Categories Earnings Call Transcripts, Technology

Zoom Video Communications, Inc. (ZM) Q2 2021 Earnings Call Transcript

ZM Earnings Call - Final Transcript

Zoom Video Communications (NASDAQ: ZM) Q2 2021 earnings call dated Aug. 31, 2020

 

Corporate Participants:

Tom McCallum — Head of Investor Relations

Eric S. Yuan — Founder and Chief Executive Officer

Kelly Steckelberg — Chief Financial Officer

Analysts:

Alex Zukin — RBC Capital Markets — Analyst

Meta Marshall — Morgan Stanley — Analyst

Nikolay Beliov — Bank of America Merrill Lynch — Analyst

Imtiaz Koujalgi — Guggenheim Partners LLC — Analyst

Sterling Auty — JPMorgan Chase & Co. — Analyst

Richard Valera — Needham & Company — Analyst

Tom Roderick — Stifel, Nicolaus & Co., Inc. — Analyst

Heather Bellini — Goldman Sachs — Analyst

Will Power — Robert W. Baird & Co. — Analyst

Rishi Jaluria — D.A. Davidson & Co. — Analyst

Philip Winslow — Wells Fargo Securities — Analyst

Shebly Seyrafi — FBN Securities Inc. — Analyst

Brad Zelnick — Credit Suisse — Analyst

Ryan Koontz — Rosenblatt Securities — Analyst

Bhavan Suri — William Blair & Company — Analyst

Walter Pritchard — Citigroup — Analyst

Matthew VanVliet — BTIG — Analyst

Quinton Gabrielli — Piper Sandler — Analyst

Alex Kurtz — KeyBanc Capital Markets Inc. — Analyst

Ryan MacWilliams — Stephens Inc. — Analyst

Patrick Walravens — JMP Securities — Analyst

Jonathan Kees — Summit Insights Group — Analyst

Presentation:

Operator

Hello everyone and welcome to Zoom’s Second Quarter Fiscal Year 2021 Earnings Release. This call will be recorded.

At this time, I will 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 year 2021. 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 on the Zoom.com website. 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 about market size and growth strategy, our estimated and projected costs, margins, revenue, expenditures, investments, growth rates, our future financial performance and other future events or trends, including guidance for the third quarter 2021 and full fiscal year 2021, our plans and objectives for future operations, growth, initiatives, strategies, and the impact to our business from the COVID-19 pandemic. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including today’s earnings press release and our latest 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar.

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

Eric S. Yuan — Founder and Chief Executive Officer

Hey Tom, thank you. Hello, I hope you are all doing well. I want to thank our customers, investors, and community for their support of Zoom. Their care, feedback, and trust of Zoom make a huge difference. And we grew our business, from being a startup to a non-startup by the public company to be a long-term sustainable company. We might be facing all kinds of challenges, but no matter how busy we are, no matter what challenges we are facing, we are always re-charged when we think about our customers’ support and become even more motivated to serve them better. With the pandemic persisting, we are very committed to work hard and are humbled by our role of enabling communications worldwide during this challenging time.

As remote work trends have accelerated during the pandemic, organizations have moved beyond addressing immediate business continuity needs to actively redefining and embracing new approaches to support a future of working anywhere, learning anywhere, and connecting anywhere and we continued to see meaningful adoption of Zoom’s video-first unified communications platform across industries and geographies.

So let me share with you just a few key metrics that reflect this. Revenue grew 355% year-over-year in Q2. Customers with more than 10 employees grew 458% year-over-year as new customers chose Zoom to be their preferred communication and collaboration solutions and we had over 35,000 educators, school administrators and IT professionals from around the world join our free virtual Zoom Summer Academy. The successful two-day Zoom event was our biggest educational event to-date, bringing together thought leadership in remote learning, practical training and networking opportunities and we remain committed to helping our education customers, including the more than 100,000 K-12 schools who have signed-up to use the platform for free during the pandemic.

Moving on to a few recent business highlights. We completed our 90-day plan on security and privacy. A comprehensive summary of accomplishments is available on our website. I’m proud of our team’s swift and transparent response, as well as the resulting improvements we made to our platform. Although the 90-day initiative is over, security and privacy matters will remain an important part of Zoom’s strategy and DNA moving forward as we strive to maintain our customers’ and other stakeholders’ trust.

We also made two exciting hardware announcements in the quarter. First is the launch of Zoom Hardware as a Service, which offers customers a variety of subscription options for phone and meeting room hardware from leading hardware manufacturers. This offering makes Zoom Phone and Zoom Rooms more accessible by minimizing friction around hardware procurement. Second is Zoom for Home, our new innovative category of software experience and hardware device partnerships to support remote work use cases. We launched this program with our partner DTEN in July, and this month we announced its expansion to Amazon, Facebook and Google devices.

We also achieved significant accomplishments for Zoom Phone. In mid-June, Zoom Phone was authorized under the FedRAMP program, enabling federal agencies to consolidate their costly, legacy telephony systems onto our unified modern cloud solution. This month, we expanded the availability of Zoom Phone service to 25 additional countries and territories. Zoom now provides local telephone service and domestic calling in more than 40 countries and territories.

On a final note, we welcome our new CISO, Jason Lee, former SVP of Security Operations at Salesforce, and our new General Counsel, Jeff True, former EVP and General Counsel at Palo Alto Networks. We are very excited to have them.

Now let’s talk about some exciting wins in the quarter. Let me start with a couple of new customers that represent some of the largest companies in their industry. First, we are thrilled to welcome ExxonMobil, one of the largest publicly traded international energy companies, to the Zoom family. ExxonMobil develops and applies next-generation technologies to help safely and responsibly meet the world’s growing needs for energy and chemical products. They recently used their scale and capabilities to ramp up production to make medical-grade masks, shields, and hand sanitizers. We are grateful that ExxonMobil chose Zoom as their unified communications platform. ExxonMobil wanted a solution that would enable them to collaborate reliably and securely with their teams, customers, and partners around the world. ExxonMobil employees are now using Zoom video communications across their global business.

Second, Activision Blizzard, a member of the Fortune 500, has chosen Zoom to modernize and consolidate onto a single communication platform across their business units and gaming franchises. As a leading interactive entertainment company, connecting and engaging the world through epic entertainment, Activision committed to a full enterprise roll-out of Zoom Meeting and Zoom Rooms to replace their mix of legacy video conferencing products.

