together. We talked about that many, many years before, right. It's right time. I think as we further expanded into the large enterprise international and also get into the unified collaboration market, as Ryan's experience can really have us. He's very hands on leader and really understand communication and the collaboration industry. And we have a high confidence with Ryan's joining Zoom, and we can keep the momentum right, not only do we win in the domestic market, but also international market as well.

Brad Zelnick

That makes a lot of sense. And if I could just ask, the scale of the success and happiness you're delivering to customers, the size of HSBC is nothing short of unbelievable. How should we think about the pricing differential at the very high-end of the market? And perhaps Kelly, if you can, just on a like-for-like basis, give us any kind of color or commentary on what you're seeing pricing wise, perhaps versus a year-ago? Thank you.

Kelly Steckelberg

Yes, we haven't seen a dramatic shift in our pricing or in the need from a competitive standpoint from a year-ago. Certainly, as you scale up to a customer size of HSBC, because of the volume and the long-term nature of the contract. We do price that accordingly, as you can imagine. And remember, we also really like the opportunity to do buyouts with our customers, which we often do if they're interested. That's one way that we get them to come in early, and especially if they're with a competitor, but they love Zoom. We want them to have Zoom as quickly as possible.

Brad Zelnick

Excellent. Thank you so much. Congrats again.

Tom McCallum

Thank you.

Eric Yuan

Thank you, Brad.

Tom McCallum

Matt, next question, please.

Operator

Next question is from Kash Rangan from Bank of America Merrill Lynch. Kash, you're unmuted.

Kash Rangan

Hi. got to hand it to Brad. I don't know how he managed to smile so beautifully when he was asking his questions. So I'm going to have to try the same thing. How to sound nice, look nice and [technical difficulty] looking at your operating step as a marketing relative with the revenue growth rate, clearly, is this a sign that you have reached that step function, evolution in your business model where the revenue is at a scale where you're starting to see underlying productivity improvements in different line items of the expenses, and you can sustain this level of operating margin. Are there -- were there kind of one-time things that did not appear in your expenses that maybe will reappear in the future, maybe you defer some expenses, or maybe the timing of expenses didn't fall the way you would expect, because although it's terrific to see massive operating leverage in your company, it was also unusual to see sequentially this level of operating margin expansion. So I'm curious as to what drove this? How much of this is permanent versus Chinese expenses? Congratulations on a spectacular quarter. Thank you.

Kelly Steckelberg

Thank you, Kash. Sure. And it's a great question. So just a quick reminder, our philosophy here is that we're investing for growth with discipline and thought. So we are very careful about ensuring that every dollar we spend has an appropriate ROI. With that said, there were a few one-time benefits that we saw in Q2 that led to the higher operating margin. So we had a higher rate of capitalized software that reduced our R&D expenses as a percentage of revenue as compared to the previous quarter. You can see the dollars were about the same, but the percentage came down. We also had a slight benefit in G&A as well as we are now starting to not only collect telco taxes. If you remember, we've talked about telco taxes in the past, we have now started collecting in certain jurisdictions and passing that through, which is reducing our need to accrue for it. And we got to some agreements with some jurisdictions that helped us understand that we could reverse a little bit of our crew that we had in there for things like penalties and interest. So there were a few one-time items that we don't expect to see going forward. And we will really continue to invest in sales and marketing. So we did see -- we’re seeing some efficiencies in marketing, as we discussed in the prepared remarks. But as we see opportunities, we will continue to invest in that area.

Kash Rangan

Congrats. Thank you so much.

Kelly Steckelberg

Thank you, Kash.

Eric Yuan

Thank you Kash. By the way, Kash, you are using the phone to join this Zoom video webinar. We can see that you have a little bit of network connectivity issues. Our technology quickly adapt with your network efficiency. We still can hear you well.

Kash Rangan

Great. Awesome.

Kelly Steckelberg

Thank you, Kash.

Eric Yuan

Thank you.

Tom McCallum

Next question, please, Matt.

Operator

Our next question is from Alex Zukin, from RBC. Alex, you're unmuted now.

Tom McCallum

Hey, Alex.

Alex Zukin

Hey, guys.

Eric Yuan

Congratulations.

