Zoom Communications Inc (ZM) 2021 Q1 法說會逐字稿

Hello, everyone.

And welcome to Zoom's First Quarter Fiscal Year 2021 Earnings release.

As a reminder, this call is being recorded.

At this time, I'd like to turn the floor over to Tom McCallum, Head of Investor Relations.

Thank you, Matt, and hello, everyone.

Welcome to Zoom's earnings video webinar for the first quarter of fiscal 2021.

Joining me today will be Zoom's Founder and CEO, Eric Yuan; and Zoom's CFO, Kelly Steckelberg.

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

Also on this page, you will 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 about our market size, growth strategy, our estimated and projected costs, margins, revenue, expenditures, investments and growth rates, our future financial performance and other future events or trends, including the guidance for the second quarter of 2021 and full fiscal year guidance for 2021; our plans and objectives for future operations, growth initiatives or strategies and the impact of Zoom's business from the COVID-19 pandemic.

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

These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results and which we discuss in detail in our filings with the SEC, including today's earnings press release and our latest 10-Q.

Zoom assumes no obligation to update any forward-looking statements we may make on today's webinar.

And with that, let me turn it over to Eric.

I mean I think Eric's mic -- there you go.

It's good.

Thank you, Tom.

Yes.

First of all, thank you all for your time today.

I still remember the first time when we had an earnings call last year.

It was around less than 1,000 participants.

Today, we have over 3,000 participants.

Thank you all for your time, and I hope you are doing as well as is possible in this unique moment around the globe.

To the frontline workers, we thank you for your courage and the tremendous sacrifices you are making to keep us healthy and our community running in this pandemic.

Everyone at Zoom appreciates all your incredible work.

COVID has brought pain for many, in particular, vulnerable communities.

The black community in the United States has also recently experienced shocking and a senseless loss.

To our communities and customers, especially those in the black community, Zoom is standing with you not only today but also into the future.

Nearly 10 years ago, we created Zoom to build a better, simpler and more efficient video communications platform.

Today, I am proud to see that our platform is serving a critical role beyond our original vision, in enabling communication and collaboration for businesses, schools, consumers and the global community to stay connected and operational during the COVID-19 pandemic.

Navigating this process has been a humbling learning experience, giving us a newfound appreciation for what it means to be a video communications technology provider in times of need.

And work-from-home and social distance initiatives have meaningfully accelerated the adoption and traffic on the Zoom Video Communications platform.

We have seen many use cases, not only from enterprises to maintain work productivity as part of business continuity plans, but also from first-time consumer users for personal and social use to connect with friends and families when physical gathering is not possible.

Let me share some metrics that illustrate the demand we experienced in this past quarter.

Customers with more than 10 employees grew 354% year-over-year as we deployed millions of licenses for new customers in the quarter.

One new banking customer deployed approximately 175,000 new Zoom enterprise licenses in the quarter.

Usage by customers in the Global 2000 grew over 200% sequentially.

We peaked at over 300 million daily meeting participants, free and paid, joining Zoom meetings in April 2020, up from 10 million in December 2019.

Currently, we continue to see elevated levels of participants even as governments around the globe have begun to [see] stay-in-place restrictions.

We had an approximately twentyfold increase in our metric of annualized meeting minutes run rate, which jumped from 100 billion at the end of January 2020 to over 2 trillion meeting minutes based on April 2020's run rate.

Scaling capacity to meet this incredible increase in traffic and use cases while providing uninterrupted, reliable and high-quality services for our customers has been a tremendous undertaking for our team, and we could not have done it without relying on our partners.

When the pandemic crisis started, our own data centers could not scale fast enough to handle the unprecedented traffic.

Fortunately, some of the top public cloud providers were there to help.

Immediately during the crisis, our long-time partner, AWS, and its CEO, Andy Jassy, enabled us to meet this rapidly increasing demand.

As our demand increased and we had limited visibility into the growth, AWS was able to respond quickly by provisioning the majority of the new service we needed, so sometimes adding several thousand a day for several days in a row.

In April, our customer, Oracle, also showed great support to help us.

Not only did Larry Ellison record a great video to encourage our team to do the right things for the world, but also offered the Oracle Cloud support.

We also provisioned a number of servers in the Oracle Cloud as the demand for Zoom continued to increase.

We are so grateful for their partnership and their responsiveness to provide capacity during this time.

While the COVID-19 pandemic has expanded our market opportunities, it also brought us many challenges.

Prior to the pandemic, Zoom was primarily built for and used by large enterprises and institutions.

During the crisis, with good intentions, we opened our platform to unprecedented numbers of first-time users without fully considering the challenges it would bring into those who did not have full IT support or established protocols for security and privacy like our enterprise customers.

As a result, we have experienced negative press related to meeting disruption, security and privacy issues.

Since these issues emerged, we have transparently and quickly addressed specific security and privacy issues, including enacted a 90-day plan initiative on security and privacy with a weekly webinar for customers to ask me anything, acquired Keybase team to add engineering expertise to build an end-to-end encrypted meeting mode, also released Zoom 5.0 client with new security features and enhancement to give customers unparalleled control over their meetings and data.

The new release also includes support for AES 256-bit GCM encryption and ability to report platform misuse to Zoom's trust and safety team.

During this period of unprecedented usage growth and negative PR, as the CEO of Zoom, I was also facing tremendous pressure, and I reached out to the high-tech community and received great support from fellow CEOs, and many of them are my mentors.

And I can't thank them enough for their advice.

I'm also deeply grateful to see the strong support from valued enterprise customers such as the CEOs from Atlassian, Equinix, HubSpot, Okta, PagerDuty, Poly, SurveyMonkey and many others, both through public statements and video testimonials.

With that, our users trust us to deliver the best and most secure video-first communications platform.

