Zoom Video Communications Inc (ZM) 2020 Q4 法說會逐字稿

Hello, everyone, and welcome to Zoom's Fourth Quarter Fiscal Year 2020 Earnings Release.

I'd like to remind everyone that this conference is being recorded.

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

Thank you, Matt.

Hello, everyone, and welcome to Zoom's Earnings Webinar for the Fourth Quarter and Full Fiscal Year 2020.

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

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

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 about future financial performance and other future events or trends, including guidance.

These statements are only predictions of what -- 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 discussed 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.

Thank you, Tom.

Thank you, and welcome, everyone, joining us on the Zoom video webinar.

At Zoom, we strive to empower our customers to accomplish more with our video-first unified communications platform.

Our success toward achieving this goal is evident in our results, with the fourth quarter capping off a strong year for Zoom, our first year as a public company.

Kelly will discuss our Q4 results and outlook in detail in a moment, so let me give few key highlights for the full year.

For FY '20, we delivered a unique combination of high revenue, profitability and free cash flow growth.

Revenue grew 88% to $623 million, and we exited Q4 at an annualized run rate of $0.75 billion.

We achieved a non-GAAP operating margin of 14.2%, up over 900 basis points year-over-year.

We generated a free cash flow of $114 million for the full year, up 397% year-over-year.

This is our fourth straight year of positive free cash flow and non-GAAP operating income.

Our customer metrics were also impressive for FY '20, including 86% growth year-over-year for customers with $100,000 of trailing 12 months revenue.

We also recently celebrated the 1-year anniversary of the launch of Zoom Phone, a key component of the Zoom unified communications platform that has significantly expanded our TAM.

Zoom Phone had an incredible start, and we are very excited about the continued momentum of the offering.

Here are just a few of the key metrics to demonstrate some of the Zoom Phone accomplishments we had this past year.

First, we are grateful to have existing customers who trust us and new customers who have looked to Zoom Phone to resolve their telephone challenges.

These factors enable us to close Zoom Phone deals with approximately 2,900 customers who have more than 10 employees.

Second, we exited the year with a run rate of 230 million Zoom Phone minutes.

Zoom Phone is a great opportunity to expand our footprint with existing customers and drive new logos for companies looking to modernize away from legacy PBX systems.

Now let me discuss a few of our happy customers.

We are thrilled to welcome Johnson & Johnson, the world's largest and most broadly-based health care company, to the Zoom family.

We are grateful that Johnson & Johnson chose Zoom to help modernize and consolidate on a unified communications platform with approximately 60,000 Zoom Meetings users.

As a global company, they wanted a solution that would enable them to communicate reliably around the world, including growing regions in Asia.

Thank you, Johnson & Johnson.

I also want to thank VMware for trusting Zoom.

VMware has been providing all employees, globally, access to Zoom meetings and digital workspace and will soon utilize a large deployment of Zoom Phone.

The easy, single sign-on access to Zoom from any device has enabled to leverage the VMware Workspace ONE platform, allowing employees to access all the applications they need from their device of choice while ensuring security and compliance.

Together with Zoom, VMware Workspace ONE helps businesses support their distributed workforces by enabling a remote-first culture.

Thank you, VMware.

Moving to a few recent business highlights.

First, in the 2020 Gartner Peer Insights Customers' Choice Award for Meeting Solutions, Zoom received the top overall rating in the Voice of the Customer category.

Zoom was the only company to achieve Customers' Choice Awards for meeting solutions serving all listed regions, company sizes and industry verticals.

Second, Okta published their annual Business @ Work 2020 report, a premier study of how organizations and people are using technology in the enterprise.

The report highlighted Zoom as a preferred video application, posting 876% growth in the Okta network over the past 3 years.

Zoom is the only company to earn the distinction of being both the fastest-growing and most popular app.

Third, we announced an expansion of our global channel partner program to add new partnerships with industry-leading master agents for Zoom Phone.

Fourth, caring for our community is a core value for Zoom, and we are conscious of our impact on the environment.

We proudly announced our top 10 Green Leader customers who were estimated to avoid the most carbon dioxide emissions by replacing in-person meetings with Zoom video meetings.

In a 90-day period, the top 10 customers were estimated to have avoided the equivalent of the annual carbon dioxide emissions of 149,000 cars.

Before tuning the webinar over to Kelly, I'd also like to address the global impact we're seeing from the coronavirus.

While this tragic situation is very fluid, Zoom is focused on using our resources to help alleviate some of the disruption and the communication challenges as an alternative to in-person meetings for our employees, customers and community.

I'm happy to report that all of our employees in the affected areas are healthy.

Given the recent emergence and growing number of coronavirus cases in the United States, we have directed our headquarter employees to work from home, unless there's a business-critical need for them to be in the office.

We are taking this step out of abundance of caution.

Zoom is doing everything we can, especially for global educational institutions, to provide resources and support to our customers and those navigating the coronavirus outbreak, including: we are proactively monitoring capacity globally to ensure maximum reliability amidst usage increases; in China, we have removed the 40-minute limit on free meetings; and we are providing informational sessions and on-demand resources so anyone can learn how to use the Zoom platform with ease.

