Zoom Video Communications, Inc. (NASDAQ:ZM) Q3 2024 Earnings Conference Call November 20, 2023 5:00 PM ET
Company Participants
Tom McCallum – Head of IR
Eric Yuan – Founder & CEO
Kelly Steckelberg – CFO
Conference Call Participants
Ryan MacWilliams – Barclays
Meta Marshall – Morgan Stanley
Kasthuri Rangan – Goldman Sachs
Michael Turrin – Wells Fargo Securities
Michael Funk – Bank of America
Karl Keirstead – UBS
George Iwanyc – Oppenheimer
Peter Levine – Evercore ISI
Patrick Walravens – JMP Securities
Arjun Bhatia – William Blair
Catharine Trebnick – Rosenblatt Securities
Thomas Blakey – KeyBanc
Shebly Seyrafi – FBN Securities
James Fish – Piper Sandler
Matthew VanVliet – BTIG
Ryan Koontz – Needham
Peter Weed – Bernstein
Imtiaz Koujalgi – Wedbush Securities
Tyler Radke – Citigroup
William Power – Robert Baird
Operator
Well, hello, everyone, and welcome to Zoom’s Q3 FY ’24 Earnings Release Webinar. As a reminder, today’s webinar is being recorded.
And now, I will hand things over to Tom McCallum, Head of Investor Relations. Tom, over to you.
Tom McCallum
Thank you, Kelcey. Hello everyone, and welcome to Zoom’s earnings video webinar for the third quarter of FY ’24. 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.us. 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 fourth quarter and full fiscal year 2024; our expectations regarding financial and business trends; impacts from the macroeconomic environment, our market position, opportunities, go-to-market initiatives, 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 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 the 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
Hey. Thank you, Tom. Thank you everyone for joining us today. In early October, we hosted Zoomtopia, our yearly customer and innovation-focused event, and it was awesome. Like last year, we ran it hybrid on Zoom Events, thousands joined us in person and many multiples of that virtually. Among the in person attendees were 40 customer presenters such as JP Morgan, MIT, Boston Consulting Group, HubSpot and Kohls, who spoke about their amazing experiences on Zoom and excitement about the future.
We also showcased newly-released innovations like Zoom AI Companion, as well as Zoom AI Expert Assist and Quality Management for the Contact Center. Zoom AI Companion is especially noteworthy for being included at no additional cost to our paid plans, and has fared tremendously well with over 220,000 accounts enabling it and 2.8 million meeting summaries created as of today. Remarkable growth in less than three months.
At Zoomtopia, I also had the pleasure of sharing the stage with Flex, a global manufacturing and supply chain leader, who spoke about how they use Zoom to connect their large, distributed workforce of 170,000 employees across 30 countries. Flex started using Zoom Meetings in 2017, quickly followed by Rooms and Team Chat.
Since then, Flex increased Team Chat users by 200% and Zoom Rooms by 245%. They also became power users of Zoom Whiteboard, creating over 13,000 Whiteboards. And moving to Zoom Phone allowed them to eliminate 50 to 70% of circuits and infrastructure across the globe, and reduce total cost of ownership. We were so happy to have Flex share their journey at Zoomtopia, and it cannot wait for what is in store for our partnership next.
Now moving on to some of our customer wins in Q3. First, let me thank Dropbox, who has been an amazing customer for many years starting with Meetings and then extending to Rooms, Phone and Events. In Q3, they selected Zoom Virtual Agent and Zoom Contact Center to provide world-class AI-enabled support to their global user base.
Let me also thank Amynta Group, a premier insurance services company, who initially adopted Zoom Phone and Zoom Contact Center on a limited scale in Q1 of this year. Seeing how our modern solution offered superior agility, customization for CX flows and administrative functionality. In Q3, they decided to standardize their customer-facing sales support on the Zoom stack and add Workforce Management, leading to a nearly 5 times increase in their monthly spend with us.
I’d also like to congratulate the Virgin Group on their launch of Workvivo to bring together 60,000 employees across almost 40 Virgin companies on one platform. The Virgin Family Workvivo platform is helping to drive social connection, encourage collaboration and boost brand knowledge. It’s inspiring to see how the Virgin Group is bringing the platform to life and strengthening culture with Zoom’s Workvivo.
These wins are a testament to the investments we are making in our customer experience offering, with the rapid pace of new innovations like Workforce Management, Quality Management, Zoom Virtual Agent and AI Expert Assist. They also highlight our progress with employee experience, especially with integrating Workvivo into the Zoom client.
Thank you so much to Dropbox, Amynta and Virgin Group. I love you all.
And with that I’ll pass it over to Kelly. Thank you.
Kelly Steckelberg
Thank you, Eric and hello, everyone. We are pleased that we beat our top-line and profitability guidance in Q3. Here are a few milestones: First, Zoom Phone reached approximately 7 million paid seats. Second, Zoom Contact Center reached approximately 700 customers as of quarter-end, while Zoom Virtual Agent customers nearly doubled quarter-over-quarter. And finally, the number of customers on Zoom One bundles that include Zoom Phone grew approximately 330% year-over-year. These proof points demonstrate our customers’ willingness to entrust us with their critical CX and EX processes, and their commitment to grow with us as we expand our platform.
In Q3, total revenue came in at $1.137 billion, up 3% year-over-year and 4% in constant currency. This result was approximately $17 million above the high end of our guidance. Our Enterprise business grew 8% year-over-year and represented 58% of total revenue, up from 56% a year ago. We continued to see improvement in Online Average Monthly Churn, which decreased to 3.0% from 3.1% in Q3 of FY ‘23. This is the lowest churn we have ever reported.
