Zoom Video Communications, Inc. (NASDAQ:ZM) Q3 2023 Earnings Conference Call November 21, 2022 5:00 PM ET
Company Participants
Tom McCallum – Head, Investor Relations
Eric Yuan – Founder and CEO
Kelly Steckelberg – Chief Financial Officer
Conference Call Participants
Meta Marshall – Morgan Stanley
Mark Murphy – JPMorgan
Fred Lee – Credit Suisse
Michael Turrin – Wells Fargo
Kash Rangan – Goldman Sachs
George Iwanyc – Oppenheimer
Siti Panigrahi – Mizuho
Sterling Auty – SVB Moffett
William Power – Baird
Matt Stotler – William Blair
Ryan MacWilliams – Barclays
Parker Lane – Stifel
Shebly Seyrafi – FBN Security
Peter Levine – Evercore
Matthew Niknam – Deutsche Bank
Alex Zukin – Wolfe Research
Ryan Koontz – Needham & Company
Catherine Trebnick – MKM
James Fish – Piper Sandler
Matthew VanVliet – BTIG
Tyler Radke – Citi
Karl Keirstead – UBS
Operator
Over to Tom McCallum, Head of Investor Relations. Tom, over to you.
Tom McCallum
Thank you, Kelsey. Hello everyone. And welcome to Zoom’s Earnings Video Webinar for the Third Quarter of Fiscal 2023. I am joined today by Zoom’s Founder and CEO, Eric Yuan, and Zoom’s CFO, Kelly Steckelberg.
Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.Zoom.us. Also, on this page you will 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 fourth quarter and full fiscal year 2023. Our expectations regarding financial and business trends; impacts from macroeconomic developments and the Russia-Ukraine war, our market position, opportunities, growth strategy and business aspirations; and product initiatives and the expected benefits of such initiatives.
These statements are only predictions that are based on what we believe today, and actual results may differ materially. These forward-looking statements are subject to risks and other factors that could affect our performance and financial results, which we discuss in detail in our filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Zoom assumes no obligation to update any forward-looking statements we may make on today’s webinar.
And with that, let me turn the discussion over to Eric.
Eric Yuan
Thank you, Tom, and thank you everyone for joining us today. So last week, we hosted our first fully hybrid Zoomtopia using Zoom Events and it was great. We unveiled new innovations like Zoom Mail and Calendar, which enable users to frictionlessly navigate across their email, calendar and other Zoom products all within the same client.
At Zoomtopia, many of our customers highlighted how they use our expanding platform to do more in the world of flexible work. At our first partner connect event, we hosted hundreds of channel partners, who are excited about working with us to drive adoption of the Zoom platform globally. And our developer partners showcased add-on apps that connect interrelated workflows to the Zoom client.
As global organizations adapt to how, when and where work happens, human connection remains paramount. Zoom is purpose-built to make all kinds of connections possible, effective and meaningful.
We have launched more than 1,500 features and enhancements on the Zoom platform this year, advancing how people connect with each other, their organization and their customers, ultimately, opening the doors wide for creativity and collaboration.
Of course, even as we celebrate our innovations and customers, we still face the backdrop of a challenging macroeconomic environment. We continue to see FX pressure and heightened deal scrutiny for new business, but remain focused on delivering happiness to our customers by innovating our platform and expanding our go-to-market capabilities.
Zoom provides a full suite of communications solutions at an attractive total cost of ownership that enables Teams to do more with less and our new products like Zoom Contact Center and Zoom IQ for Sales enable revenue generation and drive productivity. The continued strength of our Enterprise growth is a testament to how the value proposition of our platform resonates with customers even in tougher economic environments.
As we enable customers to drive greater efficiency, we also are focusing on our own efficiency. We have always been judicious with investments, prudent about spending and we have commanded robust margins since our IPO, so this is not a major shift for us. We will continue to drive innovation, customer value and platform expansion, balanced with an increasing emphasis on efficiency and profitability.
We continued to see strong traction with customers spending greater than $100,000 in trailing 12 months revenue, which was up 31% year-over-year. What’s more, these customers are increasingly seeing value in buying the whole platform, with thousands of customers already buying Zoom One packages. From an industry perspective, the largest deals came from tech, media and financial services, and we also had notable wins in retail, transportation and pharma.
On the tech front, let me first thank Qualtrics, the leader and creator of the Experience Management category, for expanding their partnership with us. Qualtrics recently upgraded to Zoom One Enterprise, which provides the full power of the Zoom platform to their users and allows them to make meaningful connections with Meetings, team chat, whiteboard, phone and more in one offering. We are delighted to offer Qualtrics a broad set of communications products integrated into one secure and easy-to-use platform.
Our Enterprise segment comprises not only large publicly-traded corporations, but also many private companies of all sizes, who see great value in enhancing their Zoom implementations by moving towards our full UC platform. Let me give you a few examples.
First of all, I’d like to thank Vensure Employer Services, a privately-owned professional employer organization for placing their trust in Zoom. In Q3, they added 5,500 Zoom Phone seats and 650 Zoom Contact Center seats demonstrating the promise they saw in adopting a modern, integrated solution for their teams to interact.
Let me also thank Chime Solutions for establishing and already expanding their partnership with Zoom, which includes Zoom One and Zoom Contact Center. Founded with an unwavering focus on bringing jobs and opportunities to underrepresented communities, Chime Solutions delivers high-touch Contact Center solutions for mid-sized companies and Fortune 500 corporations.
After seeing how well Zoom Contact Center addressed many of their customer’s needs and gaining confidence in Zoom’s ability to deliver innovation at a rapid pace, they decided to replace their legacy solution with Zoom Contact Center. Executing our innovation roadmap for Contact Center will give us the opportunity to further enhance our partnership with Chime Solutions in the quarters and years to come.
I also want to thank G-P, the number one SaaS-based Global Employment Platform, for choosing Zoom Phone to transform their communication systems and support employees across their organization. G-P understood the value of our integrated platform of communication products from their experience using Zoom Meetings, Zoom Webinars, Team Chat and Zoom Rooms.
G-P ultimately opted for Zoom Phone, as the missing piece in their UC stack, in order to improve their customer’s experience, while also enjoying the savings benefits of a cloud-based PBX solution integrated into a full communications platform.
