I was really concerned after Q3 when I saw ZM’s revenue growth decelerate from 102% QoQ in Q2 to 17% in Q3, but I was very pleasantly surprised when I saw these numbers for Zoom.
After reading the transcript, my conclusion is that this was a solid quarter. No, it was not as good as Q2 Zoom, nor was it quite as good as 2019 Zoom. But currently Zoom is growing at an annualized rate in the fifty-five ish percent range, with large profits, and margins at 68%. How many companies out there in the world not named Crowdstrike are decidedly better than that?
The only weak point is guidance, which is for $905mm (2.5% QoQ growth). Reminder that Zoom has a bit of a track record for trouncing guidance (they just beat by 9%). If they clock in at or around 11% sequential growth, this investor will certainly be content to stick around.
Conference Call Notes
Eric Yuan – Founder and Chief Executive Officer
Thank you, Tom. First of all, I’m not a cat. I’m live here. So thank you all and welcome, everyone, joining us on today’s Zoom Video webinar.
ExponentialDave: Wanted to lead with Eric Yuan’s joke, because it was hilarious.
Next, as part of Zoom Phone’s second anniversary, I’d like to highlight some exciting deals where we harness the power of the channel to secure large enterprise rollouts of Zoom Phone.
We are optimistic about the growth in our channel partners, including market agents who work as a liaison between customers and the telecommunications world. These channel partners are force multipliers and have proven to be strong advocates for us. So let me share a few happy customers stories. We are grateful to have the University of Southern California as a long-standing Zoom Meetings and a new Zoom Phone customer.
Our commitment to USC and broader higher education was rewarded when the university and their master agent short-listed us in an extensive vendor review to modernize their phone systems. After a 6-month evaluation of the UCaaS vendors, USC chose to deploy 21,000 Zoom Phone seats. We are so thankful that USC put their trust in Zoom to deliver an increasingly comprehensive and integrated set of communications services.
We are very happy to announce that Universal Music Group, the world’s leading musical company, is adopting Zoom Phone for its global workforce. UMG was looking to replace and consolidate legacy on-prem technologies to a flexible, cloud PBX solutions. As an existing Zoom Meetings and Rooms customers, UMG was drawn to the integrated nature of the Zoom Phone product. They will be using Zoom United, which will provide their global users with a one-touch experience of video, chat, and voice.
ExponentialDave: Interesting that CEO/Founder Eric Yuan chooses to focus on Zoom phone.
According to Okta’s 2021 Business at Work Report, which relies upon data from Okta’s customers, Zoom was by far the preferred enterprise video conferencing app, ranked among the most popular workplace apps overall. And was the top app by number of customers and active unique users.
We believe the opportunity ahead is significant as the TAM for telephony is forecasted to grow to $23 billion by 2024.
Illustrating the ability of Zoom Phone to meet the needs for large-scale enterprise rollouts, Zoom Phone finished FY '21 with 18 customers, each with over 10,000 paid seats.
We closed FY '21 with approximately 10,700 Zoom Phone customers with more than 10 employees, up 269% year over year. We continued to drive broad adoption across industries and customer sizes where 60% was in the mass market and 40% was in the upmarket.With our base of approximately 467,000 customers with more than 10 employees and our growing channel presence, Zoom Phone is in a strong position as customers look to modernize their phone systems to an integrated communications platform.
Revenue grew 326% to $2.7 billion as we exited the fiscal year at an annualized run rate of $3.5 billion. We grew non-GAAP operating margin to 37.1%, up from 14.2% in FY '20. Free cash flow grew by over 12 times to $1.4 billion for the full year.
In Q4, total revenue grew 369% year over year to $882 million. This top-line result exceeded the high end of our guidance range of $811 million due to strong sales and marketing execution in online, direct, and channel businesses, as well as lower-than-expected churn. The demand was widespread across products, industry verticals, geographies, new logos, and customer cohorts. The year-over-year growth in revenue for the quarter was mainly driven by the sharp increase in new customers this year, which accounted for approximately 80% of the incremental revenue, up from 59% in Q4 of last year.
We continue to see expansion in the up-market as we ended the quarter with 1,644 customers, generating more than $100,000 in trailing 12-months revenue, up 156% year over year and 28% quarter over quarter. This is an increase of 355 customers sequentially, the highest number of quarterly net adds for this segment.
