Zoom Video Communications, Inc. (ZM) Q2 2022 Earnings Call Transcript

Zoom Video Communications, Inc. (NASDAQ: ZM) Q2 2022 earnings call dated Aug. 30, 2021

Corporate Participants:

Tom McCallum — Head of Investor Relations

Eric S. Yuan — Founder & Chief Executive Officer

Kelly Steckelberg — Chief Financial Officer

Analysts:

Ittia Kidron — Oppenheimer — Analyst

Steve Enders — KeyBanc — Analyst

Imtiaz Koujalgi — Guggenheim — Analyst

Meta Marshall — Morgan Stanley — Analyst

Matthew VanVliet — BTIG — Analyst

Pat Walravens — JMP Securities — Analyst

Shelby Seyrafi — FBN Securities — Analyst

Ryan Koontz — Needham — Analyst

Siti Panigrahi — Mizuho Securities — Analyst

Alex Zukin — Wolfe Research — Analyst

James Fish — Piper Sandler — Analyst

Will Power — Baird — Analyst

Matthew Niknam — Deutsche Bank — Analyst

Tyler Radke — Citi — Analyst

Matt Stotler — William Blair — Analyst

Chaim Siegel — Elazar Advisors — Analyst

Rishi Jaluria — RBC — Analyst

Presentation:

Operator

Hello, everyone, and welcome to Zoom’s Second Quarter of Fiscal Year 2022 Earnings Release. [Operator Instructions] At this time, I’d like to hand it over to Tom McCallum, Head of Investor Relations.

Tom McCallum — Head of Investor Relations

Thank you, Matt. Hello, everyone, and welcome to Zoom’s earnings video webinar for the second quarter of fiscal 2022. Joining me today will be Zoom’s Founder and CEO. Eric Yuan and Zoom’s CFO, Kelly Steckelberg.

Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.com. Also, on this page, you’ll be able to find a copy of today’s prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements, including statements regarding our financial outlook for the third quarter and full fiscal year 2022, Zoom’s expectations regarding financial and business trends; Zoom’s growth strategy and business aspirations to drive evolution on multiple fronts as organizations and people reimagine work, communications and collaboration; and Zoom being well positioned to be successful as a platform. 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 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 we may make on today’s webinar.

In addition, as you all know, we announced our intent to acquire Five9 in July. Clearly, we are excited about joining forces with Five9, but please note that we will not be discussing or addressing questions regarding the pending transaction at this time as we are in the process of regulatory review.

And with that, let me turn the discussion over to Eric.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Tom. And thank you all and welcome to everyone joining us on today’s webinar. I want to start by thanking our customers and partners for their trust and loyalty, which led to our continued strong revenue growth alongside remarkable profitability and free cash flow. We also want to thank our hard

Working employees for their dedication to delivering happiness to our customers and partners. I have been humbled by the stories of how finance professionals have leveraged Zoom to reimagine the way they work. Specifically, I’d like to thank Charlie Munger of Berkshire Hathaway for his remarks about how Zoom has added so much convenience to his life. We are so delighted to count Charlie as a happy user. And I nominate myself to be Charlie’s personal Zoom tech support if he ever needs it.

In Q2, we also achieved several milestones, setting the foundation for us to thrive as a platform. In July, we launched Zoom Apps, which brings over 50 apps right into the Zoom meeting experience. And this is just the beginning. The beauty of our platform is it allows our ecosystem of developers to add even more functionality, by building apps where workflows are integrated with meeting interactions. This is a win-win because better integrations will boost our customer’s productivity and afford our developers exposure to our large user base. The Zoom Apps Fund, which has already invested in over a dozen startups in our Zoom Apps and SDK ecosystem, further aligns us with developers, enabling them to focus more on innovation.

We are also excited to have launched Zoom Events in July. Zoom Events is an easy, yet powerful solution to produce and host the company and public events. It acts as a layer above our existing Zoom Video Webinars and Zoom Meetings products. Zoomtopia will be virtual on Zoom Events in only two weeks, and we hope to see all of you there.

In Q2, we saw several large customer upsells. We were very happy to expand with a leading tech firm who increased their Meetings licenses over sixfold to 95,000, and with a global financial services customer who added over 63,000 Zoom Phone licenses, making them our new largest customer. Both wins were displacements of legacy solutions that Zoom beat in terms of reliability, simplicity and integration.

And let me recognize a few very big wins for the quarter. I want to welcome NEC Corporation to the Zoom family. Based out of Japan, NEC is a leader in the integration of IT and network technologies behind their slogan, olrchestrating a brighter world. In order to enhance the productivity, collaboration and happiness of their global workforce, NEC deployed approximately 110,000 Zoom Meetings licenses.

I also want to welcome Seagate Technology to the Zoom family. Seagate is a global mass-data storage infrastructure leader innovating world-class, precision-engineered data storage and management solutions with a focus on sustainable partnerships. Seagate recently decided to modernize and integrate their global communications infrastructure with over 14,000 Zoom Meetings licenses and over 17,000 Zoom Phone licenses.

Next is a Zoom Phone upsell. In Q2 of last year, we welcomed ExxonMobil, which develops and applies next-generation technologies to help safely and responsibly meet the world’s growing needs for energy and chemical products to the Zoom family. They began as a Zoom Video conferencing customer to enable their teams to collaborate globally. We are very grateful to have seen our partnership evolve over the past year and excited that ExxonMobil has recently decided to add Zoom Phone to further enhance the user experience for their global workforce leveraging a communications platform that is very easy to deploy and manage.

In addition to these great customer wins, we also closed another strategic channel partnership with Telkomsel, the largest cellular operator in Indonesia, which is the world’s fourth largest country by population. Telkomsel understands and wants to support their 170 million subscribers’ need for seamless and reliable virtual meetings to thrive in the digital workplace era. They will be leveraging the power of Zoom’s Developer Platform and ISV Partner Program to deliver a fully integrated solution via their CloudX offerings for the Enterprise segment and Zoom native apps for the Consumer segment.