Our ability to expand with existing customers also helped drive our results this quarter. One of the highlights this quarter was the expansion with ServiceNow, who has been a Zoom customer since 2018, using Zoom Meetings for its 11,000 global employees. Since the global pandemic, ServiceNow employees working from home have relied heavily on Zoom’s easy-to-use interface to stay productive and connected with their customers. As the Zoom platform has become a core piece of ServiceNow’s technology ecosystem, this past quarter, the company chose to replace its legacy hardware PBX system with Zoom Phone across their organization, further elevating their teams’ work-anywhere experience with seamless one-touch communication and collaboration.

Thank you, ExxonMobil, Activision Blizzard, ServiceNow and all our wonderful customers for trusting Zoom. I love you. All Zoom employees love you. Thank you.

In summary, we continued to scale and expand our business to meet the needs of our customers and global community. I am very proud of our achievements and thank our more than 3,400 employees for another exceptional quarter. Let’s remain focused on delivering happiness to our customers and community.

With that, let me turn things over to Kelly.

Kelly Steckelberg — Chief Financial Officer

Thank you, Eric and hello everyone. Q2 was a remarkable quarter for Zoom as we continued to rapidly grow and invest in our business to meet the demands of our customers and community.

Let me start by reviewing our financial results for Q2, then discuss our outlook for Q3 and the increased view of our full year FY ’21. Total revenue grew 355% year-over-year, to $664 million in Q2. This top line result significantly exceeded the high-end of our guidance range of $500 million as demand remained at heightened levels, combined with lower-than-expected churn and exceptional sales execution. For the quarter, the year-over-year growth in revenue was primarily due to subscriptions provided to new customers, which accounted for approximately 81% of the increase, while subscriptions provided to existing customers accounted for approximately 19% of the increase. This demand was broad-based across industry verticals, geographies and customer cohorts.

Let’s take a look at the key customer metrics for Q2. We continue to see expansion in the up-market as we ended Q2 at 988 customers generating more than $100,000 in trailing 12 months revenue, up 112% year-over-year. This is an increase of 219 customers over Q1, the highest number of adds in a quarter. We exited the quarter with a total of approximately 370,000 customers with more than 10 employees. We added approximately 105,000 of these customers in Q2, the second highest number of adds in any quarter. Year-over-year, we added approximately 304,000 new customers with more than 10 employees for 458% growth. We have continued to benefit from significant growth in our customer segment with 10 or fewer employees, as small businesses and individuals adopted and maintained their Zoom licenses for various uses during the pandemic. In Q2, customers with 10 or fewer employees represented 36% of revenue, up from 30% in Q1 and 20% in Q4 of last year. The increase in customers with 10 or fewer employees continues to shift our billing mix as these customers generally pay monthly, rather than annually as do most enterprise customers. This shift is an important point for our outlook, which I will discuss in just a moment. Our Net Dollar Expansion for customers with more than 10 employees was over 130% for the ninth consecutive quarter as existing customers continue to support and trust Zoom to be their video communications platform of choice.

Both domestic and international markets had strong growth during the quarter. Americas grew at a rate of 288% year-over-year. Our combined APAC and EMEA revenue accelerated to 629% year-over-year and represented approximately 31% of revenue. We will continue to invest in international expansion to capitalize on our brand awareness and the increased global opportunity.

Now turning to profitability. The increase in demand and strong execution drove net income profitability 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 and acquisition-related expenses. Non-GAAP gross margin in the second quarter was 72.3% compared to 82.2% in Q2 last year and 69.4% last quarter. The incremental improvement from Q1 reflects our strategy to increase our co-located data center capacity while leveraging the public cloud as needed. We expect gross margin for the rest of the year to be consistent with Q2. However, actual results may vary as gross margin is contingent upon the percentage of free users and the utilization of public cloud during the pandemic.

R&D expense in Q2 was approximately $29 million, up 128% year-over-year. As a percentage of total revenue, R&D was approximately 4%, which was lower than Q2 last year, mainly due to the strong top line growth. In FY ’21, we will continue to invest in R&D to drive innovation across all aspects of our platform. We also plan to diversify our engineering talent as reflected by our expansion in the US and India. Sales and Marketing expense for Q2 was $123 million. This reflects an increase of 78% or $54 million over last year with investments to drive future growth. As a percentage of total revenue, sales and marketing was approximately 19%, a decrease from Q2 last year, due mainly to strong top line growth and marketing efficiencies from our increased global awareness.

Overall, we plan to add sales capacity quickly over the next several quarters. The swift ramping of our sales organization to further capitalize on market opportunity is a priority. G&A expense in Q2 was $51 million, up 189% on a year-over-year basis due to higher accruals for telco taxes correlated to higher billings, professional services and additional hiring to meet the functions of a public company of this scale. As a percentage of total revenue, G&A expense was approximately 8%, a decrease from Q2 last year, as we gained leverage on our investments with the rapid growth in revenue.

The substantial revenue upside in the quarter carried over to the bottom line, with non-GAAP operating income of $277 million far exceeding our guidance, translating to a 41.7% non-GAAP operating margin for the second quarter. This compares to Q2 last year’s result of $21 million and 14.2% margin. The significant margin expansion year-over-year is due to the steep increase in revenue in Q2, which outpaced the rate of investment, even if we added over 500 employees in Q2, a 20% increase from last quarter and 53% growth year-over-year. Non-GAAP earnings per share in Q2 was $0.92 on approximately 297 million of non-GAAP, weighted average shares outstanding and adjusting for undistributed earnings. This result is $0.46 higher than the high-end of our guidance and $0.84 higher than Q2 of last year.

Turning to the balance sheet. Deferred revenue at the end of the quarter was $743 million, up 309% year-over-year. Looking at both our billed and unbilled contracts, our RPO totaled approximately $1.4 billion, up 209% from $458 million year-over-year. The increase in RPO is consistent with the strong demand and execution in the quarter. We expect to recognize approximately 72% or $1 billion of the total RPO as revenue over the next 12 months as compared to 62% or $285 million in Q2 last year. This indicates a shift in our renewal seasonality, which was historically weighted toward Q2 and Q4 and has now shifted to Q1 due to the strength of last quarter’s performance.

As a reminder, we do not focus on calculated billings as a metric for our business. We have a diverse business that spans from enterprises to individuals. With the changing mix of our business, annual billing terms and the growing level of monthly billing terms, such calculations have become less meaningful, especially now that we have a full quarter of monthly billings making up a bigger part of our revenue.