I believe our resolve will continue to make us a stronger company for our customers and the global community.

Now let me discuss a few of our happy customers.

We are thrilled to welcome Arm Technology to the Zoom family.

Arm Technology is at the heart of a computing and data revolution that is transforming the way people live and businesses operate.

In Q1, Arm chose to deploy approximately 8,000 Zoom Meeting license, 800 Zoom Rooms and 9,000 Zoom Phones to deliver a one-touch experience for their employees globally.

We are also very happy to welcome Baker McKenzie.

One of Baker McKenzie's distinguished strength is their use of cutting-edge technologies to help clients overcome the challenges of competing into this economic world.

We feel privileged to be the video communication platform of choice for the #1 law firm brand in the world.

Thank you, Arm and Baker McKenzie.

On a final note, we welcomed Lieutenant General H.R. McMaster to serve as an independent director on Zoom's Board of Directors, Velchamy Sankarlingam as President of Engineering and Product, and Damien Hooper-Campbell as Chief Diversity Officer.

Bringing their expertise to Zoom will be instrumental as we navigate rapid growth, transformation and scale.

I want to commend and thank our 2,854 employees for what we have accomplished together and for working tirelessly over the past quarter to support millions of participants around the globe.

With that, let me turn things over to Kelly.

By the way, I forgot to mention, today is also our CFO Kelly's birthday.

So happy birthday, Kelly.

Thank you, Eric.

And this is the best birthday present I could ever have.

Hello, everybody.

Q1 was an exceptional and pivotal quarter for Zoom.

We are grateful for the incredible increase in demand, as millions of doctors and patients, teachers and students, businesses and consumers chose Zoom to deliver critical communication and connection in a time of need.

It speaks greatly of their trust in the quality and ease of use of our technology platform.

We are also proud of our efforts to support our customers, employees and the global community during the COVID-19 pandemic.

In addition to opening up our platform to deliver free services to over 100,000 K-12 schools in 25 countries and millions of people around the world, especially those in highly impacted -- areas highly impacted by the crisis, we have also donated $1.4 million to COVID-19-focused charities and funded another $1 million of stock to launch our charitable fund, Zoom Cares.

The key long-term focus of Zoom Cares includes education, social equity and climate change.

Internally, we provided a onetime bonus equivalent to 2 weeks of pay for all Zoom's noncommissioned employees to offset costs associated with any disruption caused by the crisis.

Not only has the world changed since we last reported results in early March, but so has Zoom's market opportunities and growth trajectory.

Let me start by reviewing our financial results for Q1, then discussing our outlook for Q2 and the full year of FY '21 that has been recalibrated to adjust for the new trends and scale of our business.

Total revenue grew 169% year-over-year to $328 million in Q1.

This top line result significantly exceeded the high end of our guidance range of $201 million due to the increase in demand and strong sales execution in the quarter.

For the quarter, the growth in revenue was primarily due to subscriptions provided to new customers, which accounted for approximately 71% of the increase, while subscriptions provided to existing customers accounted for approximately 29% of the increase.

This demand was broad-based across industry verticals, geographies and customer cohorts.

For the -- let's take a look at the key customer metrics for Q1.

We continue to see expansion in the upmarket as we ended Q1 at 769 customers with greater than $100,000 in trailing 12 months revenue, up 90% year-over-year.

This is an increase of 128 customers over Q4, a record number of adds in a quarter.

Further demonstrating the strength in the upmarket was the addition of over 500 customers with greater than $100,000 in annual recurring revenue in Q1.

This is a onetime metric that we are sharing to provide more insight to our Q1 results.

For customers with more than 10 employees, we added over 183,000 in Q1, exiting with a total of approximately 265,000 customers in this segment.

Year-over-year, we added over 206,000 new customers, growing 354%.

While this is remarkable growth, our customer segment with 10 or fewer employees also expanded during the quarter as individuals adopted Zoom for many personal and social uses.

As a result, we have experienced a mix shift of customer cohorts, where customers with 10 or fewer employees represented 30% of revenue in Q1, up significantly from 20% in Q4.

In addition, the increase in customers with 10 or fewer employees also shifted our billing mix, as these customers generally pay monthly rather than annually like most enterprise customers.

Our net dollar expansion was over 130% for the eighth consecutive quarter as existing customers continue to support and trust Zoom to be their video communications platform of choice.

Both domestic and international markets had strong growth during the quarter.

Americas grew at a rate of 150% year-over-year.

However, our combined APAC and EMEA revenue grew even faster at 246% year-over-year and represented approximately 25% of revenue.

International expansion is a key growth initiative for Zoom.

Our global brand awareness has spread more quickly, and we have expanded into more countries than we had originally planned for FY '21.

Now turning to profitability.

The increase in demand and execution drove net income profitability from both GAAP and non-GAAP perspectives.

For my following comments, I will focus on our non-GAAP results, which exclude the charitable donation of common stock, stock-based compensation expense and related share-based equity taxes.

Non-GAAP gross margin for the first quarter was 69.4% compared to 80.9% in Q1 last year and 84.2% last quarter.

Although in early March we originally guided lower based on an increase in usage of our platform, our gross margin was further impacted by the elevated demand, especially higher levels of free meeting minutes, including those from K-12 schools in March and April.

Higher incremental costs also resulted from leveraging the public cloud providers, which was critical to our ability to meet the sudden exponential growth in usage as the crisis spread and governments instituted stay-in-place policies around the world.

Moving forward, as we build additional capacity in our own data centers, we expect to gain some efficiencies, bringing gross margins back to the mid-70%s in the next several quarters ahead.

R&D expense in Q1 was approximately $21 million, up 66% year-over-year.

As a percentage of total revenue, R&D was 6%, which was lower than Q1 last year, mainly due to the strong top line growth.

