Q1 2024 Zoom Video Communications Inc Earnings Call

Participants

Eric S. Yuan; President, CEO & Chairman; Zoom Video Communications, Inc.

Kelly Steckelberg; CFO & Treasurer; Zoom Video Communications, Inc.

Tom McCallum; Head of IR; Zoom Video Communications, Inc.

Aleksandr J. Zukin; MD & Head of the Software Group; Wolfe Research, LLC

Catharine Anne Trebnick; Research Analyst; Rosenblatt Securities Inc., Research Division

George Michael Iwanyc; Associate; Oppenheimer & Co. Inc., Research Division

Jeffrey Parker Lane; Associate; Stifel, Nicolaus & Company, Incorporated, Research Division

Karl Emil Keirstead; Analyst; UBS Investment Bank, Research Division

Kasthuri Gopalan Rangan; Analyst; Goldman Sachs Group, Inc., Research Division

Matthew Niknam; Director; Deutsche Bank AG, Research Division

Matthew Alan Stotler; Analyst; William Blair & Company L.L.C., Research Division

Meta A. Marshall; VP; Morgan Stanley, Research Division

Michael J. Funk; VP in Equity Research; BofA Securities, Research Division

Michael James Turrin; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division

Patrick D. Walravens; MD, Director of Technology Research & Equity Research Analyst; JMP Securities LLC, Research Division

Peter Marc Levine; Analyst; Evercore ISI Institutional Equities, Research Division

Peter Sterling Auty; Senior MD of Software; SVB Securities LLC

Rishi Nitya Jaluria; Analyst; RBC Capital Markets, Research Division

Ryan Patrick MacWilliams; Research Analyst; Barclays Bank PLC, Research Division

Shebly Seyrafi; MD; FBN Securities, Inc., Research Division

Sitikantha Panigrahi; MD; Mizuho Securities USA LLC, Research Division

Thomas Blakey; Research Analyst; KeyBanc Capital Markets Inc., Research Division

William Verity Power; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division

Kelcey McKinley

Presentation

Kelcey McKinley

Well, hello, everyone, and welcome to Zoom's Q1 FY '24 Earnings Release Webinar. As a reminder, today's webinar is being recorded. And now I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.

Tom McCallum

Thank you, Kelcey. Hello, everyone, and welcome to Zoom's earnings video webinar for the first quarter of fiscal year 2024. I'm joined today by Zoom's Founder and CEO, Eric Yuan; and Zoom's CFO, Kelly Steckelberg.
Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.us. 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 press release, include a reconciliation of GAAP to non-GAAP financial results.
During this call, we will make forward-looking statements, including statements regarding our financial outlook for the first -- for second quarter and full fiscal year 2024, our expectations regarding financial and business trends, impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, growth strategies and business aspirations, and product initiatives and expected benefits from such initiatives. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we may make on today's webinar.
And with that, let me turn the discussion over to Eric.

Eric S. Yuan

Thank you, Tom, and thank you, everyone, for joining us today. As we continue to execute on the strategic focuses, which I shared with you all last quarter, we are very grateful for the support, feedback and trust that we have received from our customers and investors.
Last month, we closed our acquisition of Workvivo, which we are super excited about. Workvivo is a modern employee communication and engagement platform. Their solution combines a social Internet and employee app into one central hub, forming the heart of a company's digital ecosystem.
Incorporating Workvivo's feature-rich technology into our all-in-one collaboration solution will allow us to offer Zoom customers a unified platform that keeps knowledge workers and the frontline employees informed, engaged and connected throughout the work day regardless of in-person, remote or hybrid work style.
According to Enterprise Apps Today, communicative employees have mobile workers who are 5x more productive and feel 3x less burned out. The Workvivo team is working very hard to capitalize on this opportunity and is 100% aligned with our culture of delivering happiness to customers and employees. We are so excited to join forces with Workvivo and help our customers raise the bar for employee communication and engagement.
Last quarter, we reiterated our strong positioning in AI and highlighted our expanded vision to see generative AI permeate and elevate productivity across our portfolio. In Q1, we made considerable progress towards that vision.
We outlined our approach to AI is to drive forward solutions that are federated, empowering and responsible. Federated means flexible and customizable to businesses' unique scenarios and nomenclature. Empowering refers to building solutions that improve individual and team productivity as well as enhance the customers' experience. And responsible means customer control of their data with an emphasis on privacy, security, trust and safety.
At Enterprise Connect, we unveiled ZoomIQ's new set of in-beta features leveraging generative AI to support chat and e-mail compose and meeting summary. We are also building new features to summarize long chat threads, catch up tardy meeting participants on what they missed and brainstorm in Whiteboard.
Last week, we announced our strategic investment in Anthropic, an AI safety and research company working to build reliable, interpretable and steerable AI systems. Our partnership with Anthropic further boosts our federated approach to AI by allowing Anthropic's AI assistant, Claude, to be integrated across Zoom's entire platform.
We plan to begin by layering Claude into our Contact Center portfolio, which includes Zoom Contact Center, Zoom Virtual Agent, and now in-beta Zoom Workforce Engagement Management. With Claude guiding agents towards trustworthy resolutions and empowering several service for end users, companies will be able to take customer relationships to the next level.
Now moving on to some of our customer wins. I would like to thank Major League Baseball. MLB has long used the power of the broader Zoom platform to strengthen its connection to fans and teams. And this quarter, we expanded our relationship by launching a first-of-its-kind partnership that leverages Zoom Contact Center to enhance real-time replay reviews and deliver increased transparency to baseball fans. By introducing Zoom technologies into operations on and off the field, MLB strives to create an engaging and unique experience for its fans and teams.
I would like to thank Virginia Tech for expanding our relationship by adding more than 10,000 Zoom Phone seats as well as Zoom Contact Center to their Zoom Meetings deployment. We brought responsiveness, reliability and regulatory compliance to this large expansion, and Virginia Tech leverages Zoom's unified communications platform to build a next-gen solution integrated across meetings, phone and contact center to serve the entire university community.
I would also like to thank Vensure Employer Services, which has grown its workforce significantly the past few years through hiring and M&A. In Q1, Vensure expanded their existing footprint with us by adding approximately 10,000 Zoom Phone seats and 800 Zoom Contact Center seats as well as our AI-powered Zoom Virtual Agent and Zoom IQ for Sales. It's so exciting to see customers leverage our natively integrated Phone plus Contact Center solutions and invest in our next-generation AI-enabled products across their businesses.
Finally, I want to thank My Plan Manager, Australia's leading services provider for the National Disability Insurance Program. MPM chose Zoom Contact Center for its attractive total cost of ownership, the deep integration with Salesforce, and the vision and future road map for customer experience. And our journey did not end with contact center, appreciating the value of the platform, they also decided to standardize on Zoom One. We're so happy to partner with MPM to help them deliver a world-class customer and employee experience to their clients and disability service providers.
Again, thank you so much, MLB, Virginia Tech, Vensure Services, MPM and all of our customers worldwide.
And with that, I'll pass it over to Kelly. Thank you.