The collaboration between Telkomsel and Zoom will bring communication to the next level by combining Zoom’s strong capabilities and feature-rich platform with Telkomsel’s best quality network and localized interface, together creating a powerful tool to improve customer productivity and collaboration. Thank you NEC, Seagate, ExxonMobil, and Telkomsel. I love you all.

Enterprises want digital platforms that combine meetings, phone, events, office technology, and developer solutions in a way that is simple, reliable, and frictionless. This fundamental truth underpins our leadership position in video conferencing and will help to drive further growth in Zoom Phone and Zoom Rooms, as we expand our platform and addressable market in the hybrid world.

Today, we are very fortunate to be a leading global brand with over half a million customers having more than 10 employees. Our internal innovation engine is very strong and bolstered by our growing Zoom Apps developer ecosystem and acquisitions such as Kites that will strengthen our position in AI transcription and translation.

As organizations and people reimagine work, communications and collaboration, we are faced with a once-in-a-lifetime opportunity to drive this evolution on multiple fronts. Thanks again to the hard work of our over 5,700 employees and the trust of our loyal customers, we are positioned very well to be successful as a platform embracing and enabling hybrid work. I’m very excited about the future. The journey has only begun.

And with that, let me pass it over to Kelly. Thank you.

Kelly Steckelberg — Chief Financial Officer

Thank you, Eric. And hello everyone. We had an eventful Q2 with several highlights, the first of which was the strength in the enterprise. We were able to grow the number of enterprise customers spending more than $1 million in ARR by 77% year-over-year. And the second highlight is the acceleration we have seen with Zoom Phone. We grew the number of customers spending more than $100,000 in ARR on Zoom Phone by 241% year-over-year.

In August, we will reach — in fact, actually — in fact, right before this call, we reached 2 million Zoom Phone seats, only eight months after reaching our first million. We added eight Zoom Phone customers with more than 10,000 seats in the first half of FY ’22, bringing us to a total of 26. And in Q2, we broke our record for the largest Zoom Phone deal to date, twice in the same day.

It is important to note that as we’ve just lapped our first full quarter year-over-year compare since the start of the pandemic, we have seen customers return to more thoughtful, measured buying patterns. While revenue, profitability, and cash flow were strong in the second quarter and the first half, other metrics have begun to normalize, especially when compared to the unprecedented year-over-year comps.

In Q2, total revenue grew 54% year-over-year to $1.02 billion, marking our first billion-dollar-plus quarter, only five quarters after reaching $1 billion annual run rate. The top line result exceeded the high end of our guidance of $990 million. We saw strength in our direct and channel businesses, which grew at twice the rate of our online business. Zoom Phone, Zoom Rooms and Asia Pac growth also accelerated in the quarter.

The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, where customers account — sorry, excuse me, new customers accounted for approximately 74% of the incremental revenue, and existing customers accounted for 26% of the incremental revenue.

Let’s take a look at the key customer metrics for the quarter. We saw 131% year-over-year growth in the up-market as we ended the quarter with 2,278 customers generating more than $100,000 in trailing 12 months revenue. We exited the quarter with approximately 504,900 customers with more than 10 employees, up 36% year-over-year and representing 64% of revenue. In Q2, customers with 10 or fewer employees represented approximately 36% of revenue, in line with Q2 of last year, but down from its high of 38% in Q3 of last year. As we discussed previously, this cohort, which comprises SMB and consumers who typically purchase online, is more volatile, and we expect it to continue to decline as a percentage of revenue as customers adjust to the evolving environment.

Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 13th consecutive quarter as existing customers increased their spend with Zoom and upsells of Zoom Phone and Zoom Rooms picked up pace. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 50% year-over-year. Our combined APAC and EMEA revenue grew 62% year-over-year to be approximately 33% of revenue, up from 31% a year ago.

In recent quarters, we have made significant investments in our international teams. In Asia Pacific, our direct sales team drove several strong wins in the enterprise segment. However, in EMEA, we saw some headwinds, which were predominantly driven by declines in the online segment.

Now turning to profitability, which was strong from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, acquisition-related expenses, net litigation expenses and gains or losses on strategic investments.

Non-GAAP gross margin in Q2 was 76.2%, compared to 72.3% in Q2 last year and 73.9% in Q1 of this year. The sequential improvement in gross margin is mainly due to new data center capacity coming online, and lower usage during the summer months, particularly with schools. We now expect gross margin outlook to be higher than previously discussed at approximately 75% for the remainder of the fiscal year, even while we continue to support free K-12 education.

Research and development expense grew by 89% year-over-year to approximately $54 million. As a percentage of total revenue, R&D expense was approximately 5.3%, an increase from Q2 of last year, demonstrating our ongoing commitment to building out our engineering teams globally and maintaining best-in-class product and innovation.

Sales and marketing expense grew by 72% year-over-year to $211 million. Sales and marketing expense was approximately 20.7% of total revenue, an increase from Q2 of last year, mainly due to investments and hiring to drive sustainable future growth. We plan to increase investment in global sales capacity, as well as digital marketing and events to drive additional leads for our sales team across Meetings, Phone, Rooms and Events. G&A expense in the quarter grew by 73% to $89 million, as we continued to scale these functions and invest in systems, automation and compliance to meet our new scale. G&A expense was approximately 8.7% of total revenue, a slight increase from Q2 of last year.

The revenue upside in the quarter carried through to the bottom line, with non-GAAP operating income of $425 million, exceeding our guidance. This translates to a 41.6% non-GAAP operating margin for Q2, steady with both Q2 last year and Q1 of this year. Non-GAAP diluted earnings per share in Q2 was $1.36, on approximately 306 million non-GAAP weighted average shares outstanding. This result is $0.21 above the high end of our guidance and $0.44 above Q2 of last year.

Turning to the balance sheet. Deferred revenue at the end of the period was $1.2 billion, up 59% year-over-year from $743 million. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.3 billion, up 66% year-over-year from $1.4 billion. We expect to recognize approximately 69% of the total RPO as revenue over the next 12 months, as compared to 72% in Q2 of last year, reflecting a shift back to longer-term plans.