In FY '21, we plan to continue investing in R&D to drive innovation and security functionality, including leveraging the expertise and resources from top security firms.

Also, we recently announced the addition of 2 engineering centers of excellence where we expect to add up to 500 software engineers in the next few years.

The new R&D centers in Greater Phoenix, Arizona, and Pittsburgh, Pennsylvania, will both be located near top engineering universities.

Sales and marketing expense for Q1 was $104 million.

This reflects an increase of 69% or $42 million over last year with investments to drive future growth.

As a percentage of total revenue, sales and marketing was 32%, a decrease from Q1 last year, mainly due to strong top line growth.

Overall, the increase in expense was attributable to record sales hiring and higher sales commissions due to strong execution, while we saw efficiencies in marketing.

We are expanding our hiring plans for the rest of the year to meet the opportunity presented in this new environment.

G&A expense in Q1 was $49 million, up 196% on a year-over-year basis.

It represented 15% of total revenue, up from Q1 last year due to higher accruals for telco taxes from higher billings, a onetime license payment and external professional services.

Non-GAAP operating income was $55 million, translating to a 16.6% non-GAAP operating margin for the first quarter.

This compares to Q1 last year's result of $8 million and 6.7% margin.

Again, the higher revenue plus strong execution across all areas were the main drivers of this additional profit.

Non-GAAP earnings per share in Q1 was $0.20 on approximately 295 million of non-GAAP weighted average shares outstanding and adjusting for undistributed earnings.

This result is $0.10 higher than our guidance and $0.17 higher than Q1 of last year.

Turning to the balance sheet.

Deferred revenue at the end of the quarter was $552 million, up 270% year-over-year.

Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.1 billion, up 184% from $377 million year-over-year.

The increase in RPO is consistent with the increase in demand and strong execution in the quarter.

We expect to recognize approximately 72% or $772 million of the total RPO as revenue over the next 12 months as compared to 64% or $240 million in Q1 of last year.

We ended Q1 with approximately $1.1 billion in cash, cash equivalents and marketable securities, excluding restricted cash.

In Q1, we had exceptional operating cash flow of $259 million, up from $22 million year-over-year.

Free cash flow -- sorry, can you go back?

Thanks.

Free cash flow was $252 million, up from $15 million year-over-year.

The increase is attributable to strong collections from top line growth, higher percent of monthly contracts as well as billings that started early in the quarter.

Looking ahead, we expect to increase capital expenditures for additional data center infrastructure.

And as a reminder, we will see the semiannual cadence of net cash outflows from ESPP purchases to occur in Q2.

Now turning to guidance.

As I have mentioned earlier, the current environment has expanded Zoom's market opportunities and outlook as increasing demand propelled us to a higher growth trajectory than originally planned for this year.

This requires us to recalibrate our original FY '21 plan for the new scale of our business.

The COVID-19 pandemic adds an unprecedented new variable to our business model where historical knowledge may no longer apply.

Today, as we present our current best estimate of future quarters based on new assumptions of the dramatic shift in our business, we caution that the impact and extent of the crisis and its associated economic concerns remain largely unknown.

Significant variations from our assumptions could cause us to modify our guidance.

With that, we provide a higher outlook for FY '21 based on our view of the current business environment.

For the second quarter, we expect revenue to be in the range of $495 million to $500 million.

We expect non-GAAP operating income to be in the range of $130 million to $135 million.

Our outlook for non-GAAP earnings per share is $0.44 to $0.46 based on approximately 299 million shares outstanding.

For the full year of FY '21, we expect revenue to be in the range of $1.775 billion to $1.8 billion, which would be approximately 185% to 189% year-over-year growth.

Let me help provide a bit more context on the assumptions behind our guidance.

As I discussed earlier, we have a far higher portion of revenue attributable to new customers with 10 or fewer employees who opted for monthly contracts.

Historically, monthly subscribers have a higher churn rate compared to our annual or multiyear subscribers.

In addition, as governments start to ease shelter-in-place restrictions, we may see a moderation of demand for our services.

Given our assumptions on higher churn rate as well as economic uncertainty, we are projecting Q3 and Q4 revenue to be relatively consistent with Q2.

For the full year of FY '21, non-GAAP operating income is expected to be in the range of $355 million to $380 million.

We expect to deliver non-GAAP earnings per share of $1.21 to $1.29 for the full year FY '21 based on approximately 300 million shares outstanding.

In closing, we executed well in Q1 and are proud of how our team dedicated themselves to support our customers and global community.

Thank you to the entire Zoom team, and everyone, please stay healthy and safe.

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

If you have not yet enabled your video, please do so now for the interactive portion of this meeting.

Matt, please queue up our first question.

Before our first question, actually, Eric has asked me to open the mic for him.

Eric, you are muted.

Yes, already unmuted.

Hear me okay?

Yes.

Our first question is from Alex Zukin with RBC.

Eric, thanks for everything you do.

You just delivered one of, if not the greatest, all-time quarter in enterprise software history.

I think you've been given an amazing opportunity with Zoom becoming not just a verb but really the poster child for enabling remote work.

But with that opportunity also comes a question, which is where does Zoom go from here.

How do we think about the percentage of your TAM that's been penetrated in the current environment?

What are the most exciting incremental growth drivers?

And what -- do you have an update for us in terms of the long-term vision of your company?

Because it seems like the prior long-term vision, we're there.

And then I've got a quick follow-up.

Yes.

Alex, great question.

And if we have time, probably should spend more time, also want to get otherwise what's the future.

But anyway, I truly believe video is the new voice.

Video is going to change everything about communication.

The way for us to work, live and play is completely changing.

From that perspective, a huge opportunity.

There's a lot of opportunities ahead of us.

However, for now, our top priority is to -- how to make sure we always keep our service up.