We made great progress in the upmarket and still see a lot of opportunity ahead. For example, we grew the number of Global 2000 customers generating at least $100,000 of ARR by more than 100% this year, but that still accounts for only 14% of the total population.
ExponentialDave: This makes it sound like Zoom has a lot further to go before conquering the world so to speak. Lots more customers to acquire!
We exited the quarter with approximately 467,000 customers with more than 10 employees, adding approximately 33,000 customers during the quarter and 385,000 customers during the year. In Q4, customers with more than 10 employees represented approximately 63% of revenue.
We also continued to benefit from significant growth in our segment of customers with 10 or fewer employees. In Q4, customers with 10 or fewer employees represented approximately 37% of revenue, up from 20% in Q4 last year and down modestly from 38% in Q3.
**ExponentialDave:**Interesting how before the pandemic, 20% of ZM revenues were from customers with 10 or fewer employees, but the pandemic nearly caused this number to double.
Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 11th consecutive quarter, as existing customers acquired more Zoom Meeting licenses, Rooms, webinars, and Zoom Phone products.
ExponentialDave: Curious way to phrase this statement and leaves me wondering what the net dollar expansion is for the 10 or fewer category, which accounts for a substantial 37% of ZM’s business.
Our Americas revenue grew over 292% year over year. Our combined APAC and EMEA revenue grew 687% year over year to be 33% of revenue, up from 20% a year ago.
ExponentialDave: Very promising international growth.
Non-GAAP gross margin in the fourth quarter was 71.3% compared to 84.2% in Q4 last year and 68.2% in Q3.
The year-over-year decline in our gross margin is partially due to the dramatic increase in free usage related to the pandemic, including our ongoing commitment to support approximately 125,000 K-12 domains, as well as the higher utilization of public cloud services. The sequential improvement mainly relates to seasonal audio usage, which decreases during the holiday season. We would expect gross margins to remain around 70% as long as we continue to support free K-12 education. Research and development expense grew by 91% year over year to approximately $31 million.
As a percentage of total revenue, R&D expense was approximately 3.5%, which is lower than in Q4 of FY '20 mainly due to the strong top-line growth. Though we made strides in expanding our team, we remain committed to prioritizing R&D hiring and continuing to grow in order to drive further innovation, expansion, and security on our platform. Sales and marketing expense grew by 90% year over year to $159 million. This reflects an additional $75 million over last year primarily due to investments in hiring to drive future growth.
ExponentialDave: 3.5% of spending on R&D is paltry for a tech company. Our other SAAS companies spend much more - clearly Zoom has not figured out good uses of its revenue streams yet.
Sales and marketing expense was approximately 18.1% of total revenue, a decrease from Q4 of FY '20 mainly due to strong top-line growth. We plan to continue to invest in adding sales capacity and product marketing programs over the next several quarters focused on capturing market share. G&A expense in the quarter grew by 291% to $78 million as we continued to scale our G&A functions and invest heavily in security and compliance headcount and professional services. G&A expense was approximately 8.8% of total revenue, a decrease from Q4 of FY '20.
Non-GAAP operating income of $361 million exceeding our guidance. This translates to a 40.9% non-GAAP operating margin for the fourth quarter, a large improvement from 20.4% in Q4 last year, and steady improvement from 37.4% in Q3. Non-GAAP earnings per share in Q4 was $1.22 on approximately 301 million non-GAAP weighted average shares outstanding
Turning to the balance sheet. Deferred revenue at the end of the period was $883 million, up 283% year over year from $231 million. Also, please note we have seen a shift in the mix of invoicing to approximately 50% of business being billed monthly, up from approximately 40% in the previous year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.8 billion, up 190% year over year from $604 million.
The increase in RPO is consistent with the strong demand and execution in the quarter. We expect to recognize approximately 70% or $1.2 billion of the total RPO as revenue over the next 12 months as compared to 62% or $375 million in Q4 of FY '20. We ended the quarter with approximately $4.2 billion in cash, cash equivalents, and marketable securities excluding restricted cash. This balance includes approximately $2 billion from our follow-on public offering in January.
We had exceptional operating cash flow in the quarter of $399 million, up from $37 million in Q4 last year. Free cash flow was $378 million, up from $27 million in Q4 last year.