With the reliability of our high-quality video platform, we have seen a large increase in the number of free users, meeting minutes and new video use cases.

For instance, in China, health care workers under stressful conditions in affected areas are able to connect live on video with therapists.

In closing, I'd like to thank the over 2,500 Zoom employees who are building Zoom into a great company through caring for our customers, community, company, teammates and themselves.

As we remain focused on creating a culture built around happiness and caring, I know we will position Zoom for future success.

With that, let me turn things over to Kelly.

Thank you, Eric, and hello, everyone.

Let me start by reviewing our financial results for Q4 then discussing our outlook for Q1 and the full year of FY '21.

As Eric said, Q4 was a strong end to the year.

We delivered another amazing quarter with continued traction for all offerings across all major geographies.

For Q4 specifically, total revenue grew 78% year-over-year to $188 million.

This top line result exceeded the high end of our guidance range by $12 million due to our strong sales execution in the quarter.

We delivered our Zoom Meetings, Rooms and Phone solutions to new accounts while driving major expansions with existing customers.

For the quarter, new customers accounted for approximately 59% of our year-over-year growth in subscription revenue, while the remaining 41% was due to additional purchases from existing customers.

Now let me share some of the key customer metrics for Q4.

We added approximately 7,800 customers with more than 10 employees quarter-over-quarter and exited Q4 with 81,900 customers.

This is an increase of 31,100 new customers or 61% year-over-year.

Customers with more than 10 employees represented approximately 80% of revenue in FY '20 compared to approximately 78% in the prior fiscal year.

Our continued expansion in the upmarket resulted in 641 customers with more than $100,000 in trailing 12 months revenue, up 86% year-over-year.

This is an increase of 95 customers, a record number of adds in a quarter.

The high level of satisfaction and trust customers have in Zoom was evident in our net dollar expansion rate that was over 130% for the seventh consecutive quarter and our Net Promoter Score, which remained above 70 in Q4.

Next, international expansion outpaced the high rate of growth in Americas revenue.

In Q4, our combined APAC and EMEA revenue grew 84% year-over-year and represented approximately 20% of revenue.

Revenue from the Americas was up 77% year-over-year and represented approximately 80% of revenue.

International expansion will continue to be one of our key growth initiatives in FY '21 and beyond.

Now turning to profitability.

Once again, we were net income profitable from both GAAP and non-GAAP perspectives, but I will focus on our non-GAAP results, which excludes stock-based compensation expense and related share-based equity taxes.

Non-GAAP gross margin in the fourth quarter was 84.2% compared to 82.1% in Q4 last year and 82.9% last quarter.

This result was driven by the strong sales execution in the quarter and lower seasonal audio usage in Q4 due to the extended holiday season.

Due to the coronavirus, we have already seen significant usage of our platform.

And accordingly, we will expand our capacity to meet the increased demands of both paid and free users.

For FY '21, we believe our gross margins will be at the lower end of our long-term target of 80% to 82%.

R&D expense in Q4 was approximately $16 million, up 60% year-over-year.

As a percent of total revenue, R&D was 9%, which was slightly lower than Q4 last year.

In FY '21, we plan to continue investing in our highly efficient R&D model to drive innovation through adding additional engineering talent, especially in the first half of the year.

Sales and marketing expense for Q4 was $84 million.

This reflects an increase of 57% or $30 million over last year with investments to drive further growth.

As a percentage of total revenue, sales and marketing was 45% lower than last year due to continued efficiency gains in marketing combined with slightly slower-than-expected sales hiring and the higher-than-forecasted revenue.

We look to increase the pace of hiring in the upmarket and internationally in FY '21, with additional resources being added to recruiting.

G&A expense in Q4 was $20 million, up 49% on a year-over-year basis.

It represented 11% of total revenue, benefiting from efficiencies as we scale our administrative functions and lower our accrual for telco taxes.

Non-GAAP operating income was $38 million, translating to a 20.4% non-GAAP operating margin for the fourth quarter.

This compares to Q4 last year's result of $10 million and 9.3% margin.

The higher revenue plus expense efficiencies across all areas were the main drivers of this additional profit.

Non-GAAP earnings per share in Q4 was $0.15 on approximately $293 million of non-GAAP weighted average shares outstanding and adjusting for undistributed earnings.

This result is $0.08 higher than our guidance and $0.11 higher than Q4 of last year.

Turning to the balance sheet.

Deferred revenue at the end of the quarter was $231 million, up 83% year-over-year.

Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $604 million, up 94% from $312 million last year.

We expect to recognize approximately 62% or $375 million of the total RPO as revenue over the next 12 months as compared to 67% or $208 million in Q4 of last year.

This is a result of the mix shift between our current RPO, which grew 81% year-over-year, while noncurrent RPO grew 120% year-over-year as we close longer-term deals.

The RPO results also reflects some expected seasonality benefits in Q4 due to our semiannual quotas in the upmarket segment of our business.

We ended Q4 with approximately $855 million in cash, cash equivalents and marketable securities, excluding restricted cash.

In Q4, operating cash flow was $37 million, up from $16 million or 129% year-over-year.

Free cash flow was $27 million, up from $6 million or $368 million -- sorry, 368% year-over-year.

