Zoom CFO on earnings, investment in AI

Zoom CFO Kelly Steckelberg joins Yahoo Finance Live to discuss earnings, outlook, and how the company plans to monetize AI.

Video transcript

- Well, Zoom stock is on the move this morning. It surged yesterday in after hours trading on earnings news. Now it is down by 6%. And at first glance, the video conferencing business had a strong first quarter for its fiscal year 2024. Revenue and EPS beat analysts' expectations, and the company upgraded its guidance for the year ahead. Though positive this quarter, Zoom's revenue growth has slowed considerably, of course, from the company's pandemic era boom in 2020 as larger competitors pump up the pressure.

Joining us now is Kelly Steckelberg, Zoom CFO, along with Yahoo Finance executive editor Brian Sozzi. Kelly, it's good to see you as always following the numbers. I want to dive right in here and ask you about end market demand. What are you hearing from your customers right now? We know this is a retrenching kind of environment. You guys have been doing some yourselves. So how is that affecting your clients?

KELLY STECKELBERG: Yeah. Thank you for having me. Good morning. So we were really pleased with our Q1 results. As you just highlighted, we were able to not only be on the top line and the bottom line but raise our full year outlook for both revenue and our operating margins. And Q1 is our largest seasonal renewal period, trending all the way back to the demand that we saw during the early stages of the pandemic.

And we continue to see strength in renewals. As you just heard from the United CEO, hybrid work now makes every weekend a holiday weekend. And we continue to see organizations that want to keep their employees connected and productive while they're working in this hybrid environment. So we saw strengthened renewals. Even as companies may have had their own reductions, as you said, we're able to work with them to help repurpose that spend towards areas that we can help them provide savings, like Zoom Phone, which is our cloud PBX solution, or Zoom Contact Center, which is our recent release contact center. So we were very pleased with the overall results, as well as the ongoing strength and renewals that we saw.

BRIAN SOZZI: Kelly, Brian here. Good to speak with you. Have operating margins for your business peaked?

KELLY STECKELBERG: As we just talked about, we did do a reduction in Q1, which enabled us to really be thoughtful about reprioritizing areas of investment. They're going to drive innovation and top line growth. So R&D focus on-- we did an acquisition in Workvivo. We've done investments this last quarter in collaborative AI companies, Anthropic, as well as OpenAI.

And now as we focus on the rest of the year, we are prioritizing where we're going to spend. So we highlighted we're investing in go to market teams around Zoom Contact Center, as well as some product marketing there. And we're way above our long term target margins, which gives us some room for investment. But we're really pleased. We had operating margins of 38%, which is above where we had guided. And we think as we're balancing this return to accelerated growth, we're focusing on profitability and finding the balance in those two.

BRIAN SOZZI: Hi, Kelly. Just trying to get some clarity on something that you mentioned a moment ago in terms of the contract renewal strength that you were seeing but also against the number of clients that you have that may have had to do their own reductions. So does that mean that you're seeing a seat count compression, even though the contract renewals may still be remaining strong?

KELLY STECKELBERG: We have seen some customers that have gone through their own reductions. And so when that is the case what our team has done an amazing job of is talking to them about other opportunities across our platform. So Zoom Contact Center, Zoom Phone, we just recently announced the new features in Zoom IQ, which are leveraging collaborative AI to do things like chat summarization, meeting summarization, meeting agendas. So helping them think about how they can be as efficient as possible within their organizations by leveraging the Zoom platform.

BRIAN SOZZI: Kelly, I know that Street really appreciated you guys noting that you have an AI Team inside of Zoom. So that's good. So two questions here. One, how do you plan to monetize your AI investment from a Zoom perspective? And then as we look towards Zoomtopia later this year, should we expect an AI announcement there as well?

KELLY STECKELBERG: So we already have certain aspects of AI that are being monetized. We have our Zoom Virtual Agent, for example. And that is a chat bot, conversational AI chat bot that was really accelerated through our acquisition of Solvvy that we did last year. That is a separate product that is often sold alongside our Contact Center.

And then you can expect that AI is going to add features and functionality that come bundled into multiple categories of products across our platform. Contact Center being an obvious one. But also, as we talked about, Zoom IQ has many new beta features that we announced in March. And that also is a separate product. So you're going to see it both as standalone SKUs, as well as features and functionality that enhance our other products across the entire suite.

- Kelly, can you like give us an example. When you're talking about Contact Center, like if I am interacting, does that mean I'll be interacting with a person who's getting AI prompts? Will it mean I'm interacting with an AI entirely? Sort of concretely, how are people going to be seeing it?

KELLY STECKELBERG: It means very likely both. And the goal, if you think about it, is to make repetitive tasks as efficient as possible. So if you come to a Contact Center, you might start out with a Zoom Virtual Agent. And what we've seen as we've deployed this product internally, it can answer 90% plus of the basic questions that customers first come.

And then, of course, it gets to a point where maybe you have a second tier level escalation that you need help with. And then you'll roll over to a live person. But absolutely then, they're also getting prompts through either the knowledge base or leveraging other aspects of AI to help them answer your question as quickly and as efficiently as possible.

The goal that we're using AI for in our products is to make everyone as efficient. So you don't have to do things like read through a long chat thread. You can get a summarization of that. Or it can help you even compose a response to that. And the goal is it makes you as efficient as possible, so you can take your time and focus on things like connecting with your team, rather than having to read through a whole chat thread that might have occurred during the day while you were busy.

BRIAN SOZZI: No. I mean, that sounds great to me. That's some efficiency there, for sure. Kelly, just as we think through to the next leg of growth for a company in Zoom, simply put, what does that timeline look like for Zoom, for the company from your perspective, and what is the core product that you believe that that's going to be based off of?

KELLY STECKELBERG: So we have two segments of our business. We have the online segment, which is largely self-served through our website. And we have the direct segment of our business. And one of the key milestones that we achieved in Q1 was the online business really stabilizing after several quarters of decline. So we're really excited about all the initiatives and progress we have seen in that segment of our business.

And really focused on enabling the same level of productivity in our direct business, which was there was some distraction in Q1 due to the reduction that we had previously announced, as well as the sales reorg. But we're excited about all the innovation that's happened in the platform and enabling the direct business to also start to reaccelerate their growth as we move towards the back half of this year.

- Kelly, good to see you. Thanks so much. Kelly Steckelberg, Zoom CFO, and Brian Sozzi, our executive editor. Thanks to you both. Appreciate it.