We ended Q2 with approximately $1.5 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Similar to Q1, we had exceptional operating cash flow in Q2 of $401 million, up from $31 million in Q2 last year. Free cash flow was $373 million, up from $17 million in Q2 last year. The increase is attributable to strong collections from the large increase in top line growth and higher percentage of monthly contracts throughout the quarter. For the second half of the fiscal year, we expect to increase capital expenditures for additional data center infrastructure. As a reminder, we will see the semi-annual cadence of net cash inflows from ESPP purchases to occur in Q3.

Now turning to guidance. We are pleased to raise our outlook for FY ’21 for both revenue and non-GAAP profitability. Although we remain optimistic on Zoom’s outlook, please note that the impact and extent of the COVID-19 crisis and its associated economic concerns remain largely unknown. Our higher outlook for FY ’21 is based on our view of the current business environment. For the third quarter, we expect revenue in the range of $685 million to $690 million. We expect non-GAAP operating income to be in the range of $225 million to $230 million. Our outlook for non-GAAP earnings per share is $0.73 to $0.74 based on approximately 300 million shares outstanding.

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Before giving you the full year outlook, let me provide some context on our assumptions. While better-than-expected churn was one of the drivers to our Q2 outperformance, we did experience a significantly higher level of overall churn in Q2 as compared to historical rates. As customers with 10 or fewer employees had increased to 36% of our revenue, we are assuming a higher rate of churn due to this mix shift.

From an expense perspective, we continue to focus on investing for growth, targeting investments that are appropriate for our market opportunity and the size of the business that we have become. Looking ahead, we expect operating margins to decrease from the peak in Q2 over the balance of this year as our hiring and spending catch-up with the much greater scale of our business. It is prudent to expect margins to normalize to lower levels over the next several quarters.

For the full year of FY ’21, we expect revenue to be in the range of $2.37 billion to $2.39 billion, which would be approximately 281% to 284% year-over-year growth. This implies that Q3 and Q4 revenue will be only modestly higher than Q2, indicating a decline in quarter-over-quarter growth. For the full year of FY ’21, non-GAAP operating income is expected to be in the range of $730 million to $750 million. We expect to deliver non-GAAP earnings per share of $2.40 to $2.47 for the full year FY ’21, based on approximately 300 million shares outstanding.

In closing, we executed well in the first half of our the fiscal year. With our commitment to delivering customer happiness, we believe we will grow to over $2 billion in total revenue this fiscal year, which would be a remarkable milestone, considering our guidance was below $1 billion in revenue at the start of the fiscal year. We are proud of how our team continued to perform in support of our customers and global community. Thank you to the entire Zoom team.

Before we move to our Q&A session, let me turn it back to Eric.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you, Kelly. Finally, I want to invite you all to our virtual Zoomtopia event on October 14th and 15th with too many cool features like video filter. We hope to see you all there at Zoomtopia.

Now, let me turn it back to Tom. Tom?

Tom McCallum — Head of Investor Relations

Thank you, Eric. And with that, let’s open it up for questions. If you have not yet enabled your video, please do so now for the interactive portion of this meeting. I will ask everyone to try to keep themselves to one question and if we have time at the end, we will do some follow-up, but please try to keep it to one question. And Matt, please queue-up the first question.

Questions and Answers:

Operator

First question is from Alex Zukin with RBC.

Alex Zukin — RBC Capital Markets — Analyst

Thank you. Thanks Matt. And Eric. first I want to say thank you from a leading analyst community and as a parent as a husband. You’ve made a substantive difference in all our lives. So I guess the question I get most frequently Eric is most people are now staring at their Zoom screen probably more than watching any kind of content globally. So outside of starting to show commercials in between your relevant Zoom calls, talk about the biggest opportunity for continued bookings growth whether it’s Zoom Phones, opening up the APIs, monetizing consumers’ filters that you just showed. But can you tell us the more — the better you do this here, the harder it is for us to know and understand what’s the durable growth rate. How do you comp this amazing spectacular performance. So I’ll stop there. I could go on for a bit.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. Alex, first of all, I just want to appreciate for your your continued support for many years. I think you are also right. Looks like there are so many opportunities here and there all kinds of use cases like my kids also use Zoom and telemedicine health. I think seriously by now, our hope is to help people stay connected and make sure other service always up and strictly based on the customer feedback, add some features and mixture of where you have multiple meetings, you do not have a meeting fatigue, right. I think that is our core part. So we would allow you to maybe give for the future you know how to further monetize. Again, that’s not our core part. We got to lead the foot on one-thing how to fully make a customer happy, so how do they stay connected especially during this pandemic crisis.

Alex Zukin — RBC Capital Markets — Analyst

Right. And then maybe if I could squeeze one in for Kelly. Kelly, you talked about the differences in churn that you’re experiencing from the new customer cohort that you on-boarded through the pandemic, and we’ve talked previously about what your historical churn look like for monthly customers and we know I think a little bit about how it looked and guidance before. Can you level set at a high level what was the — what did you experience with that cohort versus where it’s been historically and at a high level, what are you assuming in your guidance for that churn for that monthly cohort of new users?

Kelly Steckelberg — Chief Financial Officer

So remember going all the way back to the S1. We talked about that the monthly customers churn on average is about 4% per month and monthly rate is about 4% and we did see an increase against that in Q2 and we have modeled at that same level going forward with all the uncertainty with how long this pandemic will last, and what other potential economic uncertainty there is, we’ve modeled at that same rate going forward.

Alex Zukin — RBC Capital Markets — Analyst

Got it. Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Thanks, Alex.

Operator

The next question is from Meta Marshall with Morgan Stanley.

Meta Marshall — Morgan Stanley — Analyst

Great. Thanks and congratulations. Just wanted to get a sense of where you think you are kind of innings or percentage wise on working with organizations that may have kind of adopted you in a department or adopted you and part of having multiple services of displacing those solutions or kind of having a more full organization discussion as well as having follow-up discussion as well as attacking on phone or rooms or webinar type services. And do you have the sales teams in place just start having those conversations on broader organization and deployments.

Eric S. Yuan — Founder and Chief Executive Officer

Kelly, do you want to take it?

Kelly Steckelberg — Chief Financial Officer

Sure. So we continue to see growth in the period from both new customers as well as existing customers and tremendous opportunity with webinar especially as well as Zoom Phone. We actually signed our largest Zoom Phone deal to-date in Q2, so exciting to see that continued momentum. We also saw customers that were doubling. One of them that quadruple their existing deployment. So we are still in early stages and when we look at penetration like we look at in the Global 2000 like there is a small percentage that have a significant spend with us. So there is tremendous opportunities still ahead to meet us.