Also, I’d like to add that G-P is Zoom’s global expansion employment partner and has played a critical role in our growth strategy, giving us the agility and speed to enter new markets quickly. Again, thank you Qualtrics, Vensure, Chime Solutions and G-P, and all of our customers worldwide.
And with that, I will pass it over to Kelly. Thank you.
Kelly Steckelberg
Thank you, Eric. Let me now turn to the quarter’s results and guidance. In Q3, total revenue came in at $1.102 billion, up 5% year-over-year and 7% in constant currency. This result was approximately $2 million above the high end of our quarterly guidance. The growth in revenue was primarily driven by strength in our Enterprise business, which grew 20% year-over-year and represented 56% of total revenue, up from 49% a year ago.
We expect Enterprise customers to comprise an increasingly higher percentage of total revenue over time. From a product perspective, we had strong growth in Zoom Phone coupled with contributions from Zoom Rooms and other products.
At Investor Day earlier this month, we introduced a new metric, Online Average Monthly Churn. In Q3, this metric continued to improve to 3.1% from 3.7% in Q3 of FY 2022 and 3.6% last quarter. We are pleased that this metric has now returned to pre-pandemic levels.
The number of Enterprise customers grew 14% year-over-year to approximately 209,300. Our trailing twelve month net dollar expansion rate for Enterprise customers in Q3 came in at a healthy 117%.
We saw 31% year-over-year growth in the up-market as we ended the quarter with 3,286 customers contributing more than $100,000 in trailing 12 months revenue. These customers represented 27% of revenue, up from 22% in Q3 of FY 2022.
Our Americas revenue grew 11% year-over-year. EMEA continues to be impacted by the stronger dollar, the Russia-Ukraine war and Online performance, which combined led to a decline of 9% year-over-year. APAC, which was also impacted by the stronger dollar, declined 3% year-over-year.
Now turning to profitability, I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net litigation settlements, net gains or losses on strategic investments, undistributed earnings attributable to participating securities, and all associated tax effects.
Non-GAAP gross margin in Q3 was 79.5%, an improvement from 76% in Q3 of last year and 78.9% last quarter. The sequential improvement was mainly due to optimizing usage across the public cloud and our increasing number of co-located data centers. Given this, we expect our full year gross margin to be approximately 79%.
Research and development expense grew by 59% year-over-year to approximately $108 million. As a percentage of total revenue, R&D expense increased to 9.8% from 6.4% in Q3 of last year. This reflects our ongoing investments in expanding Zoom’s product portfolio and delivering on our customer’s evolving needs. We expect to exit the year in the range of 10% to 12% of total revenue, consistent with our long-term target.
Sales and marketing expense grew by 27% year-over-year to $301 million. This represented approximately 27.3% of total revenue, up from 22.6% in Q3 of last year. We continue to invest judiciously in sales capacity and channel partner expansion.
G&A expense grew by 6% to $87 million or approximately 7.9% of total revenue, in line with 7.8% in Q3 of last year.
Non-GAAP operating income was $381 million, exceeding the high end of our guidance of $330 million, as we continue to thoughtfully prioritize investments. This translates to a 34.6% non-GAAP operating margin for Q3, as compared to 39.1% in Q3 of last year.
Non-GAAP diluted earnings per share in Q3 was $1.07, $0.24 above the high end of our guidance. Due to our share repurchase program, our Q3 weighted average share count has decreased year-over-year approximately 4 million shares to 302 million.
Turning to the balance sheet. Deferred revenue at the end of the period was $1.4 billion, up 14% year-over-year from $1.2 billion. Looking at both our billed and unbilled contracts, our RPO totaled approximately $3.2 billion, up 32% year-over-year from $2.5 billion. We expect to recognize approximately 59% of the total RPO as revenue over the next 12 months, as compared to 67% in Q3 of last year, reflecting a shift towards longer term contracts.
As a reminder, our annual seasonality of renewals is front-end loaded and moderates over the rest of the year, reflecting the sequentially smaller renewal base. As such, we expect Q4 deferred revenue to grow at approximately 2% to 3% year-over-year.
We ended the quarter with approximately $5.2 billion in cash, cash equivalents and marketable securities, excluding restricted cash. Year-to-date, we have purchased $991 million of our own stock, representing approximately 11 million shares.
We had operating cash flow in the quarter of $295 million, as compared to $395 million in Q3 of last year. Free cash flow was $273 million, as compared to $375 million in Q3 of last year. Our margins for operating cash flow and free cash flow were 26.8% and 24.7%, respectively.
As previously discussed, this year we have seen larger cash outflows from an increase in cash taxes starting in Q2, which relate to the depletion of our NOLs and the lower tax deductions for stock-based compensation caused by the stock price decline.
We now expect free cash flow to be at the high end of our range of $1 billion to $1.15 billion. As a reminder, our range assumes that the Section 174 tax legislation requiring capitalization of R&D expenses will be repealed or deferred by Congress by the end of this fiscal year.
Now, turning to guidance. This outlook is consistent with what we are observing in the market today. Specifically, it assumes that our Enterprise business will grow in the low-to-mid 20s, while our Online business will decline approximately 8% for the year.
For the fourth quarter of FY 2023, we expect revenue to be in the range of $1.095 billion to $1.105 billion, which at the midpoint would represent approximately 3% year-over-year growth or 5% in constant currency. We expect non-GAAP operating income to be in the range of $316 million to $326 million. Our outlook for non-GAAP earnings per share is $0.75 to $0.78 based on approximately 301 million shares outstanding.
For the full year of FY 2023, we now expect revenue to be in the range of $4.37 billion to $4.38 billion, which at the midpoint represents approximately 7% year-over-year growth or 8.5% in constant currency. This represents a decrease of $15 million from our previous full year guidance, of which approximately $14 million is attributable to the continued FX pressure in Q3 and Q4.
We now expect our non-GAAP operating income to be in the range of $1.49 billion to $1.5 billion, representing a non-GAAP operating margin of approximately 34%, which is an increase of $50 million or 1%, respectively, as compared to our Q2 guidance.
Our tax rate is expected to approximate the blended U.S. federal and state rate. Our outlook for non-GAAP earnings per share is $3.91 to $3.94, based on approximately 304 million shares outstanding.
