Zoom Video Communications Inc

NASDAQ:ZM

Earnings Call Analysis

FY'25 Outlook: Modest Growth & Margin Expansion

The company reported a Q4 non-GAAP gross margin of 79.2% and expects to maintain approximately 79% for FY'25 amid focused AI investments, aiming to reach the long-term target of 80%. The non-GAAP operating margin improved to 37.5% with expectations to increase further. Revenue growth for FY'25 is forecasted at a modest 1.6% to reach $4.6 billion. The free cash flow projection is between $1.44 billion and $1.48 billion. An impressive share repurchase program of $1.5 billion was authorized, underscoring the company's financial confidence.

Corporate Performance and Strategic Investment Impact

In the latest quarter, the company delivered robust non-GAAP financial results, demonstrating meticulous control over operational efficiency. Despite a slight dip in gross margin from 79.8% to 79.2% compared with last year's same quarter, mainly due to investments in AI companion technology, the outlook remains strong. For FY '25, gross margin expectations are around 79%, with a strategic direction to elevate it closer to the 80% long-term goal, powered by optimizing data center strategies and pushing higher-margin products like Zoom contact center.

Income, Revenue, and Share Metrics

Their non-GAAP income from operations saw a year-over-year increase of 10% to $444 million, surpassing projections. The operating margin has also improved to 38.7% from 36.2% of the previous year, and non-GAAP diluted net income per share hit $1.42, topping last year's number and exceeding guidance. Even deferred revenue, which is slightly down by 3%, performed better than expected. An interesting aspect is the remaining performance obligations (RPO) which grew by 4%, indicating some resilience in future revenues.

Cash Flow Strength and Capital Reserves

Cash flow indicators are particularly encouraging, with operating and free cash flow surging by 66% and 81% year-over-year, respectively. With $7 billion in cash, cash equivalents, and marketable securities, the company's liquidity is notably robust. This financial strength is supported by aggressive cash collection, prudent expense management, and improved interest income.

Forward Looking Guidance

For Q1, the guidance sets revenue expectations at approximately $1.125 billion, contemplating a modest year-over-year growth of about 1.8%. Projected non-GAAP operating income is set between $410 million and $415 million, with non-GAAP earnings per share forecasted at $1.18 to $1.20. The full-year outlook for FY '25 is equally promising, with anticipated revenue of $4.6 billion, accounting for roughly 1.6% growth from the previous year. Despite predicting Q2 as a potential trough in year-over-year growth, it is expected to pick up subsequently. The company envisions a non-GAAP operating income ranging from $1.72 billion to $1.73 billion for FY '25, affirming a healthy operating margin of approximately 37.5%, and non-GAAP earnings per share between $4.85 to $4.88.

Investor Confidence and Shareholder Returns

Reflecting strong confidence in the company's future and solid financial performance, the Board has authorized a $1.5 billion share repurchase program, underscoring a commitment to delivering shareholder returns. The share buyback highlights the company's capacity to leverage its profitability, disciplined cash flow, and solid balance sheet to bolster investor value while staying open to strategic mergers and acquisitions aimed at growth acceleration.

Earnings Call Transcript 2024-Q4

[Operator]

Okay. Hello, everyone, and welcome to Zoom's Q4 FY '24 Earnings Webinar. As a reminder, today's webinar is being recorded. And now I would like to hand things over to Tom McCallum, Head of Investor Relations.

[Tom McCallum, executive]

Thank you, David. Hello, everyone, and welcome to Zoom's earnings video webinar for the fourth quarter and full 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. 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 first quarter and full year 2025. 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 financial performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar.

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

[Eric Yuan, executive]

Thank you, Tom. Thank you, everyone, for joining us today. In FY '24, we made a tremendous amount of progress towards our mission of one platform, delivering limitless human connection.

As generative AI began to take the world by storm, we listened carefully to customers in order to deliver AI that can best serve their needs, with innovation that is responsible, empowering and [indiscernible] has gone up in a way that commits and unifies our entire platform.

Zoom AI, combining our generative AI assistant, empowers customers and employees with enhanced productivity, team effectiveness and skills. Since its launched only 5 months ago, we expanded the AI company to 6 Zoom products, all included at no additional cost to license the users. But we're far from down. Our future road map to AI is 100% guided by driving customer value.

We are hard at work developing new AI capabilities to help customers achieve their unique business objectives, and we will have more to share in a month at Enterprise Connect. We hope to see you all there.

Our expanding contact center suite is a unified AI-first solution that offers tremendous value to companies of all sizes seeking to strengthen customer relationships and deliver better outcomes. The base product includes AI combining and our newly launched tiered pricing allows customers to add specialized CS capabilities such as AIX for assist, workforce management, quality management, virtual agent and omnichannel support.

Boosted by its expanding features, our contact center suite is beginning to win in head-to-head competition with the legacy incumbents. Beyond that, it is competing on its own merits with customers completely new to Zoom, broadening the funnel to the Zoom platform.

As Zoom becomes a full workplace solution, we are seeing customers migrate from other chat products on to Zoom team chat, very excited. Over the past year, Zoom team chat usage has increased 130% across our paid accounts, and our migration tool designed to simplify the transition has seen a 4x increase in dollars in the last 6 months.

Customers across industries are moving to Zoom team chat, including a global supply chain leader who has migrated over 1,200 users, a major law firm who has migrated 1,500 users and also a financial payments leader who has moved over 2,000 users. Customers appreciate the improved user experiences and enhanced collaboration during our Zoom team chat product as well as the cost efficiencies realized by consolidating their communications and collaboration solutions on to Zoom.

