Categories Earnings Call Transcripts, Technology

Zoom Video Communications Inc. (ZM) Q4 2022 Earnings Call Transcript

ZM Earnings Call - Final Transcript

Zoom Video Communications Inc. (NASDAQ: ZM) Q4 2022 earnings call dated Feb. 28, 2022

Corporate Participants:

Kelcey McKinley — Online Event Consultant

Tom McCallum — Head of Investor Relations

Eric S. Yuan — Founder & Chief Executive Officer

Kelly Steckelberg — Chief Financial Officer

Analysts:

Meta Marshall — Morgan Stanley — Analyst

Michael Turrin — Wells Fargo — Analyst

Sterling Auty — JPMorgan — Analyst

Quinton Gabrielli — Piper Sandler — Analyst

Ittai Kidron — Oppenheimer — Analyst

William Power — Baird — Analyst

Ryan Koontz — Needham — Analyst

Unidentified Participant — — Analyst

Matt VanVliet — BTIG — Analyst

Matthew Niknam — Deutsche Bank — Analyst

Peter Levine — Evercore — Analyst

Shebly Seyrafi — FBN Securities — Analyst

Karl Keirstead — UBS — Analyst

Rishi Jaluria — RBC — Analyst

Tyler Radke — Citi — Analyst

Alex Zukin — Wolfe Research — Analyst

Parker Lane — Stifel — Analyst

Kash Rangan — Goldman Sachs — Analyst

Matt Stotler — William Blair — Analyst

Siti Panigrahi — Mizuho — Analyst

Taz Koujalgi — Guggenheim — Analyst

Presentation:

Kelcey McKinley — Online Event Consultant

Hello, everyone, and welcome to Zoom’s Fourth Quarter Fiscal Year 2022 Earnings Release. As a reminder, today’s earnings webinar is being recorded. And now, I will hand things over to Tom McCallum, Head of Investor Relations. Please go ahead, Tom.

Tom McCallum — Head of Investor Relations

Thank you, Kelcey. Hello, everyone, and welcome to Zoom’s earnings video webinar for the fourth quarter and full year of FY 22. I’m joined today by Zoom’s founder and CEO, Eric Yuan; and Zoom’s CFO, Kelly Steckelberg.

Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.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 first quarter and full year 2023, our expectations regarding financial and business trends, our market position, opportunities, growth strategy and business aspirations, product initiatives and the expected benefits of such initiatives and our stock repurchase program. These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to the risks and other factors that could affect our performance and financial results which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements that we make on today’s webinar.

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

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Tom. Before I begin, I want to welcome Bill McDermott, CEO of ServiceNow, who will join our Board of Directors tomorrow. I look forward to working together with Bill, originally in the technology space and a successful software executive. I’d also like to thank Bart Svensen, who is stepping down from our Board of Directors tomorrow, for his years of service on our Board and I wish him the best in his future endeavors. Let me also thank our global Zoom team, customers, partners and investors for their support as we celebrate the 10-year anniversary of our inception and the three-year anniversary of our IPO.

Now I’d like to share with you three key pillars of the Zoom strategy, which we are building out to drive our future growth. The first pillar is really about being a full unified communications platform. We made enormous strides over the past several years, evolving from a meeting company into a multiproduct platform including video conferencing events, chat, or phone and more. The missing piece was the Contact Center. That was until our announcement last week. More on that in a moment.

The second pillar is hybrid work. Because we believe hybrid work is going to become more flexible and less about location. So no matter where you are, office, traveling or home, Zoom wants to make sure you have a consistent experience whether with the Zoom Rooms or on Zoom-connected device, we want to make sure you are part of the conversation and able to collaborate anywhere and everywhere.

The third pillar is the business workflows and how we leverage our API marketplace of consumer apps and our SDK. Many technology companies tell me that they want to integrate Zoom into their platform to improve the communication and collaboration experience for their customers.

For instance, we recently announced a Zoom document set integration. This will allow customers to review a document during a Zoom meeting and approve it as part of a simple bidirectional business workflow.

We are in the early innings of this transformation of work and communication. We believe there is a massive opportunity, and we plan to address it with the same level of innovation, scalability and simplicity that has made Zoom the trusted platform for hundreds of thousands of businesses around the world.

As a key part of our usage stack, I’m super excited of the announcement we made last week. We announced the general availability of Zoom Contact Center, an omni-channel customer indigenous solution that is optimized for video and integrated right into the Zoom client. It brings unified communications together with modern Contact Center capabilities. Helps customers connect over video and also support channels like voice, SMS and web chat.

Zoom Contact Center is simple for admins to configure and deploy. They can easily create menus, greetings and prompts driving the Zoom admin portal. The product can also integrate chat and video into an existing digital presence like a website, helping organizations have conversations with the customers in the right place and at right time. This is just the beginning of our plan to modernize the Contact Center and enrich the experience for our customer and our customers’ customers.

Speaking of customers, we ended the year with a lot of great wins. First, I want to thank Medtronic, a global leader in health care technology for expanding their partnership with Zoom. In 2020, Medtronic chose Zoom Meetings, Zoom Rooms and Zoom Webinars to enable its global employees to communicate and collaborate better. In Q4 of fiscal 2022, after a careful window selection process, they decided to add 60,000 Zoom Phone licenses to a new multiyear agreement. Thank you, Medtronic for trusting Zoom to deliver modern integrated UCaaS solution to support our global communication needs.

Thank you, Intuit, the global technology platform that makes TurboTax, QuickBooks, Mint, Credit Karma and Mailchimp, for entrusting Zoom with their video communications over the past several years and recently adding Zoom Phone to create a unified communication platform across their organization.

Thank you, Arena State University, which was recently recognized by U.S. News and World Report as the country’s most innovative school, and has been a strong supporter of Zoom products over the years. As a leading research university, a highly effective commutation platform is very important to drive collaboration between their staff, students, staff and the community. ASU took Zoom to be a complete conditions platform with 50,000 Zoom Meetings, 700 Zoom Rooms and 15,000 Zoom Phone licenses as well as Zoom Webinars.

I also wanted to recognize Lexel Group Corporation, a Japanese manufacturer and partner of building materials and housing equipment. As the Zoom Meetings and Zoom Rooms customer, Lexel has increased hybrid work for communication and collaboration, while levering the ease of use of the Zoom platform to enhance their customer experience with video tours of their showrooms. In Q4, Lexel added 10,000 Zoom Phone licenses, committing to a unified communications platform.

Thank you, Medtronic, Intuit, Arizona State and Level. I’m very grateful to have such a great group of customers. I love you all. Thank you.