Zoom remains focused on thoughtfully balancing growth and profitability through platform innovation, customer value creation and partner ecosystem expansion. Thank you to the Zoom team, our customers, our community and our investors.
Kelsey, please queue up our first question.
Question-and-Answer Session
Operator
Thank you, Kelly. [Operator Instructions] And of course, our first question is going to come from Meta Marshall with Morgan Stanley.
Meta Marshall
Great. Thanks so much for the question and congrats on the quarter. Maybe just sticking with the Online business for a second and kind of the stabilization of that business. Clearly, you saw the churn statistics improve. But just wanted to get a sense of how you guys are thinking about stabilization there, how you guys are thinking about just initiatives on new adds, as well as just free-to-pay conversion? Thanks.
Kelly Steckelberg
Yeah. So we — as we shared at Analyst Day a few weeks ago, we’re really happy with the continued improvement in the churn, first of all, and it improved even further in Q3. And the fact that now 70% of those cohorts have moved beyond that 16-month period in which they really see stabilization and we continue to see that happen.
Wendy and her team are really focused on continuing to look at initiatives for conversion. Those include things like adding local currencies, adding local payment types, as well as looking at packages that make sense.
So all of that is still in process, and what we’re thinking and we had talked about before is we expect Online to stabilize from a dollar perspective in Q2 of next year and based on our most recent forecast, that is still the case.
Meta Marshall
Great. Thank you.
Operator
Moving on to Mark Murphy with JPMorgan.
Mark Murphy
Thank you very much. I will have my congrats. A very nice free cash flow performance. I wanted to ask you, Eric, the pace of warranty activity is so rapid at the moment. To what extent do you anticipate that perhaps some of the new product innovations and I am thinking of Zoom Mail, Calendar, Zoom Spots and others could perhaps enhance the stickiness of the usage patterns, right, or drive engagement and collaboration higher in a way that could maybe benefit your — either your dollar retention rates or maybe some of the premium plan adoption?
Eric Yuan
Yeah. So, Mark, that’s a great question. That’s the reason why we had a very successful Zoomtopia, because we announced so many innovations, almost every innovation. When we look at that what we can do to either add value to the existing per customer to focus on stickiness or maybe the potential revenue opportunity, right? Look at area features, I think, we always follow that principle.
Look at Email in Canada, look at Online paid users, the subscribers and we do not offer the free users, right? For all those Online, the pro buyers to give Email, Calendar for free, they can use the Email, Calendar to serve for another great service, which is an improving [ph], right?
Look at all other features, like, Spots and all those features certainly can help our integrated customers also make our services more sticky. Not only do they Zoom for schedule Meetings, but also can use that to limit the office environment.
So for free users, right, for sure, like, Email, Calendar, and also Spots client, right? So every feature in the mission, I think, for sure, we will add more value to our customers, either drive stickiness or drive potential revenue opportunity like Zoom IQ, what your agent and the Contact Center and what your agent, you might feel like what you coach and a lot of features like that. So we are very, very excited, and again, and the feedback from customers are very, very positive and they are very excited about adopting those new features and enhancements.
Mark Murphy
Thank you.
Eric Yuan
Thank you, Mark.
Operator
Credit Suisse, Fred Lee has the next question.
Fred Lee
All right. Thank you for taking my question. I was wondering if you could talk a little bit about the macro impact on Phone adoption and maybe give us an update on Zoom Phone adoption overall as you have over the past couple of quarters?
Kelly Steckelberg
Yeah. So we continue to see strength in Zoom Phone. As a reminder, we announced on the last call that we had crossed over the 4 million seat mark. We also added nine customers in Q3 that have purchased over 10,000 seats and that brings us to a total of 64 customers in that category.
So I think it shows continued strength, especially in the up market even in these challenging economic times. So we’re excited about the prospects that we continue to see there and as we keep promising you all, we will break it out when it gets 10% of revenue. So you will be able to see that then a little more clearly.
Eric Yuan
Yeah. Fred, to add on to what Kelly said, more and more customers are increasingly looking at our Zoom platform, Zoom UC platform used to be looking at a imported product, phone or Meetings or webinar or team chat. Now look at a full UC stack, because that will give you a better experience in terms of the total ownership of cost is also much better. That’s why more and more customers are moving towards our full, like, Zoom platform and I am very excited about the opportunities there.
Fred Lee
Great. Thank you very much.
Eric Yuan
Thank you.
Operator
Now moving on to Michael Turrin with Wells Fargo.
Michael Turrin
Hey. Thanks. Good afternoon. Appreciate you taking the question. On the front-end loaded renewal seasonality, you had a useful tidbit on the deferred revenue growth you are expecting in Q4. Can you just maybe walk through how you gear up for that as a company given it’s a little bit outside the norm on general calendar cycles that we’re used to seeing. What kind of visibility do you have into that cohort currently and is there anything you can do to shift that profile or is it just kind of gradual as this rolls forward and you have gotten just accustomed to it internally thus far? Thank you.
Kelly Steckelberg
Yeah. So, as a reminder, this occurred, right, due to the significant increase of customers we had during Q1 in the early stages of the pandemic. And what has happened is due to the practice that we have internally of making it easy for our customers, we co-term when they add on additional products or expand their seat count, for example, so it’s continued to actually exacerbate, if you will, when we’re upselling customers that front-end loaded phenomenon.
So it will start to level out over time as we see customers in Q2 and Q4 being our largest seasonal quarters due to the six-month quotas of our upmarket reps. But as you say, we are used to it now internally, everybody knows this is how it works. We are coming into, I guess, our third renewal period and we have seen strength in each of the last two cycles.
So We are able to accommodate, we know how it works and it’s just something we know that it’s not aligned with most of the rest of the industry, which is why we keep reminding you and trying to give you as much color as possible around that.
Michael Turrin
Appreciate that. Thank you.
Kelly Steckelberg
Yeah.
Operator
And our next question will come from Kash Rangan with Goldman Sachs.
