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Zoom Video Communications Inc
Earnings Call Analysis
Q3-2024 Analysis
Zoom Video Communications Inc
In the latest earnings call, optimistic projections were introduced despite contending with macroeconomic challenges. Forecasts for the upcoming quarter entail a moderate 1% year-over-year revenue increase, with expected values ranging from $1.125 billion to $1.13 billion. This revenue projection has been slightly hiked from previous predictions made in Q2. Reflecting a similar sentiment of cautious optimism, projected non-GAAP operating income spans from $409 million to $414 million. Non-GAAP earnings per share (EPS) are anticipated to land between $1.13 and $1.15 based on around 312 million outstanding shares.
Stepping back to assess the full fiscal year, there's pleasant news for investors as both revenue and profitability trajectories have been upwardly revised. The expected annual revenue range is now set between $4.506 billion to $4.511 billion, which would represent a year-over-year growth rate of about 3%. Moreover, the non-GAAP operating income is expected to be nestled between $1.74 billion to $1.745 billion, which would command a robust operating margin of nearly 39%. The EPS forecast for the fiscal year is similarly upbeat at $4.93 to $4.95, assuming approximately 308 million shares outstanding.
The economic climate from the second to the third quarter remained relatively stable. However, foreign exchange (FX) headwinds, particularly in the Asia Pacific region, adversely influenced performance, hinting at what might have been flat or positive growth under different circumstances.
A significant stride in innovation was highlighted through the launch and adoption of the Zoom AI Companion, which does not incur extra costs for paying customers and offers notable features like accurate meeting summaries. This AI initiative is seen as a differentiator in the market, potentially driving both the conversion of free users to paying customers and increased product engagement among current customers.
The small- to medium-sized business (SMB) segment saw a slight reduction in churn rates from 3.1% to 3%. This improvement could have material benefits for growth rates and margins over the long term. The incorporation of AI capabilities is expected to further bolster user retention. Beyond churn, the overall platform has seen substantial enhancements when compared to its pre-pandemic state, suggesting that retention rates could see continued improvement.
Zoom is graduating from being solely a video conferencing solution to offering a broader platform with various features, including but not limited to Zoom Team chats. This expansion offers value for both free and paid users, thereby strengthening Zoom's position as a comprehensive communication solution.
The enterprise expansion metric, which is a trailing 12-month metric, has decelerated along with the company's growth rates. However, enthusiasm remains as initiatives such as AI Companion and other products like Zoom Phone and Zoom Contact Center continue to develop. These initiatives are predicted to play a vital role in reversing the trend and stimulating growth rate reacceleration.
Customers appear to be strategically navigating the interest rate environment by preferring shorter-term payment increments despite committing to long-term agreements. This shift is indicated by the growing Remaining Performance Obligations (RPO) contrasted against diminished deferred revenue. With an anticipated big renewal cycle in Q1 and most customers having already endured some renewal period during the current fiscal year, it is suggested a significant fraction of the customer base has already adjusted to economic impacts and reduced spending where necessary.
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Well, hello, everyone, and welcome to Zoom's Q3 FY '24 Earnings Release Webinar. As a reminder, today's webinar is being recorded. And now I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.
Thank you, Kelcey. Hello, everyone, and welcome to Zoom's earnings video webinar for the third quarter of fiscal year 2024. I'm joined today by 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.us. 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 fourth quarter and full fiscal year 2024. Our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategy and business aspirations, and product initiatives and the expected benefits of such initiatives.
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 in financial results, which we discussed in detail on our filings with the SEC, including the 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.
And with that, let me turn the discussion over to Eric.
Thank you, Tom. Thank you, everyone, for joining us today. In early October, we hosted Zoomtopia, our yearly customer and innovation-focused event and it was awesome. Like last year, we ran it hybrid on Zoom Events. Thousands joined us in-person and many multiples of that virtually.
Among the in-person attendees were 40 customer presenters such as JPMorgan, MIT, Boston Consulting Group, HubSpot, and Kohl's, who spoke about their amazing experiences on Zoom and excitement about the future.
We also showcased newly-released innovations like Zoom AI Companion, as well as Zoom AI Expert Assist and a Quality Management for the Contact Center. Zoom AI Companion is especially noteworthy for being included at no additional cost to our paid plans, and has fared tremendously well with over 220,000 accounts enabling it and a 2.8 million meeting summaries created as of today. Remarkable growth in less than three months.
At Zoomtopia, I also had the pleasure of sharing the stage with Flex, a global manufacturing and supply chain leader, who spoke about how they use Zoom to connect their large, distributed workforce of 170,000 employees across 30 countries. Flex started using Zoom Meetings in 2017, quickly followed by Zoom Rooms and Zoom Team Chat. Since then, Flex increased Team Chat users by 200%, and Zoom Rooms by 245%. They also became power users of Zoom Whiteboard, creating over 13,000 Whiteboards. And moving to Zoom Phone allowed them to eliminate 50% to 70% of circuits and infrastructure across the globe, and reduce total cost of ownership. We were so happy to have Flex share their journey at Zoomtopia, and cannot wait for what is in store for our partnership next.