Kelly Steckelberg

Thank you, Eric, and hello, everyone. We are pleased that we beat our top line and profitability guidance in Q1. Here are a few milestones. First, our non-GAAP gross margin of 80.5% exceeded our long-term target. Second, after adjusting for the 3 fewer days in the quarter, our online revenue was slightly up sequentially. And last, the moment you've all been waiting for, Zoom Phone surpassed 10% of revenue in the quarter.
In Q1, total revenue came in at $1.105 billion, up 3% year-over-year and 5% in constant currency. This result was approximately $20 million above the high end of our guidance. Our Enterprise business grew 13% year-over-year and represented 57% of total revenue, up from 52% a year ago.
As I mentioned in the quarterly milestones, our Online business improved meaningfully in the quarter as it benefited from many initiatives, including the price increase and buy flow optimization. In addition, we saw online average monthly churn decrease to 3.1% from 3.6% in Q1 of FY '23 and 3.4% last quarter. We are pleased that this part of our business is stabilizing sooner than expected.
The number of Enterprise customers grew 9% year-over-year to approximately 215,900. Our trailing 12-month net dollar expansion rate for enterprise customers in Q1 came in at 112%.
We saw 23% year-over-year growth in the upmarket as we ended the quarter with 3,580 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 24% in Q1 of FY '23, and span diverse industries such as health care, education, government and more.
As expected, we did experience some distraction across the global sales team due to the previously announced headcount reduction and subsequent sales reorganization. Despite the distraction, our Americas revenue grew 8% year-over-year, while EMEA and APAC declined by 8% and 5%, respectively.
The decline in EMEA was primarily attributable to the outsized impact of the headcount reduction due to local regulations prolonging the process, the Russia-Ukraine war and the stronger dollar. The decline in APAC was primarily attributable to the stronger dollar.
Moving on to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities, restructuring expenses and all associated tax effects. Non-GAAP gross margin in Q1 was 80.5%, an improvement from 78.6% in Q1 of last year and 79.8% last quarter. We are pleased that we have achieved our long-term target as we drove sequential improvement mainly due to optimizing usage across the public cloud and our co-located data centers. For FY '24, we still expect non-GAAP gross margin to be approximately 79.5%, reflecting additional investments in new AI technologies.
Research and development expense grew by 25% year-over-year to approximately $106 million. As a percentage of total revenue, R&D expense increased to 9.6% from 7.9% in Q1 of last year, reflecting our investments in expanding our product portfolio, including Zoom Contact Center, AI and more. Looking ahead, innovation will remain a top priority for Zoom.
Sales and marketing expense grew by 4% year-over-year to $278 million. This represented approximately 25.2% of total revenue, up from 24.9% in Q1 of last year.
G&A expense declined by 10% to $84 million or approximately 7.6% of total revenue, down from 8.6% in Q1 of last year as we focused on achieving greater back-office efficiencies and savings.
Non-GAAP operating income expanded to $422 million, exceeding the high end of our guidance of $379 million. This translates to a 38.2% non-GAAP operating margin, an improvement from 37.2% in Q1 of last year.
Non-GAAP diluted earnings per share in Q1 was $1.16 on approximately 304 million non-GAAP diluted weighted average shares outstanding. This result was $0.18 above the high end of our guidance and 13% higher than Q1 of last year.
Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 3% year-over-year from $1.3 billion. This is slightly above our guidance and primarily driven by renewals during our largest seasonal renewal quarter.
Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.5 billion, up 16% year-over-year from $3 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months as compared to 63% in Q1 of FY '23 and 56% in Q4 of FY '23. The sequential increase in current RPO as a percentage of total RPO was primarily due to shorter contract durations in recent Enterprise deals arising from uncertainty in the macro environment.
We expect Q2 deferred revenue to be down 2% to 4% year-over-year, which takes into account the recent trend of shorter durations on Enterprise deals and our renewal seasonality, which peaks in Q1 and declines throughout the year.
We ended the quarter with approximately $5.6 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $418 million as compared to $526 million in Q1 of last year. Free cash flow was $397 million as compared to $501 million in Q1 of last year. Our operating cash flow and free cash flow margins were 37.9% and 35.9%, respectively.
Due to a net legal settlement expected to occur later this year, we are revising our cash flow outlook for FY '24. We now expect free cash flow to be in the range of $1.14 billion to $1.19 billion. In FY '24 and going forward, we expect our smallest cash tax payments to occur in Q1 and the largest to occur in Q2.
Now turning to guidance. For Q2, we expect revenue to be in the range of $1.11 billion to $1.15 billion, which, at the midpoint, would represent approximately 1% year-over-year growth or 2% in constant currency. We expect non-GAAP operating income to be in the range of $405 million to $410 million. Our outlook for non-GAAP earnings per share is $1.04 to $1.06 based on approximately 307 million shares outstanding.
As our Online business is stabilizing, we wanted to give you all some additional onetime color on how we see it playing out in the coming quarters. We expect our online revenues to be approximately $480 million in Q2 and be relatively flat thereafter in FY '24.
We are pleased to raise our top line and profitability outlook for the full year of FY '24. We now expect revenue to be in the range of $4.465 billion to $4.485 billion, which at the midpoint represents approximately 2% year-over-year growth or 3% in constant currency. We expect our non-GAAP operating income to be in the range of $1.63 billion to $1.65 billion, representing a non-GAAP operating margin of approximately 37%. Our tax rate is expected to approximate the U.S., federal and state blended rates. Our outlook for non-GAAP earnings per share is $4.25 to $4.31 based on approximately 308 million shares outstanding.
As we look to reignite growth and maintain profitability, we are committed to doing so in the right way. We are pleased to have recently issued our second ESG report, which includes additional data regarding our greenhouse gas emissions inventory and recommit Zoom to achieving 100% renewable energy for our direct operations by 2030.
Our core value of care is as important as ever. It is embedded in how our product fosters emissions reductions while supporting inclusiveness. It's also evident in our corporate and employee giving.
You heard it from Eric. We are innovating extremely quickly to bring our customers the immense benefits of generative AI and empower modern collaboration. We are trusted and loved by our amazing and diverse set of customers, and we are fortunate to be one of the most recognized brands in the world.
In Q1, we made some very tough decisions related to team size, structure and incentives that have understandably caused distraction in the short term but at the same time, exemplify our commitment to long-term growth and profitability. With a focus on the future, we have refreshed our mission and vision: One platform delivering limitless human connection. Thank you to the entire Zoom team, our customers, our community and our investors.
With that, Kelcey, please queue up our first question.