Kash Rangan
Hello. Thank you very much. Happy Thanksgiving in advance. Good to see you, Eric and Kelly. I had a question on the Enterprise business. I think most of us on the call basically were waiting for the tilt where the Enterprise business will — the strength of the enterprise business can offset the weakness in the Online business. As we wait for that, I am curious to get your take on the expansion rate. I think it came in at 117% or so. And the number of customer — it used to be higher in prior quarters, the number of net new as Enterprise still also not quite rebounding and recovering. Can you give us some perspective on how much of is macro versus maybe competition from the likes of Teams, et cetera. And Eric, how does this play out into the broader adoption thesis for the Zoom platform. When are we like you to see these metrics inflect the other way that could validate your overall thesis that Zoom is that just about video Meetings, but a broader communication platform? Thank you so much.
Kelly Steckelberg
Eric, do you want to talk about Zoom One first and then I will talk about the metrics after that.
Eric Yuan
Yeah. Sure. Absolutely. So, Kash, that is a good question. And you look at the customer projects, right, as we move towards the Zoom One platform, right? So and leverage our full usage stack started from Meetings many years ago. They added a phone, webinar, team chat and so on and so forth.
I think the problem was that previously when it comes to Zoom, everybody probably assume that is to be compressing and that’s not the case. That’s why we are doubling down our Zoom One marketing awareness, also talk to the customers that we understand, not only do we offer the best with content service, but also if you look at our other offerings that’s a full UC stack and also have Contact Center as well.
I think that will take a little bit of time. But as long as customers really like, wow, Zoom has a full stack, Enterprise also have a very flexible team chat plus this is free. It works so well, integrated other UC solutions, I think customers are showing a great excitement about adopting the full UC platform.
And more and more customers are moving towards our full UC stack rather than just the Meeting or Phone and that’s why we are very excited. Because if you look at all those offerings working together seamlessly and in terms of total orders costs much better, because many interest customers are trying to consolidate their full UC that.
UC stack and client stack is different, but we might use a Email or Calendar or SharePoint or the Office from other vendors. But in terms of UC stack, they want to deploy the best, good service. That’s why we are going to win on UC stack plus download the CC as well.
Kash Rangan
Yeah. Thank you so much, Eric.
Eric Yuan
Thank you.
Kelly Steckelberg
And Kash, just in terms of like your comment about renewals, I want to highlight, especially in the Enterprise renewals remain very, very strong. We were actually slightly ahead of our internal forecast for Q3. So we continue to see — we have talked about many metrics, growth and expansion in The enterprise. It’s just, as you say, we are waiting for that stabilization in Online to because right now, it’s really having a dampening effect on the overall growth rate of the company.
Kash Rangan
Thank you, Kelly.
Kelly Steckelberg
Yeah.
Eric Yuan
Thank you, Kash.
Operator
George Iwanyc with Oppenheimer has the next question.
George Iwanyc
Hi. Thank you for taking my question. Eric, maybe with all the Enterprise progress you are showing. Can you give us an update on Contact Center and the adoption that you are seeing there?
Eric Yuan
Yeah. So, yeah, again, the Contact Center is a new service, We are very excited in particular for those customers who deploy our — full service who would like to consolidate the UC and CC together. And also, we found interesting use cases, well, not only do those traditional customer interaction department, we started deploying the Zoom Contact Center, but also the internal IT desk as well, right?
And again, the Contact Center seat cycle a little bit longer like the Meetings. But, however, we showcase our platform capability and the speed of innovation, customers are very excited. And plus, you look at our own business, right? And we used to deploying other cloud Contact Center solutions, also with [inaudible] our own Contact Center solutions, our teams themselves are very, very excited. And a lot of potential pipelines and leads right in the pipeline and also we are doubling that on that.
And again, the product side, we have higher confidence. Go-to-market side, we are gaining attractions as quickly as possible, because again, it takes some time plus also leverage channel and internal go-to-market investment. And I think that’s a future big revenue driver for us, especially customer like CC and UC together, right, and with a much better experience and also the total ownership of costs also much better.
George Iwanyc
Thank you.
Eric Yuan
Thank you.
Operator
Moving on to Siti Panigrahi with Mizuho.
Siti Panigrahi
Thank you. Thanks for taking my question. Just wanted to ask about macro pressure, you talked about last quarter sales elongation on the Enterprise side. What kind of plans you are seeing, anything worsened and also how does that impact your pipeline as well?
Kelly Steckelberg
So we certainly have seen impact, as I mentioned, from FX of the reduced guidance of $15 million, $14 million of that is coming from FX pressure and you saw that certainly in our year-over-year growth in Europe and in APAC.
In the Enterprise, again, renewals stayed strong, excitement about the products. But as we discussed, it’s continued in terms of additional deal scrutiny, I think all of my peer CFOs now are looking at deals and that’s just causing elongation in general not that things are losing, not that We are losing deals.
They are just taking longer to get done and potentially some of them pushing over quarters. But we haven’t seen that have impact. It’s just taking longer and longer, not that they are going anywhere else. It’s just taking longer to get those done.
Now the good news is, right, especially with all of the new products, the consolidation that we offer is a really great value story for our customers in terms of elimination of additional vendors, getting rid of on-prem servers and that continues to be a great story that our customers love.
Siti Panigrahi
Thank you.
Kelly Steckelberg
Thank you, Siti.
Operator
SVB Moffett, Sterling Auty has the next question.
Sterling Auty
Thanks. Hi, guys. Kelly, maybe following on that, I want to understand the 20% growth in Enterprise in the quarter versus the guidance of low-to-mid 20% for the full year, does that mean that there’s a little bit of a back-end loaded hockey stick or a bump up that we will see next quarter. And specifically, I think, investors are really interested in trying to gauge how should that business react as we move into next fiscal year in light of the concern about layoffs across all industries and a lot of your Zoom Meetings, et cetera, are based on per employee per seat pricing?
Kelly Steckelberg
Yeah. So we certainly — we have talked about this the last couple of quarters, have seen more and more of our deals shifting to the end of the quarter and taking on that more historically natural cycle that we didn’t — we haven’t seen since really early in the pandemic, but that is absolutely the case for us and we have adjusted our forecast for Q4 for some of that linearity as well.
We have continued to see, as I keep saying, strength in our renewals, and I think, that’s because while there’s concern about layoffs, there’s this other phenomenon about flexible work, right? Everybody wants to continue to working in the way they become accustomed to.
And as long as employers are supporting that and their employees it really means everybody needs a Zoom license. If you are out of the office, even 1 day a week, you need that Zoom license for phone, for Meetings, for what Zoom One. And so I think that is really compelling reasons for organizations to continue to renew with them.