Last April, we acquired Workvivo and its integration into the Zoom interface has strengthened its market position. In Q4, [indiscernible] a Fortune 10 company and a long-standing Zoom customer on Workvivo, making it Workvivo's biggest customer to date.

And on the flip side, we also saw a [ global back ] who started as a Workvivo customer adopt the broader Zoom platform. As you can see, adding new products, both organically and inorganically creates a virtuous cycle, allowing us to sell more product into a larger base. We were very pleased to see Workvivo recognized as a leader by [indiscernible] in its first report on Internet packaged solutions.

Similarly, Zoom revenue accelerator was recognized as a strong performer in the [ fourth ] week in its first year of being covered, an amazing testament to its value as a powerful AI enabled tool driving value to sales teams.

FY '24 was a difficult year from a macro perspective, and we faced those challenges head on. We become more disciplined and focused while continuing to prioritize those opportunities. As a result, we are much better positioned than we were 1 year ago. Our platform moat is deeper, our [ cognizant ] offering is more robust and our go-to-market teams are primed with defining goals and sharpened expertise to drive growth and empower our customers.

Now let's talk about some of our amazing customers. First, I'm so excited to welcome Broadcom, a global infrastructure technology leader to the Zoom family. Recognizing the simplicity and ease of use of our expanding platform, they opted for the Zoom enterprise bundle to modernize the way they communicate and collaborate.

Let me also thank [ Diageo ], a leading global beverage company for doubling down on Zoom, seeing strong value from their existing meetings, firm and rooms deployment. In Q4, they expanded to Zoom contact center and Zoom virtual agent.

Let me also thank Communitive Financial Credit Unit, our full-service financial cooperative for investing in our broader Zoom platform. They have chosen to modernize member engagement with the Zoom contact center. Community Financial for Zoom because of our one platform, video-first approach to solving all their communications needs. Zoom's integrations with key banking solutions through our APIs and partnerships were core to their decision-making process.

Finally, let me thank [ Civera ], the [ world's ] FX payments leader. Zoom was the foundation of their Zoom engagement. And from there, they adopted the wider Zoom platform in less than 2 years, seeing the benefits of the tight integration of our products underpinned by AI companion, they recently began to deeply leverage Zoom Team chat in order to streamline their pre, during, and post meeting communication all within the Zoom platform.

Everything we do here is rooted in our culture of delivering happiness. This is why our employees, this is why the customer employees -- this is why employees in modern IT departments are our biggest champions. And of course, happy employees are the most productive. So choosing Zoom becomes a win for everyone.

We are laser-focused on our mission and it could not be more optimistic of our future. The best is yet to come.

And with that, I'll pass it over to Kelly. Thank you.

[Kelly Steckelberg, executive]

Thank you, Eric, and hello, everyone. Let me start with a view of the financial highlights for FY '24. We were pleased with our strong finish to the year with enterprise revenue growing 9% and free cash flow up 24%. We also achieved a non-GAAP operating margin of 39.2%, up 326 basis points from 35.9% in FY '23.

In Q4, we saw traction in our emerging products, including a nearly 3x increase in Zoom contact center licenses as we not only added a significant number of new customers, but also expanded average deal size.

Zoom phone customers with 10,000 or more seats grew 27% year-over-year to 95. And Zoom AI companion have grown tremendously in just 5 months with over 510,000 accounts enabled and 7.2 million meeting summaries created as of the close of FY '24. We are excited about the strong growth across these new products and the benefits they drive for our customers.

Now let's dive into the financial results. In Q4, total revenue came in at $1.146 billion, up 3% year-over-year. This result was approximately $16 million above the high end of our guidance. Our enterprise revenue grew 5% year-over-year and represented 58% of total revenue, up from 57% a year ago.

We continue to see improvement in online average monthly churn, which decreased to 3% from 3.4% in Q4 of FY '23. This is consistent with the previous quarter and the lowest churn we have ever reported.

The number of enterprise customers grew 3% year-over-year to approximately 22,400. Our trailing 12 net dollar expansion rate for enterprise customer in Q4 came in at 101%. We saw 10% year-over-year growth in the upmarket as we ended the quarter with 3,810 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 30% of revenue, up from 28% in Q4 of FY '23.

Our Americas revenue grew 4% year-over-year, while EMEA was flat and APAC declined by 3%. The international performance was partially due to the FX headwinds in APAC as well as the impact of sales reorganization in early FY '24 that took longer to complete internationally than domestically.

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, income tax benefits from discrete activities and all associated tax effects. Non-GAAP gross margin in Q4 was 79.2% and which was slightly lower than 79.8% in Q4 of last year, mainly due to our investment in AI companion.

In FY '25, we expect our gross margin to be approximately 79%, reflecting focused investments in our AI features. Over the course of FY '25, we expect to directionally improve gross margin towards our long-term target of 80%, as we continue to optimize our data center strategy and grow some of our higher ASP products like Zoom contact center.

Non-GAAP income from operations grew by 10% year-over-year to $444 million, exceeding the high end of our guidance of $414 million. This translates to a 38.7% non-GAAP operating margin for Q4, an improvement from 36.2% in Q4 of last year. Non-GAAP diluted net income per share in Q4 was $1.42 on approximately $313 million non-GAAP diluted weighted average shares outstanding. This result was $0.27 above the high end of our guidance and $0.20 higher than Q4 of last year.