Question and Answer Session

Kelcey McKinley

Thank you so much, Kelly. (Operator Instructions) as And our first question will come from Goldman Sachs' Kash Rangan.
All right. Well, hearing no response, we'll go ahead and move on to Meta Marshall with Morgan Stanley.

Meta A. Marshall

All right. I think I got mine to work. Perfect. Appreciate it. I noted that you were taking down kind of -- or not taking down but giving back some of the gross margin upside that you saw in the quarter and noted that, that was for some of your AI investments. Eric, I guess I'm just wondering how you're judging kind of build versus buy when it comes to AI or just where to leverage kind of the ecosystem of AI development that's going on versus investments that you want to make.

Eric S. Yuan

Yes, good question. I think it looks like everyone seem to have just woken up to AI. Actually, we have been busy on AI front for a few years. If you look at the past several -- 2 of the largest acquisitions, right, Solvvy and Kites, right, all of them are AI-based. Internally, we also have AI team as well because we understand the importance of AI, in particular, during recently by the generative AI momentum.
I think, first of all, we do have our own AI team. We have our own internally developed AI models as well. We also will take up a very open approach. Essentially, we announced our federated approach to AI. We announced the collaboration with OpenAI at the Enterprise Connect. We also doubled on our partnership with Anthropic recently as well and down the road, maybe some open source AI models available, we are also going to embrace that.
Again, we look at everything from end user perspective, right? First of all, we have a team really dedicated on AI. And also, when we sit down with the customers, some customers, yes, really like Anthropic model. Yes, why not? We doubled on that other partnership. We know we can leverage their API as well, right? So we are taking our federated approach, which is to put a customer centric, right? That's why we are very, very excited about this AI momentum can truly improve our product experience.

Kelcey McKinley

And moving on to Michael Funk with Bank of America.

Michael J. Funk

Yes. Another question for you, Eric, if I could. Just some more detail on how you think about AI integrating into your own platform. Do you think about it more as an enhancement or as a separate SKU? And then how do you monetize AI within your platform?

Eric S. Yuan

It's a good question. I would say the answer is both. You take our Zoom IQ for Sales, for example, right? It's extremely important, right? When you send all the sales people back at home or work remotely, how to help them to improve their productivity? That's the reason why we announced Zoom IQ for Sales and even way before the generative AI momentum, right? And internally developed large language models really help us, right? We can monetize that AI, empower the Zoom IQ for Sales product.
At the same time, you look at our feature-rich collaboration portfolio, like a meeting summary, the e-mail and chat -- compose a chat message and Zoom Contact Center and Virtual Agent and also recently in beta, right, Workforce Management Solution as well, all of them will be empowered based on the AI, the platform, right? So on the one hand, we leverage AI to look at almost every features we have to empower those features and also elevate the customer, the product experience.
At the same time, a lot of monetization opportunities, right? Zoom IQ for Sales is just one example, right, as we have more opportunity for us. Again, we think AI does bring tremendous opportunity for us because we focus on communication. Take Workvivo, for example, right? We just acquired them in the employee communication and engagement level, how to leverage AI to improve that product experience as another example. Again, full of opportunities here at Zoom with AI.