Sterling Auty
Understood. Thank you.
Eric Yuan
Yeah. Thank you, Sterling. If I could…
Operator
And moving — oh, apologies, Eric. You may proceed now.
Eric Yuan
Even for those businesses, right, after before the full UC stack, look at the team chat is getting more and more popular. And also the founder also can use that for their personal use cases as well, right, because that’s free. That’s why a lot of tractions for other parts of our entire UC platform.
Operator
Our next question will come from Michael Funk with Bank of America. Michael, video for us. All right, Michael, if you can hear us, please go ahead start your video and come off mute to ask your question. I am hearing…
Eric Yuan
Yeah. Michael.
Operator
Hearing no response, we will go ahead and move on to William Power with Baird. And William, if you wouldn’t mind doing the same thing. Great. Thank you so much.
William Power
Great. Thanks for taking the question. Probably for Kelly, a pretty notable increase in stock-based compensation expense. I know you talked about this at the Investor Day to that you expected given top-ups to be more elevated. But it would be great to just get a little more perspective as to how you are thinking about that going forward, is this closer to a peak level, should — it will stay at this level? Maybe over a longer term time frame, how investors should expect that to trend? And I guess kind of tied to that, you have been aggressive on the stock buyback front, what are the plans there going forward and how could that tie in and how you think about stock-based compensation?
Kelly Steckelberg
So, first, we believe that the Supplemental Grant program is really important for the strategy of the company in terms of retaining our employees and keeping them focused and not having to worry about that.
And the Supplemental Grants vest over the same period as the underlying grant that they are tied to. So you are going to see this level continue for a few years as those grants are vesting through and many of them originally were four-year grants, so they have two years or three years left in which you are going to see that stock-based comp as those underlying shares are vesting.
With the stock, once the stock stabilizes then you will see less impact from that or less need for additional grants. So we are hoping that we are at that place and that you are going to not see additional Supplemental Grant in that same level. But until we get past probably another year’s worth, we might have some more.
In terms of the repurchase, as you heard, we purchased $991 million, so or 11 million shares. So we have a little bit of room with that and once we have completed that, we will evaluate whether or not we want to ask the Board for authorization. We haven’t done that yet.
William Power
Thank you.
Operator
And we will now hear from Matt Stotler with William Blair.
Matt Stotler
Hi, there. Thank you for taking the question. Maybe just one more on the Online business. It would be great to maybe get some color, some commentary on the economics of that business, the margin profile as it compares to the Enterprise segment of the business and what the implication there is as that revenue mix continues to shift, specifically in the context of the updated long-term figures you gave us a couple of weeks ago.
Kelly Steckelberg
Yeah. So we have talked about this before, our Online business is a higher margin business as it’s largely, not completely, but largely untouched by any person from a sales organization. There are some Online account executives that are there to answer questions. But it’s minimal compared to our Enterprise sales organization.
So we certainly took — we have done a lot of work on modeling what that looks like a and we have taken that into consideration as we laid out our long-term margins that we shared with you at Analyst Day as we look forward for the next several years and how we think the mix could shift between the underlying the Online, sorry, Online and Enterprise businesses.
Matt Stotler
Got it. Thank you.
Kelly Steckelberg
Yeah.
Operator
Moving on to Ryan Macmilly, my apologies, Ryan MacWilliams with Barclays.
Kelly Steckelberg
Hi, Ryan.
Ryan MacWilliams
Thanks so much. hey. Follow up on Matt’s question. Kelly, can you hear me?
Kelly Steckelberg
Yeah. Hi.
Ryan MacWilliams
Yeah. Probably all perfect. You previously noted a potential inflection in the Online business early-to-mid next year. With churn now right at around pre-pandemic levels, but we are still seeing revenue declines sequentially in this segment. Any updates as potential inflection and also is there any impact from existing Zoom customer’s upselling to Enterprise on this Online business segment? Thanks.
Kelly Steckelberg
So, yeah, the answer is yes. There are customers that eventually upsell into Enterprise, which is great, right, because that means they are expanding and they are becoming a bigger customer overall, which we love to see, but that does then, I mean, it’s not company churn, but it looks like it’s moving out of the Online business into the Enterprise.
And in terms of — the way We are talking about it is a stabilization of Online and we expect that from a dollar perspective to still happen in Q2 of next year, based on our current forecast that We are seeing.
Ryan MacWilliams
Got it.
Operator
I am moving on to Parker Lane with Stifel.
Parker Lane
Yeah. hi. Thanks for taking the question. Kelly, you referenced thousands of customers that have signed up for Zoom One since it launched, I believe, about five months ago. Can you help me understand the profile of those customers a little bit better? The majority of them tend to be existing customers that have been migrated onto Zoom One new packaging or are you seeing a big net new cohort as well? And then two, is it skewing more Enterprise for customers that are thinking about going with Zoom One or are you also seeing a pretty decent spread across all different size organizations? Thanks.
Kelly Steckelberg
So, Eric, I know you love to talk about Zoom One. Do you want to talk about it for a second just…
Eric Yuan
Yes. Sure. Exactly. I think that — first of all, I think, Parker, you look at our Zoom One, we launched several months ago, right? And look at all those customers, minimum-sized, Enterprise, SMB, they also see the value, that’s why we see and almost every market we are talking, they are moved towards the Zoom One package, so they do see the value. But you not see any test markets that the segment truly standing out from all the way from SMB to device and I think that’s exactly what we anticipated.
Kelly Steckelberg
Thank you, Eric. I would just add to that, that the key customer wins that we saw in Zoom One in Q3 were a pretty balanced mix of new, as well as customers that are upselling as they are adding new products to the portfolio, so We are really happy about that, that We are seeing traction in both aspects of the business.
Parker Lane
Understood. Thanks again.
Eric Yuan
Thank you.
Operator
We will now hear from Shebly Seyrafi with FBN Security.
Shebly Seyrafi
Yes. Thank you very much. So I’d like to hear from you what you think your current visibility is compared to, say, three months ago. I noticed that your RPO grew by 32% year-to-year, which is impressive. But you also had a decline in your CRPO percentage over the past several quarters, your expansion rate has been declining and with your guidance for deferred revenue to grow 2% to 3% with my model and getting billings down 10% year-to-year in Q4 and you have never really had a billings decline in my model. So just talk about the visibility you have right now versus three months ago and when you think you might see this stabilize? Is it a few quarters or is it a few years? Thanks.
