Welcome, everybody. I'm Meta Marshall. I head up communication software here at Morgan Stanley. We're delighted to have Zoom's Kelly Steckelberg, CFO of Zoom, here with us. For any Morgan Stanley disclosures, please see morganstanley.com/researchdisclosures or talk to your sales rep. So I think that that's close enough to the disclosure. All right, Kelly, welcome back to TMT. I was just saying it's always great having you here. Thank you. This really always represents the timing of the year when Zoom and COVID were on top of the mind in 2020. You were just at a meeting. You were at the beginning of a massive ramp throughout the pandemic. Now, four years later, customers have settled into their hybrid work environments. You're past some of the tougher seat count renewals. Everyone here is still using Zoom. So where is the customer conversation today around what people want from Zoom, and how are you adapting the portfolio to that? Yeah. First First of all, thank you for having us. Always love to be here. We're definitely in a transformation journey now, as everyone has come to know Zoom and realized how much we help them transform their meeting experience. Now, as the platform and the portfolio continue to expand, getting the opportunity to really talk to them about how we can solve basically all of their communication and collaboration needs, that's what we aspire to do. We're going to get into some more specifics, but we've seen incredible momentum around Zoom Phone. Contact Center is showing some really great signs early on. Then there are just so many aspects to our platform today that I always feel like I touch on a few of them, but I always forget to talk about so many of them. But I mean, in terms of whiteboard and chat and scheduler and events and rooms, we really have this amazing platform, which our mission now is one platform delivering limitless human connection. And that's really what we're doing today. OK. A much wider platform, but it's really still the essence of delivering that human connection. Yes. OK. So as part of that, expanding that portfolio, you've also opted to kind of give away the AI Companion, give it away to paid users. So still a hook there. Have you seen that as an attraction tool yet for new customers, or just as a good retention tool? Yeah. So Zoom AI Companion, as you say, is included at no additional cost for our paying customers. And we think this is really important because there are aspects of AI which spread across all of the portfolio, things like Zoom Meeting summary, which we've had over 7 million summaries generated over the last five months, chat response, email response. We feel like this is really table stakes. Again, it's at core of this communication and collaboration platform. And customers love it. We've had over 500,000 accounts enable it so far. And we expect it's very early on, but we expect that it will be a key retention tool for our customers because they're going to see a lot of value, as well as it'll help convert free to paid. Because if you're an online free customer, you can have a 30-day trial, but then after that, you have to pay for it. So that's what we expect it's going to continue to drive. OK. OK. So early days, but can still be both a retention and an attraction tool. Yeah. Exactly. From Zoomtopia this past year, you're not stopping here in terms of where the AI portfolio is going. Notably, you had kind of alluded to docs last year. Just what are some of the opportunities you see to monetize all of the AI work you're doing? Yeah. So first of all, we have AI built into the platform in many different aspects. Some of you have probably been using it in things like even your background or transcription, things that you've become very familiar with it. Generative AI has really pushed certain aspects of the platform further ahead. And if you think about where Zoom is today, we have the opportunity for Contact Center, for Docs also, to really reimagine those products with AI from the very beginning. So if you think about the power of generative AI and what it brings, and a lot of the legacy vendors are trying to harness that power and layer it into already existing products or already existing SKUs versus we have the opportunity now to recreate and reimagine what that can be. So I don't want to give too much away around docs because we're going to talk about that at Enterprise Connect in a few weeks. But in other aspects in general around generative AI, really starting to think about, OK, there's this whole aspect of it that is table stakes, but what goes beyond that? And certainly, as customers and prospects get more used to this, we can certainly see opportunities where there are premium features or individualized features. So as you all well know, we don't use any of our customer data for training our models. However, there are customers that are saying, hey, maybe I want to leverage my data for my model only, for my benefit only. So how could we do that for them in a very secure way so their data doesn't get commingled with anybody else's? That starts to be an opportunity where you could see a premium feature for that. OK. OK. Perfect. You just mentioned you guys have had a lot of AI skill sets in-house, ones that make us perhaps look more alive on video. They cancel out our dog barking. These are all heavily utilized skills by me. But you just mentioned some