Zoom Video Communications Inc Conf Presentation Call 2024305 SD000000003033386320

FINAL TRANSCRIPT 2024-03-05
Zoom Video Communications Inc (ZM US Equity)
The Citizens JMP Securities Technology Conference
Company Participants
Kelly Steckelberg, Chief Financial Officer
Other Participants
Patrick Walravens, Analyst, The Citizens JMP Securities
Unidentified Participant, Analyst, Unknown
Presentation
Patrick Walravens {BIO 3241364 <GO>}
Great. Why don't we go ahead and get started? So look. We're just delighted to have
Zoom Video Communications joining us at the Citizens JMP Technology Conference.
Kelly Steckelberg {BIO 15321517 <GO>}
Thank you. It's great to be here.
Patrick Walravens {BIO 3241364 <GO>}
Kelly, thank you for joining us. You've done this a bunch of times. We really
appreciate you.
Kelly Steckelberg {BIO 15321517 <GO>}
Of course.
Questions And Answers
Q - Patrick Walravens {BIO 3241364 <GO>}

We do. We appreciate you. All right. So let's let people learn a little bit about you
before I ask how is business and go into more things.
So where are you from?
A - Kelly Steckelberg {BIO 15321517 <GO>}

Well currently, I live in Texas. I went to high school and college there. Then I moved
to the Bay Area for 30 years, and then I went back.
Page 1 of 13

And what did you --

Putting Zoom to the test.

You are putting Zoom to the test for sure. What did you do before Zoom?

Before Zoom immediately, I was the CEO of an online dating site called --

That's right. I forgot. I totally forgot.

But I met Eric at WebEx. I was a Chief Accounting Officer and Controller at WebEx
when Eric was Head of Engineering. That's how we came together again at Zoom.

Yes. So how many years did you guys work together at Webex?

Three-ish years together at Webex. I was at Cisco for two years after that, but he
stayed within the WebEx division. I moved over.

And so you joined Zoom in what year?

I joined Zoom in 2017. So I'm coming up on my seven-year anniversary this fall.

I can't believe it's been that long.

I know. Amazing.

I can't believe that's -- wow! And the IPO was in --
Page 2 of 13

2019. So we're almost at our five-year anniversary of being a public company.

Yes. Then in -- we'll do this quickly, but in when did the pandemic start? Was it 2020?
you were here.

I was in San Jose because we had our earnings call on March we sent everybody
home on March 3. We had our earnings call on March 4, and Tom and I and Eric
were the only three in the office with our tech team in the studio. Then there was like
the week in between where I think everybody in the Bay Area was sort of trying to
figure out what's happening. The following Monday was when the whole world
changed.

Yes. Because we had -- so we were -- we had this conference going. I remember -- on
Monday Dan Springer at the time of DocuSign was sitting in that chair and he's like,
yes, some is going on. He goes, my -- I was supposed to go to Japan this week and
my Japanese team just told me don't come. They said that it would be very bad
managers if I were -- like the last thing they wanted me to do was to -- the last thing
the Japan team, one of their CEO of Dogan to do was to go to Japan and shake a
bunch of people's hands, right?
And that was the first and we were like -- and then by the end of the day on Tuesday
it was clear that something is going on. Then your company basically helps save our
society. may get a little tiered up. So thank you very much.

Thank you. It was really --

It wasn't great -- the pandemic wasn't great, but it would have been a lot worse
without --

It's interesting because I was having this session somebody reset how we took it
very, very seriously during that time. It was a weird jest position of how busy we were
and watching what else is happening in the world, even some of our employees like
the spouses or significant others being out of work and having to deal with deaths,
like it was a really trying time, but we took it very seriously and felt very honored to
keep the world connected.
Page 3 of 13
Yes. I mean probably the fastest-growing fastest revenue trajectory of all time, right?
Then all of a sudden, your $4 billion business. Then you kind of paid a price,
honestly, for -- right? You paid a price for what you did for everyone, right?
Because you guys port so many resources into meeting the needs that we had
during the pandemic, right? Then the pandemic came to an end, and then what?

So we're really in an amazing transition for this company --

Let's talk about the bad part first because I think we're in a new stage. We'll get to
the good part.