As we previously discussed, these results reflect the use of cash for the purchase of shares via the employee stock purchase plan.

Starting in FY '21, we expect the cadence of benefits from contributions to the ESPP to occur in Q1 and Q3 and net outflows from purchases to occur in Q2 and Q4.

Now turning to guidance.

We are pleased to provide a strong outlook for the full year FY '21 based on our view of the current business environment, our ability to gain market share and with the momentum we built in FY '20.

For the full year of FY '21, we expect revenue to be in the range of $905 million to $915 million, which would be approximately 45% to 47% year-over-year growth.

Non-GAAP operating income is expected to be in the range of $110 million to $120 million.

We expect to deliver non-GAAP earnings per share of $0.42 to $0.45 for the full year FY '21 based on approximately 301 million shares outstanding.

For the first quarter, we expect revenue in the range of $199 million to $201 million.

We expect non-GAAP operating income to be in the range of $25 million to $27 million.

Our outlook for non-GAAP earnings per share is $0.10 based on approximately 297 million shares outstanding.

In closing, we executed very well and are proud of the results we delivered in our first year as a public company.

Our high growth outlook at this scale is truly unique.

Given our ROI-focused business model, we continue to deliver a rare combination of strong profitability and free cash flow margins along with top line growth.

I would also like to thank the entire Zoom team for their hard work this past year and look forward to achieving additional market share gains and growth as we deliver happiness to our customers with our unified communications platform.

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.

Our first question is from Nikolay Beliov from Bank of America Merrill Lynch.

Congratulations on solid results here.

And I just wanted to thank Zoom for playing an important role in dealing with the tragedy of this virus.

My first question is for Eric.

This virus situation, this virus tragedy, do you feel like it's elevating the customer conversations and it's leading to better appreciation of your business model?

Do you think like it's maybe a permanent elevation of spending intentions or it's a temporary thing?

And a question for you, Kelly.

Did you see impact from the virus in Q4 results maybe in billings and RPO?

And how did you incorporate any potential positive impact on the business in the guidance?

Nikolay, that's a great question.

First of all, I'd like to know about your background, where are you now?

You don't want to know, man.

I think, first of all, I don't think that's temporary.

The reason why is -- I mean in terms of experience about using the videoconference like Zoom, you get a company in Silicon Valley, like InVision, Zephyr or GitLab, which are great companies, they do not have a single physical office to really understand how to enable remote workers to work together.

However, if you look at companies in other part of the world or maybe on the other side of California, quite often, we needed to tell them video is the future of communication, you need to enable video, and we needed to explain that.

But given this coronavirus, I think overnight, almost every business really understands they needed a tool like this.

This will dramatically change the landscape.

I truly believe in the future, every business would turn to video for the remote workers for the collaboration.

In terms of our results, Nikolay, for Q4, we did not see any impact directly related to coronavirus.

As a reminder, we have definitely seen an uptick in usage, but a lot of that is on the free side.

So it's very early to tell whether or not that's going to convert long term into paying customers.

As we mentioned, we are seeing impact and have continued to build capacity to ensure that we can support this increased usage.

So we are seeing an impact on our gross margins, which is why we're guiding you towards the lower end of our range for next year.

Yes.

By the way, I mentioned this to some of my friends, if I start over the company, we are not going to have a single physical office.

A lot of people has mentioned, "Are you crazy?" Now they realize that's a reality now.

Next question is from Bhavan Suri with William Blair.

I want to touch a little bit on the vertical sales effort.

You talked a lot, Eric, about sort of the adoption of Zoom taking hold on a vertical-by-vertical basis.

Just strategy as you think about the verticals, starting on the sales force, the go to market and then the applications you're integrating, how do you think about that given sort of the increasing presence in enterprise?

Yes.

So it's a good question.

So when we started, we do not know which vertical market we are going to focus on.

Unfortunately, we saw quite a few high-end customers who deployed Zoom.

Stanford Continuing Studies Group was our first big customer, and that's why our first vertical market is high-end.

And several years ago, we found a greater use case, which is health care customers because they are looking for solutions because we targeted telemedicine, telehealth for a long time.

But there's no good solution, and here they found Zoom.

And we also keep our compliance, the product experience, integration with Epic.

I think that's very, very important in a vertical market.

Also, at the same time, we also last year, we got our FedRAMP certificate.

We also expanded into the public sector market by focusing on enterprise, health care, public sectors and then also, I think later last year, we also expanded into the financial institutions.

I think in all of those vertical market, use cases are a little bit different, but our functionality, our feature, flexibility can truly help them.

That's helpful.

And I want to touch a little bit more sort of then strategically if we take a step back, we've talked a lot about convergence, and you've discussed this in the past, discussed this on calls, but it's convergence, video, voice.

We've talked about that.

We know collaboration is a piece and, again, your partner there.

But as you think about this idea of remote, disconnected people, all of it ties into collaboration, how do we communicate, how do we collaborate in Word documents, PowerPoints, whatever you're using, and you think about Zoom's video through the Zoom Phone.

But if I was to fast forward, do you think, ultimately, that collaboration space converges?

And where do you guys end up sitting in terms of the content piece?

