Zoom Communications, Inc. (ZM) Earnings

Management highlights

- Leadership & Product Strategy * Appointed Russell Dicker, a 25+ year product leader from Microsoft, Google, and Amazon, as new Chief Product Officer to lead the company's AI-first roadmap for its 'system of action for modern work' vision. * Centered the business strategy around three core priorities: elevating Zoom Workplace with AI, growing new AI revenue streams, and scaling AI-first customer experience (ZCX). - AI Product Adoption & Innovation * AI Companion paid monthly active users grew 184% year-over-year following the launch of AI Companion 3.0. MyNotes, a new personal AI note-taking feature, surpassed 1.5 million monthly active users (excluding trials) just four months after launch. * Launched new AI monetization offerings: Custom AI Companion for enterprise clients, ZVA Receptionist (AI-powered call handling for Zoom Phone), SIR by Workvivo (AI-powered employee people intelligence), and Zoom AI Services (opened core AI technologies including industry-leading speech recognition via the Scribe API to external customers and developers). * Notable early enterprise AI wins include Raymond James (10,000-seat Custom AI Companion deployment) and MongoDB (Custom AI Companion integration with third-party IT and CRM systems). - Core Business & Competitive Wins * 15 of Zoom's top 20 Q1 deals included Zoom Workplace or Zoom Phone, with multiple large competitive displacement wins. A major government contractor selected the full Zoom suite in a seven-figure ARR deal, displacing Microsoft Teams and Cisco Calling to meet strict security requirements. * Zoom Phone grew ARR in the mid-teens year-over-year, with a seven-figure ARR win for Baptist Health (16,000 workers across 200+ care locations). * ZCX (Zoom Customer Experience) grew at a high double-digit rate in Q1, with paid AI included in 9 of the top 10 ZCX deals. Large Q1 ZCX wins include Chelsea FC, Caliber Collision (1,800+ repair centers), and Japan-based Renza, demonstrating differentiated value from Zoom's unified UC and CX platform. - Financial Operational Highlights * Non-GAAP gross margin improved 70 basis points year-over-year to 79.9%, aligned with the company's 80% long-term target, driven by ongoing cost optimization. * Non-GAAP operating income grew 9% year-over-year to $509 million, with Non-GAAP operating margin expanding 130 basis points to 41.1%. * Deferred revenue grew 5% year-over-year to $1.49 billion, exceeding the prior guidance range of 1-2% growth. Remaining Performance Obligation (RPO) grew 11% year-over-year to $4.3 billion, with non-current RPO growing 19% reflecting an increase in larger, longer-term multi-product deals. * Operating cash flow grew 7% year-over-year to $522 million, and free cash flow grew 8% year-over-year to $500 million, with free cash flow margin expanding 100 basis points to 40.4%. * The company repurchased 4.2 million shares for $362 million in Q1 under the existing repurchase program, and the board authorized an incremental $1 billion in additional share repurchase capacity.

Guidance

- For Q2 FY2027, management guidance is: * Total revenue in the range of $1.265 billion to $1.27 billion, representing 4.1% year-over-year growth at the midpoint. * Non-GAAP operating income in the range of $508 million to $513 million, with an operating margin of 40.3% at the midpoint. * Non-GAAP diluted EPS in the range of $1.45 to $1.47, based on ~304 million diluted weighted average shares outstanding. * Deferred revenue growth expected to be up to 3% year-over-year. - For full year FY2027, management raised guidance from prior levels: * Total revenue is now expected in the range of $5.08 billion to $5.09 billion, representing 4.4% year-over-year growth at the midpoint, putting the company on track to surpass $5 billion in annual revenue. * Non-GAAP operating income is guided in the range of $2.065 billion to $2.075 billion, with an operating margin of 40.7% at the midpoint. * Non-GAAP diluted EPS is increased to a range of $5.96 to $6.00, based on ~304 million diluted weighted average shares outstanding (future repurchases are not reflected in the share count or EPS guidance). * Full year free cash flow is maintained at a range of $1.7 billion to $1.74 billion.

Segment performance

Total Q1 FY2027 revenue grew 5.5% year-over-year to $1.24 billion, beating the high end of prior guidance by $14 million. The Enterprise segment generated revenue growth of 7.2% year-over-year, representing 61% of total revenue, an increase of 1 percentage point year-over-year. The number of Enterprise customers with over $100,000 in trailing 12-month revenue grew 8% year-over-year, and these customers now contribute 33% of total revenue, also up 1 percentage point year-over-year. The Online segment saw a slight nominal uptick in average monthly churn to 3%, up from 2.8% in Q1 FY2026, and grew 2.8% year-over-year in Q1 revenue. By region, Americas and EMEA revenue each grew 5% year-over-year, while APEC revenue grew 6% year-over-year.