Kelcey McKinley

All right. So let's go to Kash again with Goldman Sachs, Kash, I think you're out there driving, so he's going to stay off video.

Kasthuri Gopalan Rangan

Exactly. I appreciate you watching out for my safety. But just so you know that I'm not a bot, I'm a human, I just will turn on that video very quickly on. So Eric, I'm curious to get your take. So I want you to, if you don't mind, drill a little bit deeper to generative AI and while a lot of software companies are announcing partnerships with LLMs based on the content and data that they uniquely possess, we're also at a point where many companies are identifying very unique workflows and productivity scenarios that differentiate them going forward, right?
So in that regard, just so -- there's a scenario -- everybody in UCaaS will ultimately have a generative AI strategy. So when you start to have these LLMs work with your core products and given the vast user base and behaviors that you've contained in your knowledge base, how do you think Zoom is uniquely qualified to get productivity scenarios that are very unique to Zoom, sorry, using the same word again, that could be more enduring as a source of competitive advantage because the first chapter of UCaaS was all about providing the core capability of the technology, which you did an amazing job of, but I'm curious, the next leg of productivity growth and how you can take this company forward.

Eric S. Yuan

Yes, good questions. We have a great integration with the Tesla cars, right? If you drive a Tesla, it's just one click and join the call. Even if you can turn off the video, the audio will be always on. Anyway, so back to your AI question. I think, first of all, if you look at the generative AI, 2 things is very important, right? So first of all, if you do not start a few years back, just given what's going on in the AI industry, AI world, it's, oh my god, a lot of things. However, we already started investing AI a few years back. We should understand that, the reason why our Zoom IQ for Sales was developed based on our own internally developed large language model.
Having said that, there are 2 things really important. One is the model, right? So OpenAI has a model, Anthropic and Facebook as well, Google and those companies. But the most important thing is how to leverage these models to fine tune based on your proprietary data, right? That is extremely important when it comes to collaboration, communication, right? Take a zoom employee, for example. We have so many meetings, right, and talk about -- every day, like our sales team use the Zoom call with the customers. We accumulated a lot of, let's say, internal meeting data. How to fine tune the model with those data, it's very important, right?
Not only just for the AI model itself because it will evolve for sure and also, we're also going to embrace, at the same time, how to leverage our proprietary data to fine tune these AI models towards our industry. That's very important. Look at -- take meeting, for example, right? I think the industry is probably -- we have more data than anybody else, right given all the past, many years' experience. How to fine tune that model with those data? And I think this is our unique -- will help us to deliver unique experience to customers.
If any other company, you may have -- let's say, you have a greater AI model, however, how to fine tune. It's a lot of effort, right? That's the reason why we think that's something unique for us to truly empower AI to deliver a differentiated experience to our customers.

Kelcey McKinley

Okay. We'll move on to Tom Blakey with KeyBanc.

Thomas Blakey

Kelly and Eric, good to see you guys. There were -- some large competitor of yours has been in the news lately with Microsoft possibly needing to create a separate SKU for their Teams product in terms of debundling that product. I know how important the collaboration component is to Zoom's vision of becoming the communications operating system for large enterprises. And just noting with Kelly's updated color in terms of online with that -- with the online business stabilizing, which is great. The implied guide for the enterprise business is for pretty good decel into the second half. So just wondering how Zoom is thinking about, if at all, the potential impact or opportunity there, just to get an understanding of the importance of the collaboration component to your product.

Kelly Steckelberg

Well, as we noted, we talked about earlier in the quarter, I don't think that the adjustment that you're seeing is necessarily related to competition and more due to, as we expected, some distraction internally due to the reorganization, but we feel great about the structure of our sales organization now with Graeme, especially as our Chief Sales Officer, and Wendy leading the online team and that we've made the hard decisions to get them focused and ready now to execute for the rest of the year. And we're just looking forward to seeing that come to light over the next couple of quarters.

Kelcey McKinley

And our next question will come from Parker Lane with Stifel.

Jeffrey Parker Lane

Kelly, I was hoping you could give us a better understanding of just how -- to what degree contract duration is actually compressed during the quarter, how much that will be an impact as we progress through the year. And is that more of a factor in any particular product set? Or was it pretty much across the board?

Kelly Steckelberg

Yes. It was pretty uniformly across our direct segment of the business especially
(technical difficulty)
thing to be thoughtful about every decision, which is every buying decision, I should say, which is not new, is just taking -- giving themselves time to make sure that they are getting the product deployed. And we expect it to be not long term in nature, but in order to reflect that, we updated our guidance based on, as we talked about, deferred revenue as well for the coming quarter.

Kelcey McKinley

We will now hear from Peter Levine with Evercore.

Peter Marc Levine

Maybe, Eric, one for you is when you think about the use case of AI and you think across like phone, video, contact center, where do you envision seeing the most kind of uplift in terms of client adoption of AI? Just curious to know where you're seeing that today.

