Zoom Video Communications Inc

NASDAQ:ZM

Earnings Call Analysis

Zoom's Q3 Performance Shows Growth and Strong Guidance Ahead

Zoom reported a 4% year-over-year revenue growth in Q3, totaling $1.178 billion, surpassing guidance. Enterprise revenue rose 6%, now making up 59% of total revenue. The company anticipates Q4 revenue between $1.175 and $1.18 billion—approximately 2.7% growth. They raised FY '25 revenue forecasts to $4.656-$4.661 billion, signaling a 2.9% growth outlook. Non-GAAP operating income is guided at $1.813-$1.818 billion, reflecting a 39% margin. AI Companion’s engagement surged 59%, signifying strong customer adoption. Additionally, a $1.2 billion share buyback plan was announced, aiming to enhance shareholder returns.

Momentum in Revenue and Profitability

In the third quarter of FY '25, Zoom reported an approximate 4% year-over-year revenue increase to $1.178 billion, exceeding the upper limit of their guidance by $13 million. This growth was primarily driven by a revitalization in their enterprise sector, which exhibited a 6% year-over-year growth, now accounting for 59% of their total revenue. The company has reported a consistent period of improvement, particularly as the revenue trends in both enterprise and online segments stabilize amid challenging macro conditions. Moreover, the non-GAAP income from operations for Q3 was reported at $458 million, surpassing the high end of guidance forecasts. This leads to an estimated operating margin of 38.9%, slightly down from 39.3% a year prior.

AI Integration as a Growth Catalyst

Zoom is pivoting towards an AI-first strategy, evidenced by a 59% quarter-over-quarter increase in monthly active users of the Zoom AI Companion. The company has consistently emphasized the importance of AI in enhancing their product offerings, recently launching AI Companion 2.0. This version further improves upon its predecessor by integrating broader contextual capabilities, thereby enriching customer workflows. The strong customer reception to AI Companion, particularly during the Zoomtopia event, aligns with Zoom's long-term vision of becoming a pivotal player in AI-oriented work platforms.

Customer Expansion and Retention

Zip's efforts to attract and retain enterprise customers are notable, with a 7% year-over-year growth noted in their enterprise clientele. By the end of Q3, nearly 4,000 customers were contributing more than $100,000 in revenue annually, making up 31% of total revenue. Notably, churn rates have improved, with an average monthly term reduction to 2.7%, marking a decrease of 30 basis points year-over-year. The company aims to build stronger relationships through their diverse product suite, including innovations like the customized AI Companion tailored for enterprise clients.

Guidance for Future Performance

Looking ahead to the fourth quarter, Zoom anticipates revenue between $1.175 billion to $1.18 billion, representing a midpoint growth of approximately 2.7% year-over-year. They project non-GAAP operating income will fall within the range of $443 million to $448 million, which reflects a disciplined approach to operational efficiencies. Additionally, the full-year guidance for FY '25 has been cautiously raised to an expected revenue range of $4.656 billion to $4.661 billion, indicating a growth projection of 2.9%. Zoom's total revenue outlook remains optimistic against a persistently mixed macroeconomic backdrop.

Strategic Share Repurchase Initiative

Zoom has authorized an incremental $1.2 billion for its share repurchase program, reflecting strong confidence from both the Board and management in the company’s future direction. This brings the total unexecuted buyback program to approximately $2 billion, which they expect to execute by the end of FY '26. This initiative not only aims to enhance shareholder value but also signifies Zoom's commitment to employing cash flow effectively as they navigate their business expansion.

Market Position and Competitive Landscape

Zoom's broadening focus on adjacent markets like Contact Center and Workvivo has illustrated significant success, with Workvivo customers growing by 72% year-over-year, partially due to strategic partnerships, most notably with Meta. The Zoom Contact Center customer base has also expanded substantially, with over 82% growth noted, now surpassing 1,250 customers. This 'land-and-expand' strategy has proven effective, positioning Zoom to not only retain but also attract new clients as they diversify their offerings.

Earnings Call Transcript 2025-Q3

[Kelcey McKinley]

Hello, everyone, and welcome to Zoom's Q3 FY '25 Earnings Release Webinar. As a reminder, this webinar is being recorded. And now I will hand things over to Charles Eveslage, Head of Investor Relations. Charles, over to you.

[Charles Eveslage, executive]

Thank you, Kelcey. Hello, everyone, and welcome to Zoom's earnings video webinar for the Third Quarter of Fiscal Year 2025. I'm joined today by Zoom's Founder and CEO, Eric Yuan; and Zoom's CFO, Michelle Chang.

Our earnings 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. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

During this call, we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full fiscal year 2025, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, stock repurchase program, opportunities, go-to-market initiatives, growth strategy and business aspirations and product initiatives, including future product and feature releases 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 risks and other factors that could affect our performance and our financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar.

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

[Eric Yuan, executive]

Thank you, Charles. Thank you, everyone, for joining us today. In early October, we hosted Zoomtopia, our annual customer and innovation event, and it was an amazing opportunity to showcase all that we have been working on for our customers. We had a record-breaking virtual attendance, and unveiled our new vision, AI-first Work Platform for Human Connection. This update marks an exciting milestone as we extend our strength as a unified communication and collaboration platform into becoming an AI-first work platform. Our goal is to empower customers to navigate today's work challenges, streamline information, prioritizing tasks and making smarter use of time.

At Zoomtopia, we took meaningful steps towards that vision with the release of AI Companion 2.0, further showcasing all the things that customers have come to expect from Zoom, a breakneck pace of innovation, customer obsession and reliable, easy-to-use products.