I'd love to understand how you think about the content part of the collaboration piece, not video and voice content, obviously, but we're talking about the data piece.

How do you think about that?

And I know you're going to say partnership, but I'm talking 10 years out as opposed to, say, the near term?

I think for the foreseeable future and in video and voice unified communication, that's a huge market, right, a $43 billion market.

I think we are going to be very busy, right?

Especially for enterprise migrating to the cloud, video and voice will be converted into wireless service.

We are going to be laser focused on video and voice.

But at the same time, we'll also build a platform.

Our marketplace, there are already over 200 applications.

We would like to integrate part of it with other collaboration vendors with a focus on content, like Dropbox and Box, like Okta or Microsoft.

I think that's a way, right?

Customer, they are looking for the best-of-breed service, right?

When it comes to video and voice, I think that's our game.

Congratulations.

Thank you.

Thanks, Bhavan.

Our next question is from Sterling Auty with JPMorgan.

So with the surge on free users, are you actually developing programs that will work on conversion of these potentially temporary free users into permanent paid users?

Yes, that's a great question.

First of all, we all feel sorry about those who suffer from coronavirus in China and all over the world but still grateful to those doctors for having the work to deal with the coronavirus.

I think that's why we really focus on how to have those companies -- those knowledge workers to connect.

Because in this critical time, I would say, empathy, humanity and support for each other is more important than revenue, than growth.

At this moment, we're laser focused on offering the best service to help the people in the world.

We never thought about monetize because that's not our focus.

That's not important.

If we truly care about the customers, truly deliver value to the world, I think all of those will follow in the future.

Got it.

And then one follow-up on Zoom Phone.

You talked about the almost 3,000 Zoom Phone customers.

Where are you finding the sweet spot in terms of the size of the companies that are really gravitating towards moving over to Zoom Phone?

You mentioned VMware in your prepared remarks, but is there a sweet spot for where Zoom Phone is heading?

I think, in my view, I feel that everywhere is a sweet spot right now so -- because if you look at our installed base, from SMB all the way up to large enterprise customers, when we talk about Zoom Phone, after they tested that, they say, "Wow!" That's exactly what they are looking for.

We see the greater customer adoption from SMB customers so from VMware as well because the experience is very different, right?

If you look at all other phone systems, no matter on-prem phone system or cloud-based phone system, ultimately, it's just they can make a phone call, whereas historically I'd call a phone number, we can only talk, we really cannot do anything else.

With Zoom Phone, it's very different.

One more click, I can see you.

I can share a content.

That's a totally different architecture.

That's why if you look at our installed base, after they test our solutions, they really like our experience.

No any other solutions can match that experience.

Our next question comes from Meta Marshall with Morgan Stanley.

Matt, she's on mute still.

I did unmute her.

Meta?

Yes.

Can you hear me?

Yes, we can.

Yes.

Okay.

Great.

I'm sorry about that.

No worries.

You put out some announcements over the past couple of days on additional geographies as far as Zoom Phone win.

Just wanted to see whether you're -- whether we should consider you guys covered in the major regions you'd like to be deployed in as far as Zoom Phone reach for now.

And then maybe, Kelly, you addressed kind of the gross margin impact should be mostly from kind of capacity increases from some of the free usage right now.

But should we consider some of that gross margin impact from Zoom Phone adoption as well?

That's it for me.

So yes, we're super excited that we added 11 new countries into GA for Zoom Phone, taking us to 18 total countries that were GA and additional 25 in beta.

So we're getting close to, I think, the coverage.

The goal is to be in close to 50 countries by the end of this year, which is really what we're striving for.

And a couple of key markets like India and China, we're still continuing to work on.

And then in terms of the gross margin impact, no, we really haven't seen impact from Zoom Phone.

As we talked about, it's still small relative to the overall usage that it's not having an impact on the gross margin.

It's really coming from the increase that we're seeing globally in terms of in the last month or so related mostly to coronavirus.

Thanks, Meta.

Our next question is from Heather Bellini with Goldman Sachs.

I just wanted to follow up on Zoom Phone.

I mean in a really short period of time, you've obviously had some great success with that rollout.

Eric, knowing that you're constantly listening to customer feedback, what are the top R&D priorities for Zoom Phone as you look ahead over the next 12 months?

And also, do you see any benefit on the horizon by Avaya's decision to partner with RingCentral instead of kind of going down their own path?

And so as those customers look to migrate, do you see an opportunity there?

Yes, Heather, thank you.

I know you are probably traveling.

So next time, we hope we can see so much better.

And that's a good question.

So in terms of Zoom Phone effort, we do not assume that's brand-new application because when we build a platform, the first application that is built upon a platform is video conference.

The second application is the Zoom Phone.

So mainly, we shared lots of components, right, when we built the Zoom Phone system.

Having said that, there are some features missing.

And also international coverage as well, we are making very, very good progress, as Kelly just shared.

In terms of the priority this year, we just added a little bit more features like, recently, we announced SMS, the beta, right, and also added a lot of features.

All those features, I do not think will all get assessed.

It's really just the application that will work.

The hard part, already done, right?

That's why we have a high confidence we can deliver a much better solution than our potential competitors.