of those are different forms of AI than some of the generative AI that we're talking about. And so just how do the skills you had translate to generative AI? And just how is that market for finding the talent that can kind of help advance the portfolio? Yeah. So we obviously have an amazing engineering team, but I think it's gotten even more amazing over the last nine months. Our new CTO is a man named X.D. Huang, who joined us from Microsoft. He actually wrote Microsoft Copilot, and now he's at Zoom writing Zoom AI Companion. And he is incredible. He's super inspiring. I love to hear him talk about why he's here and the vision that he has for AI. But of course, being as recognized as he is, he is also a huge draw. People want to work with X.D. And so that has actually made it really easy for us to attract talent because he is such a talent in and of himself. We also have someone who is on the sales side for AI, Mahesh, who came through our Solvvy acquisition. He was the founder and CEO of Solvvy. He is a talent in his own right. And so having these two leaders really at the forefront, I think, sets us apart. And X.D. is really thinking about how do we drive the best response for our customers, both in terms of accuracy and results at a very competitive price point. And if you have a chance, go look at his blog. He does some benchmarking, and he talks about this. And so I think he's not only helping us drive talent because of who he is, but also already in his work proving it out that our product, in terms of accuracy and response, is better than Copilot. And at least let me say it this way: better than ChatGPT, which he's using as a proxy for Microsoft right now. And so I think all of those things make Zoom a very desirable place for engineers to come to. OK. Perfect. We'll circle back to AI, but I want to move on to Contact Center for a bit. The traction you've seen in early days has been impressive, just from customer ads, but also just the pace that you're adding to that portfolio. As it stands today, who is that ideal Zoom Contact Center customer? And what are those milestones that you're looking to maybe get to some of the larger, maybe standalone Contact Centers? Yeah. So in the way that we typically release products, when it first came out, it had features and functionality to support kind of an SMB-type customer. But very quickly, we continuously are adding features on a daily basis. And very quickly, it's migrating up. So we've been talking about this over the last week or so. We already have at least two customers that have $1 million of ARR in Contact Center revenue only. So I think that shows, OK, it's getting to the point that it can support some of those bigger customers. Now, there are some features that are still on the roadmap to come, things like PCI, which is the ability to safely take credit card data from a customer that we need. But we know exactly what these features and functionality are. Some of them are check-the-box. Some of them are really needed to do business, like the ability to take a credit card. But those are on the roadmap for kind of the next 6 months. And then we're excited about, we think, really starting to be able to compete. I think the next big milestone for us is when do we cross over that 10,000-seat mark? We haven't gotten there yet. But I think within 6-9-ish months, we'll be able to compete for those without issue. And then just how do you there is certainly a very big opportunity that's just within enterprise on kind of adding on these functionalities to an enterprise sales rep versus like a dedicated Contact Center. So just how do you see that market opportunity splitting between kind of this enterprise add-on and standalone Contact Center? Yeah. So I mean, we've seen both within our customer base, which is amazing. So customers that already have meetings and phone are really a great candidate to now just extend because it all integrates natively. And especially if they're on-prem, it's such an upgrade to get into the cloud. But because Zoom Contact Center is the most modern architecture out there today and again, reimagine with AI from the very beginning, we have seen prospects come to us that aren't Zoom customers at all. And so we see this as another it's a different buyer. You'll hear this a lot from some of the other companies in the space. And it's true. But that creates an opportunity for us. It's not a detriment. It's an opportunity because we see them coming in kind of the back door, another door, if you will. That creates another great opportunity for us. OK. So you noted having kind of the most modern architecture. But another piece of Contact Center is just the channel because it tends to be pretty intensive from a professional services standpoint. So just how should we think about the incremental investment in those areas? Yeah. So first of all, we absolutely agree. We are focused on building these channel relationships. We recently hired a new head of Contact Center, Chris Morrissey, who came from NICE inContact, so really a veteran in the space, which will be very, very helpful in terms of building out those relationships and building out our team. I will say, in terms of professional services, though, I want to touch on this for just a quick second because at the hallmark of Zoom is always ease of use and reliability. And we actually have won recently against one