You've got so many people are counting on Zoom to stay connected.

Our top priority is to make sure we keep service up, double down, triple down on the privacy, security issues, and also down the road, we are going to figure out where we are going to double down on the new growth areas.

But for now, I think one thing we know for sure is the TAM is bigger than we thought before, right?

And it's how to capture value of the new TAM.

I think that's something very important.

Also, a lot of other new opportunities, our team will -- are working together, right, to get there step by step.

For now, #1 thing is focus on the current product and user experience, make sure during this pandemic crisis -- hopefully, it can end very soon -- they can leverage Zoom to stay connected.

Our next question is from Sterling Auty with JPMorgan.

Yes.

So Eric, maybe a technology question for you.

You did your 90-day program, and end-to-end encryption really became a big focal point of discussion around security and privacy.

You made the acquisition.

Can you update us on when you plan to deploy end-to-end encryption?

How will it be deployed?

And is there actually an opportunity to monetize it perhaps as an upsell?

Yes.

Sterling, that's a good question.

Before I answer to that question, I'd like to take a step back to share with you the -- what's the industry standard for now, like at Zoom or other competitors, because I mean this real-time collaboration industry for a long, long time.

I think for now, I think most of the vendors we all use AES 256-bit either GCM or CBC.

That's the standard.

The reason why if you enable end-to-end encryption, guess what, you cannot use a phone to dial in.

You cannot support a traditional old, the legacy hardware, H.323 and SIP devices.

And plus the cloud recording also is not available with some [limitations].

That's why for now most of the industry conferencing vendors do not support this feature.

However, we believe we -- no matter what, we needed to support that as well as advance the feature to give our customers, see, your meeting is extremely sensitive.

You don't want to -- Zoom know the [session key].

You can enable this feature with limited functionality.

It cannot let the phone to dial in.

And inside of that, we think this feature should be a part of our offering.

We do not want to charge with -- based on the feature, we charge the customer more.

That's not like that.

So we want to give at least the enterprise customer or business customer.

Free users, for sure, we don't want to give that, right, because we also want to work together, see, with FBI, with local law enforcement in case some people, they use Zoom for the bad purpose, right?

I think we also published a white paper, I think, a week ago, right, published in GitHub.

We got a lot of feedback, and our team for now, we are working on execution now.

So we're -- I think soon, we are going to know our release date.

For now, we are still in the -- review our white paper.

So we have confidence this will be a very good feature for our enterprise customers.

Yes, you can join us as a beta tester.

Next question is from Nikolay Beliov with Bank of America Merrill Lynch.

Can you guys hear me?

Yes.

Kelly, happy birthday and look forward to chatting with you on Thursday at our conference.

My question is I would like for you guys to provide us with a little bit more context on the guidance.

I was wondering what trends you saw in the business during the month of May and what gives you confidence that those prosumers, the increase in the mix from 20% to 30%, are going to stay for the rest of the year.

Just trying to get more color around the confidence in the guide.

So in the guidance, what we have considered, especially around those prosumers, as you call them, the monthly users, we assume that there is an escalated -- that the churn will be escalated in terms of historical.

So we've assumed multiples of what the historical churn rates have been.

And also, we have taken a conservative approach in terms of thinking about that in terms of potential uncertainty around the economic environment.

With that said, I want to make sure you understand that while we did see an increased growth of monthlies, as about half of our sales in the quarter came from monthly subscribers, when you look at the sales from our direct sales organization, the percentage of monthly subscribers was consistent with historical.

So we didn't see an increase in monthly subscribers in the upmarket.

We saw the same percentage as we have historically.

And those typically, the churn in that segment when they're annual or multiyear is a fraction of what the monthly subscribers are.

And Kelly, in this context, if I may ask a follow-up, billings grew 350% and CRPO grew around 220%.

Why the discrepancy here?

And what does it mean to revenues and how revenues flow through from CRPO and billings?

So thank you about the question about the billings and RPO.

As you know, we don't provide specific guidance around billings or RPO.

Given the fact that it's actually been exacerbated with the growth in the subscribers, they are just very difficult for metrics.

They don't apply because of the high rate of monthly billings and subscribers.

They're just not good metrics for us.

Our next question is from Alex Kurtz with KeyBanc.

Yes.

Zukin's earlier question about growth opportunities, kind of a once in a lifetime opportunity to reimagine investments in new products, new sales coverage.

And I mean, just look at your operating income this quarter or next quarter, right?

You couldn't have imagined that at the time of the IPO.

So as the team and the Board look at the next 12 months, is there something that you guys are really laser focused on that you could take all this extra cash flow and reinvest back into the business?

Yes.

Alex, again, that's a good question.

So even before this pandemic crisis, we -- not only do we offer the video conferencing service, but also we have a Zoom phone system.

Don't forget about that [one].

It's also huge opportunity.

In particular, we believe video and voice, those 2 are going to be converged into 1 service.

That's a huge opportunity.

This pandemic crisis, I would say, on the one hand, accelerated the video adoption.

On the other hand, it was brand recognition, plus a lot of prosumers, right, a lot of new use cases, like online education, telemedicine, telehealth.

For sure, we would like to double down on that.

But in terms of specific opportunity on one new service, we are going to work on that in the next several months.

And as I mentioned earlier, for now, we needed to make sure we still keep helping people stay connected.

Another thing also we know for sure is the way for us to work in the future is totally different, and how to make sure -- focus on the whole experience, right, to make sure that you have very consistent experience, when you work in the office and work in the home.

A lot of innovations will be upon that as well.

I truly believe a lot of opportunities, but we've got to be very careful, so like where we should double down, where we may not live to our -- the partners, right, to develop those applications or leverage those opportunities upon our platform.

And then a quick question for Kelly.