So what then was we have an amazing platform that everyone came to know and
love us for meetings. We have -- the segments of our business are Online and Direct.
Just to remind everybody, before the pandemic, our Online segment of the business
is about 20% of revenue, and it was really a funnel for the direct segment of the
business.
During the pandemic, our online segment grew to be over 60% of the revenue and
was exploded in terms of its international coverage because it was just so easily
accessible.
As people started coming back together again in person, we have seen that
segment of the business, people start doing Zoom happy hours, right? They want to
do those in person, which is great. We're happy to see people connected like that.
But that segment of the business has been declining over the last several quarters.
We are happy to -- we've been very focused on getting it stabilized, and we can talk
about the specifics and churn rates, et cetera.
But Q3 to Q4, we started to see that stabilization really taking hold. So that's been
really good. And as you said, during the pandemic, we were so focused on building
capacity, making our products trustworthy and reliable for everyone no matter
whether you're kindergartner or a Fortune 10 company, and focusing on making sure
that everybody had access to it, especially -- and even schools, okay one through 12
that we gave it for free to for many years, that our second act was a little delayed
because of that.
I think we're firmly in Act two, maybe Act three now, and we can talk about that, but
that's what's caused some of the deceleration of growth over the last couple of
years. We are very firmly planted now in a place that I think we're ready (inaudible)
growth in a much better way than we've been over the last couple of years. So we
can talk about all the exciting stuff there.
Page 4 of 13

Act one, we all know, we all lived through it. What was -- you said Act two -- what's
Act two?

Act two is really phone and expanding into more of a collaboration suite. And phone
has been a really an amazing growth story for us. We -- the metrics that we've
announced is it's over 10% of revenue, over 7 million seats. And really, we have some
customers using that product. So it's showing that it has now emerged into that
place where it can support the most sophisticated users.
To me, Act three now, and Eric might call it Zoom 2.0. So -- but it's like really now
emerging into a full collaboration and communication platform. Of course some of
those emerging products include Zoom Contact Center, Zoom Team Chat, which is a
product we've had for a while, but it's really been reinvented recently to really
compete with the leaders in that space. Zoom Docs, which we announced at
Zoomtopia last year. Then, of course all of that being underpinned by Zoom AI
Companion.

Okay. So now we're going to go back a little bit. All right. So everybody has used
Zoom, right? How many people in here, just out of curiosity, have used Zoom Phone.
Really just one, two --

Three, four.

How is it? Is it? What's it like --.
Q - Unidentified Participant
Easy to use.

Easy to use, right? Easy to use, reliable, all this seamless if you're using zoo meetings,
like it's all.

And so when you use the -- you're just using it from your -- you can use desktop and
you a headset --
Page 5 of 13

75% to 80% of our users use a soft phone. So they're using a headset directed to -- is
that how you use it? Yes. So gone are the days of having to pay $1,000 for a very
expensive phone to sit on your desk, right? You can buy a $100 headset and it's
much easier to use.
You can also have -- of course if you have to Zoom Client --

Lost you at those stupid the tube via phones have got?

$1,000.

Really?

Yes. They all became per waits in offices. You can also -- if you have the Zoom Client
on your cell phone, then you can have access to Zoom foam there. So -- that's what I
think became very obvious during the pandemic was the need for portability of
phone lines. To the extent people are using phone lines still, they want them with
them.
They're not in their office anymore tethered to that desk.

And how is the user experience when you're using the Zoom Phone app on the
phone, phone?

It's great. It's the same. It I give it. Brings through, you can see, like I can see on my
notifications, Zoom that it's coming from Zoom Phone and then the phone number.
So it's as CollarID.
It has voice mail. It has everything that you would expect from a phone system.

Well to save me a ton of money? So I don't know if he's in here. I had a conversation
with one of my London accounts the other day. They charge me $100 in long
distance for the stupid conversation.
Page 6 of 13

Yes.

I know.

It would be %15 a month with included --

Including London.

Yes. Exactly.

Okay. So that's a right? Where -- so your 10% now we're going to go realistically?

We've said the goal for Zoom Phone is that it will get to 25% of our revenue.

Okay.

Then some of the emerging products that we're really focused on now, of course is
Zoom Contact Center. That's been out for a couple of quarters. We're really excited.
But that product, when it came out, just like Zoom Phone, it had features and
functionality best suited for SMB, or smaller businesses, but we are very rapidly
developing. We're doing about 100 features are being added at a quarter, and this is
represented by the fact that we just announced new pricing tiers.
So when the Contact Center was released, it was -- there was one price. It was $69
per seat per month. We now have two additional tiers above that, which are $99 and
$149 and that -- they have different tiered capabilities included the top one, including
some of the premium AI features, including Agent Assist, which you can imagine
after a call documentation, it can take care of a lot of the administrative type work
that agents have to work on.
So that's been really great. What we've seen is it's still early days, but there has been
very positive reception from customers as well as partners around this. I mean we --
it's the most modern built Contact Center out there. Imagine this is the only contact
Page 7 of 13
center available that is being reimagined with AI front and center and everything.
Everybody else is trying to -- I mean on-prem tech centers probably won't even be
able to address the possibility of AI.
The cloud providers are trying to figure out how they put it on top. Then I know
there's been a lot of discussion. I've got a lot of questions about this about, well,
what's going to happen with contact centers anyway? Isn't AI just going to displace
all those agents?
And I don't think that agents are ever going to be completely displaced. I think that
they are going to become more and more efficient and be able to focus on top-tier
customers. But for Zoom, we have not only -- the contact center agent license you
can buy, but we also have Zoom Virtual Agent, which is a virtual chatbot agent. This
was accelerated through our acquisition of (inaudible), which was a great company.
So we are happy to support our customer.
We're not trying to defend an existing installed base. We're happy to support our
customers or prospects in whichever solution works best for them. We think we're
very well positioned in regards to that.