The number of Enterprise customers grew 5% year-over-year to approximately 219,700. Our trailing 12 month net dollar expansion rate for Enterprise customers in Q3 came in at 105%. We saw 14% year-over-year growth in the up-market as we ended the quarter with 3,731 customers contributing more than $100,000 in trailing 12 months revenue. These customers represent 29% of revenue, up from 27% in Q3 of FY ‘23. Our Americas revenue grew 5% year-over-year, while EMEA, APAC declined by 2%, each. On a constant currency basis, APAC grew slightly year-over-year
Moving to our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, acquisition-related expenses, net gains or losses on strategic investments, and all associated tax effects. Non-GAAP gross margin in Q3 was 79.7%, an improvement from 79.5% in Q3 of last year, but slightly lower than the first half of this year. The strong performance in gross margin was primarily driven by the optimization of usage across the public cloud and our co-located data centers, partially offset by our additional investments in new AI technologies.
For the full year, we expect non-GAAP gross margin to be approximately 80%. Non-GAAP operating income grew by 17% to $447 million, exceeding the high end of our guidance of $405 million. This translates to a 39.3% non-GAAP operating margin, a meaningful improvement from 34.6% in Q3 of last year. Non-GAAP diluted earnings per share in Q3 was $1.29, on approximately 310 million non-GAAP diluted weighted average shares outstanding. This result was $0.20 above the high end of our guidance and $0.22 higher in Q3 of last year.
Turning to the balance sheet. Deferred revenue at the end of the period was $1.32 billion, down approximately 3% from Q3 of last year. This was roughly 1 percentage point better than the high end of the guidance we provided last quarter. For Q4, we expect deferred revenue to be down 6$ to 8% year-over-year, partially driven by shorter billing frequencies on Enterprise deals arising from the high interest rate environment.
Looking at both our billed and unbilled contracts, our RPO increased 10% year-over-year to approximately $3.6 billion. We expect to recognize approximately 58% of the total RPO as revenue over the next 12 months, as compared to 59% in Q3 of last year, indicating lengthening contract durations on a year-over-year basis. As a reminder, our renewal seasonality peaks in Q1 and declines throughout the rest of the year.
Operating cash flow in the quarter grew 67% year-over-year to $493 million. Free cash flow grew 66% year-over-year to $453 million. The sharp increase in our cash flow metrics was due to stronger collections, targeted expense management and higher interest income. Our operating cash flow and free cash flow margins expanded to 43.4% and 39.9%, respectively.
Turning to guidance. For Q4, we expect revenue to be in the range of $1.125 billion to $1.13 billion, which at the midpoint would represent approximately 1% year-over-year growth. Adjusting for currency impact, this projection is slightly higher than the previously implied guidance from our Q2 call. We expect non-GAAP operating income to be in the range of $409 million to $414 million. Our outlook for non-GAAP earnings per share is $1.13 to $1.15 based on approximately 312 million shares outstanding.
We are also pleased to raise our top-line and profitability outlook for the full year of FY ‘24. We now expect revenue to be in the range of $4.506 billion to $4.511 billion, which at the midpoint represents approximately 3% year-over-year growth. We expect our non-GAAP operating income to be in the range of $1.74 billion to $1.745 billion representing an operating margin of approximately 39%. Our outlook for non-GAAP earnings per share for FY ‘24 is $4.93 to $4.95, based on approximately 308 million shares outstanding.
Thank you to the entire Zoom team, our customers, our community, and our investors for your trust and support.
Kelcey, please queue up the first question.
Question-and-Answer Session
Operator
Thank you, Kelly. And as Kelly mentioned, we will now move into the Q&A session. [Operator Instructions] Our first question will come from Ryan MacWilliams with Barclays.
Ryan MacWilliams
Hey, guys. Thanks for taking the question. Just to start with Kelly, do you have any changes in the overall macro environment in the third quarter compared to the second quarter? And could you touch on how linearity did throughout the quarter for new bookings? Thanks.
Kelly Steckelberg
Yeah. Hi, Ryan. So the macro has been pretty consistent from Q2 to Q3. We continue to see similar trends in terms of deal scrutiny, back-end loaded. So the quarter from a direct perspective was fairly back-end loaded. As a reminder, the online segment of the business is typically pretty linear throughout the quarter. I think the only thing that got a little worse from Q2 to Q3 was actually FX, as you saw in Asia Pac that had – that was a fairly significant headwind for us, whereas Asia Pac would have at least been flat year-over-year, if not for that impact.
Ryan MacWilliams
Thanks guys.
Operator
Moving on to Meta Marshall with Morgan Stanley.
Meta Marshall
Great. Thanks. Maybe just a question on kind of what feedback you’re getting on the AI companion and that’s a pretty big jump in kind of customers using it. So just what features are they really liking — and is it kind of helping with some of the free-to-pay conversion that you guys were hoping for? Thanks.
Eric Yuan
Yes. It’s a great question. I think we are very, very proud of our team’s progress since it launched the Zoom AI Companion, as I mentioned earlier, right, a lot of accounts enabled that. Remember, this is no additional cost to paying customers, a lot of features — one feature of that is like take a meeting summary, for example. Amazingly, it’s very accurate and really save the meeting host a lot of time. And also, our federated AI approach really contributed to that success because we do not count on a single AI model and in terms of latency, accuracy and also the response, the speed and so on and so forth, I think, really helped our AI combining.