Now moving on to some of our customer wins in Q3. First, let me thank Dropbox, who has been an amazing customer for many years starting with Meetings and then extending to Zoom Rooms, Phone and Events. In Q3 they selected Zoom Virtual Agent and Zoom Contact Center to provide world-class AI-enabled support to their global user base.
Let me also thank Amynta Group, a premier insurance services company, who initially adopted Zoom Phone and Zoom Contact Center on a limited scale in Q1 of this year. Seeing how our modern solution offered superior agility, customization for CX flows, and administrative functionality, in Q3 they decided to standardize their customer-facing sales support on the Zoom stack and add Workforce Management, leading to a nearly 5x increase in their monthly spend with us.
I'd also like to congratulate the Virgin Group on their launch of Workvivo to bring together 60,000 employees across almost 40 Virgin companies on one platform. The Virgin Family Workvivo platform is helping to drive social connection encourage collaboration and boost brand knowledge. It’s inspiring to see how the Virgin Group is bringing the platform to life and strengthening culture with Zoom's Workvivo.
These wins are a testament to the investments we are making in our customer experience offering, with the rapid pace of new innovations like Workforce Management, Quality Management, Zoom Virtual Agent and AI Expert Assist. They also highlight our progress with employee experience, especially with integrating Workvivo into the Zoom client. Thanks to so much to Dropbox, Amynta, and Virgin Group. I love you all.
And with that I'll pass it over to Kelly.
Thank you, Eric, and hello, everyone. We're pleased that we beat our top line and profitability guidance in Q3. Here are a few milestones.
First, Zoom Phone reached approximately 7 million paid seats. Second, Zoom Contact Center reached approximately 700 customers as of quarter end, while Zoom Virtual Agent customers nearly doubled quarter-over-quarter. And finally, the number of customers on Zoom One bundles that include Zoom Phone grew approximately 330% year-over-year. These proof points demonstrate our customers' willingness to entrust us with their critical CX and EX processes and their commitment to grow with us as we expand our platform.
In Q3, total revenue came in at $1.137 billion, up 3% year-over-year and 4% in constant currency. This result was approximately $17 million above the high end of our guidance. Our Enterprise business grew 8% year-over-year and represented 58% of total revenue, up from 56% a year ago. We continue to see improvement in online average monthly churn, which decreased to 3.0% from 3.1% in Q3 of FY '23. This is the lowest churn rate we have ever reported.
The number of Enterprise customers grew 5% year-over-year to approximately 219,700. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q3 came in at 105%. We saw a 14% year-over-year growth in the upmarket as we ended the quarter with 3,731 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 27% in Q3 of FY '23. Our Americas revenue grew 5% year-over-year, while EMEA and APAC declined by 2% each. On a constant currency basis, APAC grew slightly year-over-year.
Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains or losses on strategic investments and all associated tax effects. Non-GAAP gross margin in Q3 was 79.7%, an improvement from 79.5% in Q3 of last year, but slightly lower than the first half of this year. The strong performance in gross margin was primarily driven by the optimization of usage across the public cloud and our co-located data centers, partially offset by our additional investments in new AI technologies. For the full year, we expect non-GAAP gross margin to be approximately 80%.
Non-GAAP operating income grew by 17% to $447 million, exceeding the high end of our guidance of $405 million. This translates to a 39.3% non-GAAP operating margin, a meaningful improvement from 34.6% in Q3 of last year.
Non-GAAP diluted earnings per share in Q3 was $1.29 on approximately 310 million non-GAAP diluted weighted average shares outstanding. This result was $0.20 above the high end of our guidance and $0.22 higher than Q3 of last year.
Turning to balance sheet. Deferred revenue at the end of the period was $1.32 billion, down approximately 3% from Q3 of last year. This was roughly 1 percentage point better than the high end of our guidance we provided last quarter. For Q4, we expect deferred revenue to be down 6% to 8% year-over-year, partially driven by shorter billing frequencies on Enterprise deals arising from the high interest rate environment.
Looking at both our billed and unbilled contracts, our RPO increased 10% year-over-year to approximately $3.6 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months as compared to 59% in Q3 of last year, indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year.
Operating cash flow in the quarter grew 67% year-over-year to $493 million. Free cash flow grew 66% year-over-year to $453 million. The sharp increase of cash flow metrics was due to stronger collections, targeted expense management, and higher interest income. Our operating cash flow and free cash flow margins expanded to 43.4% and 39.9%, respectively.
We ended the quarter with approximately $6.5 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Given the strength in profitability and collections, we are increasing our free cash flow outlook for FY '24. We now expect free cash flow to be in the range of $1.34 billion to $1.35 billion, which at the midpoint would represent 13% year-over-year growth.
Turning to guidance. For Q4, we expect revenue to be in the range of $1.125 billion to $1.13 billion, which at the midpoint would represent approximately 1% year-over-year growth. Adjusting for currency impact, this projection is slightly higher than the previously implied guidance from our Q2 call. We expect non-GAAP operating income to be in the range of $409 million to $414 million. Our outlook for non-GAAP earnings per share is $1.13 to $1.15 based on approximately 312 million shares outstanding.