For the first quarter of FY '22, we expect revenue to be in the range of $900 million to $905 million. We expect non-GAAP operating income to be in the range of $295 million to $300 million. Our outlook for non-GAAP earnings per share is $0.95 to $0.97 based on approximately 307 million shares outstanding.
For the full year of FY '22, we expect revenue to be in the range of $3.76 billion to $3.78 billion, which would represent approximately 42% to 43% year-over-year growth. We expect non-GAAP operating income to be in the range of $1.13 billion to $1.15 billion, which would represent approximately 14% to 16% year-over-year growth. Our outlook for the non-GAAP earnings per share is $3.59 to $3.65 based on approximately 311 million shares outstanding.
Analyst Q&A
Our first question is from Alex Kurtz with KeyBanc.
Alex Kurtz – KeyBanc Capital Markets – Analyst
Yeah. Thanks for the question and hope everyone at Zoom is doing well. So could you frame how much Zoom Phone versus new customers versus the expansion opportunity is driving the fiscal '22 growth outlook? And as part of that, what churn rates are you assuming as return to office ramps later in the year? Thank you.
Kelly Steckelberg – Chief Financial Officer
So, Alex, we are really excited about the opportunity of Zoom Phone ahead. As you’ve heard, they performed very well this year. The Zoom Phone was the fastest-growing product line quarter over quarter in Q4, and we expect to see strong growth as we look toward FY '22. As you remember, our strategy is to sell into our existing install base.
So based on the customers that we have today, we see tremendous opportunity for further upsells with Zoom Phone. And then high level in terms of the churn rates, we have seen churn rates stabilize in the back half of FY '21, and they are certainly elevated from pre-pandemic period. And we have assumed that to continue as we move through FY '22 and the uncertainty around when people will be able to start to safely move around the world again.
Will Power – Baird – Analyst
Great. Thanks for taking the question. Yeah. I wanted to touch on Zoom Phone as well.
Terrific to see the strong results. I wonder if you can help us understand where you are in the evolution of rolling out channel partners. It sounds like that was a key contributor to some of the bigger customer additions. How much more is there to go? How much more of an acceleration could we expect there? And I guess tied to that, as you look at these bigger wins, these 10,000-seat paid customers, what’s really helping differentiate you versus the other cloud providers out there?
Eric Yuan – Founder and Chief Executive Officer
Yeah. So that’s a great question. First of all, if you look at why our customers, they choose Zoom over other cloud-based PBX solutions, first of all, you look at our existing customers, we already gained their trust. They really enjoyed other very high-quality product.
Because of that, they would like to test the Zoom. After they’ve tested Zoom, they realize Zoom Phone. After they test that, realize it’s feature-rich, very reliable, very easy to use, modern architecture, integrated very well with our Meetings, Zoom Rooms, and other product lines. So as I said, from current perspective, we have high confidence.
From a distribution perspective, not only did it drive the added growth from our delivery team, and you see like the USC account, right, driven by master agent. I think we are doubling on that, the channel partners. Especially if you look at the history of the Zoom Cloud PBX growth, primarily driven by the channel partners. I think our strategy to focus on building a greater partnership with the channel partners, such as master agent, are really paying off.
I think we are going to double down on that.
Matt Hedberg – RBC Capital Markets – Analyst
Thanks for taking my questions, guys, and congrats, really, on a stellar year. Momentum with the G2K customers over $100,000 in ARR is certainly impressive, but it still remains just vastly underpenetrated relative to your overall population. Can you talk about incremental steps you’re looking at in fiscal '22 to drive even faster G2k or further G2K adoption? And then maybe just as a follow-up for Kelly. $4.2 billion in cash exiting the year, just thoughts on deploying that? Obviously, there’s some capex expenditures, but just broader capex – or cash expenditures.
Eric Yuan – Founder and Chief Executive Officer
Yeah. Maybe, Matt, I can address the first part of your question. You’ve absolutely right. It’s only 14%, the Global 2K customers.
So the reason why – you look at our history, the way for us to grow our revenue, our user base is from the bottom up, from one-user, two-user; one department to multiple-department, and then we talk to the CIO, right? And we are doing something similar. That’s why there’s huge opportunity ahead of us. Because last year, I think that if you’ve talked with the enterprise customers, if you do not have a very strong brand, normally they even do not want to talk with you, right? Because of last year, I think Zoom has become a household brand, I think we have more and more opportunities in the pipeline. And people like to talk with us now, not only from bottom-up but also from the top-down as well.