Again, and for the online producers and also its additional cost. For sure, for free users, they do not — they cannot enjoy this combining, for sure, it’s a daily health for those who free to approve for online operate. So anyway, so we keep innovating on AI company. We have high confidence. That’s a true differentiation compared to any other AI features, functionalities offered by some of our competitors.
Meta Marshall
Great. Thanks so much.
Eric Yuan
Thank you.
Operator
Our next question on Kasthuri Rangan with Goldman Sachs.
Kasthuri Rangan
Hi. Thank you very much. Happy to see the results, and happy Thanksgiving. I just had one question, if I could restrict myself to one. The SMB online churn 3% I don’t know it came down from 3.1%. Any initiatives that you are undertaking that could bring that number even down more significantly I would resume that, that would have big implications for your growth rate and margins, which are already quite good. Thank you so much.
Kelly Steckelberg
Well, Wendy and her team are always working on initiatives. But I think what Eric was just mentioning about AI is probably really going to be a key differentiator and a retention — retention tool in the future because as a reminder, all of the AI companion features come included for our three — sorry, for our paid users. So we’re seeing it not only help with conversion, but we really believe that for the long term, it will help with retention as well.
And cash, I’ve gotten this question many times, and I would say like, this is the lowest we’ve ever seen, but also our platform is so much better. It’s infinitely better than where it was on a pre-pandemic basis for our online users. And so I think we will — this is how we’re modeling it at this level. But I think over time, you should continue to see retention just continue to improve.
Kasthuri Rangan
Thank you so much.
Eric Yuan
Let me add on to what Kelly said, also the happy Thanksgiving to you as well. So more and more customers realize, wow, Zoom even for online users, it’s not only for Zoom Meeting. A lot of other features, right? And I take a Zoom Team chatter for example, this is a great position and it had a solution. It’s part of offering, even for free users as well, right? For the paid user for sure, a lot of other features, the more they spend time on Zoom platform, really as well. This is pretty powerful, not only just for meetings but the entire platform.
Kasthuri Rangan
Got it. Thanks so much, Eric and Kelly.
Eric Yuan
Yeah.
Operator
Wells Fargo is Michael Turrin. Please go ahead with your question.
Michael Turrin
Hey, great. Thanks. Nice to see everyone. I guess as a complement to Kash’s question, you’re showing stabilization here on some of the major metrics, the enterprise expand metric took a step down to 105%. And so just wondering what it takes for that metric to similarly show stabilization as given in Q1 renewal cohort and kind of walking through that. Anything on the product side for us to consider or just any other commentary there is helpful. Thank you.
Kelly Steckelberg
Well, as a reminder, it’s a trailing 12-month metric. So as we’ve worsely seen our growth rates come down this year that’s following behind it. But absolutely, we believe that AI Companion in general as well as the success that we are seeing in Zoom Phone, in Zoom Contact Center, Zoom Virtual Agent, all of those will be key contributors to seeing that metric start to reaccelerate again as we see our growth rate starting to decelerate as well.
Michael Turrin
Thank you.
Operator
Our next question will come from Michael Funk with Bank of America.
Michael Funk
Yeah. Hi. Thank you for the questions toning. So just on the deferred revenue guidance for 4Q, Kelly, in the commentary on the macro and the rates affecting that. How should we think about growth rate in calendar year ’24 given the decline in deferred revenue and impact on new deals in enterprise?
Kelly Steckelberg
Yeah. So I mean what’s very interesting, if you look at, right, you see growth in RPO, but you’re seeing a decline in deferred revenue, which implies customers while they’re committing for long-term agreements, they are preferring to pay in shorter-term increments to keep their cash and take advantage of the interest rate environment. So the other thing, as a reminder, right, we’re going to have a big renewal cycle in Q1, and then that’s the peak and it’s going to come down.
And we believe that in FY ’24 that we’re currently in, we had — the majority of our customers had some sort of renewal period during FY ’24, which means that we believe that we’ve moved through a lot of our customers that were impacted themselves by a reduction. And we’ve talked in the past about how our team has been doing a great job of preserving that spend. But to the extent we’re helping them right-size or transition from new meetings to say, a Zoom One bundle. We think the majority of our customers, we know the majority of our customers have gone through that renewal period in FY ’24. And so that by the time we get into FY ’25, hopefully, we’re in a little more normalized renewal cycle.
Michael Funk
Great. Thank you.
Kelly Steckelberg
Yeah.
Operator
And moving on to Karl Keirstead with UBS.
Karl Keirstead
Hey. Great. Thank you. Hey, Kelly. The phone business has been a big part of the Zoom growth algorithm lately. So I’m wondering if you could elaborate on how that parties did in the quarter. On the surface, and I know that you round that seat number, but it looks like the sequential phone suggests (ph) that might have been a lot less than the last several quarters. Maybe that’s rounding, but I wanted to give you a platform maybe to elaborate about that part of the business.
Kelly Steckelberg
Thank you. So Q3 cyclically, just as a reminder, Q1 and Q3 cyclically are our lower orders, given that our enterprise reps — some of our enterprise reps are on six month quarter. So we’ve historically seen the big Zoom Phone, just add quarters be in Q2 and Q4. What we did see in Q3 was that customers in the upper segments. So customers with greater 10,000 seats grew 9% quarter-over-quarter. So we’re seeing a lot of strength in the upper end of Zoom Phone. So really happy to that. I mean that’s the largest increase we’ve had so far this year.