In the areas where they've been lifting the quarantine, the shelter-in-places, have you seen any kind of change in churn in those regions, whether it's in the U.S., Europe or Asia?

It's really too early to tell, Alex.

We've taken again a conservative approach to that, but it's too early to tell, as most places, even where they're starting to ease shelter in place, people are taking their time to go back to work.

Our next question is from Phil Winslow with Wells Fargo.

Two questions, first for Kelly, then one for Eric.

Kelly, when you think about retention, that's something that's come up a lot on this call.

What programs do you have in place to make sure that all these users that you've added stick to the platform?

Wondering if you can talk us through the programs you've had in place.

And then also, Eric, when you think about Zoom Phone in particular, not just retention but also upsell of Zoom Phone, a similar thing.

What is going to be the messaging to customers?

How do you think about the potential a year from now, 6 months from now, et cetera, attaching a full unified communications suite to that video customer?

Yes.

So in terms of retention, first of all, for all of our customers, new and existing, we have a great customer success team that is focused on ensuring training, usage adoption happen in all of our customers as well as we are looking for opportunities with our monthly subscribers to put forward offers to them to see if they would like to upgrade to an annual contract that -- helping them evaluate (inaudible) as well.

So Philip, back to your second question.

So as I mentioned earlier, we believe the video and voice, those 2 are going to be converged into 1 service.

We -- our team, we share our vision to our existing installed base.

Take Q1 for example.

One of the very large global pharmaceutical companies, they were our happy Zoom video conferencing customer.

In Q1, they deployed Zoom Phone, and which is our largest phone deal, around 18,000 phone licenses, right?

Because they like the one consistent experience, more and more opportunity like that, right?

So call your phone number, one more click, and to [upgrade] video of the same experience, I think there's huge opportunity.

Not to mention a lot of enterprise customers, for now, they still deploy on-prem and PBX version.

I think this pandemic crisis will help them to accelerate their migration from on-prem to enterprise, will further boost the cloud-based PBX adoption.

So we think that's a huge opportunity ahead of us.

The next question is from Pat Walravens with JMP.

Great.

And happy birthday, Kelly.

Thank you, Pat.

So Eric, you started as an enterprise company, but now so many individuals are using Zoom to connect with their friends and their families and their classmates.

When I go to say good night to my daughter at night, I get a lot of, "Daddy, I'm talking to my friends.

Come back later." So how is that changing your strategy going forward?

What's your consumer strategy?

I think that's a good question.

My kids also use Zoom as well for their online classes.

I believe, back to the voice, right, the voice, no matter where you are using your voice, like a phone call, my kids, myself or in office, on the way, in the home, it's the same experience.

Used to be -- we built Zoom only enable knowledge workers or business communication and collaboration.

But now given that video conferencing is going to become a mainstream service, the boundary between the prosumers, the consumers or enterprise customers is not a very clear anymore.

We got to have -- maintain a very consistent experience.

So that's why a lot of features, we build for enterprise customers can be easily seamlessly used by prosumers, consumers.

However, we got to make sure, right, for enterprise customers, we already have all those security features built in, how to easily let consumers to enable that.

This is the challenge we are facing.

In terms of opportunity, I do not think we need to have a specific consumer strategy.

Our strategy is offer one service.

No matter where you are, no matter what you do, no matter which device, it just help you to stay connected.

It's more like a infrastructure services.

Not more like an Internet service provider.

You cannot say, hey, you're using Internet for what, for business collaboration or for consumer.

It's the same thing now.

That's a huge opportunity.

Yes.

And Kelly -- if I can ask Kelly a quick question.

And thank you, Eric.

I know sometimes when you are replacing a competitor and they have an existing contract, you sign up the customer, but then you let them have however many months are left on the competitor's contract for free.

When you do that, how do you account for that?

Does that count as one of your new customers?

And does that have any impact on billings or RPO?

So we do count them as a new customer, and under the new revenue standard for 606, the entire revenue gets amortized over the full period, including the free period.

Okay.

Okay.

And then -- and so would you -- that would go into billings, too, then.

Yes, we do bill them upfront.

[For that portion], it depends on what the period is, but yes, so part of it.

Our next question is from Meta Marshall with Morgan Stanley.

Great.

I just wanted to ask a question on -- as you go forward with hiring salespeople, has -- with the influx of new customers, do you change from looking for more gatherers versus hunters?

And just as you look to layer on Zoom Phone, is the channel strategy still as important, or is an overlay sales team kind of more important going forward?

Yes.

So on the one hand, for sure, we already doubled down on our sales hiring, right, starting late last year.

I think we made a very good progress in Q1 not only for hunters, [BDI], [SDR], account executives with those quota-carrying reps, but also for the phone, right?

So it used to be -- look at our video conference services, primarily driven by our direct sales team.

But the phone business is very different.

That's why we really shift our focus not only for direct sales, but also we embraced our partner program like a master agent and really helped us a lot during the Q1.

I think we're going to do more and more on partner deals, on channel sales program around our phone business.

I think the team is working very hard on that.

Our next question is from Heather Bellini with Goldman Sachs.

Heather, can you unmute?

Right.

Sorry about that.

Look, I just wanted to say, first of all, thank you for the company and with your steering, acting the way it did over the last few months, which has been just such a trying time for so many.

But not only, obviously, did you enable all of us to stay in touch and working, but just being able to still connect with family and friends, so thank you, I think, on behalf of everybody.

My question has to do with your view -- I mean you've been asked a little bit about the Zoom cross -- Zoom Phone cross-sell opportunity here, and I know you touched on it a little bit already, but I'm interested in, again, a little bit about your vision on how you can expand your offerings given how much broader your customer base is now.

So I guess the 2 parts are, what are you seeing in terms of uptake of Zoom Phone?