Turning to the balance sheet. Deferred revenue at the end of the period was $1.27 billion, down approximately 3% from Q4 of last year. This was roughly 3 percentage points better than the high end of the range we provided last quarter. For Q1, we expect deferred revenue to be down 4% to 5% year-over-year.

Looking at both our billed and unbilled contracts, our RPO increased 4% year-over-year to approximately $3.57 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months as compared to 56% in Q4 of last year.

Operating cash flow in the quarter grew 66% year-over-year to $351 million. Free cash flow grew 81% year-over-year to $333 million. The sharp increase in our 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 30.6% million and 29%, respectively.

We ended the quarter with approximately $7 billion in cash, cash equivalents and marketable securities, excluding restricted cash.

Turning to guidance. As we consider our view for Q1 and FY '25, we have not assumed any changes in the macroeconomic outlook. For Q1, we expect revenue to be approximately $1.125 billion. This incorporates 2 fewer days in Q1 and would represent approximately 1.8% year-over-year growth.

We expect non-GAAP operating income to be in the range of $410 million to $415 million. Our outlook for non-GAAP earnings per share is $1.18 to $1.20 based on approximately 316 million shares outstanding.

For the full year of FY '25, we expect revenue to be approximately $4.6 billion, which represents approximately 1.6% year-over-year growth. We expect Q2 to be the low point from a year-over-year growth perspective and to accelerate from there. We expect our non-GAAP operating income to be in the range of $1.72 billion to $1.73 billion, representing an operating margin of approximately 37.5%.

Our outlook for non-GAAP earnings per share for FY '25 is $4.85 to $4.88 based on approximately 321 million shares outstanding. For FY '25, we expect free cash flow to be in the range of $1.44 billion to $1.48 billion. We believe that our strong cash flow generation and financial discipline, coupled with responsible capital allocation is a powerful combination.

As indicated in our earnings press release today, our Board has authorized a $1.5 billion share repurchase program that we will start executing this quarter. This not only underscores the confidence our Board and management team have in the future of Zoom, but also allows us to leverage our strong profitability, cash flow and balance sheet to drive shareholder returns while also allowing us the flexibility to consider M&A options to accelerate growth and deliver for our customers.

As a note, the share count and EPS metrics in our guide do not account for the impacts from the shareholder repurchase program.

To echo what Eric said, we are optimistic about where we are now and where we are going. Our competitive position, innovation engine and customer base set us up for success in FY '25 and beyond.

Thank you to the entire Zoom team, our customers our community and our investors for your trust and support.

Before closing, I would like to thank just one more person for their support over the years. Our Head of IR, Tom McCallum, has decided to retire this summer after a seasoned 25-year IR career. Tom, it's been an honor and a pleasure to work with you. You have contributed tremendously to Zoom's success since even before the IPO and will be dearly missed. Thank you so much for all you have done and congratulations.

I am pleased to announce that Charles Evaslage who has worked with Tom and me for several years now will assume the role. With Charles at the helm, we are confident that the investment community will continue to receive a high level of service from our IR team. Please hold your goodbyes for Tom for now as he will be with us until midyear to ensure a smooth transition.

With that, David, please queue up the first question.

[Operator]

[Operator Instructions] And our first question comes from William Power with Baird.

[William Power, analyst]

I guess -- well, Kelly, you said to hold this for Tom. But Tom, I wanted to just say thanks for all the help over the years.

Kelly, maybe just to kick it off with you. As we look at guidance, maybe just talk about what's providing confidence that the year-over-year growth should trough in Q2, if I heard you right. How do we think about the key drivers then to perhaps accelerate year-over-year growth in the back half of the year and perhaps into fiscal '26? And how do we think about that trajectory over the ensuing 18 months maybe as you get past that?

[Kelly Steckelberg, executive]

So when you think about coming down in Q2, but then accelerating in the back half, this is the culmination of what we've been talking about for a while, which is the growth being driven by Zoom phone, by Zoom Contact Center, which we've seen continue to mature by the effect that AI and adoption of team chat are having on the overall retention metrics of the company.

So all of those factors is what gives us that confidence that we're going to see it come down in Q2, but then start to reaccelerate after that. And then, I mean, it's very early to comment on FY '26, but that will be an indicator that exit rate for FY '25 will be an indicator for FY '26.

[Operator]

Our next question comes from Meta Marshall with Morgan Stanley.

[Meta Marshall, analyst]

I just wanted to ask maybe just in terms of on the deferred revenue, in the past quarter, you mentioned that deferred revenue would kind of be down the quarter or we saw it come down. And just wondering, last quarter, you had talked about the terms that you were seeing of people extending their deals come in a little bit.

Just any trends that you're seeing just in terms of renewals and what you're kind of seeing in terms of renewals either in terms of products that they're adding, but just also maybe term compression they might be seeing?

[Kelly Steckelberg, executive]

So we've continued to see strength in renewals are -- huge thanks to our renewals team in Q4. Actually did an amazing job of exceeding their target, which was great to see. And what we have seen is the continued trend of our customers wanting shorter payment terms. They're hanging on to their cash. Remember, we talked about this in Q3 that that's really what contributes to the decrease in deferred.

And then the other thing is the timing of renewals. We are seeing customers not necessarily wait to their renewal period to start these discussions. For example, I reviewed a proposal today for a customer that's not going to renew for 6 months. So customers are really thinking ahead about their contracts and being very thoughtful about this. And what that does, it create some variability in both the RPO and the deferred because it's very sensitive to the timing of these things.