And then as a reminder, we haven’t always given that metric, honestly at the exact same period. So it’s hard a little hard for you to tell exactly how it’s trending every single quarter. And as just in the past, we’ll continue to update you on future milestones as they make sense.
Karl Keirstead
Okay. Thank you.
Operator
George Iwanyc with Oppenheimer has the next question.
George Iwanyc
All right. Well, thank you for taking my questions. So Kelly, maybe following up on Zoom Phones to give us a bit of extra color on the contact center and the customer traction you’re seeing there?
Kelly Steckelberg
Yeah. So as we mentioned, we’re up to over 700 customers on Zoom Contact Center and we saw our Zoom Virtual Agents product double the number of customers quarter-over-quarter. So really excited there. I mean, maybe Eric can talk about some of the features and functionality, but we’re thrilled with the progress that we’re making there so far.
Eric Yuan
Yeah. So we are extremely excited about our content center opportunity. And it feels like back to a few years ago, when we announced the Zoom Phone, right? Quite often, a lot of people mentioned, wow, you would take you guys many years to get recognized, deployed by large customers and look at what we have today in terms of number of paid user phone (ph). I feel like if we ask well, I think we are going to follow the similar journey and maybe even better because if you look at our content center and modern architecture, extremely stable and plus a lot of AI features and innovation speed.
I think whenever a customer really take a Zoom content center seriously, evaluate Zoom contact center. The feedback is very consistent. Wow, I did not realize you guys have a so powerful contact center, it’s just amazing, right? I think that there’s further boosted our team is confidence double down, triple-down our own contact center. Again, it’s modern architecture, very scalable. I also shared quite a few customer cases, right, during this call, and we are very, very excited. A lot of new AI features in virtual agent and workforce management and so on and so forth. And this is something that are very, very exciting.
George Iwanyc
Thank you.
Eric Yuan
Thank you.
Operator
We’ll know hear from Peter Levine with Evercore.
Peter Levine
Great. Thanks for taking my question here. Maybe for Kelly, as I look at gross margins, how sustainable is it keeping at these levels? I know AI companion is being given away from as part of the package, I guess, prepaid users. But if you think about the cost to run these models, the margin profile of contact center in phone. How durable is it to kind of sustain these levels? And then second, as you think into next year, you have guided, but what’s the best way to think about stock-based comp and dilution as you kind of manage through that?
Kelly Steckelberg
Yes. So in terms of our gross margins, we’ll obviously give FY ’25 guidance on our call next quarter. But as we are working on our planning, our DevOps team is doing an amazing job of continuing to optimize around the data centers and being very thoughtful about leveraging capacity to its highest and best use and making room for all of this AI innovation. So while we are going to invest, and we’re actually — we’re going to invest to the extent that XT and the team really believe that we need to and that for the long term, it’s an amazing ROI when you look at what it’s going to do for our customers, for our growth and for our retention.
But we do expect there’s going to be some impact on gross margins. I mean we — I don’t think it’s going to be significant because the team will continue to work to operate, the very efficient manner that they do and run our colors that way, but we do expect there’s going to be some impact to our gross margin as we move forward. Do you want to add anything, Eric?
Eric Yuan
Yes. So you are right on. Just to echo what Kelly said, led by our CTO, XT and his team our federated AI approach, as I mentioned earlier, really contribute a lot. So for sure, and there’s a cost impact, but extremely manageable, right? And our team is really, really, I think I had a very smart architecture. That’s why I think in terms of cost, very manageable, but also the quality is pretty good. So and we are keep innovating on that.
Peter Levine
Thank you both.
Kelly Steckelberg
Peter, regarding stock-based comp, about a third of our expense this year is related to the supplemental grants. So as a reminder, those that best along with how the underlying grants are vesting. So there’s a couple more years for that to just start to bleed off, if you will. If you’re going to model that out.
Peter Levine
Thank you.
Kelly Steckelberg
Yeah.
Operator
And we will now hear from Patrick Walravens with JMP Securities.
Patrick Walravens
Great. Thank you. Hi. So Eric, what is your ideal customer profile on the contact center side of the business?
Eric Yuan
That’s great question. I think first of all, again, this is based on architecture and AI features. I think [indiscernible] medium-sized because the reason why for very, very large customers, even if our architecture, everything, ever ready, but sometimes they just want to look at, hey, you are still too early, but even product fully ready. That’s the reason why sometimes even we do not reach out to them. It’s very large, let’s say tens of thousands in customers, if they take our certain series. [Technical Difficulty]
Kelly Steckelberg
Is it Eric freeze or did I freeze.
Operator
I think Eric is — Okay.
Kelly Steckelberg
Okay. Let me — sorry for that. Eric, we lost you for a minute there.
Eric Yuan
Yeah. I’m sorry. And so given the new solution is sort of a modern architecture and all the new AI features those, let’s say, like 20,000, 10,000 agent customers, if they look at our solutions, they have confidence. Because of that, we want to be a little bit of practice to focus on medium-sized companies, like form of hundreds agent to thousands of agents. That’s our obviously a sweet spot. But not me, I’m going to stop here, as I mentioned earlier, any when, very big large companies, when you look at our contact center solution seriously, we have a confidence about to win. But however, to get there, they focused on the medium-sized companies.
Patrick Walravens
Okay. Thank you, Eric.