We are also pleased to raise our top line and profitability outlook for the full year of FY '24. We now expect revenue to be in the range of $4.506 billion to $4.511 billion which at the midpoint represents approximately 3% year-over-year growth.
We expect our non-GAAP operating income to be in the range of $1.74 billion to $1.745 billion, representing an operating margin of approximately 39%. Our outlook for non-GAAP earnings per share for FY '24 is $4.93 to $4.95 based on approximately 308 million shares outstanding.
Thank you to the entire Zoom team, our customers, our community and our investors for your trust and support. Kelcey, please queue up the first question.
Thank you, Kelly. And as Kelly mentioned, we will now move into the Q&A session. [Operator Instructions]. Our first question will come from Ryan MacWilliams with Barclays.
Just to start with Kelly, do you have any changes in the overall macro environment in the third quarter compared to the second quarter? And could you touch on how linearity did throughout the quarter for new bookings?
Yes. Ryan, so the macro has been pretty consistent from Q2 to Q3. We continue to see similar trends in terms of deal scrutiny, back-end loaded. So the quarter from a direct perspective was fairly back-end loaded. As a reminder, the online segment of the business is typically pretty linear throughout the quarter.
I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac that had -- that was a fairly significant headwind for us, whereas Asia Pac would have at least been flat year-over-year, if not for that impact.
Moving on to Meta Marshall with Morgan Stanley.
Maybe just a question on kind of what feedback you're getting on the AI Companion. And that's a pretty big jump in kind of customers using it. So just what features are they really liking, and is it kind of helping with some of the free-to-pay conversion that you guys were hoping for?
Yes, it's a great question. I think we are very, very proud of our team's progress since it launched the Zoom AI Companion, as I mentioned earlier, right, a lot of accounts enabled that. Remember, this is no additional cost to [ outpay ] the customer. A lot of features. One feature of that is like take a meeting summary, for example. Amazingly, it's very accurate and it really save the meeting host a lot of time. And also, our federated AI approach really contributed to that success because we do not count on a single AI model, and in terms of latency, accuracy, and also the response, the speed and so on and so forth, I think, it really helped our AI Companion.
Again, and for the online producers and also it's no additional cost. For sure, for free users, they do not -- they cannot enjoy this AI Companion, for sure, it's a [ data health ] for those who free to approve for online upgrade. So anyway, so we keep innovating on AI Companion. We have high confidence. That's a true differentiation compared to any other AI features, functionalities offered by some of our competitors.
Our next question on Kasthuri Rangan with Goldman Sachs.
Thank you very much. Happy to see the results, and Happy Thanksgiving. I just had one question, if I could restrict myself to one. The SMB online churn 3%, I know it came down from 3.1%. Any initiatives that you are undertaking that could bring that number even down more significantly because I would assume that, that would have big implications for your growth rate and margins, which are already quite good.
Well, Wendy and her team are always working on initiatives. But I think what Eric was just mentioning about AI is probably really going to be a key differentiator and a retention -- retention tool in the future, because as a reminder, all of the AI Companion features come included for our free -- sorry, for our paid users. So we're seeing it not only help with conversion, but we really believe that for the long term, it will help with retention as well.
And gosh, I've gotten this question many times, and I would say like, this is the lowest we've ever seen, but also our platform is so much better. It's infinitely better than where it was on a pre-pandemic basis for our online users. And so I think we will -- this is how we're modeling it at this level. But I think over time, you should continue to see retention just continue to improve.
But let me add on the [ world ] side, also with the happy side coming to you as well. So more and more customers realize, wow, Zoom Events for online users, it's not only for Zoom Meeting. A lot of other features, right? And like take a Zoom Team Chat for example, this is a great position which had a solution. It's part of offering, even for free users as well, right? For the paid user for sure, a lot of other features, the more they spend time on Zoom platform, really as well. This is pretty powerful, not only just for meetings but the entire platform.
Wells Fargo, Michael Turrin. Please go ahead with your question.
I guess as a complement to Kash's question, you're showing stabilization here on some of the major metrics, the Enterprise expansion metric took a step down to 105%. And so just wondering what it takes for that metric to similarly show stabilization as given like in Q1 renewal cohort and kind of walking through that. Anything on the product side for us to consider or just any other commentary there is helpful.
Well, as a reminder, it's a trailing 12-month metric. So as we've worsely seen our growth rates come down this year that's following behind it. But absolutely, we believe that AI Companion in general as well as the success that we are seeing in Zoom Phone, in Zoom Contact Center, Zoom Virtual Agent, all of those will be key contributors to seeing that metric start to reaccelerate again as we see our growth rate starting to reaccelerate as well.
Our next question will come from Michael Funk with Bank of America.
So just on the deferred revenue guidance for 4Q, Kelly, in the commentary on the macro and the rates affecting that. How should we think about growth rate in calendar year '24 given the decline in deferred revenue and impact on new deals in Enterprise?