The world wants a full communications platform, one that’s integrated with other workflows, supports a hybrid world and is secure and easy to use. Zoom is hard at work ensuring our customers exceed the soaring expectations of how businesses collaborate internally and communicate externally. To sustain and enhance our leadership position in this new area of digital transformation, we plan in FY ’23 to build out our platform to further enrich the customer experience and expand our go-to-market motions, which will enable us to drive future growth for Zoom.

I want to thank our Zoomies for their hard work over the past 10 years. We have grown to nearly 6,800 strong and are more focused than ever on delivering happiness every day to our hundreds of thousands of customers around the world.

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

Kelly Steckelberg — Chief Financial Officer

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY ’22 and the results for Q4, then we’ll provide our outlook for Q1 and FY ’23. We delivered another year of strong results. Revenue grew 55% to $4.1 billion as we exited FY ’22 at an annualized run rate of $4.29 billion. We grew non-GAAP operating margin to 40.4%, up from 37.1% in FY ’21 as we scale our operations. And we achieved an adjusted free cash flow margin of 38%.

In Q4, total revenue grew 21% year-over-year to $1.07 billion, exceeding the high end of our guidance of $1.053 billion. The growth was primarily driven by strength in our enterprise business, which continued to grow significantly faster than our online business. We also saw strong demand for Zoom Phone, which had a record quarter, adding over 550,000 paid seats. Much of the Zoom Phone growth came from strength in large customers with a number of customers with more than $100,000 of ARR growing 149% year-over-year, and the number of customers with more than 10,000 paid seats growing 122% year-over-year.

We also added a major global bank as a Zoom Phone customer. We saw 66% year-over-year growth in the upmarket as we ended the year with 2,725 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 23% of revenue, up from 18% in Q4 of last year. We exited the quarter with approximately 509,800 customers with more than 10 employees, up 9% year-over-year.

In Q4, customers with more than 10 employees represented 67% of revenue, up from 63% in Q4 of last year. As we approach our 3-year anniversary as a public company, a lot of incredible things have occurred at Zoom. We’ve seen unprecedented growth and brand awareness for Zoom Meetings and incredibly strong momentum for newer products. We’ve also expansively built out our direct channel and ISV go-to-market motions, which we collectively call enterprise. These customers have high lifetime values as they tend to increase deployments, extend terms and churn at much lower rates over time.

Starting today, we will provide metrics that more closely align with the way our internal view of the business has evolved following this period of unprecedented growth and expansion. This will include the number of enterprise customers and the net dollar expansion rate for enterprise customers.

In the appendix of the investor deck, you will find two years of historical data for these new metrics. Additionally, through the end of FY ’23, we will continue to provide the number of customers with more than 10 employees in the appendix.

In Q4, the number of enterprise customers grew 35% year-over-year to approximately 191,000. Revenue from enterprise customers grew 38% year-over-year and represented 50% of total revenue, up from 44% in Q4 FY ’21. We expect revenue from enterprise customers become increasingly higher percentage of total revenue over time.

Our online business, which we define as customers self-service through our online channel, represents the other half of our revenue, up from approximately 25% in Q4 of FY ’20, before the pandemic. The self-service model is very tactical in profitability and cash flow perspective. And while we have seen online grow more slowly than enterprise in recent quarters and expect that to continue going forward, we are continuing to invest in and innovate around this channel to drive growth.

We will also be presenting our net dollar expansion rate for enterprise customers rather than our net dollar expansion rate for customers with more than 10 employees.

First, let me start with the historic metric. Our Q4 net dollar expansion rate for customers with more than 10 employees was in line with what we discussed in Q3, being just under 130% to 129%. Going forward, we will report the trailing 12-month net dollar expansion rate for enterprise customers, which in Q4 was 130%.

Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 21% year-over-year. Our combined APAC and EMEA revenue grew 23% year-over-year to be approximately 33% of revenue, stable with Q4 of last year. On a quarter-over-quarter basis, Asia Pac revenue grew slightly faster than the overall company, but we saw headwinds to our online business in EMEA, partially associated with the holiday seasonality.

Let me share a few international highlights with you. We closed our largest overall deal ever in EMEA with 200,000 Meeting licenses and our largest Zoom Rooms deal in APAC with the customer deploying more than 3,300 Zoom Rooms to drive hybrid work across their offices. We have also expanded our partnership with Deutsche Telekom by committing to developing a joint solution specifically for the German market. We continue to view international expansion as a major opportunity for future growth.

Now turning to profitability, which is 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 innovation of common stock, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, income tax benefits from discrete activities and undistributed earnings attributable to participating securities.

Non-GAAP gross margin in Q4 was 78.3%, an improvement from 71.3% in Q4 of last year and 76% in Q3 of this year. The sequential improvement was mainly due to optimizing usage across the public cloud in our colocated data centers as well as the seasonally lower usage during the holidays. We expect this figure to return to the mid-70s in the short term before improving in the mid- to long term as we continue to build out our data centers.

Research and development expense grew by 133% year-over-year to approximately $72 million. As a percentage of total revenue, R&D expense nearly doubled year-over-year to 6.7%, demonstrating our commitment to innovation and product development. We plan to further invest to enhance our platform, including our recently announced Contact Center products.

Sales and marketing expense grew by 58% year-over-year to $251 million or approximately 23.4% of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in worldwide sales capacity and product marketing across our comprehensive communications platform.

G&A expense grew by 22% to $95 million or approximately 8.9% of total revenue. Non-GAAP operating income expanded to $420 million, exceeding the high end of our guidance of $363 million. This translates to a 39.2% non-GAAP operating margin for Q4 compared with a 40.9% a year ago and 39.1% last quarter. Non-GAAP diluted earnings per share in Q4 grew to $1.29 on approximately 306 million non-GAAP weighted average shares outstanding. This result is $0.22 above the high end of our guidance and $0.07 above Q4 of last year.

Turning to the balance sheet. The deferred revenue at the end of the period was $1.2 billion, up 34% year-over-year from $883 million. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.6 billion, up 51% year-over-year from $1.7 billion. We expect to recognize approximately 63% of the total RPO as revenue over the next 12 months as compared to 70% in Q4 of last year, reflecting a shift back towards longer-term plan.

As a reminder, due to the seasonality of renewals being front-end loaded and tapering through the year, our collections followed the same trend. Since our renewal linearity is unique, let me provide you once again with some color on next quarter’s deferred revenue. We believe it will peak in Q1 at 12% to 13% year-over-year growth and moderate over the rest of the year, reflecting the smaller renewal rates.