Kelly Steckelberg
Yeah. So the current RPO pressure is largely related to the Online customers and the decline that you are seeing in Online as the long-term RPO really benefits from the direct and — or the Enterprise side of our business, which are managed by the direct business and have more annual and multiyear contracts. That’s kind of why you see that shift in terms of the overall percentage.
I would say and then the other impact that We are having that we can’t — which is difficult to predict, of course, is FX, right? So you have to consider that, which is more concentrated Online than an Enterprise, but you heard we in our guidance that we have reduced, we said about $14 million of that, we believe to be attributable to FX.
In general, I would say, the economics or the state of our business hasn’t changed. Meaning, our Enterprise business and our Enterprise sales organization is stable. They are continuing to operate in the same way. The Online business with the improvement in churn, as well as the way that the majority of it now has shifted out along beyond the 15 months is really helpful in terms of our ability to forecast that business.
And so I think the visibility is the same, there’s just some different reasons for all those different components that you are talking about. The deferred is — again, the decline you are seeing in Q4 is really due to the front-end loaded nature of our business.
And then remember, so the front-end billing, sorry, the renewals happen at the front-end of the year, that’s where you are going to see the upswing in billings, the upswing in deferred and then that gets amortized over the years, so deferred’s coming down and then we have much lower renewals in Q4 as well. So the renewals that are filling up the bucket are much, much smaller. So it’s — you mentioned many factors and there’s different reasons for all of those.
Shebly Seyrafi
Yeah. Thank you.
Kelly Steckelberg
Yeah.
Operator
Our next question will come from Peter Levine with Evercore.
Peter Levine
Great. Thank you for taking my question. I think given some of your customers are pushing back on launch of decisions, are you able to kind of toggle your sales force being focused more on those back-to-base opportunities. And then, Kelly, just a follow-up, can you share how many of those 9 — I think you said 9,000, 10,000 phone customers or net new to Zoom and then maybe just share were these legacy PBX replacements or are you going in and replacing another cloud provider? Thank you.
Kelly Steckelberg
Yeah. So, first of all, remember, our strategy for selling Zoom Phone is selling into existing — in the existing installed base. So I don’t know actually a split between those 9, but I am sure that the majority of those were existing Zoom customers.
And I think I would say, there’s a focus on the company that, as Eric has talked about of expanding not beyond, not to just phone, right, but expanding to the full platform. So that’s really what we have our teams focusing on now. It’s Zoom One, it’s Contact Center, it’s Zoom IQ for Sales. Now it’s Email and Calendar and really thinking about that complete platform, including Zoom Chat and the adoption within organization.
So it — for all the reasons we have been talking about in terms of retention, flexibility for organizations to reduce vendors, the cost savings, the total cost of ownership that they see by having that combined that for all of those reasons, that’s really becoming the focus of our Enterprise sales organization.
Operator
And our next question will come from Matthew Niknam with Deutsche Bank.
Matthew Niknam
Hey. Thank you for taking the question. I wanted to ask, you mentioned the greater value that customers are seeking out from the broader platform. I am just wondering, are there specific areas where you see maybe more room to strengthen the platform and with the compression we have seen in market valuations, how are you thinking about potential inorganic opportunities? Thanks.
Kelly Steckelberg
So, Eric, do you want to talk about the platform and the value they see.
Eric Yuan
Yeah. Sure. Absolutely. I think for those customers, right, who deploy Zoom One platform, right? They really like it. The reason why you look at the when same client, the same interface, right? And if you have a scaled meeting, you can use our Zoom team chat, communicate with our teammates and customers, make a phone call, white board is there, now we added Email and Calendar fully integrated together.
I think that’s the whole lot. And plus, if you look at the customer, we used to be deploying many other partners solutions, always one platform on the full UC stack. That is value a seamless experience and that’s why more and more customers no matter which other cloud business solutions they deploy, for example, we deploy other cloud business solutions not realize the full value of the entire Zoom One platform, we see more and more end customers, they just reach out to us rather than they reach out to Zoom to update. Now they reach out to us. We say, yeah, I see the good value and that’s why more and more innovations will be built upon the Zoom One platform. And yeah, like, Zoom Spot, We arecently announced and that’s our focus to double down our platform story.
Matthew Niknam
And just in terms of inorganic opportunities…
Kelly Steckelberg
Yeah.
Matthew Niknam
… if you can elaborate on that?
Kelly Steckelberg
Yeah. Sure. So we continue every day to look at opportunities, and yes, the compression evaluation certainly is not lost on us. What We are always trying to balance, of course, is what would it bring to our customers, what would it bring or the impact potentially on our culture and then, of course, the value and the state of the technology, right? We have a high bar for both talent and technology here at Zoom.
So it’s been difficult, I would say, to date to find something that really meets all of those standards. Eric is a very hard judge, but that doesn’t mean that We are stopping and we continue to look for opportunities every.
Eric Yuan
Also, in terms of the full platform experience that I mentioned, our customer, the number one thing they like in our experience. Let’s say, if you look at the other biggest service provider, right? How to make sure you have a consistent experience, that’s not an easy. That’s why we tend to look at all those greater technology companies like Solvvy, we acquired many years ago.
Again, if you want to just the focus on the branded new service, we might think about the inorganic opportunity. But now look at the UC platform, we already did everything. Now We are just focus on the go-to-market side, right? And we are — we have a high confidence like We are getting more and more traction there, so.
Matthew Niknam
Thank you.
Eric Yuan
Thank you.
Operator
Moving on to Alex Zukin with Wolfe Research.
Alex Zukin
Hey, guys. Just maybe I have one question that it’s a bit forward, it’s a bit hard. But if I look at the — kind of the Shebly’s point, the forward looking metrics and the implicit guide for Enterprise revenue next quarter is about 15% to maintain that low 20s for the full year. If you go forward a second, it does look like growth next year is going to be kind of in the low-to-mid single digits, assuming the normalization or stabilization of the Online business and assuming some further decel with the macro getting tougher. With OpEx growing nearly 30% this year, what — how are we thinking about a worsening environment, like, what’s the recession playbook for Zoom. We have seen some companies take some pretty meaningful steps with respect to employees, with respect to dialing up, if you will, the efficiency of the business, what’s the plan — what’s the recession plan here maybe for both you and Eric?