[Operator]

Our next question comes from [ Ethan Brock ] from Wolfe Research.

[Aleksandr Zukin, analyst]

Congrats on the results. And I ask the question on behalf of -- Alex here. So I guess my question would just be a little bit back on the guidance for fiscal '25. Just if you can give some puts and takes. I know you said you're not factoring macro improvement, but how should we think about both the enterprise and online piece? I know you guys are rolling out some pricing increases. So maybe how to factor that going into numbers for next year?

And just also the NRR piece, maybe roughly when you're expecting that to trough. Just any color on that would be great.

[Kelly Steckelberg, executive]

So in terms of the enterprise or the direct sales organization, we kind of touched on this in the prepared remarks. But they're off to a fast start this year. We're really excited about that. If you remember last year, we had not only the overall reduction in the company, but the sales reorganization, which took a lot of time for the organization to recover from, frankly.

And so seeing them well positioned to start off this year strong is really exciting to see, and that's certainly going to contribute to the overall growth that we're expecting to see, especially in the back half of the year. And then from an online perspective, really pleased, for example, with the Q3 churn metric. I think considering that we typically see seasonally higher churn in Q2 and Q4, that churn rate holding from Q3 to Q4 at that lowest rate of 3.0 is really indicative of all the improvements that team has made to the platform, the ongoing initiatives they put in place. And so all of those considerations is what gives us confidence around the FY '25 guide.

[Aleksandr Zukin, analyst]

And just a quick follow-up. It's just around some of the AI, like you're successfully embedding it across the platform. I'm just curious, as we think about kind of the monetization angles over the next few years, I mean, if you were to stack rank where you think the combination of moving just to higher SKUs, matching price to value, which you guys are obviously already doing or are getting folks to adopt, more products on the upsell side into contact center, for example, just curious how you guys are thinking about that right now.

[Eric Yuan, executive]

Sure. I can take it. So -- and we are monetizing AI on many fronts. You look at our Zoom AI companion, right? So first of all, for our existing customers because they all like the value we created, right, to generate meeting summary, meeting [indiscernible] so on and so forth.

Because of that, we really do not -- because customers are also trying to reduce the cost. That's why we do not charge the customers for those features. However, a lot of areas we can monetize, take our AI companion, for example. Enterprise customers, how to lever enterprise customer directionally, source data and also to build a tailored the Zoom AI companion for those customers, sort of like a customized Zoom AI companion, we can monetize.

And also look at all the services, maybe I'll just take a contact center, for example. We are offering a Zoom virtual agent, that's one we can monetize. And recently, we announced 3 tiers of Zoom contact center product. The last one is per agent per month we charge $149. The reason why, there are a few features. One of the feature is Zoom expert assist right?

All those features are empowered by AI features. Not to mention, we are also going to build new services and are driven by Zoom AI companion as well. I think this year, we are going to do doubling down on Zoom AI customization and also focus on monetization. That's our effort.

[Operator]

Our next question comes from Tyler Radke with Citi.

[Tyler Radke, analyst]

I wanted to ask you about the recently announced buyback. $1.5 billion is impressive, 7% of your shares outstanding. But I guess what -- how do you kind of come up with that number? And does that signal anything about the size of potential M&A that you're hoping to do? Anything that you could just share in terms of why now and the decision process would be helpful.

[Kelly Steckelberg, executive]

Yes. So we've talked about this many times in the past. Every quarter, we have this discussion about capital allocation with our Board, of course, with Eric. And with $7 billion sitting on our balance sheet today and the string of our cash flow outlook for FY '25, we feel confident that having an authorization in place does break through this and still provides us plenty of flexibility to do M&A transactions that we might see as exciting in the future.

And we continue to look for any opportunities that make sense to bring another organization to the Zoom portfolio. And we're targeting an amount that would approximately offset potentially most of the dilution for FY '25, and that's how we're thinking about it.

Of course, you just did that quick calculation of math, but there's always variability in the execution of these programs. And we will be looking -- the way that we execute it as we set an approximate amount we want to acquire every single quarter. So we'll be evaluating this as we move through the year this year.

[Operator]

Our next question comes from Tom Blakey from KeyBanc.

[Thomas Blakey, analyst]

Congratulations on the, I'll say, early retirement, Tom. The -- just point of clarification first, Kelly on. I think Meta was asking about 2Q and the guide, and you mentioned something about being done. Were you implying, just point of clarification, that fiscal 2Q would be down quarter-on-quarter from fiscal 1Q?

[Kelly Steckelberg, executive]

We're saying that the year-over-year growth rates in Q2 will decline as compared to the year-over-year growth rate in Q1. Yes, it will be positive. It won't be -- it's not going to go negative based on our current outlook, but it will be lower than the year-over-year growth rate in Q1.

[Thomas Blakey, analyst]

My key question would be on the [ CCS ]. It sounds like you're off to a great start. There's a lot of demand out there hearing from your peers. I'd love to just give you the opportunity to talk about pricing, uptake of some of the virtual agent, agent assist functionality and maybe any type of -- what you baked into fiscal '25 in terms of visibility here as you've come out very strong in the fourth quarter into fiscal '25?

[Kelly Steckelberg, executive]

Eric, do you want to talk about contact center in general for a minute first?

[Eric Yuan, executive]

Sure. Absolutely. I think, Tom, you may not know actually, recently, I had got a new job here at Zoom. I become the contact center General Manager or the product management team engineers, go-to-market team, sales, marketing, they already reported directly.