Kelly Steckelberg
All right. I could give you an example, Patrick. We have a customer called Venture, which provides like payroll and HR services. And they became in the last year, they doubled their Zoom Phone seats. They’ve doubled their contact center our seats into four digits now. They also have deployed workforce management as well as quality management and ZVA (ph). So really taking advantage of the whole suite Zoom products, not only the contact center and its extensions, but the full suite of Zoom. And I think when they start to deploy like that, they really see the power, and it’s been very exciting to see them grow.
Patrick Walravens
Okay. Thank you both.
Eric Yuan
Thank you.
Operator
Our next question comes from Arjun Bhatia with William Blair.
Arjun Bhatia
Perfect. Thank you. Can you just touch on the international business a little bit? It seems like it’s certainly trailing the U.S. but what gets that business to turn around? And maybe talk about some of your new growth drivers, how they’re faring there with Zoom Phone and contact center? Thank you.
Kelly Steckelberg
Yeah. So Unfortunately, both EMEA and APAC over the last year have been impacted both by currency and then EMEA has been impacted by the general economy and the war there. But in terms of our focus, we have very recently actually added a new European leader and a new leader in Australia and New Zealand. So we’re very excited about the team. And since we did the reorganization earlier this year, those regions have just taken a little bit longer than the U.S. but we’re starting to see that momentum build again and really excited about what they’re going to contribute and watching their success in the future.
Arjun Bhatia
Perfect. Thank you.
Kelly Steckelberg
Yeah.
Operator
Our next question will come from Alex Zukin with Wolfe Research. His video is not on, so he may just be audio only.
Kelly Steckelberg
Hi, Alex.
Hey, Alex. Do you want to go ahead.
Unidentified Participant
This is Ethan Brock (ph) on for Alex. He said he is in [indiscernible] right now. Thank you for taking my question. I just had two quick questions. Just how do we think at what level should we expect or when for the NRR of the enterprise cohort to trough? Just any kind of puts and takes around enterprise revenue in the quarter, right, above your expectations, it grew sequentially. And it was also — it was probably like RPO, CRPO. CRPO bookings has all accelerated. I guess, is it fair to think that for next year’s enterprise growth rate would be above what’s implied in the 4Q guide? And just if you can give any more kind of color around the 4Q numbers and kind of what you’re expecting in the online churn, that would be helpful. Thank you.
Kelly Steckelberg
Yeah. So we did see strength in the direct bookings, they were very back-end loaded in Q3, which just continues the theme that we’ve been talking about in terms of the overall macro. And as we look forward to Q4, we have typically, we have the benefit of having year-end where customers are having their year-end on 12/31 and then we have our year-end on January 31. And of course, we have our six-month quota-carrying reps that are coming to the end of their quoter cycle. So hopefully taking advantage of their accelerators. But we are expecting similar behavior in terms of even if we have a 12/31 sort of bump expecting that to be back-end loaded and then January 31 on as well.
In terms of your question around net dollar expanding, we’re not going to give — I mean, we don’t guide on that. I expect that given your growth rates have come down a little bit more that there might be a little bit more room for that to come down even further until it starts to stabilize and probably reaccelerate sometime next year.
Unidentified Participant
Okay. Thank you. And then just a quick follow-up. Just on the comment you made in your prepared remarks around the shorter billings duration. I guess, is there just any way to qualitatively think relative to 3Q, if there’s any change, just how to think about obviously, people moving to a more different — shorter payment terms. So just how we think about that in terms of what’s implied in the 4Q guide? Thank you.
Kelly Steckelberg
Yeah. We — so we commented first time, in seeing this trend was in Q2. If you remember, we also talked about this in our prepared remarks, we saw this happening. And given the interests rates are high, I don’t expect it’s going to change any time soon. I think — the good news is from the health of the underlying business, right, customers are committing to longer-term duration contracts, they just are preferring to pay on shorter term. And yet, we obviously had very strong cash flow in the period. So I don’t think it’s something you should be worried about.
Unidentified Participant
Got it. Thank you very much. Congrats on the next results.
Kelly Steckelberg
Thanks.
Operator
And our next question is going to come from Mark Murphy at JPMorgan. Mark will be audio only.
Unidentified Participant
Hi, guys. This is [indiscernible] on for Mark Murphy. Thanks for taking the question and congrats on the quarter. You guys called out the Virgin Group and the launch of Workvivo across 60,000 employees and a number of the workforce-related innovations you’ve launched recently. Can you just speak to the adoption of those products and what kind of momentum you’re seeing on that front? Thank you.
Kelly Steckelberg
Yeah.
Eric Yuan
Kelly you go ahead.
Kelly Steckelberg
Yeah. I mean we’re really excited about Workvivo. They — first of all, in terms of operating, they’re continuing to run as an operating unit, which — we’re making sure that we support them and their continued momentum, and we’ve already talked about — we talked about Dollar General on the last quarter and their amazing adoption. So we’re really excited about that team. They — when they joined us, we said, welcome to the family and gave them an accelerated bookings target, and they are running and achieving against that. So really thrilled to have them and watching that continue to succeed.
Unidentified Participant
Great. Thank you.
Operator
Our next question is going to come from Catharine Trebnick with Rosenblatt.
Catharine Trebnick
Thanks for taking my question. Nice quarter. Has your appetite for M&A changed at all in the last year? All day long on CNB they kept saying, we’re looking for growth, reacceleration of growth. So I’m just wondering if you’re looking at the $6.5 billion and your attitude towards M&A? Thank you.