Yes. So I mean what's very interesting, if you look at, right, you see growth in RPO, but you're seeing a decline in deferred revenue, which implies customers while they're committing for long-term agreements, they are preferring to pay in shorter-term increments to keep their cash and take advantage of the interest rate environment.
So the other thing, as a reminder, right, we're going to have a big renewal cycle in Q1, and then that's the peak and it's going to come down. And we believe that in FY '24 that we're currently in, we had -- the majority of our customers had some sort of renewal period during FY '24, which means that we believe that we've moved through a lot of our customers that were impacted themselves by a reduction. And we've talked in the past about our team has been doing a great job of preserving that spend.
But to the extent we're helping them rightsize or transition from Zoom Meetings to say, a Zoom One bundle. We think the majority of customers, we know the majority of our customers have gone through that renewal period in FY '24. So that by the time we get into FY '25, hopefully, we're in a little more normalized renewal cycle.
And moving on to Karl Keirstead with UBS.
Okay. Great. Thank you. Kelly, the Phone business has been a big part of the Zoom growth algorithm lately. So I'm wondering if you could elaborate on how that part of the business did in the quarter. On the surface, and I know that you round that seat number, but it looks like the sequential phone seat adds might have been a lot less than the last several quarters. Maybe that's rounding, but I wanted to give you a platform maybe to elaborate about that part of the business.
So Q3 cyclically, just as a reminder, Q1 and Q3 cyclically are our lower orders, given that our Enterprise reps -- some of our enterprise reps are on 6 month quotas. So we've historically seen the big Zoom Phone, just add quarters be in Q2 and Q4. What we did see in Q3 was that customers in the upper segments. So customers with greater 10,000 seats grew 9% quarter-over-quarter. So we're seeing a lot of strength in the upper end of Zoom Phone. So really happy to that. I mean that's the largest increase we've had so far this year.
And then as a reminder, we haven't always given that metric, honestly at the exact same period. So it's a little bit hard for you to tell exactly how it's trending every single quarter. And as just in the past, we'll continue to update you on future milestones as they make sense.
George Iwanyc with Oppenheimer has the next question.
So Kelly, maybe following up on Zoom Phone, can you give us a bit of extra color on the contact center and the customer traction you're seeing there?
Yes. So as we mentioned, we're up to over 700 customers on Zoom Contact Center, and we saw our Zoom Virtual Agents product double the number of customers quarter-over-quarter. So really excited there. I mean, maybe Eric can talk about some of the features and functionality, but we're thrilled with the progress that we're making there so far.
Yes. So we are extremely excited about our Contact Center opportunity. And it feels like back to a few years ago, when we announced the Zoom Phone, right? Quite often, a lot of people mentioned, wow, it would take you guys many years to get recognized, deployed by large customers and look at what we have today in terms of number of [indiscernible] for phone I feel like if we ask it well, I think we are going to follow the similar journey and maybe even better because if you look at our Contact Center and modern architecture, extremely stable and plus a lot of AI features and innovation speed.
I think whenever a customer really take a Zoom Contact Center seriously, he value the Zoom Contact Center. The feedback is very consistent. Wow, I did not realize you guys have a so powerful Contact Center, it's just amazing, right? I think that there's further boosted our team's confidence, let's it double down, triple down our own Contact Center.
Again, it's modern architecture, very scalable. I also shared quite a few customer cases, right, during this call, and we are very, very excited. A lot of new AI features in Virtual Agent and Workforce Management and so on and so forth. And this is something we are very, very excited.
We'll know hear from Peter Levine with Evercore.
Maybe for Kelly, as I look at gross margins, how sustainable is it keeping at these levels? I know AI Companion is being given away from as part of the package, I guess, prepaid users. But if you think about the cost to run these models, the margin profile of Contact Center and Phone. How durable is it to kind of sustain these levels?
And then second, as you think into next year, you have guided, but what's the best way to think about stock-based comp and dilution as you kind of manage through that?
Yes. So in terms of our gross margins, we'll obviously give FY '25 guidance on our call next quarter. But as we are working on our planning, our DevOps team is doing an amazing job of continuing to optimize around the data centers and being very thoughtful about leveraging capacity to its highest and best use and making room for all of this AI innovation. So while we are going to invest, and we're actually -- we're going to invest to the extent that XD and the team really believe that we need to and that for the long term, it's an amazing ROI when you look at what it's going to do for our customers, for our growth and for our retention.
But we do expect there's going to be some impact on gross margins. I mean we -- I don't think it's going to be significant because the team will continue to operate in the very efficient manner that they do and run our co-los that way, but we do expect there's going to be some impact to our gross margin as we move forward.
Do you want to add anything, Eric?
Yes. So you are right on. Just to echo on what Kelly side, led by our CTO, XD and his team our federated AI approach, as I mentioned earlier, really contribute a lot. So for sure, and there's a cost impact, but extremely manageable, right? And our team is really, really, I think I had a very smart federated AI architecture. That's why I think in terms of cost, very manageable, but also the quality is pretty good. So and we are keep innovating on that.