This release builds upon the awesome quality of Zoom AI Companion 1.0 across features like Meeting Summary, Meeting Query and Smart Compose, and brings it together in a way that evolves beyond task-specific AI towards agentic AI. This major update allows the AI Companion to see a broader window of context, synthesize the information from internal and external sources, and orchestrate action across the platform.

AI Companion 2.0 raises the bar for AI and demonstrates to customers that we understand their needs. They want AI to enhance their existing workflows, not disrupt them. They want AI to deliver exceptional results for their entire teams, and they want to experience the value firsthand before incurring additional spend.

We highlighted many customers at Zoomtopia. Praniti Lakhwara, CIO of Zscaler, provided a great example of how Zoom AI Companion helped democratize AI and enhance productivity across the organization, without sacrificing security and privacy. And it wasn't just Zscaler. the RealReal, HSBC, ExxonMobil and Lake Flato Architects shared similar stories about Zoom's secure, easy-to-use solutions, helping them thrive in the age of AI and flexible work.

Building on our vision for democratizing AI, we introduced a road map of TAM-expanding AI products that create additional business value through customization, personalization and alignment to specific industries or use cases. Custom AI Companion add-on, which will be released in the first half of next year, aims to meet our customers where they are in their AI journey by plugging into knowledge bases, integrating with third-party apps and personalizing experiences like custom AI avatars and AI coaching.

Additionally, we announced that we'll also have Custom AI Companion paid add-ons for health care and education available as early as the first quarter of next year. These AI-first industry-tailored solutions will build upon the remarkable traction and customer love we have in these industries and allow us to deliver AI solutions that meet their customers' unique needs from the lecture hall to the doctor's office.

We also announced the Zoom Workplace for Frontline workers available in the first half of 2025, with the goal of extending our success in Zoom Workplace further into the extremely large but underserved frontline worker market. We will first target frontline-rich industries where we have a strong installed base and have gained substantial learnings such as retail, health care and manufacturing.

This mobile-centric solution will address the unique work style of frontline workers with features like AI Companion-generated shift summaries, on-shift communications, work management, insights and more. Contact Center and Workvivo are key pillars of our strategy to extend from our core strengths into natural adjacencies, and I'm very pleased to share that both had amazing quarters.

We secured our largest-ever Contact Center customer at over 20,000 seats, demonstrating our ability to compete at the high end, expand further into the EMEA market and win with the channel. In fact, our top 4 Contact Center deals in the quarter came from the channel, which speaks to our progress leveraging this amazing resource to extend our success across geographies and industries.

We also saw incredible traction with Workvivo as we landed 3 net new Workvivo customers with over $1 million in ARR, including the largest deal to date with a Fortune 10 company. We are very happy to see that both Contact Center and Workvivo benefit as a natural upsell to a massive base of Zoom Workplace customers, and we are encouraged to see these products bringing brand-new customers to Zoom and become beachheads for Zoom Workplace to expand. The success of this bidirectional land-and-expand motion demonstrates our better together platform vision is resonating well with customers looking for a full AI-first work platform, bridging the worlds of customers and employee experience.

Now let me recognize some of our amazing customers.

Thank you, Agencia Tributaria, Spain's national revenue service, for their extraordinary expansion in Q3. Over 2 years ago, Agencia, like many other customers, became convinced of the constraints of their on-prem phone system and deployed 30,000 Zoom Phone seats. After Zoom Phone rapidly delivered value and scale to enhance efficiency and service quality during a demanding tax season in 2022, they moved to consider our total experience, omni-channel solutions to further elevate their taxpayer services. This resulted in an incredible record-setting Zoom Contact Center deal with over 20,000 seats, in conjunction with Zoom Workplace delivering a complete Zoom experience for both employees and the taxpayers. Thank you, Agencia, for your trust and partnership.

Thank you for ServiceNow, the AI Platform for business transformation, for expanding its relationship with Zoom. Already a power user of Zoom Workplace, in Q3, ServiceNow adopted Workvivo and expanded its Zoom Phone footprint. As announced at Zoomtopia, we are deepening the integration of ServiceNow's Now Assist with Zoom AI Companion to boost our generative AI product offerings and deliver advanced workflow synergies for our customers.

It was an honor having Chairman and CEO, Bill McDermott, who is also a member of Zoom's Board of Directors, join us at Zoomtopia. Thanks, Bill. We look forward to continuing our strong partnership.

Let me also thank Redpin, a leading international fintech and proptech company, for choosing Zoom. They came to us as a brand-new customer through a trusted channel partner and identified Zoom as the best solution to transform the way engage customers with their innovative property payments software and services. Redpin opted for the Zoom total experience, including Zoom Contact Center Elite, Zoom Revenue Accelerator and Zoom Workplace Business Plus in order to enhance customer experience, elevate agent productivity and happiness, and realize major cost efficiencies from streamlining operations.

Finally, let me thank athenahealth, a leading provider of network-enabled software and services for medical practice and health systems for integrating Zoom's Meeting SDK into their athenaOne electronic health record. By leveraging Zoom's cutting-edge video technology, athenahealth is empowering its network of over 160,000 providers to deliver seamless virtual care through telehealth.

We're so pleased to see more customers adopting our Zoom Workplace and Business Services products in order to reap the benefits of our modern natively integrated AI-powered technologies.

Before handing it off to Michelle, I'm very excited to share that earlier today, we announced our new corporate name, Zoom Communications, Inc. This change reflects our evolution into an AI-first work platform for human connection and our vision for long-term growth.