Alex Zukin

Thank you. Thank you. You guys congratulations on another great quarter as well. I've got two quick ones. One, maybe first, Eric, on the federal government and the federal vertical. You guys have achieved FedRAMP certification. I'm just curious how you see that playing out for you from a pipeline perspective, from a deal perspective? How important is that vertical to your growth prospects? And then I've got a quick just a financial question for Kelly.

Eric Yuan

Yes, so to have a FedRAMP certificate is very important for us to expand into the public sector. Prior to that we even don't have a team, right, because we do not have that certificate. Given that we have that now, I think it's too early to tell because we just established a public sector team for targeting public sectors. We do have a many state level customers. I think in the next several quarters probably would see some contribution from public sectors.

Alex Zukin

Perfect. And then, Kelly, if I do the rough math on kind of current RPO bookings, I get to around 81%, 82%. I'm curious, is that the right kind of forward-looking indicator given some of the different methods you guys have, from a sales and contracting perspective? Is that an important metric for you guys? Or is billings the better one right now?

Kelly Steckelberg

So billings is really not a good metric for us due to the split of our customers that pay monthly versus annually. Remember, the core base of the company, while it is shifting, is still really based on SMB customers that pay monthly on a credit card. So buildings is really not a good metric for an indicator. I would certainly say that RPO is a much better metric to use.

Alex Zukin

Great. Thank you.

Tom McCallum

Thank you, Alex. Matt, next question, please.

Operator

Our next question is from Phil Winslow from Wells Fargo. Phil, you're unmuted.

Tom McCallum

See the Wells Fargo.

Kelly Steckelberg

I know I love your marketing Phil.

Phil Winslow

Thank you. You like that?

Kelly Steckelberg

Yes.

Phil Winslow

[Indiscernible] a bit. But my questions actually are just going to be on just what you're saying in terms of the customer in terms of replacement versus net new expansion. In other words, what percentage you’re seeing are replacing a existing solution versus actually with the customer either coming to you net new or actually expanding the number of seats versus prior provider? Thanks.

Kelly Steckelberg

Yes. So, if you talk about when we're going into our new base of customers, and when we're going into the up market, there's certainly always an incumbent that we are replacing there. And it's all the traditional providers that you would know. In SMB, it often can either be Greenfield, or maybe three that we are competing with, or some of the more mass market vendors that you're also very familiar with. As I said earlier, your net retention expansion rate though, remains really strong at a 130%, as we continue to start with small seated land and expand and then growing up from there.

Phil Winslow

Great. And then just a follow-up in terms of that land and expand. So at Eric's point about Zoom being super easy to use, and so it's a more user guy actually using what do you think in terms of sort of that seat expansion, particularly when it was replacing an existing [indiscernible]?

Kelly Steckelberg

Well, in terms of seat expansion, you're saying in general, or across specific customers?

Phil Winslow

Just on the larger customers.

Kelly Steckelberg

Yes, I mean, I think it -- customers are buying in two different ways. Obviously, we saw with HSBC, one of the largest customer deal is the largest customer single deal we've ever had. And yet now our second, our previously largest customer had another add-on in this quarter, which was over $1 million in ARR. So even in our large customers, we continue to see expansion as they add on new products like Zoom Phone, and I think very few of our customers today are wall to wall with Zoom meetings. And so, as they continue to build trust with Zoom and with the platform, then see the value they continue to expand that globally throughout their teams.

Tom McCallum

Great.

Phil Winslow

Great. Thanks a lot.

Kelly Steckelberg

Yes.

Tom McCallum

Thanks, Phil. Matt, next question, please.

Operator

Next question is from Pat Walravens from JMP. Pat, you are unmuted.

Eric Yuan

Hi Pat.

Pat Walravens

Great. Hi, guys.

Kelly Steckelberg

Hi, Pat.

Pat Walravens

Thank you. I like the 5:30 start time by the way. It makes the [multiple speakers]

Kelly Steckelberg

It's better for you guys?

Tom McCallum

Yes.

Pat Walravens

Yes, yes. Especially on a busy day like today.

Tom McCallum

That’s why [indiscernible] get it.

Pat Walravens

So I think this is for both Kelly and Eric. Look what's going to be the biggest challenge in continuing to scale at this rate and I realize your guidance is not at this rate, but to continue to scale like we are here, what's going to be the biggest challenge?