It is important to remember that because over 40% of our business is billed monthly and typically bought online, deferred revenue and RPO trends are not reliable predictors of future revenue growth. As I mentioned last quarter, the timing of our renewals has increasingly shifted to the beginning of the fiscal year, with Q1 now representing our largest renewal quarter. This shift in seasonality is a result of the significant growth we experienced in the first half of FY ’21. We expect this front-weighted seasonality will persist and potentially become even more pronounced given the scale of our base and practice of upselling coterminously with existing contracts. As such, we would expect total deferred revenue and RPO to be down modestly from Q2 to Q3.

We ended the quarter with approximately $5.1 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had strong operating cash flow in the quarter of $468 million, up from $401 million in Q2 of last year. Free cash flow was $455 million, up from $373 million in Q2 of last year. The increase is primarily attributable to the top line growth and disciplined spending. Looking at the remainder of the fiscal year, we expect to increase our capital expenditures related to ongoing data center expansion to support our growth outlook.

Now, turning to guidance. Please note that the ever-changing nature of the global pandemic continues to impact our segments and regions in different ways. Our outlook is based on our current assessment of the business environment. Specifically, our outlook assumes that our direct and channel business will continue to experience robust growth, while our online business will be a headwind in the coming quarters as smaller customers and consumers adjust to the evolving environment.

For the third quarter of FY ’22, we expect revenue to be in the range of $1.015 billion to $1.020 billion. We expect non-GAAP operating income to be in the range of $340 million to $345 million. Our outlook for non-GAAP earnings per share is $1.07 to $1.08 based on approximately 309 million shares outstanding. For the full year of FY ’22, we expect revenue to be in the range of $4.005 billion to $4.015 billion, which would represent approximately 51% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately $1.50 billion to $1.51 billion, which would represent approximately 53% to 54% year-over-year growth. Our outlook for the non-GAAP earnings per share is $4.75 to $4.79, based on approximately 308 million shares outstanding.

Before concluding, I’d like to welcome everyone to join us in two weeks at Zoomtopia, our two-day immersive experience that is packed with exciting product updates, guest speakers and virtual networking opportunities. And on day one of Zoomtopia, please join us for our Financial Analyst Briefing, where we will be providing you with greater detail on Zoom Phone, the platform, our channel partnerships and much more. And as always, Zoom is grateful to be a driving force, enabling connection and collaboration worldwide with our high-quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors. If you have not yet enabled your video, please do so now for the interactive portion of this meeting.

Matt, please queue up our first question.

Questions and Answers:

Operator

Our first question is from Ittia Kidron with Oppenheimer.

Ittia Kidron — Oppenheimer — Analyst

Hey guys, thanks. And I don’t forget to unmute yourself [Phonetic]. Great quarter again, guys. Kelly, I want to focus kind of on this transition. Clearly, you’re doing extremely well where Phone is phenomenal, the growth that you’re seeing over there, but can you give me a little bit more insights as to what is the growth in Meetings right here, right now? My math suggest a very significant deceleration in your expansion rate. And I would suspect that’s specifically to Meetings decelerating. Help me think about the contribution of growth of those two elements and perhaps how would that change over the next 12 months.

Kelly Steckelberg — Chief Financial Officer

So I think in terms of the expansion where you’re talking about the implied expansion rate that you calculated, yeah. And I just want to remind you, first of all that, when you calculate that, it includes all of our customer base. And as we mentioned, we are seeing headwinds in the online segment of our business for sure. So that’s — that — I would say that while we don’t break out revenue, we see strength — continued strength in the upmarket enterprise both Meetings and Phone and where you’re seeing that challenge in the implied metric, it’s really coming from the online segment of it.

Ittia Kidron — Oppenheimer — Analyst

So trying to interpret that to me, the churn is now finally rising in that category. Is that the right way to think about this going forward? Now that the economy is slowly opening, some businesses I guess scaling back on the usage here.

Kelly Steckelberg — Chief Financial Officer

Yeah. So remember the online business is primarily, not exclusively, but primarily small businesses and individuals. And I think what we’ve seen is, while the future of Delta is still unknown, we do see individuals especially moving around the world and feeling comfortable. I think we were talking about, most of us are probably socializing in person now, doing fewer things like Zoom Happy Hours and that where we’re starting to see some of the challenges, so the net dollar expansion in the online segment is what’s driving, pulling that number down below that.

Ittia Kidron — Oppenheimer — Analyst

Got it. Very good. Thanks.

Kelly Steckelberg — Chief Financial Officer

Yeah.

Operator

The next question is from Steve Enders with KeyBanc.

Steve Enders — KeyBanc — Analyst

Okay. Great. Thanks for the taking my question here. I guess, I just want to like dig in a little bit more on kind of the trends you’re seeing in the second half. It looks like guiding down a little bit, obviously down trend I think before, but we’re talking about an uptrend. So just want to get a better sense of what’s the biggest incremental change that you’re seeing there in the outlook and what’s changed in the past three months, specifically?

Kelly Steckelberg — Chief Financial Officer

Yeah. So again, we continue to see strength in our upmarket. We’re excited about what we’re seeing in the enterprise and Phone. And in international, we all saw growth accelerate in 2Q. When we look out, so what we have seen is a slowdown in the online segment of the business, which again, even though the pandemic seems to be far from over, we are happy that people are feeling more comfortably out traveling and that’s really where we’re seeing a slowdown and we had — if you back all the way up to when we gave guidance at the beginning of the year, we had expected that towards the end of the year, but it’s just happened a little bit more quickly than we expected. And we — of course, we feel good that people are out moving around the world, but it is certainly creating some headwinds, as we said in the online segment of our business.

Steve Enders — KeyBanc — Analyst

Okay. Great. And is that creating any opportunities then as companies do you think by going back to the office for Zoom Rooms and incremental activity with that product?

Kelly Steckelberg — Chief Financial Officer

Absolutely. So we saw Zoom Rooms start to accelerate again in Q2, which is very exciting as our customers are planning and thinking about the — attach rates more than doubled quarter-over-quarter from Q1 to Q2. So absolutely, companies are preparing and planning for welcoming their employees back to the office.