Eric S. Yuan

I think on many fronts, right, like take Anthropic investing, for example, right? For sure, we are going to lever that not only for the entire portfolio, but we are going to start from a contact center, the Virtual Agent and the Contact Center-related features. We'll also look at our core meeting platform, right, a meeting summary. It is extremely important, right? And it's also we have our team chat solution and also how to lever that to compose a chat.
Remember, last year, we also have e-mail [candidate] as well, how to leverage generative AI to understand the context, right, and kind of bring all the information relative to you and help you auto generate the message, right? When you send an e-mail back to customers or prospects, right, either chat message or e-mail, right, you can leverage generative AI as well, right?
I think a lot of areas -- even like you like say, maybe you might be late to the meeting, right? 10 minutes later, you join the meeting. You really want to understand what had happened, right? Can you get a quick summary over the past 10 minutes? Yes, you just also leverage generative AI as well. You also can get that as well. It's kind of almost a lot of key use cases, right? I think we'll be empowered by those AI capabilities. That's why we are looking at almost every area, right, how to leverage generative AI to improve that experience.
take OpenAI for example. This is a great company, and also a lot of companies are leveraging their AI. Not only bigger companies, small companies, we also announced the collaboration with them, at Enterprise Connect, right? So that's why, as I said earlier, 3 things, right? You understand the large language model, how to fine tune that with your own data and also revisit almost every feature you have. Are there any ways to empower those features? Are there any ways to monetize. That's why we take a holistic approach and also, we like our federated approach to AI. By the way, internally, we do have AI team. It should understand the large language models, not something other companies -- you just have [work up] for AI. So...

Kelcey McKinley

And moving on to Rishi Jaluria with RBC.

Rishi Nitya Jaluria

All right. Wonderful. Eric, I want to stay on the AI train for a little bit. You've obviously talked about some great use cases and feels like there's a big opportunity. I want to ask about maybe the potential to start to verticalize some of the AI solutions because it feels like you have a huge opportunity around distribution, doing things like adding AI tools on top of videos for video interviews and giving real-time signals, for example? And I'm sure that's one being discussed internally. So I just want to understand maybe how are you thinking about that opportunity to verticalize. And is that something that can make maybe direct monetization a little bit more easy because the value prop is very straight out of the box?

Eric S. Yuan

Yes, that's a great question. By the way, I downloaded the OpenAI mobile iOS app. I should ask ChatGPT to answer to a lot of question. But anyway, you are so right on. It comes vertical -- I would say, the opportunity, there are 2 things. One is a departmental level. Another one is a vertical industry, right? You look at our Zoom IQ for Sales, specifically targeted sales use case or sales department, right? Contact Center is for supported one. You're so right. Down the road, HR department or even marketing, almost every department, they all use Zoom, right? How to leverage AI to build a differentiated solution, right? That is the opportunity. That's one opportunity.
Another opportunity really about the vertical industry. Take health care, for example. Zoom by far is #1 on telemedicine, right? How to leverage that, right, and with those proprietary data, right, and also working together with the customers, right, and fine tune this AI model, right? This is one example.
Another example is a lot of law firms are also using Zoom as well, right? And how to lever the AI to truly empower those use cases is also another opportunity.
I think, as I said earlier, AI truly brings tremendous opportunity to us, so we got to leverage that. The good news, we're already heavily invested in this area for a few years.

Kelcey McKinley

And our next question comes from Catharine Trebnick with Rosenblatt Securities.

Catharine Anne Trebnick

All right. In the last 2 years, a lot of changes has happened. First, everybody worked from home and now people are going back to the office. So has that actually changed any of your opportunities when you're looking at marketing, your products. I was thinking in terms of Zoom Room and then some of the areas where you want everybody to be equal in your Zoom Room viewing. So has that changed anything? Have you seen anything different from that?

Eric S. Yuan

Yes, it's a good question. Good news is it's a question not about AI anymore. So you are so right. I think that during COVID, right, there's a lot of consumer use cases, right? Almost every family, you have with [conference] account, like a Zoom account, right? After COVID, I think you look at the usage, right. Consumer-centric usage, I think, less and less. But however, to support hybrid work, enterprise customers, they are going to leverage video conferencing more and more not only just to support remote work.
When you try to support hybrid work, how to reserve a desk, all those basic features, right, how to make sure -- when you join the meeting from a conference room, right, remote people, they can't see you, right? Not only -- just one big -- a square, right? So everyone who are sitting in the conference room, equally, we have a square as well, a Zoom square, right? So those kind of experiences extremely important, right? A lot of features are built upon enabling hybrid work, right?
That's -- even Workvivo is another example, right? During the hybrid work, right, quite often, you use a chat, Zoom, Team chat, you use the e-mail or use the phone call meetings. But sometimes, also want to announce a very exciting news and record a video. How to distribute those to employees and sometimes even to customers? That's the reason why we acquired Workvivo as well.
I think hybrid work is going to stay. That's the reason why a lot of new use cases, right? How to double down on that? Take conference room, for example, we have the Smart Gallery review feature, right? Customers like that. However, in some cases, customers say [I have still a ton of] work. I have a huge conference room. How do you support that? That's the reason why we are working on supporting 3 cameras, right? That's another way to embrace hybrid work.
I think the hybrid work does bring another kind of huge opportunity to us, especially it's hard to convince everyone back to office 5 days a week. Even for us, even if I talked with many CEOs, everyone wanted, right, sometimes we wanted to see employees more. But however, this is kind of to let employee work anywhere. It sort of become a fashion. It's hard to force employees back at home. That's why you have to embrace hybrid work. That's the reason why Zoom can play a much bigger role to support hybrid work.

Kelcey McKinley

And William Blair's Matt Stotler has the next question.

Matthew Alan Stotler

Maybe just one on the contact center side. So you obviously continue to innovate on the product front for Contact Center. But last time we got a deep update, there was still some honing that was needed on the go-to-market front. Love to just get an update on what you're seeing on that front, overall adoption of the Contact Center product suite and then what you think are the keys to driving further adoption going forward.

Eric S. Yuan

Kelly, do you want to take it?