Now over to our new CFO, Michelle Chang. Thank you.

[Michelle Chang, executive]

Thank you, Eric, and hello, everyone. It was great to meet many of you at Zoomtopia. I'm excited to be taking you through earnings for the first time, and I look forward to partnering with you all going forward. To kick us off, I'm pleased to announce that we beat our top line and profitability guidance in Q3. In line with our previous statements, year-over-year revenue growth troughed in Q2 and showed improvement in Q3, driven by positive trends in both enterprise and online. Here are a few highlights from our quarter.

We saw progress towards our AI-first vision with Zoom AI Companion monthly active users growing 59% quarter-over-quarter. And as Eric mentioned, we saw great traction expanding into adjacent markets with growth in Workvivo and Contact Center. A number of Workvivo customers grew 72% year-over-year, driven in part by the strength of our Meta partnership. And the number of Zoom Contact Center customers surpassed 1,250, up more than 82% year-over-year.

Now let's dive into the financial results. In Q3, total revenue grew approximately 4% year-over-year to $1.178 billion. This result was $13 million above the high end of our guidance. Our enterprise revenues grew approximately 6% year-over-year, reflecting a continued shift to enterprise which now makes up 59% of our total revenue, up 1 point year-over-year. We're pleased with this continued stabilization in online amidst ongoing macro conditions.

In Q3, we saw improvement in average monthly term, which decreased to 2.7%, down 30 basis points year-over-year. This is our lowest ever reported churn. In our Enterprise business, we saw a 7% year-over-year customer growth in the upmarket as we ended the quarter with just shy of 4,000 customers contributing more than $100,000 in trailing 12-month revenue. These customers now make up 31% of our revenue, up 2 points year-over-year.

Our trailing 12-month net dollar expansion rate for enterprise customers in Q3 came in at 98%. The number of Enterprise customers at the end of Q3 was approximately 192,400. As we've mentioned in prior quarters, the number of Enterprise customers distinguishes between our 2 go-to-market motions and will fluctuate with shifts in our focus and as such, has become a less valuable measurement of company performance over time.

Pivoting to our growth internationally. Our Americas revenue grew 4% year-over-year. EMEA grew 5%, and APAC was flat. On a constant currency basis, EMEA grew 3% and APAC grew 2% year-over-year.

Moving to our non-GAAP results, which, as a reminder, excludes stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains on strategic investments, net litigation settlements, and associated tax effects. Non-GAAP gross margin in Q3 was 78.9% as compared to 79.7% in Q3 of last year. The year-over-year reduction was primarily due to investments in AI. For the full year of FY '25, we continue to expect our gross margin will be approximately 79%.

Non-GAAP income from operations came in at $458 million, exceeding the high end of our guidance of $443 million, as we continue to make progress managing expenses while investing in AI, our platform and emerging products. This translates to 38.9% non-GAAP operating margin for Q3 as compared to 39.3% in Q3 of last year.

Non-GAAP diluted net income per share in Q3 was $1.38 on approximately 314 million non-GAAP diluted weighted average shares outstanding. This result was $0.07 above the high end of our guidance and $0.09 higher than Q3 of last year.

Turning to the balance sheet. Deferred revenue at the end of the period grew 5% year-over-year to $1.38 billion, driven by the continued refinement of discounting practices as well as lengthening billing terms. In Q4, we expect deferred revenue to be up 5% to 6% year-over-year.

Looking at both our billed and unbilled contracts. Our RPO increased 5% year-over-year to approximately $3.74 billion. We expect to recognize 61% of the total RPO as revenue over the next 12 months, up from 58% in Q3 of last year.

Operating cash flow in the quarter decreased 2% year-over-year to $483 million. Free cash flow grew 1% year-over-year to $458 million. Operating cash flow and free cash flow margins in the quarter were 41% and 38.9%, respectively.

We ended the quarter with approximately $7.7 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Under the preexisting $1.5 billion share buyback plan, in Q3, we purchased 4.4 million shares for $302 million, increasing our repurchases quarter-over-quarter by $14 million. And at the end of Q3, we repurchased 11.6 million shares for $739 million.

Turning to guidance. In Q4, we expect revenue to be in the range of $1.175 billion to $1.18 billion, which, at the midpoint, represents approximately 2.7% year-over-year growth. We expect non-GAAP operating income to be in the range of $443 million to $448 million, representing an operating margin of 37.8% at the midpoint as we continue to prioritize efficiencies across our operations. Our outlook for non-GAAP earnings per share is $1.29 to $1.30 based on approximately 315 million shares outstanding.

We are also pleased to raise our top line and profitability outlook for the full year of FY '25. We now expect revenue to be in the range of $4.656 billion to $4.661 billion, which, at the midpoint, represents approximately 2.9% year-over-year growth. Our total revenue guidance assumes a continuation of mixed macroeconomic environment.

We expect our non-GAAP operating income to be in the range of $1.813 billion to $1.818 billion, representing an operating margin of 39% at the midpoint. Our outlook for non-GAAP earnings per share for FY '25 is $5.41 to $5.43 based on approximately 315 million shares outstanding.

With the free cash flow results in Q3 and the increased outlook for operating income in FY '25, we now expect free cash flow to be towards the high end of our previously provided range of $1.58 billion to $1.62 billion for the full year.

As indicated in the earnings press release today, we are also excited to announce our Board has authorized an incremental $1.2 billion share repurchase. This reinforces our Board and management team's confidence in Zoom and enables us to further leverage our strong cash flow and balance sheet to drive shareholder returns. The incremental authorization brings our total unexecuted buyback to approximately $2 billion, which we expect to execute by the end of fiscal '26.