So regarding the Avaya-RingCentral deal, I think from our perspective, we really focus on our installed base, focus on the video and voice convergence.

That's kind of our vision.

And today, if you look at some of the customers, take VMware, for example, right, they deployed on-premise solutions.

And some other customers also deployed maybe the on-prem Avaya solutions.

When they evaluate which cloud-based PBX solution to go, if they do the test, they would know that.

Zoom experience is better.

It's better than any other cloud-based PBX vendors.

We have a high confidence, as long as customers are trying our solutions, that's the solution to go.

Our next question is from Brad Zelnick with Crédit Suisse.

So congrats on all the success thus far with Phone.

We have seen some of your competitors really leverage the channel to drive success.

And I was wondering how should we think about your willingness to do the same?

Yes.

So we're really excited to announce that we, just yesterday, I guess, launched our master agent program for Phone, specifically, and we've signed up 2 big partners in Infosys and AVANT, and the more formal launch will be next week at the channel -- our channel...

Conference.

Conference, yes, thank you.

Great.

And maybe just a follow-up on net expansion.

It remains above 130%.

But based on our math, it would seem to be the lowest level of expansion that we've seen thus far.

How much of the deceleration is due to large lands?

And how should we think about expansion rates from here?

So there's a couple of things that contribute to our net dollar expansion rate.

It's land and expand, as you touched on, as well as Zoom Phone.

So we really see great opportunity for that number to be influenced by Zoom Phone as well as land and expand is a critical part.

I mean it does vary quarter-over-quarter depending, as you just indicated, on the size of the initial deals.

But we're confident for the long term that it will stay at above 130.

Great.

Congrats.

Thank you, Brad.

Our next question is from Tom Roderick with Stifel.

So Eric, I apologize, I jumped over, and I think you were talking about this right as I jumped over.

Obviously, your customers are very excited to be able to use Zoom during a challenging time.

At the same time, obviously, you have a pretty nice-sized workforce over there in China as well.

And I'd love to hear just a little bit more about how you're able to still communicate what your procedures are with your R&D staff.

And as you talk about building up more R&D dollars in the year 2020, help us understand where geographically you're thinking about that in spite of all of the challenges we're facing globally right now with the coronavirus taking place.

Yes.

That's a great question.

So if you look at our R&D resources, the core R&D are here in our headquarter, in San Jose, and we also have a team in China.

And because I managed a WebEx engineer team before, I'm very familiar with that process of how to manage the offshore team.

And besides that, actually, we are using Zoom video every day.

So meaning, every engineers, anytime, anywhere they can work.

For sure, we have a security process, right?

And we are already familiar with remote working, our practice for a long, long time.

But due to the coronavirus, a lot of other business, they have to work at home.

I think quite often, we got feedback, they really do not know how to do that, but we know how.

That's why over the past several weeks, now they are -- most of them are already back to work.

But over the past several weeks, when they went back home to work, there's no any impact whatsoever because they already know how to do that, right?

And here, we also did not see any impact.

We're still working together with our team.

For sure, we all know how to use Zoom, right?

I think the impact to us is very minimal.

And for us, this year and over the next 3 years, I think we are going to have more and more resources here for the new services, a lot of artificial intelligence features and the core capabilities because the core IP R&D is still our developer here.

So that's why we further expand our R&D team here in our headquarter this year and also in the -- for the foreseeable future as well.

Great.

And a further follow-up for you, Eric.

Just in thinking about, you've been doing this a long time, you've seen a number of these sort of disruptive moments in tech.

This is clearly a disruptive moment in the global economy.

When you think about your conversations with your biggest customers out there, how are they talking about the way that they want to expand with their key partners over the next 1 or 2 or 3 years?

And do you think of this as an opportunity to really sort of shift some of those into a big digital transformation as they sort of reevaluate how they spend their money coming out of the back end of this whole situation?

Yes, that's a good question.

So by the way, today, we also have our annual analyst meeting as well.

And in addition to talking with our customers, I think your observation is right on.

I think this is a very critical moment.

So meaning, I think more and more businesses, they are going to leverage a videoconferencing service like Zoom to drive productivity.

No matter where those employees are, they still want to get the job done.

However, when it comes to videoconferencing, the key is that you have to make it work anytime, anywhere, with any device.

Otherwise, they are not going to use it.

And because of this coronavirus, a lot of businesses have remote employees, after they tried Zoom the first time, a lot of users who first time tried Zoom, they said, "Wow!

It just works." I think because of that, I think this is a very exciting time in terms of how to further drive the videoconferencing adoption.

I think this is very sustainable.

Our next question is from Pat Walravens with JMP.

So Eric, I mean, looking forward to having the COVID-19 resolved.

And when we get there, I was wondering if you could help us think a little bit about what the long-term opportunity is like for Zoom in China.

And maybe just to put a couple of ideas there: how might pricing be different, how might the competition be different and how might user behavior be different.

Yes.

That's a great question.

So if you look at our revenue, also the revenue from Asia, and China included, it's relatively small, right?

It's kind of still driven by North America and Europe and Japan, Australia.