Meta, sorry, you went back on mute.

Meta Marshall — Morgan Stanley — Analyst

Okay. Just whether you have the kind of sales organization in place to kind of have that gather — or gather conversation?

Kelly Steckelberg — Chief Financial Officer

Yeah. So as I said earlier, we are hiring very quickly to keep up with all of the demand that’s potential, the team, thank you to our amazing Zoom team which are really working around the clock to keep up with the demand today and to support and serve our customers and the community, but we are hiring. Absolutely, this is one of the biggest priorities for the rest of this year.

Meta Marshall — Morgan Stanley — Analyst

Great. Thanks and congrats.

Operator

Our next question is from Nikolay Beliov with Bank of America.

Nikolay Beliov — Bank of America Merrill Lynch — Analyst

Hi, thanks for taking my question. Just wanted to continue on the topic from the last question. Eric and Kelly, as the business grows unprecedented rights, can you help us understand what’s happening internally, your customer support organization, your sales organization, your ERP system, HCM system, on-boarding like hyper-growth scenario and maybe putting pressure on the systems and also culturally what’s happening inside the organization?

Eric S. Yuan — Founder and Chief Executive Officer

Yeah, that’s a good question. So prior to pandemic crisis, we maintain a steady growth and make sure our system process procedures, everything is doing well and however during this pandemic crisis I think business growth is just unprecedented. The good news on the one hand, we had a very solid company culture, nobody complained. We all work very hard. Look at are there any other holes in terms of procedure, process and also we hired a lot of employees, double down our support of resources and customer success, management team adding to further help because there’s so many new use cases, new customers. That’s why we hired lots of employees.

On the other hand, we also wanted to leverage opportunity. I could spend some of our business to the next level in terms of privacy, security and internal process and systems. I think, again we are very committed like every day we’re working so hard what kind of a new issues like even the free user cost or online paid subscribers when these type of tangible service, we would like to respond in a timely manner. I am not seeing well, we are perfect, but we are very committed to really double down our execution to make sure fully deliver happenings to all the users.

Nikolay Beliov — Bank of America Merrill Lynch — Analyst

And Eric which use cases and new cases are most excited about and surprise you the most. That’s it from me. Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

If I talk about new user cases probably I can speak for four, five minute. I think several like you see the problem is using Zoom for the virtual property tour. Now during the last 10 days we have closed over 50% of the newly launched property in Singapore over Zoom and also the CSK, first law firm in Florida to have virtual trial by jury. And also like self-course community services, which is largest mental health service provider in California also use Zoom to offer mental health being mental health is becoming a very big part. A lot of new users like that. Every day I feel very, very excited to see so many new used cases in order to mention like that we just announced a partnership in the United States Tennis Association to offer the virtual experience is very cool.

Nikolay Beliov — Bank of America Merrill Lynch — Analyst

Thanks so much.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

Our next question is from Imtiaz Koujalgi with Guggenheim.

Imtiaz Koujalgi — Guggenheim Partners LLC — Analyst

Hi guys, can you hear me?

Tom McCallum — Head of Investor Relations

Yeah, Imtiaz.

Imtiaz Koujalgi — Guggenheim Partners LLC — Analyst

Hey, guys. First of all. I think you mentioned one of the customer that you signed this year with all the ServiceNow and legacy PBX system with Zoom. Does that mean that you’re offering video and phone start to ServiceNow that they base all their collaboration tools with one product, Zoom?

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. So first of all, ServiceNow has been a customer since 2018. They deployed Zoom to replace other video conferencing web-conference service with Zoom video conferencing. All the parts that are here already established a greater task. We also announced a partnership. When they look at that their entire usage rate, they also deployed legacy very costly very complex on-prem PBX system, why not consolidate into one system with a very consistent product front and experience same better architecture and in terms of total cost, much lower. The user experience also much better. So that’s why they decided to replace their legacy PBX system with one safety, standardized on Zoom unified communication solution.

Imtiaz Koujalgi — Guggenheim Partners LLC — Analyst

That’s very helpful. Just one follow-up. Kelly, I think you mentioned that you signed the largest phone deal this quarter. Was there also an upsell to existing video customer or was that a new customer sign up with Zoom Phone?

Kelly Steckelberg — Chief Financial Officer

No. It was already a meeting customer as well video customer as well.

Imtiaz Koujalgi — Guggenheim Partners LLC — Analyst

Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

Our next question is from Sterling Auty with JPMorgan.

Sterling Auty — JPMorgan Chase & Co. — Analyst

Yeah, thanks. Hi guys. So now that the 90-day feature freeze is complete, Eric, I’m kind of curious where is the focus of R&D going forward. And you mentioned diversifying into India and the US, how are you structurally changing your R&D effort. Is that in relation to any type of geo-political pressure?

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. First of all, we accomplished a lot over the past 90 days. But I can tell you that we take privacy and security extremely seriously. I’m not saying we are going to give end of that, I would say, the journey is just a stop. We are going to double down on privacy and security. And aside of that, we also have a big R&D team and our core technology, our engineering leadership has been here. We also have offshore team. Look at a lot of the new used cases not only for unified, but also the case, education, capital schools and tele-medicine, there are so many use cases. I think this R&D team, I do not think that is — we can really handle that in terms of stability. We have to find more talents in a timely manner. That’s why we opened up two R&D offices in Phoenix and in Pittsburgh.

And also we would like this onshore-offshore R&D model, that’s why India also open up a big office. We had our President of Product and Engineering for China, right. great leader, right? With that, we really want to hire engineers and not only here, but also other site, also even including remote engineers, right. Because there are so many features and task. That’s why I want to invite you to join our Zoom call which is our annual user conference. We’d like to share with you a very good product roadmap.

Sterling Auty — JPMorgan Chase & Co. — Analyst

Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

The next question is from Richard Valera with Needham.

Richard Valera — Needham & Company — Analyst

Thank you. Let me add my congratulations on another incredible quarter, team. So the question is on pipeline. Kelly, you were sort of on the record saying that you entered Q2 with a bigger pipeline than you had entered in Q1. I’m wondering if you could give any similar color on how you entered Q3 from a pipeline perspective and if there’s been any change in the composition of that pipeline in terms of product or geography?

Kelly Steckelberg — Chief Financial Officer

So certainly coming into the quarter, our pipeline is still strong, and we’re continuing to see demand, but based on our guidance you can see that the demand for the year was front-end loaded and we saw that the performance in Q1. The benefit of what we saw in Q2 and that’s why the guidance is highlighted and we expect revenue for the back half of the year to be effectively consistent with Q2.