Kelly Steckelberg

Yes. So our Contact Center leader is Scott Brown. He is a great addition to our team. And we are focusing from a go-to-market perspective now in the same way that we took Zoom Phone. We are hiring. We have some onboard already, but we were hiring additional contact center specialists who will act as an overlay team and be there to support the account executives to go in as it's more of a technical sale and give them the opportunity to eventually, over time, all become versed in how to sell Contact Center. So we're in the process of that today. And as I said, we've approved more reps, so we're excited about making the investment there.

Kelcey McKinley

Moving on to William Power with Baird.

William Verity Power

Yes, I wanted to ask a question on Online. It's great to see that segment finally stabilizing. Maybe kind of 2 parts tied to that. Any early color with respect to the price increases and what you're seeing out of that? And as you look forward for the guidance for Online, Maybe Just some broader framework for how you're thinking about both churn and top of funnel, what gives you the confidence on both those fronts that this really is going to stabilize here?

Kelly Steckelberg

Yes. So we've seen a very positive reaction to the price increase. The -- when we came into the year and we were modeling it, we've actually seen better-than-expected retention rates in response to that. So that's been really great as well as Wendy's done a lot of work around the Online buy flow, which has also seen a very positive response.
And then we've talked about it in the past, but there's a whole road map of other initiatives that are being worked on and continue to be added, including things like additional payment currencies, additional payment types and additional offerings. So those are all the top-of-the-funnel items you're referring to.
And then they've also done a lot of work to the flow when people -- the cancellation flow when people come through, which is also contributing to the improved retention rates, and we feel great about them. Now they've been -- it was 3.1% in Q3, 3.4% in Q4, now 3.1% again or maybe -- yes, 3.4% and now back to 3.1% again in Q1. And as we said, we expect Q2 and Q4 to be seasonally higher quarters due to the holidays in those periods and the flexibility we give our customers to come and go as they need the product.
So the churn, we're very pleased with, and we've seen the behavior expect -- exactly as we expected it coming back down in Q1. So that gives us confidence that it's going to be within that range for the foreseeable future.

Eric S. Yuan

By the way, just quickly to add on what the Kelly said, right? So as we add more and more new services, also can help us more upsell opportunities even for Online segment. Take the Zoom Scheduler for example. We announced that new service, right? And some customers already paid for other services like [Calendaring], right? Customers, yes, I'd like it to go with Zoom, deploy something similar, right? It's part of the package, right? I think a lot of upsell opportunities for us to target the Online segment as well.

Kelcey McKinley

And moving on to Siti Panigrahi with Mizuho.

Sitikantha Panigrahi

Eric, when you -- I just want to dig into this Workvivo acquisition. Do you see that more of a long-term opportunity? Or do you see that something that we can think of, this is some sort of technology that you can cross sell into their base in near term? And what sort of -- is there some particular vertical or segment where you can see more traction there? Could you give some little bit elaborate in terms of revenue opportunity from that?

Eric S. Yuan

Yes, great question. So first of all, you look at our collaboration platform, right? We really want to offer a unified communication and collaboration platform. Customers can leave within the Zoom platform, right? I think today is -- one of the problems we are facing, customer also mention for us as well, right, quite often, they send all kind of message either to e-mail. It's really hard to find, not scalable or you send a message through chat, better than all those public channels, right?
Customers also wanted to essentially like see a video message, right? I want to share to the entire employee base and/or maybe a departmental news, right? All those kind of -- the accounting, right? Are there any other better ways to share and engage with employee, right? I think that's the reason why we think Workvivo can play a big role, right, to focus on those kind of use cases, right? It's not only for the short-term missing -- a key missing element of our entire product portfolio, but also for -- in the long run, also is -- will help us a lot because of the AI, right, because how do you make sure you have more data, right, and really collaboration, communication-related data, right?
It's Workvivo for sure. Every day, we engage with our employees. With the Workvivo platform, you will generate lots of data, right? All those, again, are very -- I would say, is relevant and meaningful, right? How to leverage the AI, right? That's why, in the long run, certainly, it can help us more.

Kelcey McKinley

Next question will come from George Iwanyc with Oppenheimer.

George Michael Iwanyc

Kelly, maybe building on the stabilization you've seen on the Online side. Can you give us a sense of what your expectations are from an expansion rate on the enterprise side as you look out over the next couple of quarters?

Kelly Steckelberg

Yes. We don't guide specifically around the expansion rate, but as a reminder, it is a trailing 12-month metric. So given that it's at 112% and you can look at where the enterprise growth rate is that possibly has the opportunity to come down slightly more until it starts to reaccelerate as we expect both online and direct revenue to start reaccelerating as we get to the back half of this year and that the net dollar expansion rate is going to trail behind that.

Kelcey McKinley

Wolfe Research's Alex Zukin will have the next question.

Aleksandr J. Zukin

Can you hear me okay? So I guess I'll try the -- kind of a two-parter. One is just a simple how do you plan to monetize generative AI functionality in the product rather than making it a part of the overall experience. And the second is, from an enterprise revenue growth perspective, I think the rate of decel being contemplated from the mid-20s last year in the first half to just over 5% in the second quarter guide implied, that's a much larger rate of decel than I think we all contemplated or thought. So how do we -- like is it upsell? Is it cross-sell? Is it new products that are launching? Is it later revenue recognition? Like what is it that's driven that rate of decel? And how do you reaccelerate obviously, but how do you get back to a double-digit growth rate in that regard because it seems like that's where a lot of the valuation oomph is coming from for the stock?