We ended the quarter with approximately $5.4 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $209 million as compared to $399 million in Q4 of last year. Adjusted free cash flow, which excludes a onetime $85 million cash outflow related to a legal settlement that we disclosed and recognized as a GAAP expense in Q1 was $274 million as compared to $378 million in Q4 of last year.

Now turning to our FY ’23 guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our enterprise business will grow substantially faster than our online business. It also assumes that our year-over-year total revenue growth rate will modestly accelerate in late FY ’23.

For the first quarter of FY ’23, we expect revenue to be in the range of $1.07 billion to $1.075 billion. We expect non-GAAP operating income to be in the range of $345 million to $350 million. Our outlook for non-GAAP earnings per share is $0.86 to $0.88 based on approximately 309 million shares outstanding. As mentioned last quarter, due to our multiyear history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the U.S. blended tax rate in FY ’23.

For the full year of FY ’23, we expect revenue to be in the range of $4.53 billion to $4.55 billion, which would represent approximately 11% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately $1.43 billion to $1.45 billion, representing a non-GAAP operating margin of approximately 32%. While our revenue grew 558% from FY ’20 to FY ’22, our operating margin also increased from 14% to 40%.

We are pursuing a massive opportunity, and we will continue to focus on the appropriate balance between growth and margins as we build out and deliver on the potential of our platform.

Our outlook for non-GAAP earnings per share is $3.45 to $3.51 based on approximately 312 million shares outstanding. As indicated in our earnings press release today, our Board has authorized a $1 billion share repurchase program that we intend to execute on beginning this quarter. This not only underscores the confidence that our Board and our management team have in the future of Zoom, but also allows us to leverage our strong profitability, cash flow generation and strength of our balance sheet to deliver returns back to our shareholders. We are excited about the large and growing opportunity ahead of us as we continue to execute on our strategy and growth outlook.

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. Kelsey, please queue up our first question.

Questions and Answers:

Kelcey McKinley — Online Event Consultant

[Operator Instructions] Our first question is going to come from Meta Marshall with Morgan Stanley.

Meta Marshall — Morgan Stanley — Analyst

Great. Thank you. Kelly and Eric, you’re coming up on the anniversary date of COVID and close to the renewal date that a lot of your customers are going to have. So can you just speak to some of the trends you’re seeing? We’re just trying to get a sense of is this a good Phone entry point? Are you seeing normalization of kind of room attack rates? Or what are you seeing as far as video license we need licenses? Just any trends that you’re seeing as one of these major renewals kind of come up at the end of this month and into the next one?

Kelly Steckelberg — Chief Financial Officer

Yes. Thank you, Meta. So we continue to see strength in our renewals, especially in the enterprise business. And as you heard from some of the highlights we talked about earlier, we had a very strong performance from Zoom Phone in Q4 as well and also Zoom Rooms as customers are really thinking about the future of hybrid work and how they’re going to keep everyone collect connected as they bring them back to the office. This is a really important strategy for them. And you heard Eric talk about some of that, and maybe Eric sets on the strategy around that, but continue to see strength both in renewals in the enterprise as well as additional Phone seats and Zoom Rooms.

Meta Marshall — Morgan Stanley — Analyst

Got it. That’s it for me. I mean just in terms of maybe just another quick question in terms of what kind of metrics you’re looking at as you make some of these sales and marketing investments to just determine what return you’re going to see on those? Or what benchmarks you’re kind of measuring yourself against that? And that’s it for me.

Kelly Steckelberg — Chief Financial Officer

Yes. I mean one of the key things we always look at internally is sales productivity, looking at it both from a U.S. and an international perspective. And then on the marketing side, we look at internally, we also look at things like opportunities and leads that get generated from any of those. And then, of course, maybe the external benchmark, we’re always looking at is sales and marketing as a percentage of revenue.

Kelcey McKinley — Online Event Consultant

Michael Turrin with Wells Fargo has the next question.

Michael Turrin — Wells Fargo — Analyst

Hey, there. Thanks. Appreciate you taking the question. I was hoping to ask one on Contact Center. And just some more detail, can you help just frame out initial observations around positioning? Is there a certain size Contact Center you’re targeting? Are there advantages you see with Zoom Video? Or lessons learned from having Phone in the market you would point to? And just in terms of the go-to-market motion, how different is that? Or how well geared are you from some of those initial conversations? Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Michael, that is a great question. We are super excited about our Contact Center announcement of last week. And first of all, this is based on our customers’ feedback. Several years ago, after the launch of Zoom Phone, many of our customers told us they would like to standardize on Zoom platform for unified communications. The only missing piece is Contact Center. We listen to our customers, our team is working so hard and finally, we’ve announced the Zoom Contact Center. But in terms of growth, similar to what we did to grow our Zoom Phone business, right? For the first year, for sure, right, we are going to target those customers who really want to standardize on Zoom platform, probably started from Meeting for those customers who deploy both Meeting and Phone, now they look at the Contact Center.

Also at the same time, we are working very hard at more and more features. I think probably for those customers as long as they want to embrace the cloud business Contact Centers, as long as they want to standardize on Zoom unification platform, who would like to target to, right? And that’s our strategy. And that’s omnichannel, video and it’s very strong. We also support SMS, voice and web chat, again, a lot of hard work, and we are going to continue innovating. And to drive our Zoom Contact Center growth. And based on the early data feedback, our customers are also very excited. They wanted to deploy a solution and really understand the unified collaboration. Also at the same time, we build this solution from ground up, right? And very consistent competitor video and Phone, we’re very excited about this opportunity.

Michael Turrin — Wells Fargo — Analyst

Very helpful. Best of luck to you there. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Michael. Appreciate it.

Kelcey McKinley — Online Event Consultant

Our next question will come from Sterling Auty with JPMorgan. Sterling, will you go ahead? Thank you for turning on your camera.

Sterling Auty — JPMorgan — Analyst

Thanks. Hopefully you can hear me okay, given the wind noise. But Kelly, I didn’t quite hear Meta’s question. I was just wondering, within the guidance for this coming year, can you give us a sense what the enterprise growth specifically looks like within that guide?

Kelly Steckelberg — Chief Financial Officer

Yes. So specifically, in enterprise, we expect that part of our business to grow at approximately 20% year-over-year. And then that you can back into that what we’re expecting from our online business is for it to be flattish for the year, but it might have some variability quarter-over-quarter.

Sterling Auty — JPMorgan — Analyst

Got it. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Sterling, by the way, our enterprise growth is pretty strong as we add more and more new services like Contact Center is first one, right? We are not going to stop here. This is our company being who truly understand the enterprise customer need. We are going to add more and more enterprise services to further grow our enterprise business. Thank you.