That means a huge opportunity ahead of us. While I want to be another head of GMO contact center seriously. But anyway, to based on customer feedback very, very positive. We're doing extremely well every quarter. In Q4, the number is amazing. And plus, the reason why we have a confidence introduced like a 3-tier pricing because a lot of the customers to us, right, they probably need a very basic contact solutions, the $69 per month per agent, very competitive, all the cool features.

Or if they want some social channel, maybe auto bond dialer, they can pay another $30 more per agent. And for a huge enterprise customers want to buy 1,000 agents and we gave not Zoom expert assist and also workforce management, all the features.

You can see Zoom has become a full suite of contact center offering. We can compete head-to-head to any legacy incumbents. I'll give one example. Zoom, we internally, we deployed our virtual agent. Guess what? Every month, received 400,018 hours and more than 90% inbound inquiries can be done by our virtual agent driven by the AI technology.

I'm very excited about everything we are doing and the feedback is very positive. Again, we are going to doubling down, tripling down on our contact center offering because that's a modern solution, AI-powered, video first, and also we build a full suite. That that's why we are so excited.

[Kelly Steckelberg, executive]

I think based on your enthusiasm, Eric, I'm going to raise your quota.

[Eric Yuan, executive]

Yes, I raise the quota of the team every day, so there's no difference.

[Thomas Blakey, analyst]

And Kelly, what kind of outlook are you baking in, in terms of the strength there and the visibility commentary about fiscal '25? And then is that -- this is just enterprise right now, right? This is the self service online here, right?

[Kelly Steckelberg, executive]

Yes, correct.

[Eric Yuan, executive]

Not yet. But yes, you're also right on. Thank you for helping us to monetize contact center in other ways.

[Kelly Steckelberg, executive]

Yes. So Tom, we looked at trends that we've been seeing, the number of customers, the growth rate, the size of the deals, which have been expanding over the last several quarters. And just -- and of course, sales capacity and taking all of that in consideration, including the new pricing tiers, that's how we built our outlook for FY '25.

[Operator]

Our next question comes from James Fish with Piper Sandler.

[James Fish, analyst]

Tom, congrats on the announcement. Just going back to a couple of questions ago on how to think about the quantitative approach here on past or future price increases on the guide for this year?

And for Eric, what's causing customers to move over to the Zoom chat function and off your main competitor like Teams? Just further consolidation onto one platform? Or is it AI companion playing a larger role here, especially as you guys are concluding it, as opposed to $30, $35 a month?

[Eric Yuan, executive]

Kelly, you want to take the first one?

[Kelly Steckelberg, executive]

No, you go ahead. You go ahead first.

[Eric Yuan, executive]

Sure. Sure. So James, one thing I think we did not do well, as I mentioned even before, is we did not do well on marketing front. A lot of customers, users, they do not know Zoom has a great persistent team chat functionality and no additional cost. And it works extremely well. All the key features, any other competitor's product, they have also have that as well. Very well integrated with Zoom product.

And plus, as you said, you're also right on. Customers, they see using their chat solution, they want to use AI, right. I send you -- James, I send you a message. I want to leverage the AI, send a long message. However, if you use other solutions, sometimes, other solutions itself, even with all AI, it's not free, right? And in our case, not only have core functionalities, but also AI combining building also at no additional cost.

I can use -- for any users, customers, you already have a meeting license, Zoom team chat already built in, right? All the core features, you can use the Zoom AI companion in order to leverage the AI chat message and so on and so forth, it works too well at no additional cost.

The total cost of ownership of the Zoom team chat is much better than any other team chat solutions. And also, we built a native client, not like some other competitors, the web-based clients. Sometimes, like I'm using Mac. Performance, so on and so forth, it's really not good and clunky experience. That's the reason why more and more customers they discover zoom team chat capabilities say, wow, why not a move to Zoom platform?

They give the team chat functionalities at no additional cost, right? That's the reason why we have confidence. I hope more and more customers are going to move to Zoom team chat. We also built a very similar migration to Zoom as well, to have a customer migrate to Zoom team chat.

[Kelly Steckelberg, executive]

And -- thank you, Eric. In terms of the price increases, James. So certainly the online price increases that we talked about last call and that we're implementing in Q4 are in all of our forward-looking guidance. And then the renewals team, as they're talking to our customer about renewals where there are opportunities for price increases, we've seen those trends over the last few quarters they've been doing that. And that would also show up in the pipeline that the team has out there. So in that context, it's also been considered.

[Eric Yuan, executive]

Yes. By the way, James and all the analysts here, if your log in with a Zoom client, you know my email address. We can create a Zoom team chat group and let's get a first-hand experience, how powerful it is. So it's very easy.

[Kelly Steckelberg, executive]

You can have one-on-one access to Eric, James. Face time him.

[Operator]

Our next question comes from Matthew VanVliet with BTIG.

[Matthew VanVliet, analyst]

I guess one more on the contact center. Curious in terms of how the mix is maybe different with a panel involvement and partners being involved in those deals over the last couple of months as you really invested in the channel program.

And then secondarily, what is the mix of, I guess, the contact center sales into existing customers, especially existing Zoom phone customers? Is that any different than the early days of Zoom phone in terms of mix?

[Eric Yuan, executive]

Yes. So -- Kelly, feel free to chime in. I think for the core product, by and large, this is directly driven and Zoom phone is mixed, right, direct and channel driven. You look at the contact center product, for sure, have Zoom contact center here.

But I think primarily driven by a lot of -- and variable established the third-party agents, right, and those are channel partners.