In conclusion, we believe our results and our guidance underscore the progress that we've made driving top line growth, strong financial management and shareholder returns. We're excited about our differentiated AI platform vision to deliver value for our customers and incredibly grateful for the trust and support of the entire Zoom team, our customers and our investors. Kelcey, please queue the first question.

[Kelcey McKinley]

Thank you so much, Michelle. And as Michelle mentioned, we will now move into the Q&A session. [Operator Instructions] And our first question will come from Meta Marshall with Morgan Stanley.

[Meta Marshall, analyst]

Great. Congrats on the quarter. Maybe for you, Eric. I just wanted to get a sense coming out of Zoomtopia what you were hearing from customers just about where their strongest interest is on AI and kind of where they're looking for you to kind of take the road map to address kind of some of their needs.

[Eric Yuan, executive]

Yes. So Meta, this is a great question. That's our -- the theme of Zoomtopia this year, really about AI. We launched the AI Companion 1.0 last year. And with more and more customers, they enable AI and also at Zoomtopia, we mentioned that there are over 4 million accounts who are already enabled AI Companion. Given the quality, ease of use and no additional cost, the customer really like Zoom AI Companion.

However, after 1 year later, they also want to understand, what's the direction, are there any new things and -- from us. So -- and the feedback from our customers at Zoomtopia Zoom AI Companion 2.0 were extremely positive because, first of all, they look at our innovation, the speed, right? And the -- a lot of features built into the AI Companion 2.0, again, at no additional cost, right? At the same time, Enterprise customers also want to have some flexibility. That's why we also introduced customized AI Companion and also AI Companion Studio. And that will be available first half of next year and also we can monetize.

Overall, the customers really trust Zoom, right? As we continue improving the AI quality, like Meeting Summary, you compare to Zoom Meeting Summary quality versus any other competitors. I have a high confidence customers like our solution, like our quality. And also a lot of new innovative features and customers really enjoy AI Companion 2.0.

And by the way, if you look at the last 3 months, look at our AI -- look at our monthly active users, it's already up almost 60%, right? And so that's very, very, very -- the positive side. So overall, the customer really like Zoom AI Companion. And also they really appreciate us. We see, we are not going to charge the customer for AI Companion, at no additional cost. So that's very good news for us.

[Kelcey McKinley]

We will now hear from Kash Rangan with Goldman Sachs.

[Kasthuri Rangan, analyst]

I'll echo the congratulations, and congrats to you, Michelle, on your first earnings conference call with Zoom. Eric, we had the pleasure of attending Zoomtopia as well. I'm curious, where are the budgets for AI coming from? Is it from a separate pool from your customers? Or are they taking budgets out of budgets -- or AI money out of budgets that were destined for Zoom?

And also a follow-up question on the macro. The tone of customer conversations post the elections, do you sense that there is slightly higher [ animal spreads ], better appetite to spend in tech -- on tech and on Zoom's products in particular?

[Eric Yuan, executive]

Kash, thank you, and it looks like you are driving. So I think look at AI, the cost, right? So every company, I think now they are all thinking about where they should allocate the budget, right? Where should they get more money or fund, right, to support AI? I think every company is different. And some internal customers, and they have a new budget. Some customers, they consolidated into the few vendors and some customers, they just want to say, hey, maybe actually save the money from other areas and to shift the budget towards embracing AI.

And given our strength on the quality plus at no additional cost, Zoom is much better positioned. In particular, customers look at all the vendors when they try to consult and look at -- again, the AI cost is not small, right? You look at some of the competitors, per user per month, $30, right? And look at Zoom, better quality at no additional cost. That's the reason why it comes with a total cost of ownership. Customers look at Zoom, I think, much better positioned.

You're also right. Otherwise, customers say, if they are going -- again, almost every business, they subscribe to multiple software services. If each software service vendors they are going to charge the customer with AI, guess what, every business is -- they have to spend more. That's the reason why they trust Zoom, and I think we are much better positioned.

And back to the second question. I think it's too early to tell. And every company, they look at the macroeconomic, I think, as we all know, is getting better and also in terms of regulation for AI. And also, it's way too early to tell. But overall, I think every company, they are very optimistic about doubling down embracing AI. Look at vendors, who they trust with a better quality, also with a better total cost of ownership. I think that's the reason why I truly believe Zoom, much better positioned.

[Michelle Chang, executive]

And maybe if I can add in, Kash, maybe unasked but an important note is our forecast sort of assumes like macro conditions and like spending conditions relative to what we saw in Q3.

[Kelcey McKinley]

We'll go ahead and move on to Arjun Bhatia with William Blair.

[Arjun Bhatia, analyst]

Perfect. And congrats on the reacceleration here. Eric, maybe if we can switch gears a little bit to Contact Center. You have that 20,000-seat deal with the Spanish revenue service, I believe, this quarter. That's a very large deal, very impressive. Can you just maybe elaborate a little bit on what were some of the major factors that drove Zoom to win a deal like that? What was the process like? How competitive was it? And what were some of the maybe differentiating factors that you saw in that, that you can maybe replicate in other Contact Center deals?

[Eric Yuan, executive]

Yes, yes, great question. So given that, I still wear the head of Zoom Contact Center General Manager. I really like your question. I think a few things. First of all, they are already our customer. They deploy, I think, if I recall correctly, more than 30,000 Zoom Phone seats before. In a very busy tax season, Zoom delivered a greater performance. They really trust Zoom. And when they look at Zoom Contact Center, they know actually our back-end architecture very scalable, right?