Kelly Steckelberg
Yeah. So I think that your assessment in terms — We are not giving — we just may be caveat first of all, We are not giving FY 2024 guidance on this call. We will do that obviously at the Q4 call. But your assessment in the way you are kind of thinking about the topline growth is right in line with kind of how We are thinking about it right now.
And in terms of then from an operating margin perspective, the way We are thinking about it is, as We are working on our FY 2024 plan, we are being very, very thoughtful about prioritization of investments. It’s how I would say it.
And as you noted, we have grown our expenses and we have hired a lot this year, and so being very thoughtful about ensuring that they are focused on the right things that we are prioritized internally. We are committed to continuing on innovation and meeting our customer’s needs, as well as go-to-market expansion. Those are really the top priorities that we have and making sure that we have resources in the right areas for that. I guess that’s what I would say.
Eric Yuan
Yeah. So, Alex, I think, We are a much better position. You look at the efficiency and the potential productivity improvements like cash flow profitability and plus we had, as Kelly mentioned, we had a lot of teams this year. I think that they are going to reach full productivity next year. That’s why I think, yeah, I think we can weather the storm, right? And for any either short-term or long-term or short or long recession, and yeah, we feel very confident to drive efficiency and productivity.
Alex Zukin
And I guess maybe just as a follow-up. If I look at the buyback cadence given on the one side, Kelly, if you are talking about having to issue shares as long as the stock goes down, on the other side, you have $5 billion in cash on the balance sheet to buy back stock. So how do we — because I get a lot of questions about dilution, particularly given the supplemental share buyback. So at least on that front, what’s the right way to think about over the next year, over the next two years, three years, how — ex-M&A, how you are going to leverage that cash balance?
Kelly Steckelberg
Yeah. So we think based on the share repurchase program that we have had — we currently have in place, we have done a good job of being able to offset the dilution from the supplemental shares. We want to be very thoughtful about our cash those. We just talked about M&A for example.
And so especially as We are focusing on our FY 2024 plan, our balancing the opportunity for managing dilution, as well as earnings on that cash and M&A opportunities. So all of those are being considered as we look forward for FY 2024 and that’s really what we have to say today. We will have more to talk about when we come back for the Q4 call.
Alex Zukin
Perfect. Thank you guys.
Kelly Steckelberg
Yeah.
Operator
We will now hear from Ryan Koontz with Needham & Company.
Ryan Koontz
Thanks for the question. Can unpack the strength in Enterprise and how to think about that revenue growth across different product categories, if not quantitative, can you kind of give us an idea where phone stacks up versus expanded meeting license and any other products look like they can become meaningful in the next 12 months as you look at that on the Enterprise side? Thanks.
Kelly Steckelberg
Yeah. So really happy with the progress we have seen with Zoom One, with Zoom Phones and the strength in Zoom Rooms in Q3. We also certainly see potential in Contact Center and Ryan Koontz, they are just so early. That from a — We are seeing progress there and excitement, but it’s early stages. So in terms of what they are contributing overall to the dollar amount, it’s minimal at this point, but we are seeing growth in terms of quarter-over-quarter expansion in those products. So that’s really exciting to see.
Ryan Koontz
Got it. Thanks. Thanks, Kelly.
Operator
And our next question will come from Catherine Trebnick with MKM.
Catherine Trebnick
Thank you for taking me — my question. Appreciate it. One of mine is on your partner program. You brought in a new partner executive last July. Could you specify any particular areas that he’s going to concentrate on to drive more revenue? He just interviewed one of the CRM magazines and said he wants to get to 50% revenue through the channel and can you just address some of the ideas that he has to implement.
Kelly Steckelberg
So, yeah, Todd, Catherine is referring to Todd, who joined us, I think, a couple of quarters ago, he’s great. At Zoomtopia, he hosted our first partner connect with over 400 partners were there. So that was super exciting to see.
And while there are lots of opportunities, I think, one of the biggest areas of opportunity is international partner expansion. We have done a good job over the last few years of building up master agents and carriers here in the U.S., but it’s still relatively nascent outside the U.S. So that will be a big area of focus for sure.
Catherine Trebnick
All right. Thank you.
Kelly Steckelberg
Yeah.
Operator
And James Fish with Piper Sandler. Please go ahead with your question.
James Fish
Hi. Thanks for the question. Most of might have been asked, but I did actually want to ask on the Enterprise sales investment that we have been talking about the last is like a couple of years. How are you guys looking to balance productivity improvements to support your margin stability versus expanding capacity, especially as these reps over the last few years, really had the advantage of an easier sales cycle with Meetings especially. Is there any way to also understand the experience of reps underneath in terms of how much are fully productive at this point? Thanks.
Kelly Steckelberg
Yeah. So in terms of our reps, we are constantly looking at opportunities to help make them more productive. And as you — we were just talking about we have hired a lot over the last few years and as we look forward to FY 2024, we will be making many fewer hires. So We are really looking for how do we enable the reps, how do we make sure that we have the overlay teams in the right places to support them.
As a reminder, that’s — we have specialists that are selling Contact Center and Phone and that’s a really important aspect of making sure that everybody is aligned on serving our customers in the best way possible. So that is a big focus.
We also have a new President, Greg Tomb, that you all met last quarter and he’s been spending a lot of time helping us think about that, especially as We are moving up in the Enterprise stack, that’s his experience, so where his background is. And then — and really focusing on making sure that our comp plans aligned. That’s another thing that We are taking a look at for FY 2024 as well.
Eric Yuan
And James, another big point just to add on to what Kelly said and also the Zoom IQ for Sales that product certainly added value to drive our team’s productivity, right, especially when reps that work remotely, right, how to manage their productivity, drive efficiency, take some actions, right, quickly. I think we will deploy Zoom IQ for Sales by end of this month, literally every rep will be fully trained on Zoom IQ for Sales, right? Not only do we have our sales productivity and also we will create a lot of opportunity for us to sell more and more Zoom IQ for Sales. That’s a future value for areas to drive productivity.
James Fish
Helpful. Thanks, guys.
Eric Yuan
Thank you.