Richard Valera — Needham & Company — Analyst

Just in terms of the contribution of Phone in the pipeline. Has that changed much any color at all on how you’re thinking about the magnitude of Phone in the balance of the year?

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Kelly Steckelberg — Chief Financial Officer

No. We — it’s performing as we expected. And as I said we’re really excited to see our largest deal to-date and ongoing upsell. So really still can see strong demand for Zoom’s Phone and we see a lot of potential there for the future.

Richard Valera — Needham & Company — Analyst

Got it. Thank you.

Operator

Our next question is from Tom Roderick with Stifel.

Tom Roderick — Stifel, Nicolaus & Co., Inc. — Analyst

Great, thank you. Thank you, guys. Great job on another outstanding quarter. Eric, this is kind of go in conjunction with the question on Zoom Phone and kinda thinking about the unified communications platform, not just a communications tool and video. I’d love to hear about some of the strategic conversations you’re having in the context of digital transformation and what else these customers want you to do and [Technical Issues] there in conjunction with how your customers are thinking about your next year’s plan. That would be great. Thanks.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah, that’s a good question. So I would say primarily the crisis completed and accelerated everything in the pipe, every business customers digital transformation. But you wanted to support employees, no matter where they are, right. But the traditional on-premise system really, it’s not a forgettable anymore. That’s why you look at all the cloud-based software distributed company is doing very well.

With respect to Zoom Phone, I think overall that’s a part of our video conferencing offering. We truly believe video is the new voice. The new reason for any business to give employees two separate systems, totally a different experience and decided that when the customers could still deploy on-prime legacy system will migrate to cloud. We want to understand who has the better architecture. Do you want to consolidate into one system. That’s the reason why we position a lot about and some other SMB customers already deployed maybe some other cloud with the PBX systems, they also want to consolidate into one system to further simplify their experience.

So overall we do not think that’s the two separate market, it is just one thing, videoconferencing and cloud-based PBX are converged into one service. So that’s our story when we talk with customers. The customer really like that.

Tom Roderick — Stifel, Nicolaus & Co., Inc. — Analyst

And Kelly a quick one for you in terms of the conversation around security, but as you agreed to enable end-to-end security for not just paying customers, but for all customers, which was the recent pronouncement, I think. What is that due to the cost structure. is that meaningful, we’ve noticed that, can you just talk about that a little bit?

Kelly Steckelberg — Chief Financial Officer

Yeah. You won’t see a meaningful impact. We certainly have been investing in both our security team. We’re thrilled to have Jason Lee who have joined us and you’ll continue to see ongoing investments. There are many going back on the market.

Tom Roderick — Stifel, Nicolaus & Co., Inc. — Analyst

Got it. Thank you. Great job. I appreciate it.

Operator

Our next question is from Heather Bellini with Goldman Sachs. She is joined in by phone. [Operator Instructions]

Heather Bellini — Goldman Sachs — Analyst

Great. Yes, great, thank you. Thank you so much and congratulations. And I think as Alex started out by saying, Eric and team just thank you for keeping everybody connected. We’re so appreciative that the school started today on Zoom. So my kids were app users today.

For the question I had was really just a little bit of Zoom Phone and I know Kelly you’ve just answered a handful of questions, but Eric or Kelly, I’m just wondering, if you can share with us how fast do you think you can see these kind of legacy phone systems like how fast do you think this work from home benefit can drive displacement of legacy PBXs, which we’ve all been waiting for quite a long time and I know this is only sold to new customers, but you have so many of those — or to existing customers, but you have so many of those at this point and is there any kind of typical competition here that you’re seeing as you’re talking to customers and they’re making the migration. Thank you so much.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. Heather, that’s a great question. So I think prior to this pandemic crisis, if we look at enterprise, we’re a high percentage of customers, they still deploy with traditional on-prem legacy, costly PBX systems. However, I think, this pandemic crisis I think it’s sort of like a wake-up call. You got to think about how to and put some in brief digital transformation. Outside of that, in a cloud-based PBX for sure is one for the thing we kind of looking at that. Another thing that’s top priority as compared to the video conferencing, but for sure is a lot of integrate customer with us and it’s really high. I think they have a lot of other systems not only for PBX, but also a lot of other systems. We also look at it cloud business solutions. I think this is quite — it’s just accelerated we had migration from a traditional PBX and the cloud-based system and also Zoom is very well positioned because customers they do not want us to all migrate cloud. And we also want to look at it new user experience like Zoom solution because it’s a one system. I think next 12 to 18 months, I would say, you will see a little bit higher acceleration reach for integrate customers to migrate to unified collaboration and integrated solution as well.

Heather Bellini — Goldman Sachs — Analyst

Thank you very much.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. Just quickly in terms of the competition, right, still the traditional legacy assisted and some other cloud-based PBX. But again, Zoom much better position, but we have one unified solution. Thank you, Heather.

Heather Bellini — Goldman Sachs — Analyst

Thanks again.

Operator

Our next question is from Will Power with Robert W. Baird.

Will Power — Robert W. Baird & Co. — Analyst

Great, thank you. I want to ask a question on the rest of world strength. You saw a surge in activity there. Usage revenue obviously grew significantly as a percentage of the total. Wonder if you could speak to how broad base that was. Was there any particular regions or countries that stood out and you talked a bit about India. And how do we think that progressing from here. Do you expect that to continue to grow as a percent of revenue. And what might that mean for the margin impact of the business if any?

Kelly Steckelberg — Chief Financial Officer

Go ahead, Eric.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. So you look at our free users or paid online subscription, right, it comes almost everywhere. However if you look at the number of visitors cloud website public countries like for sure. And US obviously number one and India, number two, Japan, number three, Canada, UK number four, number five. I think users almost from every country tried to use Zoom because it’s very easy, it is free. And if 40 minutes is not enough, you would like to pay. And some SMB customers, they also try our webinar service and also the enterprise customer might try the phone service. I think organic growth because of the brand awareness I think really helped us. So for now we just say no matter where the users come from, we would like to take a step back. We see what we can do definitely to serve them better which most of have local data center like we just announced a data center in Singapore. And also that we doubled our India presence and we ultimately have a key competitor in the growth from international expenses.

Kelly, sorry, feel free to come in.

Kelly Steckelberg — Chief Financial Officer

No, that’s okay. I was just going to say that the strings in the growth outside the world was really consistent between EMEA and APAC. So we’re very pleased with that, and overall the market, the pricing is adjusted for the markets, so you shouldn’t see significant impact on the long-term margin based on the structure that we haven’t paid for our pricing today.