Kelly Steckelberg
Yes. Thank you, Catharine. M&A is something that we evaluate and think about for as a potential strategy all the time. I have a core dev (ph) team that looks at opportunities on a daily basis. And we have a very strong lens that we look through in terms of evaluating that is, first of all, the technology and what does it bring to our customers. We would always want to make sure that our customers continue to enjoy a really high-quality product like they do with Zoom today. We look at the culture to make sure that it’s something that we think work well with Zoom. It’s usually a really good indicator success of integrating two companies.
And then, of course, we look at the lens of valuation and does it make sense? Is it a price that we are willing to pay. And because we have such a high bar, it honestly has been hard to find companies that we love that makes it through all three of those tests. It doesn’t mean that we wouldn’t love to find someone that did. There are some really great companies out there. And for one reason or the other to date, we just haven’t found the right match, but it doesn’t mean that we won’t. And that is why we have purposely remained retained, I should say, the flexibility of having that cash on our balance sheet so that if we do see something interesting, we’re able to act on it.
Operator
Moving on to KeyBank of Tom Blakey.
Thomas Blakey
Thank you very much. Good to see you, Eric, and hi, Kelly. Just wondering quickly on the stability that we were talking about a couple of quarters ago in online. It’s a pretty impressive that we went back and forth on that a little bit here and very stable. I mean obviously talked about the churn. Can you just maybe update us that on that in terms of should we expect the same type of stability in online into the fiscal 4Q and maybe even similarly into fiscal ’25, that would be helpful. Thank you.
Kelly Steckelberg
Yeah. So the team has done a lot of work this year to — on many fronts around online. First of all, stabilizing retention, which you’re seeing the benefits of that today as well as focusing on free-to-pay conversion because it’s really important that we’re continuing to fill the top of the funnel, and those are things like force brakes. And as Eric mentioned earlier, also being able to procure additional products online, things like whiteboard and scheduler are very well aligned to the strategy of our online buyers.
So those are all of the initiatives that went in our team are continuing to focus on. In terms – I mean, we hold ourselves to a very high standard. We say stabilization. What we really want to see is dollar stabilization quarter-over-quarter. And while it’s very, very close, it’s not quite there. And I expect it will be slightly down, just very, very slightly down again in Q4. But as we’re working on FY ‘25 planning with the team, really looking forward to initiatives that drive stabilization and if not, some growth into FY ‘25.
Thomas Blakey
Very helpful. Thank you, Kelly.
Kelly Steckelberg
Yeah.
Operator
The next question is from Shebly Seyrafi with FBN Securities.
Shebly Seyrafi
Yes. Thank you very much. You guided deferred revenue to decline 6% to 8% in Q4. Do you sort of billing frequencies with enterprise customers. The question I have is what kind of decline would that have been without that billing frequency change? And related to this, you’re going to have a big renewal cycle in Q1. So do you expect deferred revenue growth to pick up meaningfully in Q1?
Kelly Steckelberg
Yes. So as a reminder, the way the deferred revenue trends about the year is it’s always the highest in Q1 and then it declines throughout the year. And there’s two things that are happening. First of all, Q1 is the largest renewal period. So if the bucket gets filled up, and then that’s getting amortized through the rest of the year. But also the subsequent renewal cycles are lower than Q1. So it’s the inverse of probably every other SaaS company in the world where usually you’re adding higher renewals every single quarter, we are actually adding a lower number – a lower dollar amount of renewals every single quarter. So as Q1 is getting amortized down, what’s coming into refill at the top of that bucket is coming down every single quarter. And that’s why you have seen for quite a number of years now, typically a sequential decline in deferred revenue quarter-over-quarter.
Shebly Seyrafi
Okay. Thanks.
Kelly Steckelberg
Yeah.
Operator
We’ll now hear from James Fish with Piper Sandler.
James Fish
Hi, guys. Thanks for the questions here. Appreciate all the details around some of the product lines. But building off of a few prior questions with that contact center customer count up to about 700 versus the 500 last quarter. If my math is right, given kind of what you guys have talked about with price points kind of seems like we’re nearing $100 million of ARR now or how should we think about that average seat count at this point?
And then, Eric, for you, look, it got released and was available this quarter, but how has that workforce engagement solution really gone in terms of penetration with the contact center installed bases, is that acting as sort of a consolidation function underneath for especially that small mid-market. Thanks, guys.
Kelly Steckelberg
Go ahead, first.
Eric Yuan
I think if you look at the contact center, right? So not only just all fast to offer the core kind of contact center of capabilities, we want to offer a full platform, right, including workforce management, right? This is the — based on modern architecture, not something like, hey, you have on-premise solution for a long time, you just put it into the — in the cloud, that’s not the case. We built it everything from ground up. It’s tied to integrated with our core contact center solutions. That’s the reason why when you look at our customers right from SMB, minimum size, all the way to lot enterprise, I think we are ready.
And however, as I mentioned earlier, sweet spotters should be the major, right. However, one thing is realized, customers do have one seamless experience for everything contact center and workforce management, virtual agent AI feature call, engine, right, so we are trying to offer all of them. So that’s kind of our strategy. In terms of our workforce management contribution, it really helped because we tell them, hey, we offer everything to you. We are not going to let you deploy other third-party workforce management solutions. We offer all the services, all the functionality to you with one platform.
Kelly Steckelberg
Yeah. And James, in terms of your ability to kind of understand how those products are progressing themselves, we’ll do done with others and announced milestone metrics as we start to see them emerge. They’re just so new right now that doesn’t really sense, but we will do that over time.
James Fish
All right. Thanks, Kelly. Thanks, Eric.