I think that because of this coronavirus, I think that businesses in China realized -- I think they need to have more tools, not only Zoom, but more and more the B2B tools to drive their productivity.

It used to be you can hire, say, about 10 people, right?

You do not need to deploy HR tools.

But now you really cannot have those 10 people anymore.

They all went back home, right?

I think this will further boost the B2B SaaS application adoption in China.

And besides that, videoconferencing is a tool they all understand.

We also have some local competitors, but the market is there, the potential is big.

And also, we're in the process of navigating several options, right, to see which option is better because, over the past several years, we really wanted to go to China market.

However, I do not think that the time is right.

For now, I think the time is right.

We needed to make sure we have a sustainable strategy to expand into China to help the local businesses there.

And if I could ask, since we're all starting to have to work from home remotely a lot more, do you have like 1 or 2 key pointers you would give us about how to do it effectively?

Does a camera have to be on all the time?

So first of all, I do not think that you're at home.

I did not realize that.

Yes.

Yes.

That's the first one, you've got a virtual background.

I think that helps a lot.

I think that's pretty much actually.

In terms of -- we have all the features built in, right?

And if you just play around some features, you will see that.

Like, I think, for example, my favorite feature is to touch up my appearance, right, and also think on which background.

A lot of features are built in and also small like a record session as well and a lot of feature already built in over the past several years.

I think, finally, our customers realize it's time to kind of play around all the features we built for them.

Our next question is from Ryan MacWilliams with Stephens.

So how do you see the market trending for cloud voice pricing going forward?

Is there a temptation on your end to reduce pricing for Zoom Phone, especially given the fact some of your competitors have started offering their own video capabilities for free?

Well, we believe that we are already very competitively priced from both a Zoom Phone and a Zoom Meetings perspective against the market.

And we haven't seen price pressure beyond kind of the normal discounting that we typically do, and we feel really good about where we're sitting.

The way that we historically brought value to our customers is by adding more and more features, both Meetings and Phone, and we will continue to do that approach across all of our product lines.

So in terms of your comment about the -- some of the vendors offering the free videoconferencing.

I can tell you, it's very easy, it's extremely easy to build a very, very basic videoconferencing solution with some open source.

But however, to have a global scale, very secure, reliable, fiber net availability, it just was -- it's extremely hard.

Like I'm already in this real-time collaboration base for almost 23 years, today, you look at where we are now, there's still a lot of things that are not done yet.

I think free does not mean your customers, they want to use that service.

Great.

And just kind of to that point, with 230 million Zoom Phone voice minutes, and video minutes also expanding with Zoom Phone -- or Zoom customer growth, how do you see the AI opportunity for Zoom to add features around transcription, around this influx of usage?

So voice and video is the same platform.

But in voice, quite often, if you -- we already share the same -- the platform encryption, right?

We have an encryption process we're working on, support a customer key -- the encryption based on the key offered by customers.

But sometimes, voice is a little different.

If all use Zoom, we can offer very secure their service.

However, if they want to dial somebody else, the cellphone number or the PST number will go through the traditional PST Network, I think it's really hard because it's completely out of our control.

Great.

Congrats on the quarter.

Thanks, Ryan.

Thank you.

Our next question is from Zane Chrane with Bernstein.

I will come back to Zane.

Okay.

All right.

Next question is from Will Power with Baird.

Great.

I guess first question is as we think about the coronavirus impacts, any color you can provide in terms of the geographic spread of traffic.

How much of the traffic increase was in China versus in other geographies?

I'd love to hear anything more on some of the more unique use cases you've seen.

Yes, I can start.

Feel free to chime in, Kelly.

I think over the past several weeks, first of all, we see the very, very big jump from users in China.

And the good news, we have a very flexible back-end architecture, we can auto scale our servers.

That's why within several days, we added a lot of capacity and the really focused on the product experience.

The customers there are very, very happy.

And also afterwards, you see like -- we see the usage not only for China, for Vietnam, for Singapore, for Japan, all followed over the past several weeks.

Essentially, I think if you look at APAC, almost every country usage jumped a lot.

And last week, we see the usage from Europe and here as well.

It's kind of particular trend to see the usage jump.

I think in terms of the use cases, we talked about the doctors getting therapy.

We also, of course, see lots of educational institutions that have stopped either study abroad programs or having all of their students study from home as well as we've seen a few of our customers here that have already moved to requiring their employees to work from home as well.

And so we're seeing an increase in that sense.

And virtual events, too.

Yes.

Lots of virtual events.

That's true.

One use case I'd share with you, we also -- not only do we offer the video meetings, we also offer the video webinar platform.

It's pretty powerful.

And in a city like Wuhan, like they have tens of thousands of doctors, for a long time, they're in depression, anxiety.

And in the Tsinghua University, the #1 university in China, also with some other psychologists, they used Zoom and treating the doctors there.

That's a good use case, and it's really made those doctors in Wuhan very, very happy.

Okay.

And then if I could just get one question in on Zoom Phone, as you look across the broader unified communications space, there seems to be increased interest with bundling contact center.

I wonder if you look at your 2,900 customers, any comments as to how many are taking contact center.

How do you think about the partnership model there long-term versus having your own platform?

Yes, you're right on.