Thanks, Eric. Peter, regarding stock-based comp, about 1/3 of our expense this year is related to the supplemental grants. So as a reminder, those that vest along with how the underlying grants are vesting. So there's a couple more years for that to just start to bleed off, if you will. If you're going to model that out.
And we will now hear from Patrick Walravens with JMP Securities.
Great. So Eric, what is your ideal customer profile on the Contact Center side of the business?
That's great question. I think first of all, again, this is based on architecture and AI features. I think for now the medium-size because the reason why for very, very large customers, even if our architecture, everything, ever ready, but sometimes they just want to look at, hey, you are still too early, but even up for fully ready. That's the reason why sometimes even we do not reach out to them. It's very large, let's say tens of thousands agents and customers. if they take our solutions seriously...
Oops, did Eric freeze or did I freeze.
I think Eric is...
I don't know if that was me.
Okay. Let me...
Sorry for that.
You're back, okay. We lost you for a minute there.
I'm sorry. And so given the new solution while it's sort of a modern architecture and all the new AI features, my point it is, if those, let's say, like 20,000, 10,000 agent and customers, if they look at our solutions seriously, they have confidence. Because of that, we want to be a little bit of proactive, focus on medium-sized companies, like from a hundreds of agent. [indiscernible] That's our obviously a sweet spot.
But do know me, I'm going to stop here, as I mentioned earlier, like any event, very big large companies, when you look at our Contact Center solution seriously, we have a confidence we're going to win. But however, to get there, we're focused on the medium-sized companies.
I could give you a quick example, Patrick. We have a customer called Vensure, which -- they provides like payroll and HR services. And they became in the last year, they doubled their Zoom Phone seats. They've doubled their Contact Center our seats, and they're 4 digits now. They also have deployed Workforce Management as well as quality management and Zoom VA. So really taking advantage of the whole suite of Zoom products, not only the Contact Center and its extensions, but the full suite of Zoom. And I think when they start to deploy like that, they really see the power, and it's been very exciting to see them grow.
Our next question comes from Arjun Bhatia with William Blair.
Can you just touch on the international business a little bit? It seems like it's certainly trailing the U.S. But what gets that business to turn around? And maybe talk about some of your new growth drivers, how they're faring there with Zoom Phone and Contact Center?
Yes. So Unfortunately, both EMEA and APAC over the last year have been impacted both by currency and then EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New Zealand. So we're very excited about the team. And since we did the reorganization earlier this year, those regions have just taken a little bit longer than the U.S. but we're starting to see that momentum build again and really excited about what they're going to contribute and watching their success in the future.
Our next question will come from Alex Zukin with Wolfe Research. His video is not answering, it may just be audio only.
This is Ethan Brock on for Alex. He's in [ train ] right now. I just had two quick questions. Just how do we think at what level should we expect or when for the NRR of the Enterprise cohort to trough? Just any kind of puts and takes around Enterprise revenue in the quarter, right, in and above your expectations, it grew sequentially. And it was also -- it was probably like RPO, cRPO. cRPO bookings has all accelerated. I guess, is it fair to think that for next year's enterprise growth rate would be above what's implied in the 4Q guide? And just if you can give any more kind of color around the 4Q numbers and kind of what you're expecting in the Online churn, that would be helpful.
Yes. So we did see strength in the direct bookings, they were very back-end loaded in Q3, which just continues this theme that we've been talking about in terms of the overall macro. And as we look forward to Q4, we have, typically we have the benefit of having year-end where customers are having their year-end on 12/31 and then we have our year-end on January 31. And of course, we have our 6-month quota-carrying reps that are coming to the end of their quota cycle. So hopefully taking advantage of their accelerators. But we are expecting similar behavior in terms of even if we have a 12/31 sort of bump expecting that to be back-end loaded and then January 31 one as well.
In terms of your question around net dollar expansion, we're not going to give -- I mean, we don't guide on that. I expect that given your growth rates have come down a little bit more that there might be a little bit more room for that to come down even further until it starts to stabilize and probably reaccelerate sometime next year.
Okay. And then just a quick follow-up. Just on the comment you made in your prepared remarks around the shorter billings duration. I guess, is there just any way to qualitatively think relative to 3Q, if there's any change, just how to think about obviously, people moving to a more different -- shorter payment terms. So just how we think about that in terms of what's implied in the 4Q guide?
Yes. We -- so we commented first time, we saw and seeing this trend was in Q2. If you remember, we also talked about this in our prepared remarks, we saw this happening. And given the interests are high, I don't expect it's going to change any time soon. I think -- the good news is from the health of the underlying business, right, customers are committing to longer-term duration contracts, they just are preferring to pay on shorter term. And yet, we obviously had very strong cash flow in the period. So I don't think it's something you should be worried about.
And our next question is going to come from Mark Murphy at JPMorgan. Mark will be audio only.
This is Ardie on for Mark Murphy. Congrats on the quarter. You guys called out the Virgin Group and their launch of Workvivo across 60,000 employees and a number of the workforce-related innovations you've launched recently. Can you just speak to the adoption of those products and what kind of momentum you're seeing on that front?
Yes, do you want to that?