Eric Yuan

I think for sure for us to further scale our business many challenges. I would say the most important challenge is to maintain our company culture. We already have almost 2,300 employees. As we further expand into the international market, doubled our sales and R&D team, we are going to hire more and more people, top [indiscernible]. However, how to maintain our delivering happiness culture, make sure all of us always look at everything from customer perspective, right, responding to customer issues in a timely manner. That's a challenge. How to turn the new employees and make sure we are very humble, paranoid to care about the customer, that's a number one challenge. Other challenges are very manageable, like a product, may be the sales efficiency, the cost is not a big challenge.

Pat Walravens

All right. And then I'm going to ask one more if I can, which is I was driving up the 101 today, I saw a billboard which said, Zoom and Slack, see what together can do? So Eric, what can together they do?

Eric Yuan

I have a similar question to you, maybe you can tell us what they can do? But anyway, so I'm a huge fan of Slack, right, and a huge fan of [indiscernible]. I think many of our customers, they told us, they like best-of-breed service. They follow both Zoom and Slack, they kind of hire talents all over the world like a [indiscernible] envision. They standardize on Zoom and Slack platform, guess what, if they don't have a single physical office, right, I think the best-of-breed service can truly deliver happiness to our customers. That's why we like this partnership. We want to do more with Slack. Together we wanted to make sure costumer happy.

Pat Walravens

All right. Thank you.

Tom McCallum

Great.

Kelly Steckelberg

Thanks, Pat.

Tom McCallum

Thank you.

Eric Yuan

Thank you.

Tom McCallum

Next question, please, Matt.

Operator

Our next question is from Alex Kurtz from KeyBanc. Alex, you are unmuted.

Eric Yuan

Hey, Alex.

Alex Kurtz

Yes, thanks. Thanks, everyone. Great quarter. I love the video interaction here. It's awesome. So just on the net expansion rate in the quarter, how much is that being driven by new seats versus the phone? Then I had a clarifier on margin.

Kelly Steckelberg

Yes, it's being driven primarily by new seats as well, you were excited about the momentum we're seeing in phone, it's still a very, very small contributor to revenue. We just reminded, we launched it only in January. It did go GA in both Australia and the U.K in Q2, but it's really having a very small impact at this point.

Alex Kurtz

And just on your margin assumptions in the back half of the year around the adoption of phone, is there anything that we should be thinking about as far as the variables around that, any impact there?

Kelly Steckelberg

No. The only impact for -- on margins in the second half of the year are around expanding data centers, we are planning to add two to three more, but that is not necessarily having to do with Zoom Phone. It's just adding capacity in general for our users around the globe.

Alex Kurtz

Okay, right. Thank you.

Eric Yuan

Yes, by the way from architecture perspective, our video conferencing and Zoom Phone, we shared the same platform. As Kelly mentioned, we just needed to expand our capacity. That's pretty much, yes.

Alex Kurtz

Okay. Thank you.

Tom McCallum

Thank you. Thanks, Alex. And, Matt, next question, please.

Operator

Our next question is from Meta Marshall from Morgan Stanley. Meta, you are unmuted.

Tom McCallum

Hi, Meta.

Eric Yuan

Hi, Meta.

Kelly Steckelberg

Hi, Meta.

Meta Marshall

Hey, congrats on the quarter. So I just wanted to ask a couple of questions, maybe first and get your response to that. As you approach customers with Zoom Phone, has it changed your perspective on kind of cadence of additional features you will need to add over time, or has it really kind of met expectations to date and the cadence you were planning?

Eric Yuan

Yes. So, today our strategy is focus on upsell, right? We already build our trust. Customers really like our video conferencing experience, in terms of video quality and voice quality. We truly believe video is the new voice. Essentially, the way for customer the uses of phone is more like another way to use our video conferencing service, right? Customer -- even if they deploy a solution on the web, they feel like very familiar with our service. Just the same experience, same unified client, I think is, customer really like that experience. We do not need to tell customers to train customers. They feel like there's a part of the overall collaboration platform. This is a very natural experience.

Meta Marshall

Got it. And then maybe on kind of the hiring of Ryan. Traditionally you guys have not had a large channel presence. And so, he, obviously, has a lot of experience there. Does it change your perspective on how you think of the channel as a method of go-to-market, or just how does the hiring of Ryan kind of change the go-to-market approach?