Sterling Auty — JPMorgan — Analyst

Makes sense. Thank you.

Kelcey McKinley — Online Event Consultant

Jim Fish with Piper Sandler has the next question.

Quinton Gabrielli — Piper Sandler — Analyst

Hey. Good afternoon, everyone. This is Quinton on for Jim Fish. Thanks for taking our question. The labor market right now remains difficult, especially as you’re looking to hire and retain some of the top engineering and sales talent. Can you talk about any changes or impacts you’ve seen in Zoom’s ability to maintain your top talent? And then how you plan on differentiating and acquiring this new talent? Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Yes, Kelly, feel free to chime in. So James, you were right on, given the great resignation, right, it’s pretty challenging, right, across the industry, right? And again, we always double down our company culture, and this is extremely important for us, right? How to make sure we deliver happiness to our customers. My number one priority really think about our employees how to make sure our employees are happy, right? We are doing so many things to really help our employees. And also, again, over the past two years, we more than probably triple the size of the company, right? Many employees is drawn to Zoom remotely. Again, that’s not easy, but good news soon is going to change. Especially if you look at our remote employees, how to make sure offer the flexibility and also make sure support our employees’ needs by always set the feedback from our employees. We also have a happiness crew, always trying to understand what’s the pain point of whatever we can do differently to think of an employee. By doing that, I’m pretty sure, and we are going to make sure I’m pretty happy, and we’ll be okay. And that’s always our formula.

Kelcey McKinley — Online Event Consultant

Moving on to Ittai Kidron with Oppenheimer.

Ittai Kidron — Oppenheimer — Analyst

Thanks, Kelcey. Kelly, I have a couple of questions for you. First, I think you mentioned in your prepared remarks that you’re looking for reacceleration in the second half of the year. Maybe can you walk us through the kind of the puts and takes and what’s behind that assumption? And the second question will be regarding the online business. I know you’re only giving expansion rate, the dollar base expansion rate on the enterprise side. But given that online is still 50% of your revenue, can you at least give us kind of a rough range of where online net dollar expansion rate typically falls just so we get a sense of how to model that out?

Kelly Steckelberg — Chief Financial Officer

So in terms of the second half acceleration, you’re looking at in the upmarket or the enterprise, I should say now. It will be driven largely by continued expansion and growth in our existing customers as well as contribution from some of our new products that we’re really excited about, including Contact Center. And then in the online business, what you’re going to see is maybe we talked about at Analyst Day last year, how once those cohorts get to a certain age of 16 months and older, there’s a lot of stability that comes with those retention rates. By the time we get to the second half of this year, all of those cohorts that we acquired during the pandemic are going to have hit that cycle. So it’s really going to start to bring stability to the online business in a way that we haven’t seen historically.

And then in terms of the net dollar expansion rate to the online, we won’t be disclosing that. So in other words, I think the best I can give you is based on what Sterling just asked, which is what’s the growth rate for that business. And as I mentioned, we expect it to be flattish for next year with some variability quarter-over-quarter.

Ittai Kidron — Oppenheimer — Analyst

Very good. Thank you.

Kelly Steckelberg — Chief Financial Officer

Yes.

Kelcey McKinley — Online Event Consultant

Baird’s William Power has the next question.

William Power — Baird — Analyst

Great. Thanks for taking the question. Great to see the strong Zoom Phone numbers again. I guess I’d love to get more color around the key drivers there. It sounds like particularly upmarket. How are you competing there? What have been kind of the key differentiator? So just trying to understand growth within existing customers versus landing new customers and taking I guess it’s a multipart, but first one, where does distribution stand? I mean, how important has that been expanding distribution? How much further is there to go using the channel, etc.?

Eric S. Yuan — Founder & Chief Executive Officer

Yes. So that’s — it’s a great question. Actually, Q4 was a record quarter, right, in terms of number of new seats, more than 0.5 million, if I recall correctly, around 550,000 newly added seats for Zoom Phone. I think the first one, not only for our existing customers, but also for new customers as well because of trust, we build established with our customers over the past several years, and customers think about how to transform their business to fully embrace digital transformation, how to migrate their on-prem phone system to the cloud. They always want to deploy the best solution. Plus most of the customers already deployed the video content solution and also they want to have one consistent experience. That front-end experience is very consistent, the back-end also is very consistent. And plus very reliable and ease of use, security and also a lot of cool features. And that’s the reason why customers they want to deploy the Zoom Phone.

As long as a customer, they win us through the win their selection process, we have high confidence. Look at it into, look at the Medtronic, it’s not 1,000 of licenses, that’s a 10,000 license, right? And again, that business still — we’ll continue doing very well. And also, we are not going to stop here. We’ll add more and more features, more innovations plus combined with economic center. We do see the accelerated growth for both the Phone and also our Contact Center down the road.

Kelcey McKinley — Online Event Consultant

We’ll now hear from Ryan Koontz with Needham.

Ryan Koontz — Needham — Analyst

Thanks for question. I want to ask about your business workflow strategy there, Eric. And for your API and SDK, what type of applications are you using that for? Typically, is this primarily with tech companies? Any color would be helpful. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Ryan, that’s a really great question. Looking at our growth strategy, right? Three things, three pillars, right? And unified community platform, which just added a Contact Centers, we’re going to add more and more. The second read about the hybrid work. The third one is extremely important, which is business work-through platform, right? And we have SDK, some health care customers and they would like to embed SDK into their telemedicine, telehealth offering, we have API also marketplace. But the most important thing is really about the Zoom apps, right?

We just announced a Zoom DocuSign integration. Essentially, during the meeting time, it’s very easy in 1 click, I look at a document, I can approve that. More and more integration like that. During the meeting time or all site meeting time as well, right? And that’s the key for our the platform growth and not the reason why we invited a great leader in the CEO of ServiceNow, right? And join our Board, right? ServiceNow is probably the best worfklow application provider, right? How to learn from ServiceNow? How to embed more and more other business workflow applications to the Zoom platform and also vice versa. I think that can truly help our customers, right? Rather than they leave the Zoom interface, go to other business context, right? They can stay within the Zoom interface, can get the job done, right? Also, we are doubling down our SDK platform. right? Like education, health care, a lot of vertical industry, start up, they would like to embed zoom to their offering. That’s why we are very excited about our business workflow platform.

Ryan Koontz — Needham — Analyst

Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Kelcey McKinley — Online Event Consultant

Brad Sills with Bank of America has the next question.

Unidentified Participant — — Analyst

Hi. It’s Mike on for Brad. Sales, if I could. So first on your churn by cohort. I love to hear your thoughts and the assumptions around that. And then second, the visibility into the attach rate for Contact Center.