Steve Enders — KeyBanc — Analyst

Perfect. Thanks for taking my questions.

Kelly Steckelberg — Chief Financial Officer

Yeah. Thank you, Steve.

Operator

The next question is from Tiaz Koujalgi with Guggenheim. Hey, Tiaz, you are on mute.

Imtiaz Koujalgi — Guggenheim — Analyst

Can you guys hear me now?

Kelly Steckelberg — Chief Financial Officer

Yes. Hi, Tiaz.

Imtiaz Koujalgi — Guggenheim — Analyst

Sorry about that. Hi, I have a question on Zoom Phone. So if you look at the numbers reported tonight, you added about 500 million [Phonetic] seats I think in the last four [Phonetic] months. Prior to that, you’re adding about 500,000 seats every quarter. It looks like a bit of a slowdown in the number of seats you’re adding this quarter. Is that a fair comment?

Kelly Steckelberg — Chief Financial Officer

Yeah, almost exactly the same time frame because I think we had announced in December that we hit 1 million, and then we announced 1.5 million on our call in April, and then 2 million on this call. So, it’s almost exactly at the same pace.

Imtiaz Koujalgi — Guggenheim — Analyst

Got it. And then just one follow-up, you said weakness in the online segment, is that coming from just increased churn, or are you seeing a slowdown in new customer acquisition in that line item?

Kelly Steckelberg — Chief Financial Officer

It’s a little bit of both. So as we mentioned, we specifically saw some challenges in certain regions like EMEA, where the world — at least for a period of time, was a little more open again, and people are moving around. And that’s where we see people taking advantage of being out in the world and seeing some slower top line bookings, as well as accelerated churn.

Imtiaz Koujalgi — Guggenheim — Analyst

Thank you.

Operator

Our next question is from Meta Marshall with Morgan Stanley.

Meta Marshall — Morgan Stanley — Analyst

Great. Thanks. Kelly, I just wanted to dig into your kind of commentary on more measured spending patterns that you’re seeing and taking away from kind of the smaller business commentary that you’ve been giving and focusing that on the enterprise. And so just trying to get a sense. Does that mean normalizing the number of seats that they’re adding, or that they are rationalizing the kind of seats that they’ve had that they’re rationalizing a number of video solutions that they’re having in-house? Just what does that kind of commentary around? More measured patterns around the enterprise business mean? Thanks.

Kelly Steckelberg — Chief Financial Officer

Yeah. Thank you, Meta. We saw this start a little bit in Q1 and now continue into Q2, where I think it’s not necessarily measured in terms of how much they’re buying, but more measured and thoughtful in how they are buying in that they want to take their time. They’re doing more complete proof of concepts, for example, versus if you think about a year ago, they were in this sort of stage of trying to keep the lights on almost and buying [Indecipherable] and now they’re taking the time to really be thoughtful. And it’s just — it’s back to kind of the way they used to buy pre-pandemic, which is just much more normal buying patterns. So, I think that we’re back to more normal, and for the four quarters-ish we saw last year was really the blip and now, we’re back to a more normal measured effect to customers are taking.

Meta Marshall — Morgan Stanley — Analyst

And as part of that, just because there’s a couple of a decision by phone now, or just anything having to do with that?

Kelly Steckelberg — Chief Financial Officer

I think that certainly, the phone is a different buying cycle, but usually about the time they get to a phone they already know Zoom. So, it’s not that, that is necessarily slowing down and just that they’re taking their time to think about these decisions that they’re making.

Meta Marshall — Morgan Stanley — Analyst

Okay. Great. Thanks.

Operator

Our next question is from Matthew VanVliet with BTIGA — BTIG.

Matthew VanVliet — BTIG — Analyst

Yeah. Hi, thanks for taking my question, I guess on the continued success on Zoom Phone here, called out a number of very large deals. Curious on how often you’re being brought in where they’re also contemplating a contact center upgrade, where do you stood? Obviously, the partnership with Five9 has been in place for a while, but just more generally speaking, how often is upgrading to Zoom Phone a part of a broader modernization across that could potentially include a contact center?

Kelly Steckelberg — Chief Financial Officer

Hi, Matt. I actually don’t know exactly off the top of my head the specifics around that. We obviously are having an integrated phone and contact center solution is really important to many companies, which is why we’re excited about the deal that we’re working on with Five9. And as you say, we’ve been partnering with them. We also have other partnerships in place as well. And so, there’s nothing different about that, that has changed. I have to go back and look at. I don’t know exactly what the typical catch rate RBT knows too though. Eric, could you have a perspective on that?

Eric S. Yuan — Founder & Chief Executive Officer

Sure. So Matt, as you look at it our installed base, by now I think we really wanted to migrate from on-prem PBX system for the cloud, right? That’s where the huge opportunities that comes from. Also, since the pandemic, I think we do see some of the enterprise customers. They also started asking about, “Hey, what’s your cloud, contact center stated [Phonetic]?” Because we started climbing now. That’s why we think this is kind of for the new opportunity for us, not only for the brand and new revenue stream for contact center, but also it might further grow our Phone businesses, but because like about a year ago where a few — a lot of investment customers who really wanted to migrate their on-prem contacts centers to us. Now, given the digital transformation, for almost every enterprise customers, we do see more and more customers, we are very interested, that’s why timing-wise, it’s perfect for us to double down on the progress of contact center growth.

Matthew VanVliet — BTIG — Analyst

Great. And then following up quickly on the education front, as schools get back into session whether or not they’re going to be in person or not is sort of a debate here, but I guess, what’s the, I guess, potential monetizing more of that installed base, is it’s still going to be a relatively free solution or how is that strategy evolve? Thanks.