Eric Yuan

Yes, well, that's a good question. In terms of channel strategy, we just announced the Verizon partnership and the channel always plays a big role for our revenue growth. And even if you look at the total revenue, probably driven by the revenue team, as we further expand into the international market, with Ryan's good background, I would say, the channel contribution will play a big role in the future. Like Verizon partnership just started and we are going to more and more channel partners to help us expand into the international market.

Meta Marshall

Great. Thanks. Congrats, guys.

Kelly Steckelberg

Thanks, Meta.

Eric Yuan

Thank you.

Tom McCallum

Matt, next question, please.

Operator

Our next question is from Tom Roderick from Stifel. Tom, you are unmuted.

Kelly Steckelberg

Matt, can you unmute it?

Tom McCallum

Hey, Tom. There he is, I see him. Hey, Tom.

Tom Roderick

Congratulations on another fantastic quarter. Well done. Eric, I want to ask my first question to you and I want to put a finer point on the question. Pat just asked about, maintaining culture. Getting to a scale, that's pretty remarkable here. And I think you're up to about 2,200 employees. Can you talk a little bit about what you're doing to drive that hiring plan in place? How you are building out HR? Capturing that incremental employee at a great company like Zoom is always good problem to have, but you're getting to a scale and makes it challenging. Can you talk a little bit about just hiring and the challenge of that at scale?

Eric Yuan

Yes. So, well, in terms of hiring, so on the one hand, we wanted to do hire as quickly as possible, right? Because we have great opportunities. On the other hand, we also want to be very careful, right? We want to make sure we hire the right employees who can fit very well to our company culture with self-motivation, self-learning personality. And hiring side of that, I think we have a very aggressive hiring goal. But, to be honest with you, every quarter we did miss that, right? So the reason why we want to focus on the company culture, and we -- this is not a -- this is not a one person company, our management team company, all part of Zoom. We refer employees to join us. We do all the kind of hire for the new employees to make sure they are familiar with our business process or product. We have each other, care for each other. I think to do that right, we don't want to be too aggressive, right? That's the challenge, because sometimes I say, yes, let's hire another [indiscernible] people and starting to realize that it might break our company culture. That's why we have to balance everything, so.

Kelly Steckelberg

Tom, earlier this year we hired Lynne as our Chief People Officer, and just last week we hired a new Head of Talent Acquisition as well. And I think both of them are really focused on doing exactly what Eric said, which is hiring the right people, hiring quickly, but not lowering the bar. So, it's been a great -- two great additions to the team, yes.

Tom Roderick

Excellent. And then, Kelly, just one follow-up for you on the RPO commentary, following that the current RPO number, that is declining, as you see more and more customers at the enterprise level signing up for multi-year deal. Should we expect that trend to continue? Where the current number will -- the percentage will shrink just as a function of more enterprise multi-year deals out there?

Kelly Steckelberg

Yes, I think certainly we are continuing to see more and more of our revenue base come from up market customers is that's really one of our key strategic focus areas. How quickly that grows? I don't know. But absolutely, it's one of the key focuses that we’ve for growing the company this year.

Tom Roderick

Got it. Understood. Thank you, guys.

Kelly Steckelberg

Yes.

Eric Yuan

Thank you.

Tom McCallum

Great. Thank you, Tom. Matt, next question, please.

Operator

Our next question is from Ittai Kidron from Oppenheimer. Ittai, you're unmuted. We will give Ittai another moment. Next question is going to be from Zane Chrane from Bernstein. Zane, [technical difficulty].

Zane Chrane

Thank you very much.

Eric Yuan

Hey, Zane.

Kelly Steckelberg

Hi, Zane.

Zane Chrane

Congratulations on a great quarter.

Kelly Steckelberg

Thank you.

Eric Yuan

Thank you.

Zane Chrane

[Indiscernible] solid results. So I was just wondering if you could dig into the architecture and the technology a little bit, Eric. One of the push backs I hear from skeptics is that, a good program replicates something like Zoom or video conferencing over the weekend and it's not really differentiated solution. That's not what I've heard from enterprise customers that have adopted Zoom. So I was just wondering, if you could dig into what is the secret sauce that really makes your technology and architecture unique and difficult to replicate? Thank you.