Is there anything you could share with us about penetration rates or the seat count that you're at now or maybe just how you might have seen adoption inflect in the quarter?

So anything around that, just so we could see how that's starting to take off given how many more new customers you've added.

But also, when you look at this evolving collaboration market, what's next for you all?

Because you have phone, you obviously have video.

What -- is -- should we expect a chat service at some point just so we could close the loop on the entire messaging experience?

So any thoughts you have there.

Thank you, Heather.

Maybe, Kelly, if you can address to the phone questions.

I will answer to the second part of the question.

So the primary demand and focus of our new customers and expanding customers in Q1 was really ensuring business continuity, and so they were focusing mostly on the video communications platform.

But as our focus for Zoom Phone is to sell into our existing installed base, it now creates a huge opportunity for more sales in Q2 and the rest of this year.

So we're really looking forward to that team having an expanded customer base to sell to.

Yes.

So to answer to your second question, look at the video collaboration business, as I mentioned earlier, TAM is bigger.

The phone -- add up the phone, together, I think it's also a huge market.

Not to mention, we also have online business.

Online business used to be a small portion of our total net MRR growth.

But now, given the popularity of the videoconferencing, a lot of consumers and prosumers, they all use Zoom for like online happy hour, online learning kitchen class, it can be -- the use cases is much more broad.

For sure, we can monetize that.

One thing for sure we know, we are not going to support an advertisement model, right?

We are not going to support that.

We never wanted to sell customer data.

So that's something we know for sure.

We will not do it.

However, in terms of how to embrace all kinds of prosumer [to the] use cases, I think there's a lot of ways to monetize.

Online subscription, this is -- you already see the number.

It's not -- as we keep the service up, keep the innovation, I think we are getting more and more online buyers as well.

So regarding the new services, I think video voice, that's our company DNA.

In terms of chat message, we also have a built-in chat.

But also, we really look at everything from a customer perspective.

They deployed Slack.

This is great.

We have a wonderful integration with Slack.

It is great service.

And a customer deployed Microsoft Teams.

We also interoperate -- integrated with Microsoft Teams very well.

And so on some customers, they want to standardize on Zoom platform.

Okay, too.

Our video voice, we also have a chat built in, right?

So from that perspective, we are taking a very open, flexible approach and look at everything from a customer perspective.

But overall, we are being laser focused on video and voice, enterprise business and consumer, prosumer as well.

Thank you, Heather.

Next question is from Walter Pritchard with Citi.

Question for Kelly.

Wondering if you could -- you can hear me?

Yes.

Okay.

I'm wondering if you could help us understand, on the churn side, obviously, unprecedented demand for those under 10 employee monthly-type customers.

Any order of magnitude you can put around the sort of churn versus what it's been historically that you're thinking about in the forecast?

And then I had one follow-up.

Yes.

All I would say is that we're taking a very conservative approach assuming that the historic norms don't necessarily apply to this new cohort, both from the magnitude as well as the potential around economic uncertainty.

So we -- we're -- the way we're forecasting it is using multiples of the historic churn rates.

And then maybe as you get into the -- obviously, next quarter is going to be just sort of more of what you had this quarter in terms of a full quarter of all the business.

But as you think about the quarters beyond that, how do you think about just a sustainable level of new customer adds?

I mean do you feel like what's happened here has pulled forward multiple years of demand?

Or do you think it has opened up awareness so much to what you do that you could actually see higher levels of new customer adds as we get past this big bump up that we've seen with COVID?

Yes.

I mean we certainly have seen a lot of pipeline creation in the quarter in both Q1 and in early Q2.

So that's been positive to see.

And remember that our selling strategy around Zoom Phone as well as Zoom Rooms is to sell into our existing customer base.

So this just creates a whole new opportunity around those future products and selling those products in the future as well.

The next question is from Zane Chrane with Bernstein.

I'm wondering, how do you think about balancing the data security and privacy concerns versus ease of use?

It seems like that's always a balancing act where if you lean too far one way or the other, you're going to upset one type of customer.

And that becomes even more complex now that you're heavily moving into the consumer space.

How do you balance that kind of from a technological and user interface perspective?

And then I have one follow-up to that.

Yes.

Yes, thank you.

This is a great question.

So our service was built for serving enterprise customers, and we have all kinds of security features built in.

Normally, we're working together with the enterprise IT team, right, to develop our service from a security perspective.

And they are going to enable or disable those security features and we have an official onboarding process.

We really understand how that process works.

And however, doing this pandemic crisis, we have lots of first time users.

As a CEO, I think I should have done better job.

The reason why, not only do we offer our service but also we should play a role of IT for those first-time users.

In terms of enabling [password] and meeting room or (inaudible), a lot of features, we -- this is a mistake I made.

So we learned a hard lesson.

And that's why I say, when we look at enterprise customers and consumers, there's a little bit of different, obviously, philosophy.

For enterprise customers, just to keep any other secure features.

However, for prosumers, it's different.

Sometimes -- you're so right -- whenever there is a trigger of conflict, that's why we doubled down our security team.

We wanted to leverage this opportunity, to completely transform our business to be the most secure solution.

However, if there is a conflict between the privacy, security versus the usability, I think privacy, security is more important than usability.

Like 3 clicks, yes, customer may not like it.

They want 2 clicks.

But if there's a privacy issue, yes, we still want to have 3 clicks.

So that's why, however -- and we do have a team who will review every use case, every -- the feature.

We wanted to make sure -- focus on the privacy, security; at the same time, do all we can, don't lose the ease of use.

That's also critical.

So that's why we hired a lot of security researchers, engineers to make sure, on the one hand, we are very secure and safe to use; on the other hand, also how to balance.

This is an ongoing effort.

We are committed.

Very helpful.