Eric S. Yuan — Founder & Chief Executive Officer

So, Matt, before I answer to that question, as you know, I’m accommodated [Indecipherable]. The number one thing is really a couple of communities, right? To support K12 schools, this — I would see that’s a no brainer for us. Let’s call it adding no cost, right? We feel very proud. We never thought about how to monetize our service for those K12 schools, right? Now we all go back to school. Wight with that, we’re having more banners, resources to think about how to monetize other installed bases. I give an example, like free users. Last year, we were extremely busy to have the work, to have the people stick negative. We even do not have banners to think about how to monetize those free users, right, I mean, how to embrace with the consumer, right? We never thought about that before. Now it’s the right time, right? How to think about embracing the consumer’s credit, how to monetize those free users? It’s something we’re very excited. We do not want to monetize those K12 schools. It’s our responsibility to have with us as always.

Matthew VanVliet — BTIG — Analyst

Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Matt.

Operator

Our next question is from Pat Walravens with JMP Securities.

Pat Walravens — JMP Securities — Analyst

Great. Thank you. Hi, guys. And I don’t think there’s ever been a company that has grown so fast and realistically pulled a lot of demand forward, right? Because everyone needed to get their video conferencing solutions in place very quickly. And now, as I look at 54% this quarter, Kelly, your guidance suggests 30%, 31% in Q3, and 15% in Q4. So, all that is just a lead-up for. Eric, what is your top one or two priorities in the next 12 months as you go from this hyper growth to a much more reasonable growth period? If you could just sort of contrast those for us, I think that would be really helpful.

Eric S. Yuan — Founder & Chief Executive Officer

Sure. I would say, Patrick, those are great questions. First of all, you look at it prior to pandemic, look at our growth, always focus on the enterprise customer. The first service is Video Conferencing. We introduced a second revenue stream, Zoom Phone, both of them are doing well and how to introduce the third one or fourth one, how to double down on that? This is always our thought. We did not realize, it’s still pandemic crisis. All of us as several years, probably we should have planned sort of [Indecipherable] services beforehand. Now, actually, you can get our [Indecipherable], how to introduce more and more revenue stream, new services to support our enterprise customer. That’s always part of us. Essentially, this is a part of our overall platform straight. And inside of that also, there’s a new opportunity ahead of us. As I mentioned earlier. We never realized there’s so many consumers and — who are so loyal to the platform. The usage is still pretty healthy. How to embrace the consumer’s credit? It’s also something on top of our minds as well. We never thought about that before. It’s right time. We look two things, enterprise platforms and also consumer. Those two things will drive our future growth.

Pat Walravens — JMP Securities — Analyst

That’s great. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Patrick.

Operator

Our next question is from Shebly Seyrafi with FBN Securities.

Shelby Seyrafi — FBN Securities — Analyst

Yeah. Thank you very much. So, I’m looking at your implied guide for Q4. It seems like you’re guiding it to — the sell to around 12% or so, plus or minus from 3% [Phonetic] or so Q3 with a similar compare I would argue. Now, it seems like it’ll actually be down potentially sequentially from Q3. So, can you elaborate on why that might be the case? You talked about the online issues. How long do they last, for example, and if we go to like 10% to 12% growth in Q4, should we accelerate afterward if we — the compares get easier, how should we think about next year?

Kelly Steckelberg — Chief Financial Officer

Yeah. So in terms of what you’re seeing in Q4, it is continued uncertainty around headwinds in the online segment, absolutely it’s driving that. And we’re — in terms of what that implies for next year, we’re not ready to give FY ’23 guidance today unfortunately. We will be prepared to do that when we get on the Q4 earnings call, and of course, we’ll have a lot more earnings at that point to share with you, but that is exactly what continues to drive that in Q4.

Shelby Seyrafi — FBN Securities — Analyst

Okay. If there were any reason why the online issues would be bigger in EMEA than in the Americas, in Asia?

Kelly Steckelberg — Chief Financial Officer

Well, that is the pandemic question, right? Because it really what we’ve seen is this varies depending — by region and by segment depending on where each of those countries or markets is in their pandemic life cycle. And we’ve seen it ebb and flow over the last 18 months by market. And so it’s — that’s the challenge. I think that all businesses are having right now and thinking about the future with uncertainty — so much uncertainty around the pandemic right now, it’s just difficult to forecast exactly.

Eric S. Yuan — Founder & Chief Executive Officer

To add to what Kelly has said. Look our user base in EMEA, seasonality also is a factor, right, particularly in the summer time, not to mention that COVID situation and the user there might have a little bit longer vacation, right? It’s seasonality for sure is the key factor, and that’s another big difference compared to our user base here.

Shelby Seyrafi — FBN Securities — Analyst

Okay. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Operator

Our next question is from Ryan Koontz with Needham.

Ryan Koontz — Needham — Analyst

Thanks for the question. Great to hear the progress in the enterprise. Clicking along there. And it sounds like some real strength in APAC. Why don’t you share with us any additional color on particular market verticals or applications you’re seeing that are kind of key to penetrating and getting these big, large global 2,000 tech wins. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Yeah, Ryan. I would say, first of all, whether that top two market is not education and health care is pretty strong and also will bring us more opportunities when we expand into the international markets like APAC. And also, like are those are telco, Telkomsel. Those kind of telco partnership will further help us for us penetrate into each of those APAC countries, right, into most of the new opportunities. Recently, we launch launched Zoom Apps. And also, like some of the partners, we build a new solution upon our platform, like fast technologies. I think a lot of new opportunities, we do not even build upon by ourselves. And those sort of hearty customers, they can leverage our user API or SDK, or Zoom App to build all kinds of new solutions to — [Indecipherable] on all those vertical markets, or even the department as well, right? That’s where the opportunities are comfortable.

Ryan Koontz — Needham — Analyst

So, you’re seeing some opportunities to upsell into the C FAST type applications in the enterprise?

Eric S. Yuan — Founder & Chief Executive Officer

Yeah, both, actually. Yeah, because in those third-party partners, a little bit of very healthy business also bringing the Zoom to the installed base and also, by establishing a trust [Indecipherable] obviously are in most stock, right? Essentially it’s a very healthy channel, not only for their own business and whatever, but also it’s a greater channel for us.

Ryan Koontz — Needham — Analyst

Helpful. Thanks, Eric.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Ryan.