Yes, Kelly, go ahead.
I mean we're really excited about Workvivo. They -- first of all, in terms of operating, they're continuing to run as an operating unit, which -- we're making sure that we support them and their continued momentum, and we've already talked about -- we talked about Dollar General on the call last quarter and their amazing adoption.
So we're really excited about that team. They -- when they joined us, we said, welcome to the family and gave them an accelerated bookings target, and they are running and achieving against that. So really thrilled to have them and watching that continue to succeed.
Our next question is going to come from Catharine Trebnick with Rosenblatt.
Has your appetite for M&A changed at all in the last year? All day long on CNBC they kept saying, oh, we're looking for growth, reacceleration of growth. So I'm just wondering if you're looking at the $6.5 billion, and your attitude towards M&A?
Yes. Thank you, Catharine. M&A is something that we evaluate and think about for as a potential strategy all the time. I have a corp dev team that looks at opportunities on a daily basis. And we have a very strong lens that we look through in terms of evaluating that is, first of all, the technology and what does it bring to our customers.
We would always want to make sure that our customers continue to enjoy a really high-quality product like they do with Zoom today. We look at the culture to make sure that it's something that we think work well with Zoom. It's usually a really good indicator success of integrating two companies.
And then, of course, we look at the lens of valuation and does it make sense? Is it a price that we are willing to pay. And because we have such a high bar, it honestly has been hard to find companies that we love that makes it through all three of those tests. And it doesn't mean that we wouldn't love to find someone that did. There are some really great companies out there.
And for one reason or the other to date, we just haven't found the right match, but it doesn't mean that we won't. And that is why we have purposely remained, retained, I should say, the flexibility of having that cash on our balance sheet so that if we do see something interesting, we're able to act on it.
Moving on to KeyBanc's Tom Blakey.
Good to see you, Eric, and hi, Kelly. Just wondering quickly on the stability that we were talking about a couple of quarters ago in Online. It's a pretty impressive that we went back and forth on that a little bit here and that's been very stable. I mean obviously you talked about the record churn. Can you just maybe -- maybe update us that on that in terms of should we expect the same type of stability in Online into the fiscal 4Q and maybe even similarly into fiscal '25, that would be helpful.
Yes. So the team has done a lot of work this year to -- on many fronts around Online. First of all, stabilizing retention, which you're seeing us the benefits of that today as well as focusing on free-to-pay conversion because it's really important that we're continuing to fill the top of the funnel, and those are things like force brakes.
And as Eric mentioned earlier, also being able to procure additional products online, things like whiteboard and scheduler are very well aligned to the strategy of our online buyers. So those are all of the initiatives that Wendy and her team are continuing to focus on.
In terms -- I mean, we hold ourselves to a very high standard. We see stabilization. What we really want to see is dollar stabilization quarter-over-quarter. And while it's very, very close, it's not quite there. And I expect it will be slightly down, just very, very slightly down again in Q4. But as we're working on FY '25 planning with the team, really looking forward to initiatives that drive stabilization, and if not, some growth into FY '25.
The next question is from Shebly Seyrafi with FBN Securities.
Yes. You guided deferred revenue to decline 6% to 8% in Q4. Do you shorter billing frequencies with Enterprise customers. The question I have is what kind of decline would that have been without that billing frequency change?
And related to this, you're going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up meaningfully in Q1?
Yes. So as a reminder, the way the deferred revenue trends throughout the year is it's always the highest in Q1 and then it declines throughout the year. And there's two things that are happening. First of all, Q1 is the largest renewal period. So if the bucket gets filled up, and then that's getting amortized through the rest of the year. But also the subsequent renewal cycles are lower than Q1.
So it's the inverse of probably every other SaaS company in the world where usually you're adding higher renewals every single quarter, we are actually adding a lower number -- a lower dollar amount of renewals every single quarter.
So as Q1 is getting amortized down, what's coming into refill at the top of that bucket is coming down every single quarter. And that's why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter-over-quarter.
We'll now hear from James Fish with Piper Sandler.
Appreciate all the details around some of the product lines. But building off of a few prior questions with that Contact Center, customer count up is about 700 versus the 500 last quarter. If my math is right, given kind of what you guys have talked about with price points kind of seems like we're nearing $100 million of ARR now? Or how should we think about that average seat count at this point?
And then, Eric, for you, look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of penetration with the Contact Center installed bases, is that acting as sort of a consolidation function underneath for especially small mid-market.
I think if you look at the Contact Center, right? So not only just for us to offer the whole Contact Center of capabilities, we want to offer a full platform, right, including Workforce Management, right? This is the -- based on modern architecture, not something like, hey, you have on-premise solution for a long time, you just put it into the -- in the cloud, that's not the case. We built everything from the ground up. It's tied and integrated well with our core Contact Center solutions.
That's the reason why when you look at our customers right from SMB, medium-sized, all the way to large enterprise, I think we are ready. And however, as I mentioned earlier, sweet spotters should be the major. However, one thing is realized, customer, do you want to have a one seamless experience in for everything, Contact Center, Workforce Management, Virtual Agent, AI feature called, [ indie ] so we are trying to offer all of them.