Kelly Steckelberg — Chief Financial Officer

Sure. So Brad, if you — or Mike, sorry, if you remember back in Analyst Day last fall, we shared a chart that shows how as cohorts age, when they get to that 16 months and older, they really stabilize in terms of retention rates. And if you go back and look at that, you’re able to see what we shared with not only the retention rates, but also where we are in that aging process. And so it’s very easy for us now to look forward and predict how those retention rates are going to impact the overall base of that — of the online business. And so that’s exactly what we’ve assumed. They just continue aging because we’ve seen really strong stability in those retention rates as they get to that 15 to 16 months age. So it hasn’t changed even as the business has kind of overall volatile, it doesn’t change in those order of things. So we’re just following that.

Unidentified Participant — — Analyst

And then the assumption to the attachment rate for the Contact Center?

Kelly Steckelberg — Chief Financial Officer

Yes. So we — it’s so early right now. We have — we haven’t done it in terms of the tax rate yet. We just look forward to the back half of this year and assume that we start to see some revenue there. We saw really, we had many really strong enterprise customers sign up for the beta. So we’re excited to see how it goes.

Unidentified Participant — — Analyst

Great. Thank you so much.

Kelcey McKinley — Online Event Consultant

Matt VanVliet with BTIG has the next question.

Matt VanVliet — BTIG — Analyst

Hi. Thanks for taking my question. I guess as you look at the many investments you made on the international side of things, where do you feel like you are, from a sales force maturity, and efficiency relative to a lot of the efficiencies you’ve already shown in the U.S.? And just as each of those markets mature, maybe any kind of regional or country by country specifics would be great. Thanks.

Kelly Steckelberg — Chief Financial Officer

So the international team has grown tremendously over the last few years. We certainly continue to see opportunity. And we talked about this before, but as a quick reminder, with the growth and the brand awareness over the last few years, it’s really enabled us to go in and put reps where we see opportunities without having to see markets with marketing dollars.

I think the big area of opportunity that still is for us internationally is the channel. That is where we — there’s a cross-functional initiative in the company to really focus on the channel, especially focused around on Phone, and that can be master agents that can be carriers, Deutsche Telekom and our strong partnership there, we just announced, is a great example of that effort. And we’re going to continue to focus especially over this next coming year because that’s a really important part of the distribution strategy for Zoom Phone.

Matt VanVliet — BTIG — Analyst

Thank you.

Kelcey McKinley — Online Event Consultant

And Matthew Niknam with Deutsche Bank has the next question.

Matthew Niknam — Deutsche Bank — Analyst

Hi. Thanks for taking the question. You’ve talked about M&A being a greater part of the story going forward. I’m just wondering with the pullback in market valuations for some higher growth, how are you thinking about inorganic opportunities? And are you seeing more of these opportunity surface, particularly in the private market? And then maybe if I can just sneak in a follow-up. On the customers with more than 10 employees, I believe that declined slightly sequentially. Just wondering if there’s any color you can give in terms of maybe what drove the bulk of those departures in terms of customer size?

Kelly Steckelberg — Chief Financial Officer

Sure. So in terms of inorganic and the open for M&A, we really are continuing to be focused on this. And I think, the strength of our balance sheet in terms of cash leaves us a lot of opportunity regardless of what’s happening with our stock price, honestly. So we will continue to focus on opportunities for augmenting talent or technology, which is what we’ve said all along. And then in terms of the decline in the — you are right, it was slightly down, the customers with greater than 10 employees. And you — back up for just a quick minute, remember that when we went public, we picked that metric as a proxy for our direct business and that customers with fewer than 10 was the proxy for our online segment.

And what’s happened over time as we’ve seen this tremendous growth in online as a channel, it started to kind of overlap there, which is why we don’t think it’s really the appropriate metric to use any longer going forward. But that decline was driven by churn that we saw in the online segment of our business with customers that have more than 10 employees.

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Matt, to add on to what Kelly said, I think it’s time to really look at the online business and also our direct business, driven by sales channel. An online business, meaning those customers never interacted with our site, right, just to go online to use their credit card to buy. I think that’s probably the best — it’s the right time for us. Look at the online business and also direct channel business, right, rather than just a thin — because it’s still a little bit confusing, right? Sometimes you also talk a rep, sometimes go on and to buy. And it’s time for us to look at the pure online business, meaning they never interact with our sales rep, right? I think that’s a better rate, the better metrics down the road.

Matthew Niknam — Deutsche Bank — Analyst

Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Matt.

Kelcey McKinley — Online Event Consultant

Peter Levine has the next question with Evercore.

Peter Levine — Evercore — Analyst

Thanks for taking my questions. So maybe just to piggyback off the Contact Center discussion. I think it’s been reported that you’re selling seats at $70 per month per agent. So that’s obviously a huge discount from the industry average, call it, $200. So is the pricing and indication that Zoom just doesn’t have all the features, functionality? And it just doesn’t warrant the premium price? Or is this just Zoom being aggressive and just trying to get market share? And I would assume — my second part of my question is, I would assume, over time, the idea is to get the full voyage functionality AI? Is it WHO and kind of move that pricing up to kind of where the industry is today?

Kelly Steckelberg — Chief Financial Officer

So Peter, I would say that Zoom has always been disruptive in pricing and Contact Center is absolutely different. If you look across the market in how we price Meetings, how we price in Phone, we introduced it. We’re approximately half the price of any of our competitors’ list price. And that continues to be the case with Contact Center as well. I mean, over time, we absolutely will continue to add features and functionality to the exact same approach that we took for Zoom Phone in terms of the launch and how it grew over time and expanded the functionality. The same is true with Contact Center, but you should not take the price as reflecting anything in terms of the quality of that product.

Eric S. Yuan — Founder & Chief Executive Officer

Peter, Kelly, right on. Our growth strategy always better product, better price and also much better service.

Peter Levine — Evercore — Analyst

Thank you.

Kelcey McKinley — Online Event Consultant

Shebly Seyrafi with FBN Securities has the next question.

Shebly Seyrafi — FBN Securities — Analyst

Yes. Thank you very much. So with your guidance for fiscal ’23, it looks like you’re guiding for about 11%-or-so revenue growth in my model to fit your bottom line guidance, I’m getting around 40% opex growth, it’s like 4 times your revenue growth. And that’s an unusual kind of multiple like 4 to 1. And usually, that’s indicative of a company’s belief that they could grow fast, meaning like 20% plus in the future. So my question really is, is the goal here to invest way ahead of your expected revenue growth in ’23 with the idea of accelerating your revenue growth to 20%-plus at some point in the future? And related to this, I know you’re guiding for online being flattish this year, is your goal to get that to at least double-digit growth in the future?