And also they look at our -- all the feature set, right? As I mentioned, all -- the past few quarters, we support PCI, FedRAMP, the workforce management, the quality management and also social channel. They know our pace of innovation is amazing and because the architecture piece of trust, because of the features and also look at our [ scalability, ] and we have no problem from very beginning can support very large Contact Center agent deployment because, again, when we build an architecture from day 1, not like other vendors, where they had to have a [ surge ], right, to support up to the 10,000 or 20,000 from day 1. Our architecture already very scalable. That's the reason why the customers, they are very, very happy to deploy Zoom Contact Center.

Again, from an outside perspective, we feel like, wow, that's a large deal, 20,000 agents. But you're talking with our product engineering team and say, "Hey, we already support that deal from an architect perspective on day 1," right? So given more and more customers recognize the potential of Zoom and look at our piece of innovation, I think, especially the AI, I think we are very well positioned to win more deals like that.

[Kelcey McKinley]

Our next question is going to come from Patrick Walravens with JMP Securities.

[Eric Yuan, executive]

Patrick, you are muted.

[Patrick Walravens, analyst]

Hopefully, I'm unmuted now. Can you hear me?

[Eric Yuan, executive]

Yes.

[Patrick Walravens, analyst]

Okay. Great. Congratulations. Michelle, I think I'm going to focus on you if that's all right. So can you just tell us again why you -- I asked you this question at the Analyst Day, but I think a bigger venue would be helpful -- why you took this job, what you found so far? And then maybe -- you obviously haven't guided for next year yet, and you're early in your tenure, but maybe any points that you would share with us in terms of how to think about next year?

[Michelle Chang, executive]

Yes. Great. Thanks, Pat, for the question. Let me kind of go back and just remind people, I came to Zoom, I think in part at the beginning because of the iconic brand and the established leadership in meetings. But as Eric and I began our conversations over the interview process, I got more and more excited about where I saw Zoom going to an AI-first platform company and could see a lot of the seeds, if you will, of growth being planted and starting to come to fruition. So got very excited about that.

And maybe my learning sense has been delightful, honestly, to see the customer love and the pace of innovation. I think you've heard about it before, but to be amongst it, I think, has been a delight. And so my focus as the CFO is really going to be on top line, as you noted, getting the top line revenue growth further accelerating, certainly continuing to manage margins and expenses as Kelly has.

And then maybe the last part I'd say that I think you saw us re-up here today is capital allocation with our buyback. And in terms of how to guide for FY '26, look, we will officially guide as we always have in the next guidance period. So I'll take my comments until then.

[Kelcey McKinley]

James Fish with Piper Sandler has the next question.

[James Fish, analyst]

Maybe, Eric, for you. On the AI side, you guys were talking about AI investments obviously impacting the gross margins. You talked about that last quarter. But is this -- where do we think about the AI investments actually going into? Is it sort of the back-end infrastructure or thinking about it more on companion side and more modules? How are you feeling about the AI portfolio for Contact Center generally?

And then just, Michelle, for you. On the -- you talked about lengthening billing terms. We're starting to see, though, a difference between -- on RPO and billings for sure but a big divergence really on the current and noncurrent RPO trends this quarter. Can you just kind of walk us through what happened there despite the comment on lengthening billing terms?

[Eric Yuan, executive]

Yes, Jim, it's a great question. I can address your first one. So look at AI, right? So we have to invest more, right? And I think a few areas, right? One is look at our Zoom Workplace platform, right? We have to [ invent ] more talent, deploy more GPUs and also use more of the cloud, basically GPUs, as well as we keep improving the AI quality and innovate on AI features. That's for Workplace.

And at the same time, we are going to introduce the customized AI Companion, also AI Studio next year. Not only do we offer the free service for AI Companion, but those Enterprise customization certainly can help us in terms of monetization.

At the same time, we leverage the technology we build for the workplace, apply that to the Contact Center, like Zoom Virtual Agent, right, and also some other Contact Center features. We can share the same AI infrastructure and also a lot of technology components and also can be shared with Zoom Contact Center. Where AI Companion is not free, the Contact Center is different, right? We also can monetize. Essentially, we build the same common AI infrastructure architecture and Workplace -- Customized AI Companion, we can monetize.

Contact Center, also, we can monetize. I think more and more -- and like today, you see you keep investing more and more, and soon, we can also monetize more as well. That's why I think we do not worry about the cost in the long run at all, I mean, the AI investment because with the monetization coming in, certainly can help us more. So, so far, we feel very comfortable.

[Michelle Chang, executive]

And, James, maybe to answer your question on RPO and specifically why we see the current piece go up, we are seeing, just to confirm, lengthening billing terms. So we're encouraged by that of an indicator, both in Online and Enterprise, of our customers' dedication to Zoom. In particular, our current, as you note, went up 10%. And the way that I would have you think about that is when we have coterminous contracts, we tend to see, as we sell outside of that expiry cycle, that current volume go up temporarily before it goes to long term, so net-net, a positive thing as to expanding portfolio with our customers.

[Kelcey McKinley]

And we will now hear from Alex Zukin with Wolfe Research.

[Aleksandr Zukin, analyst]

Congratulations on a solid quarter. Maybe just, I'll say, 1.5 questions. On the monetization side, Eric, as you're starting to see AI companion additions and interactions start to scale, as you think about the kind of ultimate monetization opportunity of AI in terms of the broader portfolio, how, when, where should we see it? Is it through selling Contact Center that's more AI native into the overall base? Is it the verticalization of the AI Companion 2.0? Is it better AI Companion expanding? Just give us a flavor for the how and the when.