So that's kind of our strategy. In terms of our Workforce Management contribution, it really helped because we tell customer, hey, we offer everything to you. We are not going to let you deploy other third-party Workforce Management solutions. We offer all the services, all the functional to you with one platform.
Yes. And James, in terms of your ability to kind of understand how those products are progressing themselves, we'll do as we done with others and announced milestone metrics as we start to see them emerge. They're just so new right now that doesn't really sense, but we will do that over time.
We are not ready to share with a number, exact number yet about how many customers deploy the Workforce Management, so let's stay tuned in the future quarters.
And our next question will come from Matt VanVliet fleet with BTIG.
Yes. I guess following up one more on sort of the Contact Center and Zoom Phone. In terms of overall customer mix, you're well below 1% penetration on customer -- on Contact Center here. Is there a target that you think is sort of the next few years of the customers you're going to go after? How high do you think of roughly 200,000 customers? You have an existing Contact Center that you've maybe identified and comparably work your way into.
And then sort of following up on that, what percentage, if you can share the over 100,000 customers, 100,000 revenue customers have Zoom Phone or Zoom Contact Center as an attachment there.
So I guess the way that I think about Contact Center and its progress is that it's so far is very, pulling in a very similar road map, if you will, than that Zoom Phone did. So if you think about -- we can see the visibility internally just as we could with Zoom Phone.
But in terms of ARR as a metric for example, it's going to take a little while for that to be something that's visible to you. But so far, it's tracking in a very, very similar way that Zoom Phone did, which I think is very encouraging. And that we need a couple more years and then it starts to be a really significant growth contributor. It just start small and then grow quickly, and that's what we're seeing.
And also, if you look at opportunity, very similar as well. Many years ago, a lot of our Enterprise customers, their phone, you see deployments still on plan. Today, you look at most of our Enterprise customer, Contact Center still on track. So that's why a lot of opportunity ahead of us, in particular, given out modern architecture is very scalable.
Needham's Ryan Koontz has the next question.
Happy Thanksgiving. From Zoomtopia, yes, team we're really impressed with the Zoom Rooms and what you're doing there. The innovation really seems years ahead of the market. And I wondered how you -- what's your updated view on the Rooms opportunity for the company. Do you think it's strong enough that you can use that as a lead as almost a stand-alone product? And you see the market opportunity more promising for you with that product. You have to go-to market initiatives, those sort of questions.
So, yes, Ryan. So speaking of the opportunity, you're also right. We never, in our customer, in on for many years, right, they deployed the Zoom Rooms for more and more customers. I mean they try to embrace hybrid work. They need to have a modern solution for their conf-rooms, they evaluated multiple solutions, Zoom Rooms indeed stands out is indeed years ahead of any other competitors.
However, sometimes for customers when they try to support a hybrid work right now, they're in the middle of embracing hybrid work, right? What's the new layout of the entire workplace and how many conf-room they needed to support and so on and so forth, right? That's why a lot of opportunities.
At the same time, [indiscernible] when they work together with customers and not only for conf-room innovation, but also entire workplace, the management, what's the new layout that one is supposed. I think a lot of opportunity, not only for conf-room itself, like how to reserve a desk, right?
All those things we all build in as a part of the Zoom Rooms, like for example, like a digital signage and also part of Zoom Rooms as the full -- the conf-room or workplace solution, and that's why we needed to make sure a focus on marketing side to share with the customer. Again, Zoom Rooms is not only just for your conf-room solution, but it's for hybrid work and also for entire workplace as well.
We'll move on to Peter Weed with Bernstein.
Thank you. I think for the first time, at least as far as I can look at in the model, it looks like the kind of larger enterprise that's greater than $100,000 enterprise customers were roughly flat quarter-over-quarter. But we're hearing the great stories about customer expansions and the number of those customers has continued to increase, which would imply there's a whole another set of customers that are either shrinking or churning and it appears that got more pronounced this quarter than perhaps we've seen recently.
How should we think about those effects? And is that more churn? Or is it downgrades? And when customers are churning or downgrading, where they're going? And is this something that is kind of temporary and you see it kind of ending? Or is it something where we may have some pain for a bit of time before we get through some effects?
Yes. So I think we've talked about this the last couple of quarters. We certainly have seen impact in our customers having retraction in their own businesses, in their own employee count. So we -- if that's the situation that we are working with them, we -- so the good news is we've not seen a lot of logo churn. It has been more down selling in terms of rightsizing, their meeting license numbers. And yet even in that situation, our team is doing a great job of taking the opportunity to transition them from potentially meetings to one of our Zoom One bundles that include Zoom Phone.
We talked about in our prepared remarks, we saw that grow over 300% year-over-year in terms of the number of customers that are using those bundles, and that's great for many reasons, right, in terms of retention and having more than one product deployed, we see as very advantageous to customer retention.
So we certainly have worked with many, many, many of our customers this year on ensuring that they have the right package in place. And -- but I also talked about earlier, this earlier on the call, that we know that the majority of our customers have had some sort of renewal period in FY '24, meaning that we hope, we anticipate that as we've got and get through the end of this year, we've moved through most of those transitions where organizations have done their own reductions and are aligning their licenses to that.