Will Power — Robert W. Baird & Co. — Analyst

Right. Thank you.

Operator

Our next question is from Rishi Jaluria with D.A. Davidson.

Rishi Jaluria — D.A. Davidson & Co. — Analyst

Hey, everyone. Thank you so much for taking my questions and now like a truly outstanding quarter, I think with any companies could have imagined. I wanted to follow up a little bit on the earlier question, which is some of the moves in China, right. I mean stop free trials, recently started direct sales there, at the same time expanding R&D efforts in India and in the US as well. Just what’s kind of the impetus for this move is just a signal or kind of just a little bit away from China maybe much faster geo-political pressure. And then for Kelly, what sort of impact would this have from a model perspective both on the top line and margins? Thank you.

Kelly Steckelberg — Chief Financial Officer

Yeah. So we don’t have any current plans to move our engineering talent out of China. We are focusing on diversifying it by adding talent in the US and India. That’s really the goal. And our leadership team is currently based in San Jose. So there is no change in that overall structure. For the long-term, if there were something were to change there would be no immediate impact on our service or our ability to provide services to our customers, sorry, in the short term and the medium term, over the long term, there could be a potential impact on the margins, as we would need to replace those talent somewhere else potentially.

Eric S. Yuan — Founder and Chief Executive Officer

And just add on to credit side, revenue wise, it’s very small, no impact. Previously, you look at almost from every country, we have online subscription, we have direct sales out of China. In China, the overall revenue were small, the online subscription, you’re going to have a special items, we already sold that before. We would like to simplify our go-to-market cause it actually does support and as soon as in here, a lot of our resources, why not simplify that, just to live in our third-party partners with wide delivery in solution, I think that we’re sustainable and good from our side.

Rishi Jaluria — D.A. Davidson & Co. — Analyst

Wonderful. Thank you, Kelly and Eric.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

Our next question is from Phil Winslow with Wells Fargo.

Philip Winslow — Wells Fargo Securities — Analyst

Hey, thanks guys for taking my question and congrats on another just phenomenal quarter. Wanted to talk about converting monthly users to annual users. Kelly, one of the things you talked about on the last call, wonder if you can give us an update on just sort of what you saw from that, call that Q1 cohort during Q2 in terms of your ability to convert those and how should we think about any sort of the promotions, sort of initiatives changing going forward. Thanks.

Kelly Steckelberg — Chief Financial Officer

Yeah, of course. So our marketing team is really focused on this, running campaigns and reaching out to these customers to provide them the opportunity to convert from monthly to annual and we were happy with the success that we saw in Q2 and are continuing to focus on this. And we’ve also made some changes to our online buy flow to make it easier for the customers as well to self-serve and upgrade if they are so inclined. So we expect to see — that continue to be a focus for us as we move to Q3.

Philip Winslow — Wells Fargo Securities — Analyst

Got it. Thanks.

Operator

Our next question is from Shebly Seyrafi with FBN Securities.

Shebly Seyrafi — FBN Securities Inc. — Analyst

Yes, thank you very much. Question for Kelly. You’re guiding revenue to be up around 3% sequentially, but if I assume that your customer count is at least flattish Q-to-Q, your average customer count is going to be up around 16% Q-to-Q, which implies that your ARPU is implicitly going be down 13% Q -to-Q. And so my question is, I have never seen a double-digit decline in your ARPU before, what would drive that?

Kelly Steckelberg — Chief Financial Officer

Well, as we’re sitting here right now, looking forward, I think it’s more around the uncertainty around the churn and what’s going to happen with the overall economy, that’s really the uncertainty there and why we’re guiding flat for Q3 to — Q3 and Q4 revenue will be flat and modestly up from Q2. And we’ve had a significant increase in our mass market customers where there just remains limited visibility in terms of the long-term contribution for those customers. So I don’t think that we necessarily expect that dramatic increase in ARPU that you’re pointing out, it’s more around the uncertainty in churn and what does that mean for the topline growth.

Shebly Seyrafi — FBN Securities Inc. — Analyst

Okay, Thank you.

Operator

Our next question is from Brad Zelnick with Credit Suisse.

Brad Zelnick — Credit Suisse — Analyst

Great. Thank you so much and I echo my congratulations and gratitude all around and it’s nice to see everybody. My question is for Eric. Eric, from a product perspective, how might Zoom in the future be able to go deeper into the context in which communications is happening. I’m thinking about human behavior or human intense for example to help make the experience even more valuable.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah, that’s a great question. That’s why please join our Zoomtopia. I think first of all, you are absolutely right. Zoom is not only a communication tool, up and good deal, because our mission is to develop a better service, better online video conferencing service even better than face-to-face meeting, how to lever AI functionality like not only have you the meeting transcription but also analyze that it’s how many manner and let’s see it continuous to be healthy, but I’ll give you a quick reminder, hey slow down, right, so protecting or something like that, all of that AI features and plus look at it in the long run like non-transmission we would hire, and also how to shake hand remotely, a lot of cool features like that. Another plus, you look at the new video and the perspective, right, how do add some of the fun features like the video filter and how to making a 3D video, level AR, I think a lot of the technologies, not to mention 5G, and then in the future, I think that you look at future, a lot of those good technologies and truly make the video conferencing experience much better.

Brad Zelnick — Credit Suisse — Analyst

Thank you so much.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you. Please show — on — at Zoom quality.

Brad Zelnick — Credit Suisse — Analyst

I wouldn’t miss it.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

Our next question is from Ryan Koontz with Rosenblatt Securities.

Ryan Koontz — Rosenblatt Securities — Analyst

Hi, great. Thanks for the question. With regards to the sales and marketing investment came in a little light there and obviously have really strong customer pull for the product, how are you thinking about your go-to-market motion, how it might change your sales strategy relative to your — for the business success to-date and if you look at reseller channels or other technology platform partners to take you to market into the enterprise? Thank you.

Kelly Steckelberg — Chief Financial Officer

So the decline in sales and marketing was partly due to just the strong top line performance as well as efficiencies that we’re seeing in marketing. When we expect the — as a percentage of revenue, sales and marketing to increase through the back half of the year, so we’re really focused on continuing to hire globally. Also we did, if you remember we announced the master agent program for Zoom Phone in Q2 and are really excited about that program, and expect it to go contribute — continue to contribute more significantly as we move through the year. And on the meeting side, continuing our mostly direct model, which has been very successful for us to-date.