Kelly Steckelberg
Thanks, James.
Operator
Moving on to Matthew VanVliet with BTIG.
Matthew VanVliet
Yeah. Hi. Good afternoon. Thanks for taking my question. I guess you highlighted Zoom Rooms and curious how much of that uptick do you feel like has been sort of a return to office for a number of companies and really having that mixed modality of a conference room and still having remote workers in. And how much, I guess, sort of risk might that come under over the next several quarters of being a growth lever as we have seen layoffs, as we see a slower macro and maybe that’s not an additive spend that the companies are going to want to undertake when they are already paying for the individual Zoom licenses? Thanks.
Kelly Steckelberg
Yeah. I think it’s very similar to Zoom Meeting licenses in the aspect of as long as you have a hybrid workforce, you need the right technology in your conference room. Other — to ensure that you have this inclusive experience that we have all become so accustomed to and we continue to listen to our customers, customers work on innovations to ensure that we provide that.
But I don’t think it’s going to go away. I mean we will see what happens, right? I think it’s still yet to come to see what happens with like commercial real estate. However, Zoom Rooms and the importance of those in a hybrid workforce, I just — I can’t tell you how important that is. I can’t stress enough the importance of that and that’s really what our customers are seeing as well as they are in some sort of state of a hybrid work environment.
Matthew VanVliet
Great. Thank you.
Eric Yuan
And also, Matt, another thing just quickly, so it used to be like you look at the conference room, right, most of the usage are used internal, right, for internal cost. Now look at the Zoom Rooms, that’s not the case.
A lot of customers are leveraging Zoom, right, talk to the customers and the partners, right? That’s one difference, because that’s the reason why customer like Zoom, right? When you talk with the customer partners, you want to make sure I have the best experience, right?
And another thing even for those companies who might think about laying off employees and reduce number of the employees. Guess what? Less taxes, but more conference rooms. Then otherwise, what can you do, right, to double down our customer and partner, right? And that’s why we still see the great opportunity ahead of us.
Matthew VanVliet
Thank you.
Operator
And we will move on to Tyler Radke with Citi.
Tyler Radke
Hey. Thanks for taking my question. Kelly, in terms of the Q4 guide, I understand that currency was a bit of a factor there on the lower outlook. But can you just unpack kind of what you are assuming from a macro perspective? Is the Q4 guide relative to what was implied last quarter, is it incorporating churn getting worse in SMB or weaker net adds or maybe you are seeing something on the Enterprise side? Just help us understand the non-FX side in terms of what you are expecting for Q4.
Kelly Steckelberg
Yeah. So in the Online segment of the business for Q4, we expect churn to be pretty much in line with Q3. I mean it’s likely that number is going to bounce around a little bit quarter-to-quarter and that’s going to all be visible to you now as we report it, but we are not forecasting any dramatic changes there.
And then in the Online segment, I would say that, the — I mean, sorry, in the Enterprise segment, I would say, the biggest change that We are seeing is just this continued push to deals being at the back end of the quarter.
And so that linearity — over the last few years, we had a much more balanced linearity in our Enterprise segment and what that leads to, of course, is deals contributing to revenue in the quarter and We are seeing much less of that as these deals are going back to the more traditional back end, really, really back end of the quarter.
Now we have the benefit in of having kind of the two periods of December 31st close and then the January 31st close, but we are expecting the linearity more consistent like with what we have seen in Q3 than what we saw a year ago.
Tyler Radke
Thank you.
Kelly Steckelberg
Yeah.
Operator
And we have time for one additional question from Karl Keirstead with UBS.
Kelly Steckelberg
Hi, Karl.
Karl Keirstead
Great. Thanks for fitting me in. Hey, Kelly. I’d just love to ask you about the — your perceived utility of the billings number. Traditionally, we look at that number as a decent proxy for business momentum. But, obviously, minus 10 in 4Q and plus 1% for the full year, I am guessing you would argue that that’s a poor proxy for Zoom’s momentum. So can you opine on that a little bit, because I think maybe there’s some consternation about that negative 10% and 5% billings?
Kelly Steckelberg
Thank you, Karl. I should have said this earlier. So as a reminder, we don’t guide to billings we never have, because we don’t think that they are a good indicator for us. Because of the large percentage of our customers that are, especially in the Online segment of the business that are on monthly contracts. And so because they bill and they pay us monthly, they don’t show up in that number and so that’s why it doesn’t — it isn’t really a good proxy for you to use.
Karl Keirstead
Okay. And as a follow-up, Kelly, is there anything else that’s skewing that DR number. Is there any change to invoicing terms or maybe more flexible payment terms to customers that maybe on the margin are impacting DR as well?
Kelly Steckelberg
Nothing significant.
Karl Keirstead
Okay.
Kelly Steckelberg
It’s really more about the timing — you are talking about the deferred revenue specifically…
Karl Keirstead
Yeah.
Kelly Steckelberg
Really about…
Karl Keirstead
Yeah.
Kelly Steckelberg
… the seasonality of the renewals. I can’t stress that enough for everybody. Remember, it’s the two factors. It’s — the fact that they bill in Q1 and then so you are going to see an uptick in billings and deferred and collections. And then that amortizes over time and then the billings in Q4 are just a lot smaller.
So you have this double impact, right? Now you have amortized a lot of the deferred that was picked up in Q1, so We are down at the lowest period and the billings in Q4 are the lightest period to refill that bucket.
So it’s going to, look, this is going to be a phenomenon that We are going to see for years to come, as I talked about until. Over time, we start to see more and more of our bookings happening in but that’s going to take a long time.
Karl Keirstead
Yeah. Makes sense. Thank you.
Kelly Steckelberg
Okay. Thanks a lot, Karl. Thanks everybody.
Operator
And again that does conclude our Q&A session for today. I will go ahead and turn things back over to Eric for any closing or additional remarks.
Eric Yuan
Thank you. First of all, thank you for every Zoom employees, great work. Thank you for every customer, partner and investors, greater support. You all have a wonderful holiday season. Thank you again. See you in our Q4 meeting. Thank you.
Operator
Thank you, Eric. And again, this does conclude today’s earnings release. We thank you all so much for your participation. And from our family to yours, may you have a safe and happy holiday season. Enjoy the rest of your day and again we will see you next quarter. Good-bye.
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