And Michelle, if I look at from a kind of forward KPIs, I see Enterprise billings growing double digits again. I see cRPO growing double digits again. I see churn for the Online business basically getting lower every quarter by 20 to 30 basis points. why shouldn't we kind of extrapolate that as the Online business stable, flat; Enterprise business, accelerating from here?

[Michelle Chang, executive]

Yes. Eric, do you want to go on the monetization? Or I'm happy to tag into on the AI front.

[Eric Yuan, executive]

You can address the second one. Of course, this is just a housekeeping, basically, one. Then, I can address the first one later.

[Michelle Chang, executive]

Yes. So to answer your question -- and Alex, obviously, we're not going to guide to '26 until February. But I would say we feel good about the beat to forecast. We feel good about the implied raise to Q4. And we feel good about the overall acceleration. If you look at our H2 growth, it's above H1. So net-net, in terms of what we've said and what we've guided, it's delivering on what we said.

And then you kind of go to the underlying KPIs and you look at it, and I think there's a lot of strong fundamentals. So look, I'm not going to confirm the numbers that you gave, but I think maybe one way to think about the models for revenue is we've given a Q4 revenue growth guide. I believe the midpoint of that growth rate is -- probably represents a reasonable proxy for how to think about revenue growth into FY '26.

[Eric Yuan, executive]

Yes. Alex, by the way, we will share more in detail in the Q4 earnings call [ if we see ] FY '26. By the way, you mentioned Online. Remember, 2 years ago, FY '23, right, look at Online business. It declined by 80%. A year ago, the 4%. Now this year, flat, right? You see the trend is very positive.

So back to a question of AI monetization. We already monetize AI today but not for the Workplace product, both our -- really the services, like Contact Center, like Zoom Revenue Accelerator, right? And like the newly coming services like Zoom Workplace for Frontline workers, for educators, for health care, those -- the product tailored for vertical industries.

At the same time, we also focused on Enterprise. I think some -- maybe second half of next year. And for the -- because the Customized AI Companion and AI Companion Studio will not be available in the first half of next calendar year, right?

I think a lot of monetization opportunities. But also at the same time, not only do we monetize AI Companion but also, we leverage the AI Companion to further build the relationship with the customer. Like a customer look at it today, the Zoom platform, on the one hand, ease of use, stable, secure, plus AI, a greater performance quality at no additional cost, right?

I think more and more -- we do see some customers last 2 quarters. They switched to Zoom platform. right? I gave one example, right, why in Q3, we won a very large insurance company. And if I recall correctly, won 20,000 seats, the Zoom Workplace platform. For sure, there are some big competitors there, so-called for free, but when they analyze their employees like our Zoom service, they analyze the total cost, Zoom AI Companion also at no additional cost, that's one of the key reasons why they select Zoom as their collaboration platform. So that's a very big win, right, in Q3. So...

[Michelle Chang, executive]

And then back, sorry, to your question. In online, kind of the way that I would think about the Q4 is sort of flat to slightly down. And then certainly, because I get this question a lot, the ambition for Online is growth. Just want to make sure I answered your Online questions.

[Kelcey McKinley]

And we will move on to Siti Panigrahi with Mizuho.

[Sitikantha Panigrahi, analyst]

Great. Michelle, congrats on your first earnings call and you talked about your focus to reaccelerate top line growth. Can you guys hear me?

[Eric Yuan, executive]

Yes.

[Sitikantha Panigrahi, analyst]

Okay. So it's good to see the platform, mostly your NRR stabilizing, and now you talk about multiple products, like Phone, Contact Center, Workvivo, Custom AI Companion, a lot of different products you are talking about that will layer in growth. So as you look forward to next year, which products you are more excited about? And how do you rack out of these products when it comes to layering the growth to the core platform?

[Michelle Chang, executive]

Yes. It's such a great question. I guess I would start with just sort of the foundation of Zoom, and then I'll kind of build out in my answer. So look, the foundation of Zoom was obviously the Meetings. We're working very hard to move that to platform. And we're excited by the deceleration of seat down-sells that we're seeing. We're excited by the competitive wins that we're seeing. We're excited by the online churn rate. So kind of in our foundation as we bring in AI, as Eric has said many times, at no additional cost or we bring -- we build out the portfolio of Workplace, we're excited at sort of what that could mean to the foundation of our business.

And then certainly, as we think about growth vectors there, a part of that Workplace platform is a shift to Phone, which has been a significant growth driver to us. We'll certainly -- that will certainly continue. And then I would say the products that we're seeing, the momentum in today, we call them -- or I call them our emerging products in Contact Center and Workvivo, I think will continue to be durable elements for product growth going forward.

And then, over time, I think you'll see more of that AI monetization and some of the things that we announced at Zoomtopia, but like any products, those will come in with time. And you asked a lot about product growth. But I guess I would also call out that I think there's a lot of growth vectors that we still can grow from in terms of our international growth or our channel expansion, our continuing to go up market.

There's a lot of really great proof points of when we get customers in on the Workplace. It decreases churn. That accelerates revenue growth with our land and expand. So I think there's a lot of -- beyond sort of the traditional product levers of growth, a lot more we can do.

[Kelcey McKinley]

Allan Verkhovski with Scotiabank.

[Allan Verkhovski, analyst]

I'll echo the congrats on a strong quarter. Michelle, it looks like the deferred revenue growth in the quarter came in right as you guys were expecting, which is a slight change of pace from the beats we've seen there. There are a number of large deals you highlighted in the quarter, like the Contact Center deal with over 20,000 seats. Can you just walk us through the puts and takes there in the quarter? And perhaps give us a refresh about the level of conservatism you're embedding in your Q4 guide of deferred revenue growth being 5% to 6%?