Kelly Steckelberg — Chief Financial Officer

So as we mentioned in the prepared remarks, Shebly, we absolutely expect there to be an inflection point and for revenue to start to reaccelerate in the back half of the year. We’re not yet — we’re not prepared to give multiyear guidance at this point. But what you should expect is we’re modeling for the exit growth rate to be higher than the full year growth rate for FY ’23.

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Just quickly prior to pandemic, our growth strategy is very clear, right? Double down on enterprise every two years, we’re going to introduce a new service, right? To really add mobile, right? Also upsell. Over the past two years, we have to really think about how to help the world and help people stay connected. That’s the reason why we spend a lot of time to make sure I offer the K-12 school free services also and focus on online business as well. Right now, we’re seeing the COVID crisis is over, right? We got to go back, double our enterprise growth strategy. Also, at the same time, we have to adjust our previous enterprise growth strategy, which is every 2 years, you are to add a new service. Now probably every 1 year, you need to add 1 more new services, right? That’s a way for us. That’s the reason why we adjust our growth strategy, right, to double down, triple down our enterprise customers.

Shebly Seyrafi — FBN Securities — Analyst

Okay. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Kelcey McKinley — Online Event Consultant

I’m moving on to Karl Keirstead with UBS.

Karl Keirstead — UBS — Analyst

Kelly and Eric, the EMEA and APAC growth has been a big part of the Zoom story as the U.S. market has become more penetrated yet. In this past quarter, the growth in both those regions decelerated pretty sharply. Kelly, I know you talked a little bit about seasonality in Europe. Do you mind elaborating on what’s happening in international? And when you set your 11% growth target, what’s embedded in that number in terms of your non-U.S. growth even if you can be directional?

Kelly Steckelberg — Chief Financial Officer

Yes. So in Q4, we did see — we saw strength in Asia Pac, and we even saw strength in EMEA, too. As you remember, we announced our largest deal ever for EMEA, which is super exciting. So strength in the enterprise segment of the business. But we absolutely saw an impact from holiday seasonality, which we expected. We talked about that in the call on Q3 as you — as == In terms of looking forward, international absolutely is a really important part of our growth strategy, and we do continue to expect it to grow at a rate that is higher than the U.S. And so that’s — and we will continue to also add — invest in sales capacity internationally at a rate that is higher on a percentage basis than we would be doing in the U.S. as well.

Karl Keirstead — UBS — Analyst

Got it. Okay. Thanks, Kelly.

Kelcey McKinley — Online Event Consultant

And our next question comes from Rishi Jaluria with RBC.

Rishi Jaluria — RBC — Analyst

Wonderful. Thanks for taking my question. I wanted to go back to, look, I appreciate the new reporting way of reporting things. I think it makes a lot more sense. But just when we think about the above 10 and sub-10 employee segment, it was down sequentially again, but it’s actually slightly up versus Q1 and up year-over-year. How is this relative to your own expectations? And how should we be thinking about that segment going forward? And maybe alongside that, when we see these above 10 employee customer count down sequentially, I know a big chunk of those are online customers, totally makes sense. Based on your observations, what are you seeing those customers doing? Are they unplugging? Are they moving to a competitor? Or are they just downgrading to a free version of Zoom? And maybe there’s a monetization opportunity down the line? Thank you.

Kelly Steckelberg — Chief Financial Officer

Yes. I mean it’s — so in terms of like this is why this number doesn’t make sense anymore because it’s gotten so mixed up between the customers and the channel. I think the size of the customers and the channel, that’s what Scott really unconvoluted with this metric going forward and why we’re not going to really talk about it going forward. So in terms of how we see it going forward, honestly, Rishi, we aren’t even modeling around this metric any longer. We are completely moving to thinking about enterprise and online because as I said in the prepared remarks, that really reflects how we think about the business and how we are measuring and managing that’s what makes the most sense. And what you should really continue to see is ongoing growth in the enterprise business. We’re super excited about the strength that we see there and double-digit growth for next year. And that online is going to be flattish, and that’s what we expect. In terms of what these customers are doing, we — especially in the smaller customers, we see them — we even come back, we even come back, right? We make it very flexible for them to do that. And so at any point in time, they might be taking a break, but they might come back when it makes sense for them. And that’s what we want. We want it to be easy for them to come and go as they see the need for our products.

Rishi Jaluria — RBC — Analyst

Thank you.

Kelcey McKinley — Online Event Consultant

And we will now hear from Tyler Radke with Citi.

Tyler Radke — Citi — Analyst

Hey. Good afternoon, everyone. Thanks for taking my question. Kelly, I wanted to ask you just a couple of points on the FY ’23 outlook. I guess, first, how are you thinking about price increases and just generally pricing power philosophically? And then second of all, the reported revenue this quarter relative to your guide was some of the smallest upside we’ve seen as a public company. So just any changes in guidance philosophy? Or how you’re approaching the guide for this year would be helpful. Thank you.

Kelly Steckelberg — Chief Financial Officer

Yes. In terms of the outlook on pricing perspective, we currently don’t have plans to increase our prices across the board. We are especially for the online segment of our business, we are looking at opportunities for localized pricing and selling in local currency, which I think will be really helpful in terms of especially some of the smaller customers in those markets, and getting those plans rightsized to those markets. But no plans to increase our prices across the board.

And then in terms of the beats that you were mentioning for Q4, as we’ve grown and scaled as a business, I think you’re starting to see — our guidance and our bets get more correlated to the size of the business and reflects the growth rates that we’re experiencing going forward.

Tyler Radke — Citi — Analyst

Thank you.

Kelcey McKinley — Online Event Consultant

Moving on to Alex Zukin with Wolfe Research.

Alex Zukin — Wolfe Research — Analyst

Hey, guys. Can you hear me okay?

Kelly Steckelberg — Chief Financial Officer

Hey, Alex. Yes.

Alex Zukin — Wolfe Research — Analyst

Thanks for taking the question. I’ve got just a competition one and then a numbers one. So Eric, maybe for you first. Given the increasing importance of the enterprise business, the increasing spend there, the product diversification, what’s the right way to think about this post-pandemic competitive environment vis-a-vis Microsoft as well as your other competitors? Is it the same sales cycle longer? More — give us a flavor of what you’re seeing and how you’re planning for the full year?