Eric S. Yuan

Kelly, I'll address the first one. You'll take the second one. I think in terms of how to monetize generative AI, I think, first of all, take Zoom IQ for Sales for example. That's a new service to target the sales department. That AI technology is based on generative AI, right, so we can monetize. And also seeing some features, think even before the generative AI popularity. We have a live translation feature, right? And also, that's not a free feature. It is a paid feature, right, behind the pay wall, right, and also a lot of good features, right?
Take the Zoom meeting summary, for example, for enterprise and customers, if you deploy Zoom One, we have those features, right? For thousands of customers, they are still free. All those SMB customers, they did not deploy Zoom One. They may not get to those features, right? That's the reason -- another reason for us to monetize. I think there's multiple ways to monetize, yes.

Kelly Steckelberg

And then in terms of the enterprise outlook, as I mentioned earlier, we expected the distraction in Q1 as there was impact to the sales org not only from the reduction but also reorganization. And we feel really good about the structure of the sales organization now. And we've also, as I mentioned, we are prioritizing where we want to continue to invest and just recently committed to adding more reps in the Contact Center team for example. We hired a leader in Europe, which we haven't had before, so really excited to have Frederic join us.
And all of these put us -- bring us to be very well positioned to execute for the rest of the year. And now we're looking to the sales team to do exactly that. And they -- we talked about we have an amazing platform that's there for them to sell, and we're all rallying behind them to support them to see them execute.

Kelcey McKinley

Moving on to Michael Turrin with Wells Fargo.

Michael James Turrin

Kelly, on the billings deferred revenue side, you came in a little bit ahead of what you were guiding for a few percentage points from last quarter despite some duration impact, so I'm wondering if there's any way you can help us quantify those duration impacts either on Q1 or the Q2 guide and anything else you can provide just to help us think through seasonality as you've now passed the heavier renewal period but mentioned maybe some sales transition impacts still out there. Just help us think through just what's contemplated in the guide from a few different levels.

Kelly Steckelberg

Yes. So I think on the billing duration impact, as I said earlier, we don't expect this to be a long-term impact. We think it's just indicative of some of the uncertainty that's in the macro environment today and just watching and being thoughtful about the impact that it's having on deferred and then you also heard it in terms of RPO. But we've seen this impact before, and we've also seen customers come back then. And I think especially as we continue moving towards more bundles, Zoom One, Contact Center, Zoom Phone, those are all products that customers are going to commit to for the longer term.
So I think as you continue to see more and more of those in our pipeline and being sold by the enterprise team, that, that duration impact will start to expand again. And then in terms of the balance between enterprise and online, we're thrilled that enterprise has stabilized a little bit earlier than we expected. Given the days in the month -- the days of the quarter, that's why we gave a more specific view because it's a little bit tricky when you look at it for the rest of the year. And the guidance contemplates all the things that we already talked about in terms of the pipeline and all the initiatives the online team is working on and then, of course, the restabilization, if you will, of our direct sales org at the same time.

Kelcey McKinley

And Ryan MacWilliams with Barclays has the next question.

Ryan Patrick MacWilliams

Great. Appreciate it, guys. And congrats on Zoom Phone reaching 10% of sales. Just thinking back a few years, pretty amazing that this metric only came after reaching 5 million Phone seats sales, so quite the run. Look, I love all that AI questions so far, but I guess I'll just ask the boring macro question. Kelly, are you seeing any differences in the impact of macro to the Online segment versus the Enterprise segment? And have you seen any changes at renewal on the Enterprise side, maybe from an enterprise logo like churn standpoint?

Kelly Steckelberg

No. So our enterprise renewals, as you know, Q1 is our highest seasonal quarter, and the renewals were exactly in the range of where we expected them to be for the quarter. So that was really great to see. And then in terms of Online, where we've seen strength that we've already talked about, I think it's increasing the top of the funnel. We've also continued to see strength in annual plans, which is great. And this is due to the -- just a reminder, when we did the price increase, we didn't increase the price for the annual plan.
So it just shows customers committing to the amazing value that they see in Zoom and the discount that they get for committing to the long term. But of course, that's amazing for us because the lifetime value of those annual customers is so much greater.

Kelcey McKinley

Patrick Walravens with JMP Securities has the next question. I'm not sure he's out there, Patrick, do you want to come off mute and start your video for us? All right. Hearing no response, we'll go ahead...

Patrick D. Walravens

I'll come off mute. I'm going to turn off the video and you can see why. The -- Eric, can you talk to us a little bit about sort of the (inaudible) and what part of that is appealing to [invest]?

Kelcey McKinley

Patrick, so sorry, your audio is cutting out for us. Will you try one more time? And unfortunately, we might have to skip you if it doesn't improve, but try again, please.

Patrick D. Walravens

No worries. Eric, can you just talk a little bit more about Anthropic and what they believe come with it?

Eric S. Yuan

Sure, sure, sure.

Kelly Steckelberg

You heard Anthropic. Yes.

Eric S. Yuan

Yes, yes. I think, yes, Anthropic is a great partner, and it's a great team. And when we look at the AI landscape, I think why not double down on that partnership, right? And given our federated AI approach, right, internally, we discussed that happened to be in the middle of using another round of financing, right? That's why how to solidify our partnership, right? Again, they are a great team, great technology. And I think this is no brainer for us. We invest in them to further solidify the partnership.
And yes, so that's pretty much because look at our Contact Center, right? We will further empower our Contact Center offering, right, and also that would be applied to our entire product portfolio. Again, this is very important to our federated approach to AI, and that's the reason why we invest in them. So..

Kelcey McKinley

We'll go ahead and move on to Matthew Niknam with Deutsche Bank.