But it sounds like you're not seeing an uptick in churn. This is mostly just that kind of reduction in force. And once we're through that, then you set a [ 4 ] in so that the expansions can kind of work going forward on all the great things people are buying, which even us at Bernstein, we're great customers and love the product.
So yes, I mean that's, we're not giving FY '25 guidance, just to be clear. But yes, but that's in general what we anticipate, just knowing that we've worked through most of our customer renewals this year, and I assume that they've gotten through their reductions. Now it depends on what happens overall with the macro, but that's what we believe to be the case.
Our next question will come from Taz Koujalgi with Wedbush.
Sorry, can you guys hear me now?
Yes.
A question on Zoom Phone. So Kelly, can you give us the ARR last quarter, we have the Zoom Phone seat this quarter. Further, if I do a rough math on the ASP, it comes down to like $7 to $8 something per month, which seems like almost half or even more of the list price. If you can just confirm that and has that discounting gone down, gone up?
So as a reminder, you can buy Zoom Phone either for $10 per license per month if you have metered calling on top or $15 if you get unlimited long distance. So the ASP is going to depend on which version of that, which of the SKU the customers are buying and how they come together.
And then if you think about some of our largest enterprise customers, we do discount not just for obviously, for Zoom Phone, but the overall value of their purchases or their value of being a customer for longevity in terms of length of cycles, willingness to pay upfront. So all of those things contribute, but it sounds like you're right in. You're right in sort of the ballpark. We have not seen a dramatic shift in those discounts up or down.
And just one follow-up. Is that similar to what you're seeing in the Contact Center or since your I think the list price was 70 for Contact Center. Any comment on how the discounting in contact center compares to what you've seen in Zoom Phone?
Yes. No. I don't think if you can correlate them. They're very different products with a different sales cycle and their approach. So I don't think you can try to take a percentage discount necessarily from one product and expect it to apply to a different one.
We will now hear from Tyler Radke with Citi.
So Kelly, if I look at the midpoint of your guidance for Q4, it's about 1% growth in then there is some currency in there. But how should we be thinking about that as a jumping off point for fiscal year '25? What are kind of the puts and takes that would cause growth to be higher than that, and also lower. It does sound like you're starting to see some stabilizations in parts of the business. But just help us frame for how we should be thinking about that trajectory beyond Q4.
Yes. So we will obviously give FY '25 guidance on the Q4 call. However, I do think that the Q4 implied extra rate and considerations around the macro? And if it is stabilizing or improving over time are important considerations. We do see -- we've talked about many great aspects of our business today, growth in Phone, growth in Contact Center, stabilization and all Online, all could be contributors that could drive growth in FY '25 to be slightly higher than the implied Q4 exit rate. But right now, I mean, if you look at the extra rate consider the macro and take all that into account as you're modeling.
We'll move on to William Power with Baird.
Great. Maybe a couple of quick follow-ups. I guess, Eric, to an earlier question on AI Companion, can you just talk about where you're seeing the greatest usage. I mean what are customers most focused on? And what's the early feedback look like? And what are customers asking for in AI? Where can you continue to add more value there?
Yes, it's a great question. First of all, AI Companion it includes a lot of features. Like if you are related to the call, you want to instead of what's going on, what kind of the point I missed, and so you can quickly ask, right, all those kind of features. And also when you use our team chat, you can have a composer chat solution and a lot of features built upon that, right?
And one of the key features customer really like is very for sure stepping forward is the meeting summary, right? And after meeting over, not only to be generated. Sometimes, your record a meeting or sometime you do not record a meeting anymore. You just record a summary. And that feature works extremely well. We do see among a lot of other features, customers already started in a blink. I think this went probably one of the highlights. It is very easy to use and you see the very obvious in our way right to enable that feature.
So again, it's a lot of other features as well. And like for me, I also use our -- the client, [indiscernible] client, connect and other services you can, right? You can have you compose e-mail as well, right? It's a lot of features, right? And down the road awareness for the Whiteboard with AI Companion as well. Almost every service entire platform, we're going to lever the AI Companion. So and a lot of features and the AI Companion.
Make sure you enable meeting summary and explore so many features, I'm pretty sure you'll love that. So we've got a lot of very positive feedback from those early adopter.
And our last question is going to come from Stephen Bersey with HSBC. Stephen, if you want to go ahead -- I believe, Stephen, just disconnected. Stephen, are you still out there? If you are not, I don't think he's no longer with us.
So you know what, Eric, I'll just turn out to you for closing remarks.
Yes. So first of all, thank you all for your time to join our Q3 earnings call, I really appreciate. I wish you all and your families have a wonderful holiday season. Thank you again for your great support. Thank you.
Thank you so much, Eric. I apologize, Kelly. Again, everyone, this concludes today's earnings release. As Eric and Kelly mentioned, we thank you all for your participation. And from our family to yours. May you and yours have a safe and happy holiday season. Enjoy the rest of your day.