[Michelle Chang, executive]

Yes. So first of all, I would say we guided that it will be 5% to -- or that it grew 5% in Q3, and we guided to 5% to 6%, so just to reorient everyone. The dynamics of what's driving that are tightening of discounting and lengthening of billing terms. And we expect those to obviously continue into Q4. So in terms of what may be -- how to think about it in terms of our guidance philosophy, I would say, it's very much the same. So I've continued a guidance philosophy similar to what has been had historically at Zoom.

The other thing that I would mention, nothing different to what Zoom has said historically, is that revenue is ultimately the better measure and indicator for our business given some fluctuations that you'll see from quarter-to-quarter in deferred revenue. So that's really what I would point people to.

[Kelcey McKinley]

And Bank of America's Michael Funk has the next question.

[Michael Funk, analyst]

Yes. Great. One for you, Eric. So you really created an iconic brand with Zoom Video, owned that point solution space and have now expanded into other areas, new names in communication that captures it all. You have Phone now. You have Contact Center, adding AI on top, arguably even edging into work management with some of the products that you're rolling out. So the delineation is less clear now between yourself and competitors in other areas. So how do you think about attacking the market? Is it purely based on product? Or how important is price as you try to win new business?

[Eric Yuan, executive]

Yes. So that's a great question. I think our philosophy from day 1, always the better product, the better price and better service, right? First of all, our core strength is really about the product experience and make sure the customer like us. Look at recently Gartner Peer Insights report, right? Zoom is the only one in the leader section. That's the reason why the customer likes us and because they truly like our product.

Because of that, we introduced a lot of other new products, essentially gave a customer suite, and we call that Workplace, the AI-first work platform. At the same time, you look at the price, a year ago, if I recall correctly, right, it may be more than that now. We increased price for online, and we do not see any issues. And the users really like our product.

Now -- actually used to be customers, they bought our point solutions like many years ago, Meetings and Phone and also the Whiteboard and a lot of also [ point ] product. Now they prefer our platform approach, right? And look at the entire platform. They can leverage more service from Zoom. And at the same time and with the AI at no additional costs, the customer tries the Zoom brand and more sticky and down the road, with the Custom AI Companion or other innovations, for sure, and we can monetize more.

Essentially, we do not want to do something similar to some competitors, right? You're kind of stuck with your competitors. They call that for free. And then every year, they increase price. We don't want to do that. We want to build a long-term trust. Given some time, the customer realized Zoom not only very stable, ease of use, and also, we introduced more and more services, they would like to consolidate into the Zoom platform. From that perspective, I think more opportunities for us to monetize as a platform player and not to mention AI as well. So that's our strategy. Yes.

[Kelcey McKinley]

We will now hear from Samad Samana with Jefferies.

[Samad Samana, analyst]

I'll echo the congrats on the next quarter. Maybe on Workvivo, I know Meta announced that it would be sunsetting the Meta Workplace product, and it would be in stages over '25 and '26 in mid-tier customers toward Workvivo. Can you help us think about how you're thinking about that ramp? You've had good momentum there. Customers grew 72% year-over-year. Can you quantify maybe how much of the growth is coming from Meta and how we should think about that momentum going forward?

[Eric Yuan, executive]

Yes. Great question. So Michelle, feel free to chime in. I think we acquired Workvivo, I think, 2 years ago. And because -- you look at the employee engagement. That's very important. This will be part of Zoom work platform. I think that company, that team is much better positioned. They have very scalable, very cool, the product. That's the reason why we acquired them.

And also, a few quarters ago, right, and Meta screwed -- focused on the AI, a lot of other things, they decided to -- and retire Workplace product. For sure, there are some other vendors out there as well. But based on the customer feedback, because the product maturity, right, they decided to go with Zoom as a partnership, right? So meaning Workvivo is an exclusive partner, right? They also build the migration tools, right, to have customers who deploy Workplace, the product for Meta and replace that with Workvivo.

If you look at our top deals, I think almost all of those deals and because of Meta migration. And also, I think we have also a very strong pipeline as well. Again, that's not a small company. We do not focus on SMB. This is a very large integrated customer, some of the Zoom Workplace customer already. Some even not a Zoom Workplace customer but they also deployed Zoom Workvivo.

I think the pipeline is very strong and very promising. And also, we also want to innovate more on Workvivo, double down on that, I think give us more opportunity and to further grow that business. I think you look at the growth rate and quarter-over-quarter, year-over-year, it's pretty exciting. And I think that business can contribute more to our business down the road.

[Michelle Chang, executive]

Maybe just to add in from my standpoint, yes, the Meta partnership is driving the growth. We're not going to quantify it or speak to it. But I think if you look at a lot of the underlying metrics that we said in our prepared remarks, they tell a more holistic story for Workvivo growth and a lot of the things that we've been focused on from geo expansion to partner dynamics to getting those large customers as well as breadth. And they build up a lot of the natural things that Zoom has strength in certain industries like retail as well as frontline. So I think, yes, the Meta partnership is part of that, and there are some durable dynamics to underscore a lot of the things that Eric talked about.

[Kelcey McKinley]

The next question will come from Tyler Radke with Citi.