So they already have a great relationship. We heavily invest into that area. So that's the reason why a lot of deals are brought to us by those, the channel partners. Some of them even never use that. They are not a Zoom meeting customers, but also, they've become the first zoom contact center customers.. So that's kind of a channel and also the Zoom contact center specialist.

Also, at the same time, because Zoom phone and Zoom contact center, we integrated very well, and also we are training all those Zoom phone specialists also to become a Zoom contact center specialists, right? The further have our internal sales capacity as well.

I think the overall -- and you look at the revenue trajectory and, Kelly, correct me if I'm wrong, it's very similar to our Zoom phone growth. And hopefully, after I become GM, maybe we can beat that as well. So -- and anyway, so that's where we are now.

[Kelly Steckelberg, executive]

The only thing that I would add to that is we're very excited. We hired Chris Morrissey in November. He is a veteran in this space. So really excited to have his talents here at Zoom. And then One other thing to note which has been interesting about contact center is we actually have seen customers -- new customers coming for Zoom Contact Center.

So it's also an opportunity to start to bring -- expose the platform to new prospects and customers as they're really excited about this really modern technology that we have in Zoom contact center.

[Eric Yuan, executive]

By the way, Chris reports to me directly. It came from [ NIC ], so NIC in contact.

[Operator]

our next question comes from Siti Panigrahi with Mizuho.

[Sitikantha Panigrahi, analyst]

So how about the other growth driver you have on phone -- on the phone side? So help us understand like what's your penetration right now within the installed base on the phone side? And any update in terms of where the number of states or revenue you have by end of this fiscal year?

[Kelly Steckelberg, executive]

Yes. So we are really excited about the ongoing strength and growth in new phone. The -- in terms of the opportunity ahead, even internally, the penetration rate for deal attach is still under, I think, 20%. So that just highlights -- there's also a greenfield even within our existing Zoom customer.

And the metric that we gave this quarter was that customers with greater than 10,000 seats increased 11% year-over-year or 27% -- sorry, 11% quarter-over-quarter, 27% year-over-year to 95%. So seeing lots of strength in that high end of the customer base, which we're really excited about. And we didn't give a seat count metric this quarter. It's probably something that we'll do in the next quarter or 2.

[Operator]

Our next question comes from Arjun Bhatia with William Blair .

[Arjun Bhatia, analyst]

Maybe going back to the contact center piece and trying to loop in the AI expert assist side. When you're seeing customers come in, are they adopting the premium tiers off the bat? And do you have a sense of whether the usage of expert assist is ticking up as a result? Or is this something that we should think of as a future upsell driver as customers kind of land, maybe at the low end and then expand over time?

[Eric Yuan, executive]

Yes, that's a great question. The reason why we introduced the model tiers for the contact center because we really look at it from a customer perspective. Each customer, they have a totally different demands or requirements. And sometimes, they do not care about -- and the super media channel, right? And it just need a core functionality, right? Just a few hundred seats migrate from other cloud based upon center solutions, really do not need workforce management or care management, right?

That's the reason why we have 3 tiers now, right? Quite often for the SMB customer, I think Zoom contact center essentials is good enough, right? And we talk with the customers with more than 1,000 agents. For sure, we would like to have those AI expert assist and workforce management or quality management so on and so forth?

That's the reason why because customer demand, we have multiple tiers and our contact center specialists and those partners -- channel partners working together, right? Based on customer demand, we'll offer different tiers. We might introduce more in the future. We do not know. But again, we look at everything from a customer perspective. That's the reason why based on those multi tier packages, you can see that. The demand coming from every segment, SMB customers, a lot interested customers, and it's very healthy.

[Kelly Steckelberg, executive]

And just to further what Eric said. The packages are off to a really good start. We've had approximately 3,700 licenses sold in those upper tiers. And the ASP for those is double what our existing ASP was before we introduced those additional tiers. So it really shows you how this is going to not only address a broader market but also accelerate our revenue growth here.

[Eric Yuan, executive]

Yes. Used to be a little bit over 50. Now it is 100. This is a great result.

[Operator]

Your next question comes from Taz Koujalgi with Wedbush.

[Imtiaz Koujalgi, analyst]

I have a question on the guide for next year. Kelly, how do you think about the breakdown between enterprise growth and online for next year? Should we see online start growing year-over-year in '25?

[Kelly Steckelberg, executive]

Yes. We aren't going to give specific guidance for the segments, but we are really focused on continuing to have stabilization in the online segment, which you saw happen again this quarter is -- actually both quarter -- both segments were slightly up in Q4, which was great to see. And really focusing on the initiatives to drive -- basically stabilization is how I would think about it for FY '25 in the online segment.

[Imtiaz Koujalgi, analyst]

And then one follow-up for Eric. Eric, you mentioned increasing deal sizes for contact center. Can you compare when a customer buys Zoom phone and buys Zoom contact center, are the deal sizes a lot different, similar because the ASP is a lot higher for contact center? But I'm guessing the seat count is lower. How does the seat -- deal values compare between phone and contact center?

[Eric Yuan, executive]

I think -- that's a great question. I think for sure, I do not think I compare that a Zoom phone by Zoom contact center, as we started normally, so we have a lot of accounts. But every deal size is smaller. Now we see that every size of a deal is bigger and greater and greater, right? This is much better than before.