Eric S. Yuan — Founder & Chief Executive Officer

Yes. So again, Alex, there’s comms competition, right? Always customers, right? And so it’s easy to piggyback on top of our innovation. That’s pretty much — that is the formula is very sustainable. But however, if we would really just focus on some of our competitors, I would say, first of all, and you take a Microsoft, for example, right? And in some enterprise customers standardize Microsoft. Some enterprise customers standardize on Zoom platform. For some enterprise customers, you look at Okada [phonetic] billions in report, right? And look at the Ocata’s Microsoft Office 365 deployment. In terms of coexistence, between Zoom that percentage is increasing year-over-year around 145%, right? Meaning all those and Microsoft Office 365 customers need deployed both Zoom and Microsoft solution, right? And also, we also on many fronts, we partner with Microsoft as well, right? I think that’s why the market is huge, right? And some customers realize the Zoom platform great. They like Microsoft, their chat, yes, this deployed a Zoom video and voice. But I think that will continue. Also, at the same time, right? Like we added a Contact Center, we are going to add more and more new services, right? In addition to focus on a horizontal collaboration platform, we also want to focus on more value-added like Contact Center and also some other services as well, right? And by doing that, on the right hand, we compete against some of those bigger competitors. On the other hand, it also integrate more and more with them as well, right? That’s our strategy. Yes.

Parker Lane — Stifel — Analyst

Got it. And then Kelly, so I just want to go back to the point that Sterling asked about the guidance with respect to enterprise versus online, the 20% and flat. Just help us bridge that to where billings guidance for Q1 is negative, billings guidance for the full year, I think pencils out to low single digits. CRPO, sequentially, decelerated. What’s the — like what is the number we should focus on the forward-looking metric to give us confidence in that reacceleration of revenue growth that you’re calling for? And particularly, the sustainability on some of the enterprise and online trends?

Kelly Steckelberg — Chief Financial Officer

Yes. So remember that, unfortunately, billings is not a good forward-looking metric. And it’s due to the fact that we have this split in our business. And the enterprise business is — the billings associated with that are what you would expect in a normal SaaS business, and they’re multiyear — annual to multiyear. In the online business, it is not. But there are many of those customers that are still buying and pay on a monthly basis.

So it really doesn’t make sense for a metric, and that’s why you’re going to continue to see volatility in that metric. And because of that, I think what we’ve tried to give you was at least some color around deferred revenue. So you can understand that because also the seasonality and the linearity that we have in our renewals and our billings. Unfortunately, the best that I have to give you is our revenue guidance, and that’s it. We’re trying to give you metrics that better reflect now how we think about that.

Alex Zukin — Wolfe Research — Analyst

Okay. Thank you.

Kelcey McKinley — Online Event Consultant

We’ll now hear from Kash Rangan with Goldman Sachs.

Tom McCallum — Head of Investor Relations

Eric, before Kash jumps on here, I just wanted to let you know, Kash, unfortunately, was on the participant side. So we just pulled him in as a panelist, but he used our Zoom chat product to come on over. So welcome to the world of Zoom Chat.

Kash Rangan — Goldman Sachs — Analyst

So Eric, I think 2022 is a year of transition, right? I was really intrigued by something you said back in September, how you are positioning Zoom for the next era of communications. You have a lot of products in the product road map, the video exchange center and you have the event platform, etc. I’m curious to see — to get your thoughts on how you’re preparing Zoom for the next chapter? What are the product milestones we should be expecting from the company? And the go-to-market transformation, our strategic initiatives, your partnerships, etc., to help Zoom be ready for the vision that you laid out in September.

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Kash, that’s a good question. Given that you are using Zoom chat, right? It’s always our unified communications platform. Not only that, but when comps unified counting lab, Chat or Phone and Video Conferencing, Events, Webinar, and all those missing part of Contact Center we just added on, right, to the UC platform. And also look at other two pillars and also the hybrid work and the business work for as well. Essentially, in the next several years, we are working very hard to transform our business from a meeting company to a platform company, right? In terms of metrics, you got to look at our enterprise growth.

Now online base used to be the revenue-wise very small, it’s more like the byproduct of our online marketing platform because of COVID, right? That revenue grows very well, also very profitable. Now given the COVID is over, we have to go back to trip down our enterprises growth in terms of more new services, in terms of embracing the platform, right? You will see in the next several years, we are going to introduce more and more enterprise services. And also from a technology perspective, like AI and also some more integration with other business working for applications. I think, overall, add more and more value to our enterprise customers. I think that’s way for us to look at our growth for the next few years.

Kash Rangan — Goldman Sachs — Analyst

Thanks so much.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Kash.

Kelcey McKinley — Online Event Consultant

Matt Stotler with William Blair. Please go ahead.

Matt Stotler — William Blair — Analyst

Kelly, Tom. Maybe just one, as you think about building out the full UC stack. Obviously, you’ve got many of the key components, video, phone, everything around those two Contact Center now that you’re pushing into. When you look at especially some of your enterprise competitors, some of the large buy-in that you get from IT around those other solutions is because they’re based on things like foundational productivity tools like e-mail or file sharing or scheduling and full feature chat, things like that. So how do you think about how those fit into your road map? Or if not directly, how you satisfy those needs for your enterprise customers as you keep moving that market?

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Matt, first of all, for now, we’re focused on unified communications platform, right? And not like a file sharing. That’s the reason why Kash is using Zoom Chat, which is our persistent group chat. It’s a part of our unified and communications platform, right? Customer can standardize and Zoom send or chat a message, send a chat message to a group. I continue. I have a phone call and Contact Center. That’s our unified communication platform, right. That’s part of the first pillar of our platform strategy.

In terms of file sharing, first of all, we are integrating very well with other vendors, right? How to further embed like those solutions into the Zoom platform play. This is also our strategy down the road. More to come and stay tuned.

Matt Stotler — William Blair — Analyst

Got it. Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Kelcey McKinley — Online Event Consultant

Siti Panigrahi with Mizuho. Please go ahead with your question

Siti Panigrahi — Mizuho — Analyst

Eric and Kelly, I just wanted to ask you about the growth drivers. Could you anchor or like you talked about so many products besides Video, you talked about Phones, Chat, Contact Center, so many other products. So how do you rank this growth driver near term versus maybe medium term, like two, three years out?

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Near term, as I mentioned earlier, right, look at our platform, three key pillars, unified communications platform, hybrid work and business work through platform. In terms of a near-term driver, we got to focus on double down, triple down our unified communication platform for the time being. And the future driver is not only that, but also the how to support hybrid work, how to support the business work with platform. Those two things will help us to further grow our business down the road in addition to unified communication platform.

Siti Panigrahi — Mizuho — Analyst

I mean what about Contact Center? When should we expect that to have some kind of material contribution?