So we focused on our core video and voice capability.

In terms of contact center, I think it's a very definite market from our perspective.

However, from a customer perspective, they like to have a very seamless integration.

That's why we partnered with Five9 and also in contact, we've got Twilio and Genesys.

And specifically, Five9, the CEO, Rowan, is a great leader, really understands collaboration.

And the 2 teams are working together very well.

And like at Zoom, we also use our video conference, our Zoom Phone system, we also deploy Five9, and the solution works very well.

I think there's a huge opportunity like between Zoom and Five9.

So ultimately, we wanted to partner with other contact center solutions.

Next question, we're going to go back to Zane Chrane with Bernstein.

Yes.

Can you hear me?

Yes.

Congrats on a great quarter.

Thank you.

So I wanted to dig into the nonbusiness customers a little bit.

I know that's only about 20% of your revenue at the time of IPO, but it's an important group in some ways just because it had a much higher annualized churn rate than I think your business customers typically do.

Can you give us a sense of what portion of the revenue nonbusiness customers comprise now and what that should look like over the next couple of years?

Yes, it's actually been really steady, at that same 20% of revenue for FY '20.

I mean I think, over time, as we continue to focus more and more on the upmarket, we'll see that overall percentage decrease, but it's been pretty steady and consistent over the last year.

And just a follow-up to that, had the renewal rates, the contract renewal rates, either on a customer or a dollar basis, changed over the last year?

I know you talked about the net expansion rate.

But before including up-sell and seat expansion, how should we think about the trend for just contract renewals?

Yes.

We haven't seen any trade change.

It's been pretty consistent.

It's holding pretty steady.

Got it.

Okay.

Great.

Congrats on a great quarter.

Yes.

Thanks, Zane.

Thank you, Zane.

Thank you.

Our next question comes from Alex Zukin with RBC.

Congratulations on another very successful quarter.

Maybe first for Eric, how important -- particularly in the larger deal opportunities, as you think about the future of work and the compression of that adoption curve given something like the coronavirus, how important from a go-to-market perspective and some of those larger deals are your relationships with partners like Slack, like Dropbox that kind of enable your customers to create an entire experience around this area?

Yes, that's a good question.

I think -- first of all, I'd like to take a step back to share with you what's happening about the decision-making process for a large enterprise because, over the past 10 or 20 years, normally, CIO will make the final decision.

Today, it's very different.

Almost 50% of workforce is today here are millennials, right?

And they've grown up along with the smartphone.

And that's why if they do not like your service, no matter what, they are not going to use your service.

This is their habit, right?

This is their experience.

And besides that, I think land and expand influenced by the bottom-up users is extremely critical, right?

Quite often, they already use the Dropbox, right, or use the Slack.

And if they want to find a best-of-breed service like video and voice, they also deploy Zoom.

That's why we have a very, very tight integration with Dropbox.

Within Dropbox interface, you can log to Zoom.

Within Slack, you can also log to Zoom.

I think that's a trend.

The best-of-breed service will drive the adoption, will truly deliver happiness to large enterprise customers.

That's great.

And then maybe, Kelly, one for you.

If I think about current RPO and RPO, I think we're looking at the current RPO bookings of 58%.

Compare that roughly to the 46% guide for revenue growth next year, help us bridge that a little bit.

And then in the script, you also mentioned some seasonality benefits to RPO from semiannual quotas in kind of the upmarket segment.

Can you maybe unpack that and explain that a little bit?

Yes.

So just a quick reminder, that RPO is not an absolute directional metric for us due to there's a significant percentage of our customers who both buy and pay monthly.

So it doesn't correlate the way you would expect it to from other enterprise customers.

And in terms of the seasonality, if you remember, when we talked about this in Q3, we saw some seasonality in terms of it being somewhat flatter Q2 to Q3, and now we're seeing that benefit in Q4 due to the fact that our upmarket teams are on 6-month plans.

And so what we see is, as they get to the end of their 6-month plans, they have the opportunity, obviously, to overachieve and go into accelerators that we see a typical linearity toward -- or seasonality towards the back half of their 6-month plans.

And that's what you're seeing in some of that increase for the RPO for Q4.

Perfect.

Congrats again.

Yes.

Thank you, Alex.

Thank you, Alex.

Our next question is from Phil Winslow with Wells Fargo.

He just joined back in.

We'll move -- we'll come back to you, Phil.

Next question is from Ryan Koontz with Rosenblatt.

Congrats on a great quarter.

Thank you.

So as you look at your video seats you're winning, can you estimate the percentage that are defections from other platforms versus greenfield wins?

And then in the broader picture, are you seeing changes in the competitive landscape kind of given your increasing market leadership there?

I think if you look at all the report, right, over the past several years, and Zoom is becoming the most popular video conference application and look at our customers, quite often, especially for large enterprise customers or medium-sized customers, they already deploy other solutions, but they do not use that very often.

And it's also the different experience.

It's more like a web conferencing or audio conferencing.

And Zoom is a true-breed cloud -- a video-first, the solution.

And that's why they all want to switch to Zoom.

It's not like from one solution to the other solution, I believe this is a totally different service, and we are in a different category because it's more like a Tesla car and other cars, they're all cars but totally separated, different in category.