Operator

The next question is from Siti Panigrahi with Mizuho.

Siti Panigrahi — Mizuho Securities — Analyst

Hey guys. Thanks for taking my question. I just wanted to dig into the enterprise segment. Q1, Q2, those are two bigger renewal quarters. Now that’s behind now. So what changes you are doing on your go-to-market strategy mainly increasing quota carrying sales save, or any changes that you are doing for this normalized environment. And Phone used to be one of the big cross-sell opportunity for you, and how should we think about the Phone as you get into a more normalized renewal environment?

Kelly Steckelberg — Chief Financial Officer

We are absolutely continuing to invest in our sales capacity. We are focused on certain regions, especially where we see lots of opportunities like Asia Pac. We recently hired a new leader there and are really excited about the progress we’re already seeing with his leadership. And then, we are continuing to invest in marketing. So as we move post-pandemic era a little bit in terms of not hoping that, but sort of what we saw from last year with the lift in brand awareness, we’re continuing now to think about how we do invest more in specific product marketing around Zoom Phone, around Zoom Rooms as well as a digital marketing campaign. So, helping to drive additional leads for all of our teams on a global basis. And then also, the channel continues to be a really important aspect of our go-to-market. So the channel was responsible for approximately 27% of our Zoom Phone sales in Q2. We added six additional master agents — partners during Q2. So really excited about continuing to invest in the channel on a global basis.

Siti Panigrahi — Mizuho Securities — Analyst

Thanks, Kelly.

Kelly Steckelberg — Chief Financial Officer

Thanks.

Operator

Our next question is from Alex Zukin with Wolfe Research.

Alex Zukin — Wolfe Research — Analyst

Hey guys. Thanks for taking the question. I think I’m going to — I’ll probably touch on a topic that’s been mentioned here before. Because I think a lot of people that are investing in the company at this point, they really are investing in the non-online story of the company, the enterprise story, the large business. There’s a lot of metrics there. There’s a lot of, kind of, pollution and noise in these metrics. How do we think about the growth of the important part of the business for investors, meaning the over 10 employee customer base, either from an incremental bookings perspective, from an incremental revenue perspective? And when does the headwind were anchored on the business from the pandemic, from the once-in-a-generation SMB buying pattern? When does that trough? And so, when do we see a normalized — kind of normalized growth rate for the company?

Kelly Steckelberg — Chief Financial Officer

Yeah. So thank you, Alex. First of all, we agree with you that really, we want everyone focus on the long-term potential of the up-market. As a reminder, in Q2, that segment of the business grew at twice the rate of the online business. So that gives you some indication of how those two segments are diverging a little bit. And then as we look forward, I guess the best way to help you think about is you want to look at the net dollar — the implied net dollar expansion rate that we were talking about earlier, right? You can think about what’s happening there is the net dollar expansion rate for the online segment is under one, right? That gives you some idea of what’s happening, again, how to think about those two different segments of our business.

In terms of where is, is there a trough, I think that it’s back to trying to predict the pandemic, which is a difficult thing for obviously anybody in the world to do right now. And as much as we are excited about vaccines being more widely distributed, unfortunately, as we see Delta continuing to grow in certain parts of the world, we have even in the last few weeks, like seen certain pockets of strength. So I think that that’s going to depend on really what we continue to see in terms of the spread of variants around the world.

Alex Zukin — Wolfe Research — Analyst

Got it. And I guess maybe for Eric, you mentioned the seasonality, the vacations in Europe. Is there a way to kind of get a sense for the Delta caution upon about just EMEA SMB versus the US SMB just so we can get some sense of that magnitude change?

Eric S. Yuan — Founder & Chief Executive Officer

I think overall, I think our up-market has been well, especially look at in North America [Indecipherable]. In EMEA, I think a mass market online SMB, I think it did not do well last quarter, more seasonality, COVID situation for sure. Maybe things are a little bit worse because they’re longer vacation [Indecipherable].

Here, look at our North America market, I think, the upsell Phone and also the Zoom Rooms because every company, they’re starting to go back to the office. New opportunities are coming and also doing very well. That’s why I say even if a little bit of time on SMB, by and large, we did not see a big bar and because offset by — we open hybrid work opportunities.

I think to look at the APAC, APAC, we did not see that at all in last quarter, assuming we’re about. And I think overall as we mentioned earlier, we got it go back to our enterprise. Because the last year, I think the online business used to be just a marketing channel, but however, not only marketing channel, but also contribute a lot to our revenue from a percentage perspective.

Now, the game is out of that. Percentage is going to down on earth [Indecipherable]. With that, we can focus on our enterprise customer. And plus, given that, we’ve become a household name. It will bring a new opportunity to monetize. Usually, the monetization for online allow the users just the online subscription. I would say that may not be a sustainable strategy for the online users’ monetization, we got to have all of these to monetize those — the online installed base. That’s why we are very excited about our future.

Alex Zukin — Wolfe Research — Analyst

All right. Thank you, guys.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Alex.

Operator

Our next question is from James Fish with Piper Sandler.

James Fish — Piper Sandler — Analyst

Hey, guys, thanks for the question. On the win with Seagate as an example here, how often are you seeing it that Phone is leading to a greater number of seats at existing customers, or really, how can we think about that potential uplift within just for installed base today, or selling phone with meetings that create a greater number of seats at current accounts, not just meetings seats, but overall, employees that you can actually cell phone into? Is it a two-times opportunity that we just don’t have as many meetings seats because you can have more — you can have less hosts than you do employees?

Eric S. Yuan — Founder & Chief Executive Officer

James, that’s a great observation. I think — you are so right. I think one year ago, we really did not see that. Normally, we buy more Meeting licenses and as [Indecipherable] probably a little bit, obviously Phone and also for the existing installed base, the upsell.