Also Read:  Greif Inc. (GEF) Q3 2020 Earnings Call Transcript

Ryan Koontz — Rosenblatt Securities — Analyst

Got it. Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

So just briefly to add on to what Kelly said. If you look at marketing efficiency, you look at our market place, in order to have more than 700 in the third-party applications, that’s another way for us to promote our brand awareness, right more and more integrations. So then we can have our marketing efficiency.

Ryan Koontz — Rosenblatt Securities — Analyst

Got it. Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

The next question is from Bhavan Suri with William Blair.

Bhavan Suri — William Blair & Company — Analyst

Great, thanks for taking my questions and congrats. I guess I want to touch on something a little more probably high level and strategic. I obviously asked you in the past about the convergence, and what it’s like and collaboration fit in. So let’s turn this a little bit differently. You’re going to host Zoomtopia. And this whole event planning space is a huge market. And it feels like an obvious fit for you and you have partners there, but the natural extension of this into events and meeting seems to make a lot of sense. How do you think about that market? And then do you think about sort of maybe using the stock as a way to buy, but you could also build, I mean Kelly has got into R&D coming up, you’ve got a lot of points between 40 and 30 to spend R&D and not all that’s going to go to support existing platform. So, just some sense of the event space, how you think about it? And is that a build versus buy decision or a partner decision? Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. First of all, I think you have a good question of our vision right now. It looks like you have some great idea. Actually maybe after the call, I would like to connect you with our product managers. I think you are absolutely right.

Bhavan Suri — William Blair & Company — Analyst

Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

If you look at Zoomtopia, right, not only do we have webinar, but also we need to look at our entire online event management experience, right. It’s not only to the real-time part pre-event and planning and on marketing and promotion and marketing content material. Obviously you would, a lot of I think the content, right? I think inside of that, I think we believe this service as a strategic value have quality spend on our webinar reach. And inside of that I think in terms of, sort of we — due to that everything by ourselves, obviously your partner, maybe acquire somebody I think, it’s too early to tell, but strategy-wise, you’re also right. That’s got to be our focus, our part, it’s low hanging fruit, right.

Bhavan Suri — William Blair & Company — Analyst

Thank you.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

The next question is from Walter Pritchard with Citi.

Walter Pritchard — Citigroup — Analyst

Hi, Thanks. I’m curious, this quarter, just as it related to the really strong new customer adds and revenue came from that channels, how many — are you seeing an uptick in customers that are coming in through sort of displacements that had maybe not a older generation solution, but tried something in the last three to six months and we weren’t happy with it and switched over.

Eric S. Yuan — Founder and Chief Executive Officer

Kelly, do you want to take it?

Kelly Steckelberg — Chief Financial Officer

I don’t think we saw as much of that. I mean it’s definitely customers have been using something. I think that what has happened and over the last four to five months is, people have realized, that the solution they had in place just wasn’t up for — up to the strength of what it needed to be in this pandemic. And so we’ve continued to see amazing brand, move over from some other competitors as they’re really looking for something to ensure that they can keep their employees really effectively [Technical Issues] while keeping them safe as well. And then of course, we are super excited about sort of the school districts that we’ve seen sign up. We have the top two school districts in the US as our customers today. So that really highlights the scalability of the platform and them wanting to ensure that they have a really reliable solution as they went back to school.

Walter Pritchard — Citigroup — Analyst

And then when do you think your phone customer count, any horizon on that?

Kelly Steckelberg — Chief Financial Officer

That’s one of the things we’re considering Walter that we’ll talk about. We said that for Zoom Phone we’ll give milestone updates. We’ll look at it, at Zoomtopia and see if that makes sense, the last update we gave was actually at the anniversary date of Zoom Phone. So we might wait till then.

Walter Pritchard — Citigroup — Analyst

Okay, thank you.

Kelly Steckelberg — Chief Financial Officer

Thank you.

Operator

Our next question is from Matthew VanVliet with BTIG.

Matthew VanVliet — BTIG — Analyst

Hi guys, thanks for taking the question. Great quarter there. You talked a little bit about channel partners, still remains a fairly low portion of your overall sales but curious what the uptake is in total partners registering as part of the program? Is it something that you are proactively doing or is just the demand for the product sort of pulling them in?

And then on sort of a related note, from an international market perspective, do you feel like you can hire aggressively enough from a sales headcount internationally or do you need to look at partnerships in specific markets that could be smaller growth areas, but growth areas nonetheless?

Kelly Steckelberg — Chief Financial Officer

So from the hiring side, we definitely believe we can hire everything that we need, internationally. We really invested in our talent acquisition team and are doing that on a broad base around the globe to ensure that we are able to hire as quickly as possible. As you know, there is a little bit of a longer lead time for notice periods internationally, but we’re hiring as quickly as we can.

And then in terms of the uptick, kind of partners and channel, we don’t give out those specifics, but we are continuously looking at our channel program to ensure that they are not only competitive, but driving the results that we want. So it’s something we evaluate on a constant basis.

Matthew VanVliet — BTIG — Analyst

Thank you.

Operator

Our next question is from Quinton Gabrielli with Piper Sandler.

Quinton Gabrielli — Piper Sandler — Analyst

Hey guys, thanks for taking my question and congrats on a great quarter. Really, just one quick question from our end. Obviously, you guys saw some really strong enterprise traction for Q2, just wondering if we could get some idea of the percentage of revenues from enterprise customers compared to that 23% we saw in the last quarter? Thanks.

Kelly Steckelberg — Chief Financial Officer

We — our sharing that — for the revenue, we don’t call out specifically customers that we — I’m sorry, enterprise customers, but that the revenue from effectively customers with fewer than 10 was 20% in Q2, which is consistent with previous quarter, in that same range.

Quinton Gabrielli — Piper Sandler — Analyst

Got it. Helpful. Thank you.

Operator

Our next question is from Ittai Kidron with Oppenheimer. Ittai? Okay. We will come back. Our next question is from Alex Kurtz with KeyBanc.

Alex Kurtz — KeyBanc Capital Markets Inc. — Analyst

Yeah, thanks. Thanks for taking the question. Actually someone at Zoom did a good job, because we just switched our school district from Google Meeting over to Zoom for the start of the fall semester, so someone deserves a raise. So yeah, thanks. So, Kelly, as you think about OpEx trending into next fiscal year, I know you don’t — are going to talk explicitly to it yet, but a lot of churn to assume especially in that Q1 of next year and you have a lot of investments that you’re making as far as R&D and sales and marketing. So as we’re working through our models and looking into OpEx levels from Q4 to Q1, how should we be with a framework for that?