That's why I think that from that perspective, I would say every customer, no matter which are the solutions they are using today, is a greenfield, right?

That's our experience, yes.

We're going to go back to Phil Winslow.

So our next question is from Phil Winslow with Wells Fargo.

Congrats on a great quarter.

Just wanted to focus on Zoom Phone.

Obviously, you guys continue to see great traction there.

And I remember when you first launched it, you'd said, "Hey, it would take a while to get some of these bigger customer wins knocked down," but it seems like you've done that.

Do you think about it just sort of the functionality of the offering?

Is this sort of the 80-20 rule where you've got 80% of what you need to actually knock down some of these big accounts, and the 20% is just for maybe, say, like a small percentage of the base.

Maybe help us think about sort of where the functionality is right now, how that affects sort of the types of customers you can address and sort of where you see this going forward.

Yes.

So Phil, that's a great question.

So maybe I'd like to share with you a little bit of analogy about what's been going on in the smartphone industry, right?

So the first time I saw the BlackBerry, I know that all the feature phones on that era is over, and all those feature phone died because the BlackBerry does offer something new and other feature phones can't offer, which is the e-mail.

I fell in love with the BlackBerry for many, many years until I saw the iPhone.

When I saw the iPhone, I know BlackBerry is over.

Because the reason why, they have a marketplace, all kind of applications, even if the iPhone does not offer some of the functionalities that were already available in BlackBerry, but that's a trend in the future for marketplace.

Something similar is happening in the cloud-based PBX market.

On the one hand, you are still right, we lack some of the features.

But on the other hand, when customers look at our product experience, look at the unified collaboration experience, and with one more click, they can screen share and can upload it to a video call.

They say, "Wow, that's the future." That's something so critical.

In terms of some other minor features, they know we can add it.

That's the reason why we got iPhone today versus the BlackBerry.

I think that, that's a same story now.

Our next and final question is from Jonathan Kees with Summit Insights Group.

Great.

Glad I made it in, and I'll add my kudos to your strong numbers.

And yes, and also commend you for the humanitarian efforts you're making there.

My questions are, I guess, if you can update us in terms of your partnership with RingCentral, Five9, the partners where you're white label.

Basically, any of the partners who are there, the lead and -- to a deal and they bring you in.

In the past, you've talked about it, how that's trending and trending well.

If you can update us on that and quantify anything for us, that would be great.

And then I have one other question.

Thank you, Jonathan.

By the way, we have a very cool feature called a virtual background, if you want to try it.

Okay.

I'm still learning it.

So I may need help in terms of changing the background.

Right now, I have -- I call from a home office.

I'm happy to follow up with you, Jonathan, make sure you can get it, not a problem.

Yes, IR/IT support.

Great.

Yes, and sales.

And sales, okay.

Yes, speaking of partnerships, take Five9, for example, I think in this year, we'll achieve more because in the 2 teams, we enjoyed working together, right?

So I know Rowan very well.

He's such a great leader.

I think more and more customers, it will allow them to, "Hey, I want to deploy Zoom Phone.

I also want to pick up a contact center solution." Five9 is a great partner, right, and along with some other contact center partners as well.

In terms of RingCentral, they were a very good partner over the past several years.

And I think they are pretty smart in terms of partnering with the best-of-breed service, right?

And that's why we built a white label solution for them, which is RingCentral Meetings.

And that partnership really helped RingCentral, right, in terms of becoming the unified communications market leader because they have the best videoconference service, right?

However, I think from our perspective, and we would like to really look at our customer and look at what's the best experience we can offer.

And RingCentral, over the past several years, they tried to build their own videoconference solution.

I don't know how good that solution is, but we focus on our customer experience.

And in terms of revenue from any of our partners, it's relatively small, right?

And customers, they would like to deploy the unified solution from one vendor, from us: video voice, the same architecture, same experience.

And you will see more and more overlap between Zoom and RingCentral.

In particular, after they announce their videoconference service, I'm pretty sure that experience is not as good as Zoom.

I'm sure.

I'm sure.

And then if I can, I guess, it's more out of curiosity.

You already talked about you have your headquarters employees working from home because of COVID-19.

You have -- most of your sales are direct sales, are field reps, are knocking on doors.

I guess are you seeing an impact there?

And are you going to change your strategy there?

Or is that what you're doing with like channel and getting others to start selling for you?

I don't think there will have any impact whatsoever.

The reason why, our sales reps, they're pretty creative.

And we also support a video background.

They shoot a video in the office and use that video background, I even do not know where they are, seriously.

And I feel like they're still in the office.

And I would say, there's no any impact.

Probably even better because they can save on their commute time from where they live to office, probably we should increase the quota for them.

I'm kidding, I don't know.

Well, Eric, I think that's the last question.

Matt, is anyone else out there?

That was our last question.

Great.

Do you want to have some closing remarks and just thank everyone, Eric?

Yes, first of all, thank you all for your time.

I really appreciate for your support, and we will do all we can to deliver a much better service to serve our customers well.

Thank you.

Thank you, everyone.

Bye, everybody.

Thank you.

Appreciate it.

Thank you.