of those big three names that you know because our product was so much easier to configure. The customer realized they could do it themselves and not have to go out and pay almost equally as much for professional services. There's a differentiation there that really, I think, is going to continue to drive this market in a different way. OK. Eric, either jokingly or non-jokingly, I couldn't really tell from the earnings call, assumed leadership of the Contact Center business. What is he focused on in particular? And why not bring in a dedicated leader here? Yeah. So I mean, Eric wouldn't be happy if he wasn't wearing like five hats at one time. He really thrives in that environment. And he has taken the team directly to him for a while. It won't stay this way forever. But the focus is he's really wanting to return them to day one mentality. We talk about day one a lot. We have a conference room named after it, even in HQ, and really driving quick decision-making by having Eric at the top. It really can help facilitate that, making sure that he's very clear on what the priorities are. And if there's ever a disconnect across the organization, that he can very quickly change that or adjust. And I think also having access to customers. I think all of that, what he's really doing is amping up the speed of development and go-to-market here. OK. OK. And so how do you think about kind of timing and bringing somebody else into that position or maybe bringing somebody in along him that can eventually? Yeah. I mean, I think that Chris is a great addition to the team in terms of running the sales organization. I mean, the way the organization we don't have true GMs at Zoom. What we have are functional leaders or functional specialists, like Chris being the go-to-market. And then we have product managers in the product team. So I think having it come to Eric just means it's a little more direct. I don't know that we would ever put them all together. It's more likely that they would go back into their functions at whatever time we felt like the product and the team have made enough progress. OK. OK. Perfect. So let's kind of turn back to the fiscal 2025 outlook, which you gave on earnings last week. You mentioned on earnings expectations for continued pressure on NRR, at least through Q2. Just how should we think about NRR recovering and just what drives that and the Q2 timing around? Yeah. Yeah. So NRR, net dollar expansion, is a trailing 12-month metric. So given that, we can see what's happening with our enterprise revenue. And we expect that to follow behind that a little bit. We've talked about this probably on several calls over the last four quarters that we went through our own reduction in forced earlier last year. And many of our customers went through something similar. And while we don't ever let our customers out of their contracts early, we certainly work with them. We don't ever want customers paying for something that they aren't using. And so as we've gone through the last year, we know that the majority of our customers had a renewal opportunity. Our team has done a great job of working with them to, if they needed to downsell or reduce the number of meeting seats they had, of retaining that spend and getting them onto a Zoom One bundled SKU or adding in phone, something along those lines to retain that. But there has been pressure there, for sure. Now, the great news is that when we look at the renewal opportunities, we know that the majority of our customers had an opportunity to renew in FY 2024. And And that when we look into FY 2025, the percentage of customers that are renewing in FY 2025 that did not have a renewal event last year is much, much, much, much smaller. Hopefully, the majority of customers that had that opportunity to get right-sized, and as we look towards this year and we're moving through this year, it will be much less of a headwind for us. That will help start to get that metric moving back in the right direction. OK. OK. OK. Got it. A common discussion with investors right now is just what is that source of funds for AI? And a lot of organizations have both Teams and Zoom. And so the question among investors is, why isn't Zoom a source of funds for AI? You're clearly having those discussions every day. What do you think is misunderstood about the role that Zoom has and why they can't consolidate other point products with you? Well, we can. We absolutely can. So I guess the first thing that I would say is, right, there's this funny perception about Microsoft being free. And Graeme, our head of sales, always he has this funny saying, which is, it's free like a free puppy. It's not free. Somebody in that organization is paying for it somewhere. And we have the opportunity and the discussions we're having with our customers is Zoom has a lot to offer. We talked about this at the beginning, like the platform being so large that if you look through some of our customer spend, we provide an opportunity for them to consolidate vendors and probably eliminate spend. Our Zoom Team Chat product has made a lot of progress over the last couple of years. And we've seen the usage there grow 130% year-over-year. We have a migration tool, which is designed to help migrate from another vendor you might be paying. The downloads over the last six months have grown 4x for that product. So great opportunity to eliminate