A – Kelly Steckelberg
Yeah.
A – Eric Yuan
We are not ready to share with the number, exact number yet about how many customers deploy the workforce management, so we’ll state in the future quarters.
Operator
And our next question will come from Matt VanVliet fleet with BTIG.
Matthew VanVliet
Yes. Good afternoon. Thanks for taking the question. I guess following up one more on sort of the contact center and Zoom Phone. In terms of overall customer mix, you’re well below 1% penetration on contact center here. Is there a target that you think is sort of the next few years of the customers you’re going to go after? How high do you think of roughly 200,000 customers you have an existing contact center that you’ve maybe identified and comparably work your way into. And then sort of following up on that, what percentage, if you can share the over 100,000 customers, 100,000 revenue customers have Zoom Phone or Zoom Contact Center as an attachment there?
Kelly Steckelberg
So I guess the way that I think about contact center and its progress is that it’s so far is very, pulling in a very similar road map, if you will, than that Zoom Phone did. So if you think about — we can see the visibility internally just as we could with Zoom Phone. But in terms of ARR as a metric for example, it’s going to take a little while for that to be something that’s visible to you. But so far, it’s tracking in a very, very similar way that’s Zoom Phone did, which I think is very encouraging. And that we need a couple more years and then it starts to be a really significant growth contributor. It just start small and then grow quickly, and that’s what we’re seeing.
Eric Yuan
And also, if you look at opportunity, very similar as well. Many years ago, a lot of our enterprise customers, their phone you see deployment is still on-prem. Today, you look at most of our enterprise customer contact center still on track. So that’s why a lot of opportunity ahead of us, in particular, in our model architecture is very scalable.
Matthew VanVliet
Great. Thank you.
Operator
Needham’s, Ryan Koontz has the next question. Ryan, please go ahead.
Ryan Koontz
Hi. Happy Thanksgiving. From Zoomtopia, we’re really impressed with the Zoom Rooms and what you’re doing there. The innovation really seems years ahead of the market. And I wondered how you — what’s your updated view on the rooms opportunity for the company. Do you think it’s strong enough that you can use that as a lead as almost a stand-alone product? And you see the market opportunity more promising for you with that product. You have to go to market in those sort of questions. Thank you.
Eric Yuan
So you’re right. So speaking of the opportunity, you’re also right. We never, customer, for many year, they right deployed the Zoom Rooms for more and more customers. I mean they try to invest hybrid work. They need to have a modern solution for their conf-rooms, they are multiple solutions, Zoom Rooms indeed stands out is indeed years ahead of any other competitors. However, sometimes for customers when they try to support a hybrid work right now, they’re in the middle of embracing hybrid work, right? What’s the new layout of the entire workplace and how many conf-room they needed to support and so on and so forth, right? That’s why a lot of opportunities.
At the same time, when guys work together with customers and not only for conf-room innovation, but also entire workplace, the management, what’s the new layout [indiscernible]. I think a lot of opportunity, not only for conf-room itself, like how to reserve a desk, right? All those things we all build in as a part of the Zoom Room, like an example, like a digital signage and also part of Zoom Rooms as the full as the conf-room or workplace solution, and that’s why we needed to make sure a focus on marketing side to share with the customer. Again, Zoom Rooms is not only just for your conf-room solution, but it’s for hybrid work and also for entire workplace as well.
Ryan Koontz
That’s great. Thank you.
Eric Yuan
Thank you, Ryan.
Kelly Steckelberg
Thanks, Ryan.
Operator
Now we’ll move on to Peter Weed with Bernstein.
Peter Weed
Thank you. I think for the first time, at least as far as I can look at in the model, it looks like the kind of large enterprise was greater than $100,000 enterprise customers were roughly flat quarter-over-quarter. But we’re hearing the great stories about customer expansions and the number of those customers has continued to increase, which would imply there’s a whole another set of customers that are either shrinking or churning and it appears that got more pronounced this quarter than perhaps we’ve seen recently.
How should we think about those effects, and is that more churn or is it downgrades? And when customers are churning or downgrading, where they’re going? And is this something that is kind of temporary and you see it kind of ending? Or is it something where we may have some pain for a bit of time before we get through some effects?
Kelly Steckelberg
Yeah. So I think we’ve talked about this the last couple of quarters. We certainly have seen impact in our customers having retraction in their own businesses in their own employee count. So we — if that’s the situation that we are working with them, we — the good news is we’ve not seen a lot of logo churn. It has been more down selling in terms of rightsizing, their meeting license numbers. And yet even in that situation, our team is doing a great job of taking the opportunity to transition them from potentially meetings to one of our Zoom One bundles that include Zoom Phone.
We talked about in our prepared remarks, we saw that grow over 300% year-over-year in terms of the number of customers that are using those bundles and that’s great for many reasons, right, in terms of retention and having more than one product deployed, we see as very advantageous to customer retention. So we certainly have worked with many, many, many of our customers this year on ensuring that they have the right package in place. And — but I also talked about earlier this earlier on the call, that we know that the majority of our customers have had some sort of renewal period in FY ’24, meaning that we hope, we anticipate that as we’ve got — get through the end of this year, we’ve moved through most of those transitions where organizations have done their own reductions and are aligning their licenses to that.
Peter Weed
But it sounds like you’re not seeing an uptick in churn. This is mostly just that kind of reduction in force. And once we do that, then you set a four in so that the expansions can kind of work going forward on all the great things people are buying, which even us at — great customers love the product.