And from that perspective, it's very different competitors from Zoom, right? That's the reason why you look at our -- the Zoom and the industry package, right? And elite package is 100 -- I think, is 49 per user per month, per agent per month. It's much -- and bigger than Zoom phone, right? That's the reason why I think in terms of pricing, it is very different. We see that more and more medium and large enterprise customers are double Zoom contact center, you can see that every deal size is much bigger. And we do know number of customers, but focus on the size of customers, that's very healthy.

[Operator]

Our next question comes from Matthew Bullock with Bank of America.

[Unknown Analyst]

I'll be on behalf of Matt today. Regarding Zoom's progress and road map for contact center product development. Can you provide an update on the company's near-term priorities in terms of functionality improvement? And then in the longer term, where is the company's focus to better position the offering for larger-scale enterprise deployments?

[Eric Yuan, executive]

Yes, this is great. So first of all, I want to tell you from an architecture perspective, we are ready already for a very big live customers in terms of a number of concrete agents, and we did a test, it works very well.

For now, we just focus on the feature side. Again, we already have lots of features. Most of the customers, they can deploy Zoom contact center without any problem. Migrate from legacy contact center solution providers or migrate from the other cloud solution providers.

In terms of a new feature. For the -- I think in the next few quarters, like one big picture is a PCI compliance, right? We need to support that, right? And also how to support the channel partners, right, and also all those features may not be the core features, but also like PCI compliance and also the supporter of channel partners, right? All those features sort of like enterprise related, so -- and we're also working on that.

And also some like workforce management, management further enhance that. and also add a lot of AI features as well. I think as you can see, in the core feature set already there, we just need to add a few here and there and think, well, almost 100% ready. Like even for the social media channel, we already support -- and the other -- like in the social media channel, how do we support more the channels like WhatsApp, right? How to add WhatsApp there? It's just some corner feature here and there in the next few quarters. And yes, this team is working very hard on that.

[Operator]

Our next question comes from Mark Murphy with JPMorgan.

[Unknown Analyst]

This is [ Arty ] on for Mark Murphy. Congrats on all the milestones. You mentioned in your prepared remarks about how AI companion is integrated into your contact center suite solutions. In our discussions with industry contacts, those sort of applications for Gen AI have been pretty scaled pretty strong in a lot of customer interest. Are you guys seeing a similar pattern with customers? Is that an area where you're seeing kind of an outsized interest or utilization of the AI tools?

[Eric Yuan, executive]

Yes, I think it's very similar. If you look at the Zoom meeting product, right? We constantly discover the Zoom AI companion to help you with the meeting summary. And after they discover that feature and they would like to adopt that, right? Contact center, the same thing. And like a virtual agent, Zoom export assist, right, leverage those AI features. Manager knows kind and what's going on in real time and also -- and the agent while can have the AI, to get a real-time in order base and any update about these customers.

All those AI features can dramatically improved agent efficiency, right? That's the reason why it's kind of -- will not take a much longer time for those agents realize the value of the AI features because it's kind of very easy to use. And I think that in terms of adoption rate, I feel like a contact center AI adoption rate even probably faster than the other -- the core features, so -- core services.

[Operator]

Our next question comes from Matthew Harrigan with Benchmark.

[Matthew Harrigan, analyst]

Do you have any thoughts on the relative macro strength you're seeing in different markets, Pacific Rim, Japan? Obviously, [ Buffet ] was just extolling the virtues of Japan is an investment area right now, Europe, U.S., et cetera?

[Kelly Steckelberg, executive]

Yes. We agree. We see Japan as certainly a very important market for us. And it is a core focus for FY '25 is reinvesting and reinvigorating our go-to-market teams in both EMEA and APAC. We have new leadership in some of those markets and are really excited again about the quick start, the teams being in market and we're ready to go look forward to great things from them this year.

[Operator]

Our next question comes from Peter Weed with Bernstein.

[Peter Weed, analyst]

I really appreciate all the detail, and it's obviously pretty exciting news to see all the expansion opportunities going on with the enterprise customers, along with kind of maybe a floor coming in with the online customer group.

I guess, 2 follow-ups I got around the enterprise customers. I don't think you commented on how churn is evolving with those customers. And obviously, with continued tailing and [indiscernible]. I'm trying to unpack what portion of that is coming from churn versus what portion of that is coming from the kind of continued refresh cycle you have with like long-tenured customers that are still coming down on seats.

And then the second part is kind of if you look through on that NRR and you're talking about some acceleration going on later this year. And I think that's starting to mix in customers that no longer are those long tenure that have seats coming down, and it's really being replaced by those that -- the expansion is really in functionality is coming in.

If you look at those customers that are kind of past their seat readjustment, how expansive are those customers that we can maybe look forward to out a year or so being a greater portion of the mix?

[Kelly Steckelberg, executive]

Yes. So it's a really good point, Peter. So we've talked about this a few times, but in FY '24, we know -- we saw that the majority of our customers had a renewal event. So they had the opportunity to work with us as they needed to potentially rightsize their seat count.

Again, our renewals team has done an amazing job of taking the opportunity to talk to them about the opportunity to upgrade to Zoom 1 to potentially add in Zoom phone or additional products, so maintaining that spend. So we've seen some shifting around in terms of the overall portfolio, but really focused on maintaining that spend. And what that does is it really situates us very well as those customers start to grow again, that the customers are now sitting in different SKUs that potentially are more retentive and also at a higher price point, honestly, that they can grow into as they start adding seats again.