Kelly Steckelberg — Chief Financial Officer

Yeah. So you should expect the operating margins to decrease incrementally each quarter going forward as we are continuing to, as you said invest in R&D and that’s more in our sales and marketing teams as well and getting more that longer-term margin that we’ve talked about historically. We’re going to talk in more detail around at Analyst Day, but the last time we updated you on this, we feel that our long-term margins were around 20%. So I think you should assume we’re getting more in that range, then near to that then the 41.7%.

Alex Kurtz — KeyBanc Capital Markets Inc. — Analyst

Okay.

Eric S. Yuan — Founder and Chief Executive Officer

Alex, by the way, if your kids at school districts have any questions or any feedback of Zoom, please let them know, you know Zoom CEO well and can be there.

Alex Kurtz — KeyBanc Capital Markets Inc. — Analyst

I send them right to you, Eric.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you, Alex.

Operator

Our next question is from Ryan MacWilliams with Stephens.

Ryan MacWilliams — Stephens Inc. — Analyst

Thanks guys for the question. So for Zoom Phone pretty unbelievable rate of achieving global service coverage, but congrats on the expansion there. Kelly, when you mentioned doubling or tripling the Zoom Phone feeds and various deployments, is that a part of its expanding global service coverage? And have you seen more enterprises trialing Zoom Phone as a result of this regard?

Kelly Steckelberg — Chief Financial Officer

All right. So, certainly international expansion, I think we’ve said historically that was the biggest opportunity for us and I think I’ve heard example of that is the two largest Zoom Phone deals in Q2 were outside the US. So that really shows the strength and what the international coverage is bringing to Zoom Phone. And I’m sorry, what was the other one — enterprise customers trialing Zoom. Yes, absolutely, there are some amazing names that we can’t talk about yet, but we’re excited about the traction that we’re seeing in the enterprise customer base as well.

Ryan MacWilliams — Stephens Inc. — Analyst

Best is yet to come. Thanks guys.

Operator

Our next question is from Pat Walravens with JMP Securities.

Patrick Walravens — JMP Securities — Analyst

Great, thank you. If she comes in on time and I’m going to give you some real feedback from one of your customers. Oh, here she is.

Unidentified Speaker —

Hello.

Patrick Walravens — JMP Securities — Analyst

Okay. Gigi [Phonetic], what is — so Gigi school also just switched from Google to Zoom, and Gigi what is that you like best about Zoom?

Unidentified Speaker —

The breakout rooms. I thought they are really convenient, because my teachers, we have lots of students in our cohort, our group and it’s really hard for all of us to talk at once. So she breaks up in six breakup rooms and I have four, five students with me, and it’s really nice to talk to them, still work with them, check answers instead of having [Indecipherable] kids like, wide, huge group and you can never get to talk. That’s why I love breakout room so much and I’m pleased working with it.

Kelly Steckelberg — Chief Financial Officer

Great. Thanks for the feedback, Gigi.

Patrick Walravens — JMP Securities — Analyst

So, my question is. And so, Eric, when everyone’s working from home, how do you make where you work an attractive place to work?

Eric S. Yuan — Founder and Chief Executive Officer

So, first of all, your Gigi’s comments made my day today, [Speech Overlap]

Patrick Walravens — JMP Securities — Analyst

Okay, I’m glad. Yeah.

Eric S. Yuan — Founder and Chief Executive Officer

So speaking workplace, I think for now I think for the foreseeable future, we are going to work from home, but we’ve got to think about long-term plan, so meaning after pandemic crisis is over, what the new workplace look like. We talk with many customers, partners. We believe, in terms of the working from home, this trend will stay. I’m not saying all of us. We keep on working from home, it’s very, very likely it’s hybrid, meaning twice a week or three days a week. You can send all employees back at home. And some other time, we are working in office. And also you can further consolidated a lot of small obviously slightly do not need to have offices everywhere, everywhere you also have high tenant almost everywhere. And for us, even for the work place today, look at a lot of companies, very big open space. I think that, I mean that may not work anymore in the future. Good news, we do have it planned for the next 10 maybe 12 months, we can optimize what the future workplace look like. But again, no matter what I think the truth like this and still can help.

Patrick Walravens — JMP Securities — Analyst

Okay.

Operator

We have time for one more question and the last question is from Jonathan Kees with Summit Insights Group.

Jonathan Kees — Summit Insights Group — Analyst

Great. Guys, struck [Phonetic] me in there. I add my congratulations to the quarter and thank you for getting me in here. So I guess I have my one question as well as if I can a clarification. The clarification first maybe is — more for Kelly. Kelly, you had said last quarter your modeling in the assumption that your sales teams will start being more moderate or more normalized level of business activity. I noticed that wasn’t in the guidance in the commentary this quarter, is that still the case, then that carry over from last quarter, that’s a clarification.

And my real question is, can you tell me about the discounting or the pricing that you have for the enterprise RFPs, are you seeing a lot of that, are you seeing a good amount of that? Thanks.

Kelly Steckelberg — Chief Financial Officer

So in terms of our sales rep productivity, you know as you can imagine, it was in an extreme high level in Q1 and also extremely elevated in Q2. As we look forward to Q3 and Q4, we have modeled it certainly to be lower than that, but still higher than what we saw last year. So it was kind of somewhere in between what we saw for the first half of this year, so where it was exiting FY ’20.

And then in terms of enterprise discounting, we don’t disclose specifics around that, but we haven’t really seen a significant change in the buying patterns of our enterprise customers.

Jonathan Kees — Summit Insights Group — Analyst

Great. Keep up the good work. Thanks.

Eric S. Yuan — Founder and Chief Executive Officer

Thank you.

Operator

Okay, that wraps up our Q&A.

Tom McCallum — Head of Investor Relations

Great. And I think we’ll turn it over to Eric for any final comments, Eric.

Eric S. Yuan — Founder and Chief Executive Officer

Is Ittai still available? Looks like he has question, right, no?

Operator

I don’t think Ittai is going to be asking a question today.

Eric S. Yuan — Founder and Chief Executive Officer

Yeah. So thank you all for joining us today. And we truly appreciate for the time. It has been memorable first half to our investors and analysts. We appreciate your continued support for Zoom. Thank you all. See you next quarter. Thank you.

Kelly Steckelberg — Chief Financial Officer

Bye. Thank you.

Tom McCallum — Head of Investor Relations

Thank you everybody.

Operator

Goodbye.

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