Having said that, I think the rest of the Global 2K customer is basically looking at the international and the growth opportunity. I think the future is bright as long as we keep improving on execution.
Kelly Steckelberg – Chief Financial Officer
Matt, in terms of what we’re going to do with that $4.2 billion, as you said, we are certainly investing in building out more data center infrastructure, and we are constantly looking for opportunities for other interesting companies, potentially M&A activity, that could add either to our talent or our technology. It’s just as I’m sure all of you know, Eric has a very high bar for both, and so we just haven’t quite found the right match yet, but we keep looking. Colin Born leads our corporate dev team, and his team are just constantly looking and seeing what’s out there that looks interesting. So we’ll see.
Sterling Auty – J.P. Morgan – Analyst
Yeah. Thanks. Hi, guys. So were you successful in rolling out all of the countries that you wanted to for Zoom Phone during calendar 2020? What’s the plan for 2021? And can you eliminate the need for the bring-your-own-carrier program that you launched with?
Eric Yuan – Founder and Chief Executive Officer
Yeah. So first of all, if you look at our international penetration, it consists of 42 countries if you look at our Zoom Phone and the service. I think look at our phone – the growth, 40% are from the up-market. 60% are from SMB market.
If you talk about up-market, I think more and more opportunities will come from international customers.
Meta Marshall – Morgan Stanley – Analyst
Great. Thanks. As you think about leveraging your platform, digital events is something you talked about at Zoomtopia with OnZoom as another kind of natural adjacency. Any traction here to call out on OnZoom? Or just how do you think about kind of finding other use cases or platforms for video usage?
Eric Yuan – Founder and Chief Executive Officer
Actually, in terms of OnZoom, we launched OnZoom on-prem last October at our Zoom annual user conference. But now, it’s in the beta stage now, right?..
…Essentially, OnZoom two parts: consumer-driven OnZoom to allow the knowledge workers to make a living, to sell a yoga class, teaching anything online over Zoom platform; and also, we are beginning to expand our webinar platform to be an end-to-end corporate virtual event platform. That market also has huge growth opportunity.
Zane Chrane – Sanford C. Bernstein – Analyst
Zoom Phone. It was a separate question a little bit. I’m curious, since it’s less compute-intensive if that could maybe have higher margins, especially since you don’t have a free offering for that, like the video conferencing?
Kelly Steckelberg – Chief Financial Officer
Yeah. Pre-pandemic, when we looked at the Zoom Phones, margins were actually slightly under the gross margin for Meetings due to the cost for the carriers on either end. So the goal, though, is as we continue to grow, is to have leverage to be able to invest, and of course, to see efficiencies across the overall platform that eventually those gross margins converge. And that’s what we’re expecting to see right now, given the gross margin being impacted on Meetings by the free usage.
Zoom Phone gross margin is probably actually even higher than Meetings right now.
Analyst: Kelly, my question is for you just around the seasonality of the business. Last year was so unusual.
How are you thinking about modeling this year from a new business perspective, thinking about seasonality? And I know you caveated your guidance relative to the uncertainty of COVID. But what’s the embedded assumption? Even though I totally appreciate that economies reopening doesn’t mean that people stop using Zoom.
Kelly Steckelberg – Chief Financial Officer
Yeah. I think, first of all, you have to think about our business in terms of online and direct as they both have become very significant businesses, and there’s a little bit of different behavior to the two of them. In the direct business, we expect to move back to a more normalized seasonality, if you will, as you’re growing through the year, especially with enterprise buyers, to be a little more back-end loaded in each of the quarters, as well as back-end loaded in terms of the year, especially as we’re continuing to add capacity in our sales organization and having those reps ramp throughout the year as well. From online perspective, that is the one that is I think a little more uncertain, dependent upon the timing of people potentially returning to work as well as this integration with OnZoom.
And what we have modeled is we believe to be conservative in terms of an acceleration in churn rates. We’re doing everything we can, though, of course, to retain those consumers and help them see the value in Zoom so that we don’t see that as we move through the year.