a spend there. Zoom Whiteboard comes with our Zoom Meetings for free. So if you're paying one of the two leaders out there, great opportunity to convert, eliminate that spend, get onto Zoom. So also, we have a scheduling product that you might be paying another third party for. So we have all these opportunities to eliminate other spend, simplify your vendor approach. And oh, by the way, if you want to move your on-prem phone to the cloud, we're probably going to cut your spend in half, at least, and eliminate all that on-prem servers, servers, and someone to take care of it. The price disruption and the total cost of ownership that Zoom brings and the fact that customers really love Zoom, they want to be on our platform, and they want choice. People don't want to be told they have to use a certain product. They want choice. They want to be able to choose a product. Very often, that's Zoom. OK. Perfect. I would say that that echoes a lot with what we hear from CIOs in our calls. You just alluded to phone. Certainly, that's been an area where we've seen kind of consolidation to Zoom. Given that phone now stands at over 10% of revenue and has over 7 million seats, just how should investors be thinking about where that penetration can get relative to the videos, the meetings, and standalone? Yeah. I mean, we're so excited about the potential of phone. We've said for a while that we believe that Zoom Phone could be at least 25% of revenue overall. If you think about meetings at some point getting to about half, phone being like 25%, and then the remainder of 25% getting taken up by some of these emerging products that we've been talking about, we still have a huge opportunity. When you look at the attach rate for Zoom Phone to our existing install base, it's less than 20%. So that shows you the greenfield we still have internally. Charles and I were looking at this metric again this morning. There's over 400 million landlines on-prem still sitting out there today. So there's a lot. Now, I don't believe all of those. There's going to be some consolidation or migration to things like meetings. There's still a lot of opportunity in the phone space out there. OK. So So you've noted in the past that Contact Center should follow a similar trajectory as phone. However, right now, all anybody can talk about is Contact Center. And given the price point, just why can't it ramp fast? Yeah. It's actually a really good point. So when we said it's been following the same path as phone, what we are looking at is the dollar contribution on a quarterly basis. And over the last several quarters, it's been kind of following the same path that phone has. We just introduced the increased pricing tiers a few weeks ago. And what we've seen is it's a small subset of customers so far because it's so new. But the ASP for customers buying in those new pricing tiers is double what the ASP was in the original tier or the original price point. So it might. It's just too early to I mean, we haven't seen it yet. But that alone could drive some acceleration. And then, of course, all of the innovation that's happening, getting to this true enterprise it could, as well as we have Zoom Virtual Agent, which is our answer to there's a lot of discussion around what's happening in migration from live agents. And we have a really great offering that we've seen be very efficient internally when we've used it that also could help drive that quickly. OK. OK. So let's talk about further stabilization on the online business. More recently, some of those trends have been pretty encouraging. But just as we think about what could make that segment grow again, where are we on some of the initiatives that you guys have talked about, whether that be free-to-pay conversion, adapting pricing offerings? It seems there's been a lot kind of talked about. But where are you seeing that traction? So just to touch on what you said, so in Q4, we saw online churn at 3%, which is the lowest rate we've seen. But I think what's more interesting about the Q4 number is that it was flat to Q3. And seasonally, Q2 and Q4 are higher churn quarters due to the holidays. So the fact that it was flat quarter-over-quarter to me is actually pretty remarkable. Now, as we've modeled FY 2025, we have assumed that churn stays consistent at these levels. But I'm really interested to see, with all of the improvements we've seen in the platform, how that plays forward. We are also really focused on FY 2025 just maintaining this stabilization. But to return this to growth, some of the initiatives we're thinking about we did improve or increase prices, I should say, in FY 2024 across almost all aspects of the online business. But you'll see that flow through in FY 2025. And then continuing to look for opportunities of more products that you can sell online. Online is very different. The buyer is a small business owner or an individual sole proprietor. So you need something that helps them drive their business that can be self-serve, and thinking about this organically as well as inorganically. And I think historically, we've thought about inorganic opportunities more along the lines of direct and starting to think about, OK, what else could we do for that small business owner, though, that lends itself very well? Back to the very beginning, when we talked about being the overall communication and collaborations