For the brand new customers, because customer look at one platform for both video and voice, we understand video and voice are converging into one platform plus our Phone business is very mature now. Every quota doing very well. Customer like it, it’s not like, oh, this is something brand new. We do not want to take any risk. It’s very mature, plus the integrated screens, both video and voice are doing very well. Essentially, from now, I would say probably — I do not know, but I guess probably more and more customers now I’m going to — are going to deploy video for us and it didn’t deploy. So, very like to be on day one, they are going to deploy both given the dynamics of each business, sometimes probably they wanted to deploy more Zoom seats than the Meeting licenses.

James Fish — Piper Sandler — Analyst

Got it. Thanks.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, James.

Operator

The next question is from Will Power with Baird.

Will Power — Baird — Analyst

Great. Thanks for taking the question. I guess, tech question probably for you Kelly. As we think about the 10-plus employee cohort, kind of your upmarket segment, how do we think about, one, customer growth from here? And two, as you think about that net expansion, they’ve been above 130%. What’s the sustainability of that, right? Because you’ve gotten a number of growth drivers and you’ve got a lot of large numbers working against you. How do we think about the outlook on that front?

Kelly Steckelberg — Chief Financial Officer

Yeah. In terms of net dollar expansion, we expect it to stay above 30 [Phonetic] certainly for Q3. And then in terms of Q4, we expect it to be at least in that range, not — it’s a quarter out. We don’t know exactly, but we are going to be right in that same range still for Q4.

And then in terms of the customer growth, I think that what you are going to continue to see is ongoing growth driven by large deals. So the customer count may slow, but as you’re going to continue to see growth driven by these big deals, as we see opportunities to continue to cross-sell with Zoom Phone, as you heard, right, we beat our two largest deals records on the same day this quarter. So really seeing opportunities there. And then as we were planning to go back to the office, also opportunities for Zoom Rooms and then think about Zoom Events. We’re going to start to see opportunities for larger and larger, bigger customer wins. And I think the other thing to note, we talk about in the quarter, but just want to make sure we understand, we had a deal this quarter that now became our new largest customer. So not our new customer, an existing now with their upsell, right, we became the largest customer. So we’re continuing to see these really significant large wins, and that I expect to continue.

Will Power — Baird — Analyst

Right. Thank you.

Operator

Our next question is from Matthew Niknam with Deutsche Bank.

Matthew Niknam — Deutsche Bank — Analyst

Hey, thanks for taking the question. You talked a little bit about some more measured behavior from customers in terms of buying patterns. I’m just wondering, can you talk a little bit about the competitive backdrop, whether you’ve seen peers, maybe getting more aggressive, especially larger enterprise customers really take their time to reevaluate the future of work post COVID. Thanks.

Kelly Steckelberg — Chief Financial Officer

Eric, you want to talk about…

Eric S. Yuan — Founder & Chief Executive Officer

Sure. I think, Matt, we look at the churn, the future work, hybrid work. For sure, that will be the mainstream, right? And however — and because of embracing hybrid work, a lot of employees, right, student working from a home, or maybe work in the remote locations. And in all like and prior to pandemic crisis, right, quite often and you might have deployed solution. This is good enough, right? And given employees now to support hybrid work, the best way to service will do very well. If we look at employees, they do not have IT support sitting next to them, right, and plus, you really worry about the productivity, if you do not give the best tools. That’s why in a good enough service, we’re going to doing well. Every businesses, we would like to deploy the best-of-breed service, always give the employees much better tools to improve their productivity, to help employees because to support a hybrid world is not that straightforward, right?

And I’ll give you one example, like a complement solution, [Indecipherable] gallery feature. Out of this, customers, they do not care to have a meeting by somebody assisting in the conference room, some join remotely, that experience is not as good as the big, the webinar on me too right. That’s why I think the hybrid work, certainly we’ll have Zoom by even some of sometimes our competitors the mile of evidence of price. I think the good news is the customer really wants to have a very reliable fixing us the platform, you know very easy to use. I think that’s the reason why I think that Zoom is positioned much better than any of our competitors.

Matthew Niknam — Deutsche Bank — Analyst

Thanks, Eric.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Matt.

Operator

Our next question is from BoYoung Kim with Citi.

Tyler Radke — Citi — Analyst

Hi, Tyler Radke, earlier in the Q&A, you showed some progress around the master agent program and also had cited some really large international phone deals. So, I wanted to hear about what you’re seeing in terms of the productivity of the channel partners and international markets relative to what you’re seeing from channel partners in the US and to what extent is that impacted by the nascent stage of the master agent program in international markets, as well as the nascent state of the broader market in a cloud-based phone. Thanks.

Kelly Steckelberg — Chief Financial Officer

So, I think we are seeing strength in our channel partners globally. But as you say, it’s a much newer program and much smaller internationally. So excited to really — this is one of the main focuses for our channel team, which is expanding outside of the US, it’s focused for the rest of the year.

In terms of productivity, I don’t think that it really varies. I mean we were really excited about the Telkomsel deal, which is one of our largest channel partner deals, ISP deals with date, so that’s really exciting. But we’ve had significant wins in the US as well. So not seeing dramatic differences in productivity on a global basis.

Operator

Our next question is going to be from Matt Stotler with William Blair.

Matt Stotler — William Blair — Analyst

Hey guys, thanks for taking the question. I think just — just one for me. Obviously, as you guys have spoken to so far, the enterprise opportunity here is really kind of the which was really exciting and compelling going forward. But given the commentary around finding other ways to monetize the base, whether that’s a consumer or otherwise, we’d love to maybe get an update, or whatever color you can provide on the level of premium usage that you’re seeing today, now outside of the seasonality with education, Just the level of premium users from the platform, how that’s changed over the past four or five quarters, thoughts on the back half there, and then any commentary on what conversion you’ve seen there or you expect you could see if you decided to really try and monetize that.

Kelly Steckelberg — Chief Financial Officer

Yeah.

Eric S. Yuan — Founder & Chief Executive Officer

Go ahead.

Kelly Steckelberg — Chief Financial Officer

We still see free users. A large, they’ve really grown over the last 18 months and they’re about 30% of our minute usage today as compared to like 10% pre-pandemic. That gives you an idea of the number — we don’t talk about the number of users, but that at least gives you a relative understanding of how they grow over time.