Matthew Niknam

Just 2 quick ones on cash flow maybe for Kelly. First, accounts receivable the last 2 years, it's been about a drag of $80 million this quarter, much better only about $29 million. Wondering what changed there in terms of cash collections. And then secondly, in terms of the legal settlement, if you can just quantify and let us know maybe when we should anticipate that.

Kelly Steckelberg

Yes. In terms of the settlement, Matthew, we -- it's not clear exactly when that will be completed in terms of the payment. That's why we said, for the full year, we're updating. It could be in Q2. It could also be in Q3. That's why we just wanted to give you visibility into that.
And then in terms of your first point about collections, I think part of that, honestly, is just the continued improvement that we're seeing in our team around collections and our ongoing DSOs and also, as we've seen online, when there's more online, especially annual, that is -- the online is mostly paid via credit card. So that is an improvement in terms of our DSOs usually as that's growing because the DSOs on online are about 3 days, if that helps.

Matthew Niknam

And the legal settlement, if you could just quantify how much that is.

Kelly Steckelberg

It's exactly the amount -- it's the difference between our previous guidance. Let me say it this way. There was no other change to our cash flow outlook other than the anticipated potential net legal settlement.

Kelcey McKinley

Shebly Seyrafi with FBN Securities has the next question.

Shebly Seyrafi

So you're implicitly guiding for your Enterprise growth rate to decelerate to something like 6% in Q2 and maybe 3% to 4% in the back half. It was only double digits in the past. So I know you have a lot of changes this year with the sales force, et cetera. After this year -- or do you target double-digit growth in Enterprise? Or is it like an upper single-digit growth rate?
And also related, the Online business is stabilizing at $480 million for the next few quarters, it looks like. Q4, that means 0 growth versus negative growth. Is it a growth business afterwards as well? So I'm just looking, after this year, is Online a growth business? Is Enterprise low double digits or upper single-digit growth rate business?

Kelly Steckelberg

All the investments that we are making today are focused on growing the top line and investing in ways to do that for the future for both online and the direct business. So that's innovation. It's expanding our platform. It's focusing on investing in the go-to-market teams in terms of what we've talked about earlier like the Contact Center, adding a leader to Europe, really focusing on marketing in the right way.
And we haven't obviously given FY '25 guidance but the goal is, and we've talked about before, starting to see reacceleration of growth as we exit FY '24 and having that continue into FY '25. We're so early in the year of FY '24, but lining up everything to anticipate reacceleration as we exit the year.

Shebly Seyrafi

And the Enterprise?

Kelly Steckelberg

Across -- potentially...

Shebly Seyrafi

I'm just saying, the Enterprise, is it upper single digits or low double-digit growth rate, the way you're targeting it, not guiding, just targeting?

Kelly Steckelberg

Yes, I'm not going to get that specific, especially this early. We'll be prepared more, right, to talk about that later this year.

Kelcey McKinley

And we'll move on to Karl Keirstead with UBS.

Karl Emil Keirstead

Okay. Great. Kelly, just to follow on that conversation about driving for acceleration next year and earlier on, you talked about innovation being a huge priority, that seems to me like there's the potential to shift a little bit the growth margin trade-off as you invest to drive growth next year. I'm wondering if you're intending to signal that high 30s, 40% margins, everybody on the call should consider sort of a peak. And then if I could ask a clarification, did Workvivo impact at all your guidance for this year?

Kelly Steckelberg

Yes. Thank you, Karl. So as a quick reminder, our long-term target operating margin is lower, much lower than where we are operating today. And that is, as we've said in the past, to give us the opportunity as we see opportunities for investment to do so. We are really focused on doing everything we can to drive top line growth and continue to take market share. In the period of time where we've had slower growth, we've been focused on balancing that with profitability, but as we see opportunities, we absolutely could bring our margins down.
So yes, I think we're at probably the peak of where our margins are, but again, we're always being very thoughtful about growth and profitability and balancing both of those. And then in terms of the Workvivo team, given they're amazing and we're really excited about bringing them into the family, but they're having really, I would say, minimal impact on both the top line and the bottom line today.

Kelcey McKinley

We have time for one additional question, which will come from Sterling Auty with MoffettNathanson.

Peter Sterling Auty

Hopefully, my connection holds up. Just wondering back on the Enterprise. Given the Online, $480 million a quarter stabilization, it implies the enterprises revenue is well below Street consensus. Did we analysts just have the mix model (inaudible) wrong? Or was the disruption or something having a bigger impact on the Online -- or on the Enterprise business for the rest of the year?

Kelly Steckelberg

I think there's 2 things. I think, first of all, we've seen Online stabilize much more quickly than we anticipated or than we had been indicating to all of you. So I think the overall mix for the year is probably shaping up to be a little bit different than you anticipated and even on -- that we anticipated at the beginning of the year.
And then we're doing -- as I said, we're doing everything we can to focus on supporting our direct sales organization. The distraction in Q1 was not de minimis, right? It was -- as I said, it was across not only the reduction but also a reorganization and some changes to incentives and comp plans. And so we're very happy that that's all behind us now, and we're all looking forward to do everything we can to support them and regain momentum there.

Kelcey McKinley

And again, this does conclude our question-and-answer session. So I'll pass it back to you, Eric, for any closing or additional remarks.

Eric S. Yuan

Well, thank you all for your time. Really appreciative for all your support, and thank you and see you all in the next meeting. Appreciate it. Take care.

Kelly Steckelberg

Bye, everyone.

Kelcey McKinley

And again -- sorry, Kelly. And again, this does conclude today's earnings release. We thank you all for your participation. So go enjoy your summer, and we will see you next quarter.