It's really helpful to not have to defend an existing install base.

It's nice.

You can lower price and it doesn't hurt you and hurt your competitors.

Yes.

I love this space. I love the contact center space. It's remarkable because if you just
go look at Gartner, right? I mean great research there, right?

Yes.

But I mean Gartner's research is great. It's not great research by me just go look at
Gartner --
Page 8 of 13

Yes.

But the contact center plus the conversational AI stuff is going from $19 billion in
2023, these are just Gartner estimates to $39 billion in '27. That's insane.

Yes. it's amazing.

It's amazing. It's amazing. So you're adding almost $20 billion even for a company as
big as view, that's big enough right at billion of TAM in four years, $5 billion a year.

Yes. We are --

How on earth can this market be growing that fast?

Because I think that everybody is trying to figure out how do they help customers
self-serve. That's where the conversational AI is really important. There's a lot of
legacy systems sitting out there that need to get converted and need to get pushed
to the cloud.

Yes. Okay. So usually, I start with this, but how's business, Kelly? How are things
going?

So thank you for asking. We had earnings last week, and we were very pleased we
had a strong finish to FY '24. Q4 revenue was above our guidance. We had very
strong free cash flow. We ended the year with $7 billion in cash.
And saw stabilization, as I mentioned earlier, in both Online and Direct, which was
really good, great. They were both up quarter-over-quarter. So that was really nice to
see. We announced an authorization from our Board to do a $1.5 billion buyback in
FY '25 so --
Page 9 of 13
So the sales team, generally Eric was happy with the production of the sales team in
Q4?

Yes. So if you remember, we had, as a company, we made the very difficult decision a
year ago to do a reduction in force and a pretty significant reorganization of our
sales team, including several members of the leadership team. That was a significant
disruption for our sales organization. And because of international labor laws, it took
about two quarters to get that all worked through in some of the international teams.
So it was really nice to see the teams regain their footing and start producing in Q3
and then finish Q4 strong.

Okay. Yes. It sounded good. You guys sounded good, but they're a little confused on
the guidance. So why was the guidance not more reflective of sort of the tone?

Yes. So I think we feel like we're in a really good place starting this year in terms of
like the sales teams being ready. They were off to a start for us, which means that
territories and quotas and everybody was -- had their book very early in the quarter
than 12 days, which is a really great way to start the year. Platform is amazing, Contact
Center evolving. The one -- I guess there's a couple of areas that we're continuing to
monitor and keep an eye on.
One of those is international. International was definitely a headwind for us. Last
year, if you remember, both EMEA and APAC were flat to down. So really need those
teams -- it's about 30% of our revenue. So we need those teams to start seeing
again.
We have new leadership in both arenas. So I think be a little cautious about that to
get them moving in the right direction again.
Then there are companies very similar to Zoom that went through their own
reductions. Of course we never want our customers to have seats that they don't
need, or we paying something to use. So we work with them on their renewal
timeframe. We know that the majority of our customers had a renewal opportunity in
FY '24, but not all of them. What happens in those discussions Typically, the team has
done a really good job of, first of all, of course maintaining the customer.
Then secondly, really focusing on maintaining the spend, meaning if they are down --
if they want to rightsize or downsell some of their Meeting license count, upselling
them into like a Zoom One bundle or adding in Zoom Phone. So really focused on
preserving the dollar spend. That sets us up well for future growth as they start to
hire again that we're in these higher dollar SKUs. But that's not an upsell, right?
That's just sort of a negotiation to keep the spend where it is.
Page 10 of 13
And we know that we have a percentage of our customers, that's much less than last
year that have a renewal event in FY '25 did not renew in FY '24, meaning we have
more of this ahead. So that's why we talked about it on the call that we expect the
low point in terms of year-over-year growth to be in Q2 and then to start to see
reacceleration in the back half. That's a combination of continued maturity of contact
center, working through the most significant renewals we have, which are in Q1 and
Q2.
As a reminder we're starting probably the inverse of any other SaaS company you
know, which is Q1 is the largest renewal period for us than Q2 than Q3 than Q4. This
all the way back to the pandemic era, but we got to get through those.
Then hopefully, we leave the year at a more accelerated growth rate than we're
coming in with.