Bhavan Suri – William Blair – Analyst
Hey, everyone. Thanks and let me echo my congrats, a really great job. I want to chat a little bit about one specific competitor. It’s our friends at Microsoft.
And I’d love to understand in a little more depth how that’s playing out, not today because, obviously, the results speak for themselves. But they’re ostensibly giving it away for free, and we know E5 is not free. We know upgrading to E5 costs. But they have a lot of power in the mid-market and the enterprise.
And I guess how do you feel about what they’re doing? Is that a sense that at some point, maybe when you go back to work, it’s good enough? Like how are you and the sales team sort of working around this issue of Teams ostensively given away for free? That’s kind of what I’m getting at, specific to them, given sort of their scale and their power and their platform and they bundle it, etc. Thank you.
Eric: …But quite often, when we talk of integration with him, they would like to work together with us. So willing to collaborate, right? That’s very important…If you look at it from an end-user perspective, especially if you look at it from today’s workforce, almost over one-third are millennials. Guess what? They would like to use the best-of-breed service. If you give them something they do not like, they say, no, I’d like to pay it with my own credit card.
So the best-of-breed service will win, for sure. And also, if you look at it even from a CIO or IT perspective, they would like to bet on two vendors, right? If you’re stuck with one vendor for everything, guess what, what if there’s outage? What if in the future, innovation speed slows down? That’s why I’m talking with the enterprise customers, they would like to deploy the best-of-breed service. Like Zoom video and voice is much better, right?
That’s why the coexists strategy [works] very well. Last but not least, if you look at the Okta report.
Probably that’s the most important report for any IT professionals, right? You look at Okta report. Zoom is, for sure, the No. 1 video conferencing app, right? And in terms of the position – based on a number of the customers, Zoom apps ranks No. 5.
However, there’s one metric that’s very interesting. If you look at Okta’s Microsoft Office 365, the deployment of the customers, 44% also deployed at Zoom as well. That proves one thing. Customer, they would like to bet on good solutions because we can coexist very well.
Again, this market size is much bigger than anyone can emerge in. That’s why I think that a coexisting strategy works very well. And we look at everything from a customer perspective. Sorry, that’s a long answer.
Analyst: I wanted to dig a little deeper, not just on the contact center side, but as customer experience really becomes a greater focus for larger enterprises, just what the opportunity is to embed Zoom from a partnership perspective? Either in other software platforms or just kind of in company websites, things of that nature, to help facilitate a more interactive approach with customers and sort of how you can better monetize that in the long run?
Eric Yuan – Founder and Chief Executive Officer
Yeah, Matt, that’s a great question. That’s overall our platform play. So today, in addition to having the APIs and SDKs to give the third-party companies and partners vertical apps like online education, telemedicine apps via our platform, SDK, we also introduced the Zoom Apps. I think that’s our future.
Because the reason why some not only built for the business indications but also offer our people-centric interface. You and I kind of use Zoom and also have a window, right? You and I can play games together, you approve my expense report, integration with the ServiceNow, Workday, and Salesforce, and all kinds of applications, not only for business apps but also for consumer apps. Well, today, you look at our marketplace, we already have over 1,000 apps published in the marketplace. So we are going to double down on our Zoom App ecosystem.
Essentially, that’s the future for our platform play. And down the road, let’s say, you have a lot of new applications or existing integrations, you have many ways to monetize down the road. The goal is to offer a people-centric Zoom interface for other applications to be integrated into Zoom.
Analyst: I have a question for Eric or Kelly on Zoom Phone attached versus Zoom Meetings. So let’s say, a customer has both Zoom Meetings and Zoom Phone, I’m assuming that every user who would have a Zoom Phone license versus Zoom Meetings will only be the host who leads the Zoom Meetings.
Is there like a rule of thumb or what you’re seeing in the customer base in terms of what the ratio of Zoom Meetings licenses to Zoom Phone is, and what that potentially can be going forward?
Kelly Steckelberg – Chief Financial Officer
Generally, what we see is that your point is that not everybody needs a Zoom Meetings license because only the host need a Phone. We see for most organizations is they actually buy Zoom Meeting licenses for all of their employees as they want them to be as efficient as possible, and then they buy a corresponding number of Zoom Phone seats as well. So typically, when a company is doing – our customers are doing a full deployment, it’s a 1 to 1 ratio of Zoom Meetings to Zoom Phone.