And like we always say, as Eric mentioned about our share value of care, our core value of care we really care about all those [Indecipherable] specially to keep people connected during these more difficult times. And there’s always a hope that they continue to invert or that they have the opportunity to give you a new [Indecipherable] more new users to the power of Zoom.

Matt Stotler — William Blair — Analyst

Got it. Thank you.

Operator

Our next question is from Chaim Siegel with Elazar Advisors.

Chaim Siegel — Elazar Advisors — Analyst

Hi, Kelly and Eric. How are you?

Kelly Steckelberg — Chief Financial Officer

Hi. Nice to see you.

Chaim Siegel — Elazar Advisors — Analyst

I had a couple of questions if you have time, but since obviously, the focus is on enterprise, I just wanted to know how fast the sales forces growing and when the efficiency for that Salesforce starts to kick in. I guess that’s one.

And also, just related to that on operating expenses. So, I’m not sure how long you expect flattish sequential growth, but on the operating expense, it seems like maybe it will start to grow faster than revenues. And just wondering with relation to focusing on getting the enterprise is going, how fast expenses will grow versus revenues.

Kelly Steckelberg — Chief Financial Officer

So, as we’ve been saying for the last several quarters, there are areas that we were not able to hire and invest in as quickly as revenue grew last year. And so, what we’ve been doing on the last couple of quarters is focusing on reaccelerating investment, especially in the areas of R&D, as well as for the carrying [Indecipherable], and we are absolutely continuing to do that.

We still are underinvested in R&D at a little over 5% of revenue, and the long-term target is 8% to 10%, so we’re continuing too higher as quickly as we can. And then similarly in terms of quota-carrying heads, we’re being very thoughtful about the segments and the regions in which we’re hiring a fair number, like slipping back for a minute, there is a huge chum and it’s a huge opportunity out there.

And we want to continue to add quota-carrying heads in sales capacity into our system to take advantage of that. As long as we continue to see an opportunity for growth, we will continue investing in quota-carrying heads. We are also, as I mentioned earlier, accelerating our spend in marketing as we were able to pull back a little bit on that last year.

But we think now is the right time to continue reinvesting there. And then the two areas that we always look to be as efficient as we can, our G&A and COGS. And G&A is right in the range of where we would want to be for the long term. Over time, we do expect COGS to decrease as we continue to move more and more of our services out of the public cloud into the data center, our own data centers.

I mean, we’re always going to have a hybrid approach there. But also, eventually at some point when K-12 schools are freer to go back to campuses, we do expect to see improvement in our gross margin. But we will absolutely continue to support those students in schools as long as we think it’s needed.

Chaim Siegel — Elazar Advisors — Analyst

Is there a general timing of efficiency where you would to tick in for the enterprise, for sales [Indecipherable] on the enterprise? I know you’ve been growing it. And I know it takes time, I was just wondering if there’s timing where if they [Indecipherable] going to start really performing for you?

Kelly Steckelberg — Chief Financial Officer

No, I mean — I would say is we are continuing to hire quota-carrying heads quickly and we will continue to do so. So that means there’s a constant state of having a ramping rep in the system. And since we have no plans to stop hiring quota-carrying heads in the near future. But I can’t say when all of a sudden, they’re going to necessarily be more efficient.

Chaim Siegel — Elazar Advisors — Analyst

Thank you very much.

Operator

Our next question is from Rishi Jaluria with RBC.

Rishi Jaluria — RBC — Analyst

Hey, Eric, Kelly, Tom. Thanks so much for taking my questions. Good to see you all. I wanted to just ask about Zoom Events. I know initially when you’ve talked about the product, it was kind of pitches a little bit of a monetization factor for the Prosumer segment, right?

Helping fitness instructors, yoga instructors who run class online, but clearly, it seems like there are much grander ambitions, right? The fact that you’re going to run Zoomtopia on that, I think tells us there’s maybe a bigger enterprise opportunity, even as companies are looking at doing in-person conferences again, they don’t want to have a strong virtual and hybrid component to it.

So, can you maybe talk a little bit about what you see as a longer-term vision with Zoom Events, especially Enterprise and maybe let’s go on that? Thanks.

Eric S. Yuan — Founder & Chief Executive Officer

Rishi that’s a great question. So, remember last year, last October, at a Zoomtopia we reduce resuming events, you know, we started from on Zoom. And we thought about how to have the people working from home who still can’t get it streaming live like filling these online classes, Zoom all those classes.

That’s the reason why we decided to build the Zoom Events ever. Again, we always listen to other customers, in particular, our enterprise customers. And they all told us, there are more opportunities around the carpet events in the corporate and probably not assume a focus on the all told us, hey, we’ve [Indecipherable] in either better than here that.

We ought to have an EBITDA platform, they wanted us to extend that, and I didn’t know how to expand it into an even bigger Annual User Conference like Zoomtopia, that’s why we [Indecipherable] above corporate, which is rebranded as Zoom Events. We do see a huge opportunity. And besides that, the consumer learns. It’s not a card or zoom you miss anymore. This is more like on Zoom website.

We still were aggregate all those consumer-driven events right like on fitting in a cost and [Indecipherable] plus, but if I know, if you look at our short of opportunities, assuming you went there because many of our existing customers told us we need a platform like that because it already does. They do not want to go to any other platform. They are very patient. That’s the reason why they shift over our spending the database since the last ASM problem.

Rishi Jaluria — RBC — Analyst

Right. Wonderful. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Operator

Okay. Well, thank you to all of our analysts, that’s all the time for questions that we have for today. And then to Tom. Let’s bring you back to Tom.

Tom McCallum — Head of Investor Relations

Great. Thank you, everybody. And we hope to speak to you more of the rest of the quarter and see you at Zoomtopia. anything else Eric?

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Thank you all for you come today. Hope you all join the next mass at Zoomtopia, September 13th, and 14th. I really appreciated all your support as far as always. Thank you.

Tom McCallum — Head of Investor Relations

Thank you.

Kelly Steckelberg — Chief Financial Officer

Thank you.