And just a quick follow-up to what Heather was asking.

She mentioned chat.

I've been thinking, is there an opportunity for embedding more cloud-based storage or file sharing to enable more real-time collaboration and file sharing or editing while on a Zoom call?

Is that something you guys have considered?

Or -- I know you have a partnership with Dropbox.

Is this something that would maybe make sense to build out yourself or even acquire some capability along those lines?

Yes, good question.

So yes, we already announced the partnership with Dropbox before, recently also partnership with Box as well with a seamless integration.

We also support Microsoft Drive, Google Drive as well.

Essentially within the meeting interface, you want to share the files from those cloud providers.

I think, overall, we focus on the customer experience.

As I mentioned earlier, our video and voice is still very critical to our business in the future.

So for now, we just want to integrate, interoperate with other best-of-breed service providers.

Our next question is from Bhavan Suri with William Blair.

I just have one.

It's really around competition, right?

In last few months, given your success and given COVID, we've seen Blue Jeans being acquired, Pexip IPO.

RingCentral announced their own video solution.

I'd love to understand -- none of these actually imply anything immediately material in the competitive environment, but obviously, investments are playing out in that environment.

I'd love to think about how do you think about navigating through this and differentiating.

Obviously, the scale you have is a differentiator.

But how do you think about the competitive technology differentiation in the space?

I'd love to, Eric, get your thoughts around that.

Yes.

So sorry, I lost for several seconds, pressed wrong button, left the meeting by accident.

Sorry.

I know maybe I did, too.

But did you hear it or -- it was around competitive environment, around RingCentral introducing video.

It's around Pexip.

How do you think about the competitive environment?

Has it changed, and how do you navigate it?

Yes.

So if you look at the competitive landscape, I think this pandemic crisis does not change anything, and we're still laser focused on the video and also we have a phone service.

Take -- for sure, the market opportunity is much bigger than before now, right?

You take RingCentral for example, and they were focusing on the phone service.

We focused on video.

We added a cloud with PBX.

They added a phone -- they added a video conferencing.

We were a good partner before.

For now the market is bigger.

I would say any competition is always good for consumers, right?

And if there's no competitors, that's not [any use].

So we are okay.

So we do everything from an end user perspective.

Our next question is from Ryan MacWilliams with Stephens.

So I attended a Zoom wedding last month, and it went great.

And my own wedding in September might be over Zoom, so I just want to say thank you for providing a back-up plan there.

Really a standout quarter, and congrats on execution.

For Kelly, for the second quarter, would you expect new recurring revenue added in the second quarter to be above the recurring revenue added in the fourth quarter of last year?

I just have one follow-up.

New recurring revenue in Q2 to be greater than Q4?

Yes, based on the outlook, I think that it will increase.

The historicals in [revenue].

It is an increase over what it would be as compared to Q4, yes.

Perfect.

Yes.

I mean I can't really compare it to the last quarter.

And then, Eric, just on -- and drafting off Bhavan's last question.

You mentioned in your comments that enterprise communications continues to be a fragmented market, low overall cloud penetration rate.

But with both competitors and customers now trending towards 1 platform for cloud video and voice, over the next few years, do you see this market consolidating around maybe 1 to 2 competitors for enterprise communications?

Yes.

It's too early to tell, but overall, I truly believe the best-of-breed service provider will survive and thrive because customer -- when it comes to video and voice, you've got to make it work anytime, everywhere, right, any device.

It's not that easy.

Otherwise, the reason why in this pandemic crisis customers trust Zoom, to use Zoom, because it just works and the quality and a lot of innovations.

And that's why I think video to voice, it's not that easy.

It can be the basic service with all the basic features, okay.

But to make it work in 7x24 with no any outages and also focus on innovation, it's not that straightforward.

And that's why I think as long as we keep working harder, really listen to our customers to be the first vendor understand their pain point, understand their use case, to be the first vendor to come up with a solution.

Even if we have so many competitors, I think we are okay because, again, this is a huge market opportunity, right?

So we may not kind of serve for every customer, but as long as we keep listening to our customers, keep the innovation, I think we should be okay.

Our next question is from James Fish with Piper.

Kelly, happy birthday.

I'd agree that June 2 is the best day of the year in my humblest of opinions.

You guys talk about churn in the second half of the year.

I think you can look at sort of some verticals like education or some of the consumer additions that you guys had in the quarter as potentially not sustainable in terms of that 300 million users.

How should we think about that 300 million user number in terms of (inaudible) added in and education, for example?

Sorry, James, can you just repeat the last part of that?

How should we think about the 300 million user number in what?

Just curious where you think that 300 million user count is actually -- what number is actually sustainable within the current customer base?

So I just want to clarify that 300 million is daily participants, both free and paid.

So that was the peak that we saw in April.

It has come down a little bit in May on average.

But we still continue to see a high level of usage of both free and paid users.

So I think, certainly, over the long term, we expect it to grow beyond that 300 million number.

Yes, got it.

By the way, James, those 300 million meeting participant is -- that's just a meeting participant.

It's not -- that number is not unique.

If you join 5 times, they will become 5, right, and from free users or paid users.

Yes.

Yes.

Totally understand.

And then just a quick follow-up.

It's the eighth quarter in a row of plus 130% net renewal rate.

But could we get more color there as to how much stronger this quarter was from an upsell rate compared to the past few quarters?

Yes.

We've committed to providing the metric of being greater than 130% just because it's (inaudible) bounces around period to period, and we don't want you to read too much into that.

So that's the guidance that we're going to provide today.

Our next question is from Ittai Kidron with Oppenheimer.

Great quarter and happy birthday, Kelly.

Fantastic.

I had a couple of questions.

First, on Global 2000, you talked about how it grew 200% quarter-over-quarter.