platform for them, how do you support that small business owner in that? That's, I think, a new area we're thinking about from a strategic perspective. I know I've asked you this in the past around the online business. But do you see the greatest opportunity with kind of net new? Where do you see that growth coming from? Is it the free users today and converting them? Is it user expanding what you're selling them? Or is it international markets that you might not be in today? Yeah. So it's all of the above. So if you talk about the free-to-pay conversion, we believe that AI Companion will be a really important growth driver there. The team has done an amazing job of continuing to add currencies, add payment times, which really opens up the market. And then because if you remember, the majority of the revenue for online is outside of the U.S., which is the opposite of what you see in our direct numbers, and then adding more to the platform, just giving them more to be able to sell, is a really important growth driver for the future. OK. OK. Got it. So let's move into profitability. Investments in AI are denting growth margins slightly, not much. But you continue to post upside on operating margins while remaining well ahead of kind of the long-term targets that you've laid out. So just how do you think about the puts and takes of the profitability trajectory, particularly given some of the AI investments ahead of you? Yeah. So everything we're doing at Zoom is focused on returning growth to the top line. So that means investing in areas that have the potential to do that. So if we talk about AI at first, as you mentioned, our guide for FY 2025 is that margins would come down about 100 basis points from last year to 79%. That will be balanced by or potentially offset as we see growth in some of our higher margin products like Contact Center. That could help offset some of that. And then we're also really investing in the product and engineering side, both on expanding the platform as well as AI. So as you look through this year, that'll become more evident. Those are the areas that you're going to see really focused investment and spending, and then trying to be as efficient as we possibly can around G&A, always. Then we've also seen some opportunities for efficiency in marketing as well. Those are the areas that are going to help sort of fund. I mean, we're really happy with the outlook for our profitability in the high 30s. I think that really just reflects our ongoing discipline and focus on prioritization. So, I mean, you talked about product investments and R&D investments. Just how are you judging the ROI of those? And maybe I'll kind of pose it in two ways of the ROI investments that you're making on new products but the ROI that you're getting on some of those efficiency efforts kind of within your own organization. Yeah. So I mean, it's always a balance for us in thinking about continuing to deliver happiness to our existing customers as well as expanding the platform. So we're continuing to invest in areas like even meetings itself. We still continue to innovate and think about meetings and ensuring that that is really staying at the edge, if you will, of innovation and what's available. And that, for us, then helps drive retention because our customers love it. In terms of new products, we always think about what's the market opportunity, what's the TAM. We take a very obviously disruptive price approach. So trying to balance that out. I think the great thing is because of this very efficient platform that has been built that's driving this from day one, it allows us to be price disruptive and give a lot of value back to our customers. OK. And then free cash flow has just been another area where there's been a lot of volatility maybe over the past couple of years as you guys became a taxpayer, as there were some kind of SEC disruptions. Are we to a point now where there's a much kind of higher correlation of free cash flow to kind of operating profit? Yes. And so you're exactly right. As we moved through this experience of using up our NOLs and becoming a full cash taxpayer, that was a little bumpy, I think, for all of us along the way. But we announced our guidance for next year of approximately $1.4 billion, which is fairly consistent with the amount of cash we produced again this year. And it should be a lot tighter correlation now between operating margins and free cash flow. All right. So obviously, coming out of the quarter, investors were encouraged by the announcement of the $1.5 billion share repurchase authorization. You just mentioned you're generating almost that in cash this year, $7 billion worth of cash on the balance sheet. Just what are your kind of current thoughts around capital allocation? So again, we're always focused on looking for opportunities to drive growth. With that said, with the strength of our balance sheet with $7 billion in cash and no debt, we feel, and the outlook for free cash flow generation the next year, we feel like there's an opportunity to share some returns back with our investors through the buyback authorization while also maintaining a lot of flexibility and opportunity to seek inorganic growth if we found a target that meets our threshold. I mean, we have a very high bar, which is why we've only done a few acquisitions in the past. But we are certainly always looking for