Eric Yuan

Well, so in terms of large enterprise customers, for sure, when we started, we were focusing on SMB customers, right. Over the past several years, we started expanding into large enterprise customers. And the reason why we do see the -- we -- almost every enterprise customers, we do see a lot of users. Even for the large enterprise customers or the standardize on other platform, we see the one user, two user, one department, and two department, they all use their own budget to deploy Zoom. The reason why they are not happy about any other services in terms of ease-of-use, the quality, like this what’s your background or feature and consistent experience across the desktop, mobile and conference room statistics, right. I think the combination of technology, ease-of-use, security will win the customer trust, right. If you look at all other solutions out there today, all of them architecture is very old, right? Not a design for modern video cloud -- video first architecture. That's why we're ahead of any of our competitors for several years. Otherwise, I will go back to work all the weekend.

Zane Chrane

Yes, that's really interesting. One of the things I think is really fascinating is the extensibility and the APIs to connecting another platforms. It seems like there's a lot of Greenfield opportunity there for maybe tying in with vendors like Salesforce or HubSpot or other cloud providers. Could you talk about what your vision is for those partnerships and kind of the technology integration to build that ecosystem?

Eric Yuan

That's a good question. Today, look, you talk with many customers in -- on one hand, they all like best-of-breed services. On the other hand, quite often you need to switch back and forth in terms of context, say like, a Dropbox or Box to Zoom or Salesforce to Zoom, the last into Zoom, right. A customer like to stay within the same context, right, say, like I'm using the Jira Atlassian system, right. Within that Jira system I can launch a Zoom call, join a Zoom meeting [indiscernible] meeting, I think that what the customer told us. That's why how to seamlessly embed Zoom into any other business workflow applications, that's the direction to go. That's the reason why we're announcing the Zoom marketplace, right? Give a customer a very flexible API. Customer even -- they do not know that it belong to a Zoom call. They feel like they are going to stay within the work day, the user interface or ServiceNow user interface. I think that's the direction.

Zane Chrane

Sounds great. Well, thanks a lot and congratulations on a great quarter.

Tom McCallum

Thank you, Zane.

Kelly Steckelberg

Thanks, Zane.

Tom McCallum

Matt, next question, please.

Operator

Our next question is from Ryan Koontz from Rosenblatt. Ryan, you are unmuted.

Ryan Koontz

Great. Thanks, guys. Congrats on a great quarter. Given your early success in the enterprise space, why don't you give us some color on the market verticals you're seeing the lowest hanging fruit for competitive displacements out there?

Eric Yuan

Yes. So, when we started, we were focusing on high-tech market and later on we expanded into the high-end, as well as healthcare market. Over the past two to three years, we also doubled on financial sectors, and we’re going to focus on public sector as well. Over the past two quarters, we do see a very good momentum in our financial sectors. I think we are going to see more and more big enterprise customers from financial sector.

Ryan Koontz

Helpful. Thank you.

Tom McCallum

Great.

Eric Yuan

Thank you.

Tom McCallum

Thanks, Ryan.

Tom McCallum

Thank you. Matt, next question, please.

Operator

Next question is from Jonathan Kees from Summit Insights Group. Jonathan, you are unmuted.

Jonathan Kees

Great. I want to add my congratulations for the quarter. Great results. I want to ask a couple of topics. One, in regards to -- how I'm thinking about it, this is -- you beat your guidance, you beat estimates. When you gave guidance for this quarter you just reported, is about a month and a few days after the quarter ended. So, I guess, the way I'm thinking about is a lot of the revenue, a lot of the deals were more back-end loaded. Was there anything specific that caused that? Did you have any promotions or were there deals, like an HSBC deal that were in the previous quarter that came over into this report quarter? Just curious in terms of how that upside trended in terms of revenues and also, yes, what caused that?

Kelly Steckelberg

Yes. Hi, Jonathan. We did not see a tremendous shift in our linearity for the quarter. As we move into more and more enterprise customers, some of them do buy towards the back part of the quarter. But due to the -- we have customers of all sizes, so they tend to buy consistently -- pretty consistently throughout the period. So, I think, part of the over performance against our guidance was, again, us giving guidance that we want to ensure that we can achieve as a public company.