Kelly Steckelberg
Yeah, I mean that, we’re not giving FY ’25 guidance, just to be clear. But yes, that’s in general what we anticipate, just knowing that we’ve worked through most of our customer renewals this year, and I assume that they’ve gotten through their reductions. Now it depends on what has overall with the macro, but that’s what we leave to be the case. Yes.
Peter Weed
Thank you.
Kelly Steckelberg
Yes.
Operator
Our next question will come from Imtiaz Koujalgi with Wedbush.
Kelly Steckelberg
You are on mute.
Imtiaz Koujalgi
Sorry, can you guys hear me now?
Kelly Steckelberg
Yeah.
Imtiaz Koujalgi
A question on Zoom Phone. So Kelly, you give us the ARR last quarter, we have the Zoom Phone seat this quarter. Further, if I do a rough math on the ASP, it comes down to like $7 to $8 something per month, which seems like almost half or even more of the list price. If you can just confirm that and has that come gone down or gone up?
Kelly Steckelberg
So as a reminder, you can buy Zoom Phone either for $10 per license per month if you have metered calling on top or $15, if you get unlimited long distance. So the ASP is going to depend on which version of that, which of the SKU the customers are buying and how they come together. And then, if you think about some of our largest enterprise customers, we do discount not just for obviously, for Zoom Phone, but the overall value of their purchases or their value of being a customer for longevity in terms of length of cycles, willingness to pay upfront. So all of those things contribute, but it sounds like you’re right in. You’re right in sort of the ballpark. We have not seen a dramatic shift in those discounts up or down.
Imtiaz Koujalgi
And just one follow-up. Is that similar to what you’re seeing in the contact center or versus your I think the list price was 70 for contact center. Any comment on how the discounting in contact center compares to what you’ve seen in Zoom Phone?
Kelly Steckelberg
Yeah. No. I don’t think if you can correlate them. They’re very different products with different sales cycle and approach. So I don’t think I can try to take a percentage discount necessarily from one product and expected to apply to a different one.
Imtiaz Koujalgi
Thank you.
Kelly Steckelberg
Yeah.
Operator
We will now hear from Tyler Radke with Citi.
Kelly Steckelberg
Hi, Tyler.
Tyler Radke
Yeah. Hi. Good evening. So Kelly, if I look at the midpoint of your guidance for Q4, it’s about 1% growth in others. Some currency in there. But how should we be thinking about that as a jumping off point for fiscal year ’25? What are kind of the puts and takes that would cause growth to be higher than that, and also lower. It does sound like you’re starting to see some stabilization in parts of the business. But just help us frame for how we should be thinking about that trajectory beyond Q4.
Kelly Steckelberg
Yeah. So we will obviously give FY ‘25 guidance on the Q4 call. However, I do think that the Q4 implied extra rate and considerations around the macro? And if it is stabilizing or improving over time are important considerations. We do see — we’ve talked about many great aspects of our business today, growth in Zoom Phone, growth in contact center, stabilization and all online, all could be contributors that could drive growth in FY ‘25 to be slightly higher than the implied Q4 exit rate. But right now, I mean, if you look at the extra rate consider the macro and take all that into account as you’re modeling.
Tyler Radke
Thank you.
Operator
We’ll move on to William Power with Baird.
William Power
Great. Thanks. Maybe a couple of quick follow-ups. I guess, Eric, to an earlier question on AI companion, can you just talk about where you’re seeing the greatest usage. I mean what are customers most focused on? And what’s the early feedback look like? And what are customers asking for in AI? Where can you continue to add more value there?
Eric Yuan
Yeah. It’s a great question. First of all, AI combining includes a lot of features. Like if you are related to the call, you want to instead of what’s going on, what kind of the point I missed, and so you can ask, right, all those kind of features. And also when you use our team chat, you can have a composer chat solution and a lot of features built upon that, right? So — and one of the key features customer-like is very for sure Zoom Meeting summary, right? And after meeting Zoom, not only to be generated. Sometimes, record meeting or some — for now you don’t know recorded meeting anymore.
It just recorded a summary. And that future works extremely well. We do see among a lot of other features, customers already started in a blink. I think this one is probably one of the highlights. It is very easy to use and you see the very adverse in our way to enable that feature. So again, it’s a lot of other features as well. And like for me, I also use our — the client, the Zoom Client, connect and other services you can, right? You can have — you compose e-mail as well, right? It’s a lot of features, right? And down the road awareness for the whiteboard with AI companion as well. Almost every service entire platform, we’re going to lever the AI combined. So and a lot of features and the AI Companion.
William Power
Thank you.
Eric Yuan
You enable meeting summary and explore so many features, I’m pretty sure you’ll love that. So we’ve got a lot of very positive feedback from those early adopter.
Operator
And our last question is going to come from Stephen Bersey with HSBC. Steven, if you want to go ahead — I believe, Stephen, just disconnected. Stephen, are you still out there? If you are not, I don’t think he’s — no longer with us. So what, Eric, I’ll just turn out to you for closing remarks.
Eric Yuan
Yeah. So first of all, thank you all for your time to join our Q3 earnings call, I really appreciate wish you all and your families have a wonderful holiday season. Thank you again for your great support. Thank you.
Operator
Thank you so much, Eric. I apologize, Kelly. Again, everyone, this concludes today’s earnings release. As Eric and Kelly mentioned, we thank you all for your participation and from our family to yours. May you and yours have a safe and happy holiday season. Enjoy the rest of your day.
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