Risks & headwinds

- Forward-looking statements (including financial guidance, product adoption expectations, and AI growth projections) are inherently uncertain, and actual results may differ materially due to a range of factors detailed in Zoom's SEC filings (including Form 10-K and Form 10-Q). - There can be quarter-to-quarter variability in deferred revenue growth due to the structure of larger, longer-duration competitive takeout deals for Zoom Phone and ZCX, which may include customer grace periods that impact revenue recognition timing. - AI adoption by enterprise customers has been slower than some early projections, requiring dedicated field engineering resources to drive deployment. - Online segment churn saw a nominal uptick in Q1, and while management characterizes this as not meaningful, sustained churn increases could pressure online segment revenue. - Increased competition in the contact center (CX) market, including new native offerings from large incumbent players like Salesforce, creates ongoing competitive pressure.

Analyst Q&A

• Q: What pull-through and incremental wallet share are AI solutions like ZCX driving, and what drove the strong billing performance in Q1 and the slight uptick in online churn? /

  A: AI is a core driver of ZCX growth, with paid AI included in 9 of the top 10 ZCX deals, and 4 of those including Zoom Virtual Agent (ZVA). Zoom is adopting flexible, innovative pricing models for ZCX, moving beyond traditional prepaid models to usage-based and soon outcome-based pricing to fit customer preferences. Strong enterprise billing is driven by product diversification, churn reduction efforts, and AI monetization. Deferred revenue beat guidance because fewer large deals required the customer grace periods management expected, not a material change in demand. The online churn uptick is nominal and not meaningful, as the online business has stabilized after years of volatility.

• Q: What key conversion-driving features does Custom AI Companion have, and what are the main sources of future margin expansion? /

  A: Key high-value features of Custom AI Companion include enterprise-grade agentic retrieval, a no-code workflow builder, and a custom agent builder. It is core to Zoom's shift from a conversation-centric platform to a completion-centric platform, where AI automatically executes tasks after meetings. For margins, Zoom continues to drive COGS efficiency to offset higher AI usage costs, and strictly allocates capital and headcount only to its three core growth priorities. Zoom uses its own AI tools (being its own customer zero) to cut internal costs, for example reducing customer support costs while improving CSAT and response times.

• Q: How does Zoom compete with Salesforce's new native voice CX offering, and what is driving the increase in longer-duration non-current RPO? /

  A: Zoom and Salesforce approach the CX market from different angles: Salesforce enters from its CRM system of record strength, while Zoom enters from its existing unified communications (UC) and meeting customer base, which is a natural fit for conversation-centric contact center operations. Zoom's key differentiation is its native unified UC and CX platform with integrated AI, including the ability to easily add video to customer interactions, which competitors cannot match. The growth in non-current RPO is driven by the shift in Zoom's business toward more phone, contact center, and AI deals, which naturally have longer terms than traditional meeting-only deals.

• Q: How has customer perception of Zoom as an AI company evolved, and where do you see AI monetization ranking over the next 12-18 months? /

  A: Currently, customers view foundational AI players (chip and LLM providers) as core AI companies, but Zoom is gaining recognition as customers deploy its AI products. More customers are coming to see Zoom as an AI-first application layer that delivers tangible productivity value. The top AI-driven growth priority over the next 12-18 months is scaling ZCX, which already has clear strong momentum. New AI offerings (Custom AI Companion, Workvivo, ZVA) follow, with Zoom AI Services farther down the list of near-term monetization. AI embedded in existing SKUs also provides indirect value by reducing churn and attracting new customers, which is an important secondary benefit.

• Q: How does Zoom's communications layer remain durable in the AI era, and what is the strategic value of Zoom's real-time conversation data? /

  A: In the pre-AI era, completing tasks was a two-step process: hold a conversation, then manually update backend systems. In the AI era, Zoom's conversation layer remains the critical first step, and AI now automates the second step automatically. Zoom becomes the context layer that generates the meaningful real-time conversation data AI needs to execute tasks. Human-to-human conversation will remain core to all work, so Zoom's interface will not be displaced by AI agents — the value of Zoom actually increases in the AI era, as conversations are the foundational input for actionable AI workflows.