Jonathan Kees

Okay, great. That makes sense. And second topic, if I can here, this one is more for you, Eric. I understand that you make it a task to reach out to customers who've left and try to understand why they're left or are leaving. I think that personal touch is wonderful. Just curious if you share with us any gems, anything that you've learned in terms of why these customers have left or thinking about leaving?

Eric Yuan

Yes. So, several years ago, I did spend a lot of time talking with those customers who left, but over the past two to three years, I did not spend too much time on that, because a lot of those users will cancel their service are very low and went per users. Actually, they really do not leave the Zoom. It's like they are going to take the family vacation over the summer timeframe and they cancel the service. After the summer, they're going to risk it as well, right. So we did not see any very big large enterprise customers, that's why I spend less and less time on that. So -- and yes, so really do not focus on that anymore.

Tom McCallum

Hey, Jonathan, did you get the camera we sent you?

Q - Jonathan Kees]

Yes. Wonderful. I hope -- can you see me? Is the camera off?

Tom McCallum

No, we can't.

Jonathan Kees

Oh, no.

Tom McCallum

We will help you out in the next one. I will follow up and we will make sure it gets you on there, so …

Jonathan Kees

Oh, no. I'm using it right now. I guess, you can hear the mic?

Tom McCallum

Yes.

Kelly Steckelberg

Yes.

Jonathan Kees

Okay. Yes, I am using it right now. So sorry about that. I thought it was on camera.

Tom McCallum

No worries. I just want to make sure you got it. Thank you. Hey, Matt, how many more do we have?

Operator

We have one more question. Next question and last question is from Ryan Williams from Stephens. Ryan, you are unmuted now.

Ryan MacWilliams

Thank you.

Tom McCallum

Hi, Ryan.

Kelly Steckelberg

Hi, Ryan.

Ryan MacWilliams

So, in a recent interview, Eric, you mentioned that 95% of your engineers are working on voice video. But you noted your focus is always on what customers are asking for. Are there any current capabilities customers are asking for aside from Zoom meeting phone?

Eric Yuan

I think, first of all, we already have a roadmap, right. At the same time, we wanted to talk with the customers and make sure our roadmap fits well to customer need. Having said that, we’ve so many large enterprise customers, quite often if they tell us a feature or a solution, it's really hard for us to prioritize that. That's why every time we offer product managers, our sales engineers always try to understand what's the pain point from a customer side, quite often they have a same pain point. And because of that, I think you look at our feature set roadmap is not that very complex, right. It's kind of we understand the pain point and want to make sure our solution can fit very well to customer need. Having said that, I think we do not have the challenges to manage the feature request from a large enterprise customers. The roadmap is -- we always share the roadmap with our large enterprise customers, they all buy that.

Ryan MacWilliams

Thanks. And one last question on acquisitions. Last quarter, you mentioned that you're keeping your options open. But to this point, do you currently believe you’ve the infrastructure in place to handle a large acquisition?

Eric Yuan

I think, well, in terms of acquisition, I think, we are working very hard on day-to-day execution and huge opportunity ahead of us. And we do not see any great opportunity, right. If you know of any opportunity, please let us know. Otherwise, we are just laser focused on our execution to make sure our customer happy.

Tom McCallum

20 investment bankers are now calling you, Eric.

Kelly Steckelberg

Yes.

Eric Yuan

I do not have money. Money from Kelly's side.

Ryan MacWilliams

Thanks, guys.

Eric Yuan

Thank you.

Kelly Steckelberg

Thank you.

Tom McCallum

Congratulations on new position too. So Eric, do you have any closing remarks?

Eric Yuan

So, I think, Ittai also in the call, right?

Tom McCallum

Oh, yes. Matt, does Ittai still with us?

Operator

Let's see if we can get him back. We tried him earlier. So Ittai, you are unmuted again.

Eric Yuan

Ittai, are you on the call?

Kelly Steckelberg

Who is joining in his place?

Operator

He did have somebody joined earlier and we did confirmed with him earlier they were on the phone. I'm not sure if they're listening at the moment.

Eric Yuan

Okay.

Kelly Steckelberg

Okay. Thanks, Matt.

Tom McCallum

Thank you Matt.

Eric Yuan

Yes. Thank you all for joining us and we look forward to seeing many of you at Zoomtopia. Thank you.

Tom McCallum

Thank you.

Kelly Steckelberg

Bye, everybody.