We do see there's going to be a much lower percentage of our customers that are up for renewal this year that didn't have a renewal event last year. So we've seen, again, the majority of our customers that they had something to work through in terms of rightsizing. We've seen the majority of them have the opportunity to do that in FY '24. So we expect that to have a much lower impact in FY '25.

[Peter Weed, analyst]

And the churn side of it, how much of the roll-off in NRR is because churn has gone up? Or is it continuing to be what it has always been on the enterprise side, pretty stable?

[Kelly Steckelberg, executive]

It's been pretty stable. We did -- we've talked about these customers that we're rightsizing. You saw -- given the reductions that we saw across our customer base, and you saw generally in organizations last year, there was some impact for that, but the churn rates themselves have been pretty stable.

And you remember that our net ARR number is a trailing 12-month metric. So you're likely going to see a little more decline in that metric before it starts to reaccelerate again, along with our revenue that we're expecting to see at the back half of this year.

[Operator]

Our next question comes from Shelby Seyrafi with FBN Securities.

[Shebly Seyrafi, analyst]

So adjusted for the 2 fewer days in Q1, you're guiding for 3.6%, so 4% growth in Q1. And for the year, you're guiding for about 1.5% growth. I know you bought them in Q2, but it seems like with a reasonable projection, there's still going to be like 2% growth, roughly half the 4% growth in Q1 in the back half of the year, you're going to have these new products ramping, the phone, the contact center, AI, et cetera.

I'm trying to understand why you don't expect an adjusted revenue growth acceleration in the back half instead of the implied deceleration I get in my model.

[Kelly Steckelberg, executive]

Yes. We do -- we are guiding to 1.8% in Q1. So that's the outlook that we are giving. If you're backing into something different. But the guidance that we're giving, as a reminder, is 1.8% and then 1.6% for the full year with the decline that we are expecting from a year-over-year growth perspective in Q2.

[Shebly Seyrafi, analyst]

Let me be clear. But Q1 has a 1.8% hit from the 2 fewer days. So adjusted for that, it's 3.6% growth in Q1, right? So apples-to-apples, 3.6% goes down to something like 1 to 2 in the back half of the year, and you have new products ramping in the back half of the year. So I'm trying to understand that.

[Kelly Steckelberg, executive]

So as I mentioned in prepared remarks, we are not assuming any improvement in the overall macro economic outlook and/or changes significantly in terms of our international contribution. So all of that combined, we are taking what we believe to be an appropriately prudent outlook for the year.

[Operator]

Our next question comes from Catharine Trebnick with Rosenblatt Securities.

[Catharine Trebnick, analyst]

So back to the contact center, to beat a dead horse. It seems like there is this -- a lot of the information I gathered was there's a big push for light contact centers and it seems that Zoom fits that quite well with your pricing model. And when I say light, I mean those are nonagents versus agents. So do you have like a split for the quarter that you were willing to share? That would be agent versus non-agent? I'm just trying to get a good handle on that growth outside the traditional agents for license because there seems to be a good opportunity there.

[Eric Yuan, executive]

I think direction wise, you're so right. And on the one hand, for the real human agent, they still need more in contact center solution. We are working hard on that, replace legacy vendor solutions or other cloud business solutions.

On the other hand, and it is more and more demand, I think the customers, they do not going to deploy a human agent anymore, right? Can have the virtual agent. I think that's the reason why also I say Zoom virtual agent as well. I think maybe in the next few quarters and maybe are ready to disclose that. For now, I don't know think we're ready to disclose that number. I can -- but we focus on both sides. And either you do not have more agent, you can have the AI. This is good. Or you can buy more agents, that's okay, too. And yes, that's our plan.

[Operator]

Our next question comes from Peter Levine living with Evercore.

[Peter Levine, analyst]

Kelly, your comments on M&A, can you maybe share with us what you're thinking in terms of inorganic contribution, but what area would you consider? Is it CCaaS? Is it like flow collaboration? But any sense on kind of where you're thinking or how you're thinking about adding to the portfolio?

[Kelly Steckelberg, executive]

Yes. We've been exploring opportunities actually across all of those areas, Peter. We look for opportunities to either accelerate what we already have, which would obviously be in the CCaaS space and a good example is what we did in the past with Solvay around our virtual agent product or something that sits a little bit next to it, which Workvivo is a great example of that as well.

So we are continuing to look in areas both within our current portfolio as well as around us with things like productivity tools. So that's how we're thinking about it. Eric, is there anything you want to add?

[Eric Yuan, executive]

Yes, you're also right on just either the technology driven or just to expand our cap or maybe double down on our existing services. Pretty much those 3 things, yes, we are very interested on offering.

[Operator]

We only have time for one more question, and that comes from George Iwanyc with Oppenheimer.

[George Iwanyc, analyst]

Kelly, maybe expanding on your comments on the sales side and the reorg. How do you feel about your productivity in North America and internationally? And when you look at investing this year, like where are you putting the most effort?

[Kelly Steckelberg, executive]

Yes. So you saw in our results for Q3 and Q4 that we had reacceleration in sales productivity in the back half of FY '24. And again, off to a really fast start for FY '25. So excited about that.

We are investing in both direct and channel on a global basis as it's really important that we keep fueling the growth driver that we have here in North America, but also reinvesting and reinvigorating our international markets as well.

[Operator]

This concludes our Q&A. And I would now like to pass things back to Eric for closing comments.

[Eric Yuan, executive]

Well, thank you all for your support. Thank you all for your time. I really appreciate, and see you next quarter. Thank you.

[Operator]

Again, this concludes today's release. We thank you all for your participation. From our family to yours, thank you.