Those are generally very sophisticated organizations with a lot of IT dollars, and they move very quickly.

I guess my question is, is the penetration rate with meetings at that point -- at this point, pretty much at 80% to 90% with that customer base?

Have we fully explored with the ones that have purchased with you, are they already where they need to be given how fast they can usually move?

And then the second question relates to phones.

Kelly, you mentioned that -- regarding a previous question on phones that a lot of the focus has been on video right now, but you see that as an upcoming expansion opportunity going forward.

I guess the question is, considering the environment, is the environment helpful in accelerating phone adoption or perhaps the other way around?

[Are you finding] organizations are looking to cut on spend?

They already have an established phone system and everybody is using their cell phones from home, I guess, at this point.

Is phones something that can get a boost from COVID as well given that it's not walking into a vacuum?

Every company has a phone system, whereas very few have very broad adoption of video.

Okay.

So in terms of your first question around penetration of the Global 2K, that isn't a metric that we specifically disclose.

But the good news is, is that it's not as high as you threw out there.

So we still have lots of opportunity to grow in that segment today even with the significant growth that we saw quarter-over-quarter.

And then in terms of the phone, I think given the land and expand strategy and the significant increase we saw in new customers this quarter, we think there is a lot of opportunity ahead and that phone -- we talked about this probably before, but phone seems to really be the last area of IT that has been taken to the cloud.

And as people have adopted more of Zoom and they come to trust and rely on the ease of use and the reliability of the platform, phone is just the next natural step for them to take.

So we're really excited about that opportunity and don't believe that the COVID pandemic to be an inhibitor to that.

So Kelly, right on.

So it had -- to add on to what Kelly said.

If you look at it as a separate service, you're so right.

Especially during this pandemic, I have a cell phone number, why do I need to deploy another service?

Do not make any sense.

However, if you think the phone is part of video, that phone and video are the same thing, the same service, you will know that, and the growth will follow as well.

This is our vision.

We think of phone and voice the same thing.

The same product, same service, same back end, same experience.

That's why we see the huge opportunity.

If you want to sell a phone service as a separate service that's not in a video -- not a part of videoconference service, you are so right.

There's no reason for us to deploy a separate service.

Just the same phone number.

What's the point, right?

That's why I think we have a huge opportunity because our architecture, because of the phone and Zoom video are the same service.

So that's a very different [play].

Next question comes from Will Power with Baird.

I wondered if we could drill down a bit into the education segment, either in terms of revenue or paid users.

Was hoping you'd give us some context on how you're thinking about education in the second half of the year as we get back to school.

Obviously, there's still a lot of uncertainties around that.

And I guess the other part to that is are there any learnings from some of these countries where they've gone back to school in terms of usage, whether South Korea or elsewhere.

So we don't break out the specific revenue by vertical.

But what I can tell you is that, from a growth perspective, education was the [second] highest vertical with growth on a quarter-over-quarter basis.

So we saw very strong execution and demand there.

And looking forward, as a reminder, many universities and schools have announced that they are potentially hosting all of their classes in the fall remotely, so we expect that demand to be strong even as we see certain (inaudible) easing their restrictions of shelter in place.

Yes.

By the way, we offer free service to more than 100,000 K-12 schools around the globe.

And I think you're so right.

After the summer, are they going to keep using Zoom for online classes or what we should do?

I think that's -- yes, we are going to work on that.

For now, we just to help those K-12 schools.

And of course our -- primarily, we focus on the high ed before, and now we have more and more K-12 schools.

That's a very different game.

Our final question then will be from Tom Roderick with Stifel.

Yes.

There we go.

We'll get the mute off.

I appreciate it.

So I guess the question, a lot have been -- a lot of the questions have been asked on the top line.

But you had to scale up massively in a way that, 90 days ago, we couldn't possibly have expected this.

You started to see a little bit of this in China and perhaps even at the time of the last call, Europe.

So you had some awareness, but Kelly, even at that time, you were talking about gross margins in the 80% range.

Can you just talk a little bit more about what you did and how you managed to scale that business up so quickly?

And then would love to hear just about the elasticity of that going forward, to the extent that some of the monthly users do churn.

Do you have the ability -- and this may actually interact with the Oracle partnership that was announced in late April.

I would love to just hear a little bit more about that, the ability to scale up and scale down and how quickly you can do that.

Yes.

So first of all, I think huge thanks and credit to the entire employee base of Zoom.

Many of them worked extended hours and lots of weekends to support our customers and this increased demand.

Also, huge thanks, as Eric mentioned, to many of our partners as well who helped us scale up as we saw this unprecedented -- and it was difficult to forecast the expansion in our capacity that was needed.

In terms of the ability to scale up, what we're focused on, of course, is we were -- like in gross margins, focusing on adding in the public cloud, and over time, we'll start to add more capacity in our colos to start to moderate that gross margin impact a little bit as well as in other areas of the business, we scaled up with third-party resources to help us.

And over time, we'll look to backfill those with direct employees, which is more cost effective but helped us get through this unprecedented increase in demand.

And also, Tom, during this pandemic crisis, our top priority is to show our corporate social responsibility.

Essentially, we do all we can to help people stay connected at no cost.

We even now look at, "Hey, if you had several thousand servers, what's the cost look like?" "No, don't worry about that." This is time to help people stay connected.

But down the road, after the pandemic crisis, it's sort of ended soon, I think for sure, we are going to go back to our -- the gross margin focus.

Yes.

Eric, do you have any final closing remarks before we turn off the webinar?

Yes.

I want to say is thank you all.

Thank you, everybody, Zoom employees.

Thank you all the users, customers.

Thank you for your trust.

Thank you for our shareholders.

And we will do all we can to truly deliver happiness to you.

We will not let you down.

Thank you for your support and truly appreciate it.