opportunities either to extend the capabilities of the platform that we have already or to buy something that is more adjacency that sits beside us. OK. I want to open it up. Are there any questions from the audience? We have a question up here. Somebody coming through, though. Thank you so much. It seems the Contact Center is doing really well. No surprise, Eric's the automatic product guy. Does it mean that you will develop this area more organically going forward rather than inorganically for Contact Center specifically? Yeah. So when you think about Contact Center, there's the agent's desktop. And then around it, there are many, many other products that a desktop agent typically uses. There's the knowledge base. There's the CRM that has all the customer data. There's workforce management. And so I think those are the areas that lend themselves potentially to an acquisition around this space. In the core of the desktop itself, that's the part that's really important to us that it natively integrates with voice, with video, and that we've really the majority of our organic development has been focused on. But you can think about the space around it that might lend itself very well. We are very focused on developing APIs. We have them with Zendesk, ServiceNow, Salesforce. But there are others that are needed. I think you could see where there's an opportunity to develop or partner or buy in that area around it. Got it. So I have probably asked you this question in 25 different sessions over the years on just what are the hurdles to M&A? You guys have had healthy cash generation, a healthy cash balance for a while. So I know you guys have a high bar. But just what do you feel like are those hurdles? Yeah. Yeah. So there's three criteria, the lens that we look through. First is, what is our customer going to get out of this? So what is the product? And because we are proud of the infrastructure, the modern infrastructure on which Zoom is built, you've probably all had the experience where you're using a software program or platform of some sort. And you can tell where that seam is, where they've tried to layer something in. We don't want our customers to ever have that experience. So it's going to have to be something that is a reasonably modern architecture that we can start to integrate without having to rebuild. That would be ideal. Secondly, we look at the culture because we believe culture is a really good indicator of the success of an integration. Same thing. You've been around. You've probably seen a lot of companies buy other companies where the integration doesn't go well. That, unfortunately, can happen. I did a lot of time at Cisco and have seen good examples and bad examples of this. We want to be very thoughtful about that. Then, of course, third is valuation. In the time that I've been at Zoom, we've seen valuations be unattractive, attractive, maybe less attractive. They kind of bounce around a little bit. Being very thoughtful about that is important to us. That's, unfortunately, why we were unable to get the Five9 deal done a few years ago. The valuation just became such that we didn't think it made sense any longer for investors. That's the lens that we look through. We've done four acquisitions to date. Two, we're really focused on acquiring talent. Two, we're focused on acquiring tech. Those have all gone very well for us. I'm confident that we're going to continue to find more. We just keep looking. OK. Perfect. So maybe just a last question for you, Kelly. You've talked to a lot of investors. Where do you feel like the biggest disconnect is between the story you're telling and what investors kind of believe this story is? Yeah. I think it's understandable. I think most investors are waiting for us to really show them that we can grow again. And we are in such. I'm thinking of saying this before we got up here. If you think about where Zoom is today as compared to where we were a year ago, we are in such an amazingly better place. We have this platform that the technology and the innovation engine is so strong. I mean, we talked about X.G. joining our company. But we also have a Chief Product Officer, Smita Hashim, who joined us from Microsoft. And she is Microsoft and Google. She is amazing. She is so talented. Mu Han, who is our Chief Development Officer, also joined from Microsoft within the last year-ish. Amazing, but also attracting great talent. So we have this innovation engine, which is just running almost at warp speed. It's incredible how much they're producing. And then when you look at the company and our go-to-market teams, we have new leaders in Europe and in Asia. We talked about Chris on the Contact Center. And last year was very distracting as we went through our own reduction as well as sales reorganization. We're sitting here now with our sellers having had their quotas and their territories in place for a couple of weeks already. They're running fast. So it's really a different company in a different place. And it's up to us to execute now. And I don't think that that's probably visible to everybody as it wouldn't be. So excited about what the year ahead has to bring. OK. Well, we were just talking about how every year this presentation is always very timely. And so I look forward to having that in another year. But Kelly, thank you so much for being here today. Thank you for having us.