Eric S. Yuan — Founder & Chief Executive Officer

Contact Center is part of our unified communications platform, right? And again, customer already deployed meeting the phone, they would like to deploy the Contact Center. Overall, we put the Contact Center into our missing piece of the unified communications platform. Together, right, we’ll drive our UC growth. But in new growths will come from second pillar and third pillar.

Siti Panigrahi — Mizuho — Analyst

Thank you.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you.

Kelcey McKinley — Online Event Consultant

Taz Koujalgi with Guggenheim has the next question.

Taz Koujalgi — Guggenheim — Analyst

Hey, guys. Can you guys hear me?

Eric S. Yuan — Founder & Chief Executive Officer

Yes.

Kelly Steckelberg — Chief Financial Officer

Yes.

Siti Panigrahi — Mizuho — Analyst

I have a question for Eric and then a follow-up for Kelly. Eric, as you launch your own Contact Center, what does that mean for your partnership with Five9?

Eric S. Yuan — Founder & Chief Executive Officer

The partnership is still doing well because some customers already deploy firm now people to Zoom. We want to make sure, and we keep improving that experience, right? However, some customers — some brand new customers who deployed on-prem solution and would like to consolidate everything to Zoom platform, yes, we would like to get those customers, right? And again, this market is huge for Contact Center. You look at all those modules, right?

And one of the Contact Centers is huge, right? And sometimes customers already deploy a fine, they are going to deploy more. The features from them also deployed the Zoom Content or Deploy Genesis, that’s what I pursuited, okay? Again, we will focus on our installed base. We focus on those customers who truly believe Zoom’s UC vision. We’d like to standardize on Zoom platform, right? That’s our good strategy.

Taz Koujalgi — Guggenheim — Analyst

And then follow-up for Kelly. Kelly, if I look at your free cash flow margins for this year, there’s about a 4-point gap between the operating margin and free cash flow margin. Going forward, as we have a bigger mix of enterprise, I guess, versus the online cohort does that gap get — why don’t you see a bigger delta between operating margins and free cash flow margins in fiscal ’23?

Kelly Steckelberg — Chief Financial Officer

The gap in operating margins year-over-year is really being driven by our ongoing investment in R&D. So at a little over 6% this year, it’s still not within our target range. Our targeted range for R&D is 10% to 12%. So that’s a big driver for — as we’re continuing to invest and innovate for the future. And a little bit of that will be offset in the overall improvement in the gross margins for the long term, but we still are in the middle of that multiyear strategy of moving from the public cloud into our own co-located data centers, so that’s going to take a little bit more time. And then sales and marketing is also going to increase a little bit as a percentage of revenue as we continue to focus on sales capacity as we talked about.

And also really, as we’re building upon this amazing brand awareness that we garnered for new meetings, we want to make sure that everybody also understands the great value they can get from being phone from an events as well as in Contact Center s. So you should expect to see more targeted product marketing in the future.

Taz Koujalgi — Guggenheim — Analyst

But in terms of — I don’t guide to free cash flow margins, but that delta between operating margin and free cash flow margin should not remain consistent going forward? Or should that delta widen because now you have more enterprise customers who are probably paying upfront more and you get a better cash flow margin?

Kelly Steckelberg — Chief Financial Officer

Yes. Over time, we expect our relationship between operating margin and free cash flow to go back to what it was pre-pandemic. So if you go back and look at the variability or the, I should say, the differential you saw there, that’s what you should expect to see as we move through probably sort of get through the back half of FY ’23, it should start to normalize like that again. We still have some investments in the early part of this year around continue to build out our data centers. We’re doing some office build-out as well, so you should expect to see CapEx a little bit higher than kind of the normalized rate. But eventually, we’ll get back to that normal relationship.

Siti Panigrahi — Mizuho — Analyst

That’s great. Pretty helpful.

Kelly Steckelberg — Chief Financial Officer

Yes.

Kelcey McKinley — Online Event Consultant

And we have time for 1 additional question, which will come from Parker Lane with Stifel.

Parker Lane — Stifel — Analyst

Yes. Hi. Thanks for taking the question. With the return of business travel and mandates being rolled back, curious to hear what your customers are thinking about in terms of their event plans for this year. Are you still anticipating that your customers will do more virtual-only and hybrid events than they did pre-COVID? And how is that sort of translating into the demand you’re seeing for events in 2022?

Kelly Steckelberg — Chief Financial Officer

We really expect that as people start to travel, they’re going to travel for certain events, but not for all of them. So we really expect the future to be hybrid, and that’s why we’re really excited about our Zoom Events strategy and that it can accommodate both in-person as well as virtual attendees. And that’s what we really think is going to be the future because people, I mean, are excited to be out and being traveling again, but they want to do it when it’s convenient for them and when it makes sense in their life. And I don’t think we expect people to return back to the way it was pre-pandemic. and it’s going to be some combination just as work is we expect events to be the same.

Eric S. Yuan — Founder & Chief Executive Officer

Parker, just to quickly add on to Kelly to what Kelly said. If you look at the event, for sure, that will be hybrid. Like last summer, I joined Salesforce Dreamforce hybrid event. I had a great experience, right? A lot of people doing online and also they have several hundred people there in person, right? But in the future, even if that is still hybrid event, I would say the percentage of — and those people who are going to show up in person will be more and more. But again, it’s still the hybrid. Also a lot of people are joining online as well. I do not think we’d be back to pre-pandemic. All the events just in being there in person, I do not think that’s the case based on the conversation with some of our customers.

Parker Lane — Stifel — Analyst

Yes. Thank you, guys.

Eric S. Yuan — Founder & Chief Executive Officer

Thank you, Parker.

Kelly Steckelberg — Chief Financial Officer

Thanks, Parker.

Kelcey McKinley — Online Event Consultant

And again, that does conclude our Q&A. So Eric, I’ll turn it back to you for any closing comments you may have.

Eric S. Yuan — Founder & Chief Executive Officer

Yes. Thank you all, really, for your time. Thank you for your time. Thank you for your support. I truly appreciate it. Thank you. Take care.

Kelcey McKinley — Online Event Consultant

[Operator Closing Remarks]

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Warehouse behemoth Costco Wholesale Corporation (NASDAQ: COST) has reported a double-digit increase in third-quarter earnings and revenues. Revenues increased 16% year-over-year to $52.60 billion. Total comparable store sales grew 14.9%, while

Infographic: All you need to know about Autodesk (ADSK) Q1 results

Design software company Autodesk, Inc. (NASDAQ: ADSK) on Thursday reported strong revenue growth for the first quarter of 2023. The San Rafael, California-based tech firm posted total revenue of $1.17

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