[Tyler Radke, analyst]

I wanted to direct my question to Michelle. Congrats again on the first earnings call here as CFO of Zoom. I wanted to ask how you think about margins. So if we look at Q3, the operating margins were down very slightly year-over-year. I think Q4, they're guided to be down about 1 point year-over-year if you round up. How should we think about the path to long-term operating margins? I think you're still a couple of points above the high end of that long-term guide that you put out at Analyst Day. Should we expect to get back to that long-term operating margins next year? Just give us a sense for the path there.

And then maybe just if you could give your own philosophy, too, around how you evaluate expenses? What are some of the things that you look for just in terms of ROI in case your framework is maybe different than how things were done at Zoom before?

[Michelle Chang, executive]

Perfect. Great question, and thank you very much, Tyler. So I would say, I think it's important just to reemphasize what we're investing in. We're investing in AI. We're investing in our emerging growth businesses, and we're investing in the platform. As I think it sort of sets up the frame that I'll have, I don't think it's different than maybe the frame that Kelly and Eric had before, which is we're going to invest for top line growth, and we're going to invest for our strategy going forward.

And so look, our guidance approach remains the same. I said that before. We gave, as you noted, long-term guidance that had that operating margin lower than where we are today because of those investments. I just want to emphasize that is a long-term margin scenario and so not something that you should take for FY '26.

And again, we'll come back in FY '26 and -- or we'll come back in February and give FY '26 guidance. But in terms of my philosophy, I think it's going to be -- a lot of where Eric and I are going to spend our time is how do we really make sure that every dollar that Zoom is spending is going towards those things that I mentioned and going towards top line growth?

And so look, we'll employ other ways of capital allocation. But in terms of internal capital allocation, I think it's going through each thing, questioning the return, questioning the alignment to strategic value and making sure that, as a culture, we have a disciplined approach of really looking at our expenses and having a culture of driving savings to offset the investments that we know we're going to need to make.

[Eric Yuan, executive]

Yes. Just to quickly add on to what Michelle said, Tyler. I think if you look at our company track record, especially as the way for us to manage the cost, a very disciplined approach. Even 1, 2 quarters, you see like more investment on, let's say, on COGS side. I'm very, very proud of our world-class DevOps team, led by our President of Product, Velchamy. He and his team, they always know how to automate, further optimize a lot of cost savings.

That's one area I normally -- I do not spend any time because I have a high confidence that team, they can always come up with some ways and to further reduce the COGS, right? And even for AI, they know where to optimize. I think I have very high confidence. Even 1 or 2 quarters more investment, something like that, I personally feel like the team can come up with some better ideas to further reduce the cost.

[Kelcey McKinley]

Michelle and Eric, we have time for one additional question. It's going to come from Mark Murphy with JPMorgan.

[Mark Murphy, analyst]

Great to see you. Eric, I was wondering if you can perhaps speak to the customer interest that you're seeing to integrate data from their own internal repositories into AI Companion because I believe that triggers the $12 per user per month monetization or it's one of the important triggers.

I would think that, that is also going to drive some real product stickiness and value that would ratchet higher. So I'm just curious how many customers are showing that interest, what kind of scenarios they can design and therefore, maybe how to think through the monetization potential at that price point.

[Eric Yuan, executive]

Yes. So Mark, it's a great, great question. So that's the reason why we introduced the Customized AI Companion or AI Companion Studio because, a few quarters ago -- and we talked to many Enterprise customers. They shared with us feedback, right? So they like AI Companion.

Also, they want to make sure, hey, some customers, they already build their own AI large language model. How to [ federate ] that into our federated AI approach. And some customers, they have very large content, like a knowledge base, how to connect with that. Some customers, they have with other beginning systems, right, like a ServiceNow, Atlassian and Workday, a lot of Box and HubSpot, how to connect those data sources, right?

And also even from an employee perspective, right, they won't have a customized avatar, like AI to -- as a personal culture as well. So meaning those customers, they have customized requirements. To support those customer requirements, we need to make sure we have AI infrastructure and technology ready, right? That's the reason why we introduced the AI Companion, the Customized AI Companion. The goal is really working together with integrated customers to tailored for each Enterprise customer. That's the reason why it's not free.

I think the feedback from Zoomtopia is very positive because, again, those features are not built by our -- just the several product managers, engineers think about let's build that. We already solicited feedback from our Enterprise content before, those features that I think can truly satisfy their needs.

[Michelle Chang, executive]

And maybe, Mark, if I could add in, I think that Zoom has some really powerful differentials here in terms of our approach. The democratization of AI and kind of the core SKUs and letting people kind of try it and get to experience it, I think will provide an important on-ramp.

And then I would say our open platform approach, when you start looking at bringing in custom things or connecting with other data sources, I think that, in addition to a price point, which is very -- which is more reachable, if you will, for customers, are going to be important competitive differentiators for us going forward.

[Eric Yuan, executive]

So Kelcey, is this the last of the question?

[Kelcey McKinley]

That was the last question, Eric. I'll turn it back to you for closing if you'd like.

[Eric Yuan, executive]

I think, first of all, thank you all for your time. This is the first earnings call -- Michelle first earnings call. I think very similar, the transition from Kelly and -- to Michelle. And I feel, Michelle, this feels like it's not your first earnings call. Feel like you're already on Zoom earnings call for many times before, right? So thank you for Kelly's great work over the past many years. Michelle, thank you. And again, thank you for all the investors and really appreciate your time. See you all in the next earnings call in February. Thank you.

[Michelle Chang, executive]

All right. Thank you.

[Kelcey McKinley]

Thanks, Eric and Michelle. And again, everyone, this concludes today's earnings release. We always thank you all for your participation. And again, from our family to yours, may you and yours have a safe and happy holiday season. Take care until next quarter.