All right. Awesome. One more for me. So your long-term operating margin growth
rate is 28% to 32%, and (inaudible) 39%. Someone was like that can't be ready go.
I think it is right. They're like, Why? And I go, she explained at one point, but I don't
remember. So I can ask a -- so you just did 39% and your long-term rate is 28% to
32%. What do we --

The reason -- remember, the number1 priority at Zoom is investing for reaccelerating
growth. The reason that we've kept our long-term margin at those levels is because
we reserve the right to the extent that we see organic or inorganic opportunities to
reaccelerate growth that we could potentially do that at the expense of margin. Now
you all know and would trust that we're a very disciplined company. So if we were to
do an acquisition, we would always focus on how do we drive efficiency through
that? But that's really why that's there.
We -- to the extent we see significant opportunities in the market, we just wanted to

be able to act on that.

Okay. Right. Cool. Yes. Any questions from our audience?
Yes. I mean I guess I used to come is colocally them. So we think I know what we're
talking about. I guess going back to the sell side, I was on the management you're
talking on the side of things. I always hear people the second half is going to be
better than first half.
What analysis have you done to make you feel like that's the case? Then you feel
more comfortable for a number (inaudible)?
Page 11 of 13

We got to repeat the question.

Okay. So why do we feel that second half growth is going to be better? Yes. Yes. So
the way that we've planned for FY '25, which is how we do it is, of course it's capacity
model as well as what do we expect products to contribute.
And this is where contact center is continuing to add functionality throughout the
year. There are some very specific features that we know we need to be able to
compete at the upper echelon of those enterprise opportunities. These are things
like PCI compliance, which is the ability to safely take credit cards. There's still some
channels and some integrations that we need, and those are coming in the first half
of the year. So that's part of it.
I think more impactful from a modeling perspective is the renewals that I just talked
about. The renewals are so front-end loaded and knowing what we learned in FY '25
in terms of the rate of renewal, not on a local basis, but on a seat count basis,
modeling that in, there's going to be some impact early in the year from that still as
customers are getting rightsized from reductions they've taken earlier, probably last
year. Yes.

We actually have a mic, look at that, hold on.
Great presentation. Here's my question. Zoom has an unusually high brand
awareness effect like Netflix. What new features and products are you doing that are
industry agnostic that can leverage all the time in the world versus contact center
and a few that honestly are very limited in scope. What are you doing in that area if
any?

Yes. It's a really good point. I think foam, we I think extends across all aspects of it.
We are looking for -- this is back to the discussion about organic versus inorganic,
especially in our online segment. We've really started to think about a mechanism for
online growth is adding more products to the portfolio that they can sell and
thinking about what products lend themselves well to self-service. So these are
individual proprietor, sole proprietors or small business owners, what do they use
every day.
In addition to their phone and their meetings, they use chat. They use some sort of a
marketing tool probably. They have a website, they use productivity tools. So those
are the things that we're thinking about, okay how do you -- that's the best way all-
line is going to grow, honestly, is through portfolio expansion.
Page 12 of 13

Easy way to charge your customers and get paid, particularly when you're delivering
your service over Zoom. Yes. That's a big one. You know what I'm talking about. That
is a big one. 40 seconds for one more.

It's definitely weird. I really like doing this.

That's awesome. How many of these conferences have you done?

We need to count it up. We didn't -- it used to be the JMP conference and then it
became the tech. I think we might be coming up on -- this might be 20. Happy
anniversary. congratulations.

I don't know what it is. But I'll take it anyways.

That's awesome.

All right. Kelly, thank you so much for coming.
It's great to see you again.
This transcript may not be 100 percent accurate and may contain misspellings and
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Page 13 of 13

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FINAL TRANSCRIPT 2024-03-05

Zoom Video Communications Inc (ZM US Equity)

The Citizens JMP Securities Technology Conference

Patrick Walravens {BIO 3241364 <GO>}

Kelly Steckelberg {BIO 15321517 <GO>}

Thank you. It's great to be here.

Patrick Walravens {BIO 3241364 <GO>}

Kelly Steckelberg {BIO 15321517 <GO>}

Questions And Answers

Q - Patrick Walravens {BIO 3241364 <GO>}

So where are you from?

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

Really just one, two --

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

You can also have -- of course if you have to Zoom Client --

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

They're not in their office anymore tethered to that desk.

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}

A - Kelly Steckelberg {BIO 15321517 <GO>}

Q - Patrick Walravens {BIO 3241364 <GO>}