Thank you, Matt. And let me welcome everyone as well to Zoom's earnings video webinar for the third quarter of fiscal 2022. I'm joined today by Zoom's founder and CEO, Eric Yuan; and Zoom's CFO, Kelly Steckelberg.

Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at investors.zoom.com. Also on this page, you'll be able to find a copy of today's prepared remarks and a slide deck with financial highlights that, along with our earnings release, include a reconciliation of GAAP to non-GAAP financial results.

During this call, we will make forward-looking statements, including statements regarding our financial outlook for the fourth quarter and full year 2022. Zoom's expectations regarding financial and business trends, Zoom's growth strategy and business aspirations to help customer embrace change, enable hybrid workforces and grow their businesses, product features and expected benefits of such features and Zoom's continuing to fortify its position as a leading brand in its industry. 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 discussed 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 S. Yuan - Founder & Chief Executive Officer

Thank you Tom. In the spirit of the upcoming holiday season, I want to recognize the hard work of Zoom's global workforce and thank our customers, partners and investors for their steadfast trust and support. We continue to fortify our position as a leading brand in our industry.

We are honored that Gartner named us a Leader in the 2021 Magic Quadrant for Meeting Solutions for the sixth consecutive year and for Unified Communications as a Service for the second consecutive year.

Zoomtopia 2021 was bigger and more successful than ever before. We hosted nearly 34,000 live virtual attendees on our platform and 277 speakers, including customers like Choice Hotels, Ally, and Hubspot. And we did it on Zoom Events – our all-in-one solution for virtual and hybrid events.

Zoom Events allowed us to streamline event preparation, enhance audience engagement, and conduct better post-event communication and analysis. Its multitrack functionality enabled us to roll our Analyst Day directly into the Zoomtopia agenda so that participants could move seamlessly across the Analyst Day track, other tracks of Zoomtopia, and the all-connecting lobby.

At Zoomtopia, customers shared how they use Zoom to enable flexible co-located workforces and grow their businesses. We demonstrated how Zoom Apps, which already has 67 apps after only a few months, has the potential to enhance meeting productivity and collaboration.

More and more businesses are building products on our platform that connect interrelated work streams to the Zoom client both inside and outside the meeting. We were also super excited to unveil the Zoom Video Engagement Center, which enhances our customers' ability to communicate with their customers through our omnichannel solution, and shows our broader commitment to the contact center space. It is expected to be generally available early next year.

Whether it's the ability to virtually whiteboard in and around the meeting, or utilize AI to transcribe or translate a meeting live, Zoomtopia demonstrated that previously futuristic capabilities have arrived. We are working hard to develop and deploy the technologies of the future to address current business needs and reimagine how we communicate and work in a flexible hybrid world.

Now let me recognize a few big wins for the quarter. We are excited to have Carrier Global Corp, the leading global provider of healthy, safe, sustainable and intelligent building and cold chain solutions, as a long-standing Zoom Meetings customer and now, a new Zoom Phone customer as well. Following several months of extensive vendor reviews of leading UCaaS vendors, Carrier selected Zoom Phone to modernize their phone systems for a large portion of their nearly 53,000 employees across 180 countries. We are so thankful that Carrier chose Zoom to deliver an increasingly comprehensive, secure, innovative and integrated set of communications services.

In addition to Carrier, we had many other upsells this quarter. For example, one of the world's largest global retailers decided to add 20,000 Zoom Phone licenses to their existing Meetings, Rooms, and Webinar footprint in order to better manage their global offices, distribution centers, and retail locations. This demonstrates our strong value add to the retail vertical and builds upon previous success stories like Tapestry and Target.

We also had several notable Zoom Meetings wins in Q3, including, a very large expansion for a leading Federal System Integrator which puts them at 45,000 users, demonstrating the security and reliability of our Zoom for government platform; a competitive win with a global technology firm for 16,500 meeting licenses to modernize the way their employees communicate; and expansion within our big four audit and big three consulting clients, which added more than 35,000 meetings licenses in the quarter to their existing strong meetings footprints.

Thanks to our customers, investors and the hard work of our approximately 6,300 employees, we've grown over the past decade from a video conferencing solution to a communications platform that encompasses unified communications, as well as developer and event solutions. All these services provide an indispensable platform for individuals, enterprises and developers to connect, collaborate and build in the hybrid world.

And with that let me pass it over to Kelly.

Kelly Steckelberg - Chief Financial Officer

Thank you, Eric. And hello everyone. Let me start by reviewing our financial results for Q3, then discuss our outlook for Q4. In Q3, total revenue grew 35% year over year to $1.05 billion, exceeding the high end of our guidance of $1.02 billion. The growth was primarily driven by strength in our direct and channel businesses, which grew at twice the rate of our online business, as well as improved churn in both online and direct segments.

From a product perspective, we saw strong demand for Zoom Video Webinars, Zoom Rooms, and Zoom Phone. Zoom Phone had year-over-year revenue growth in the triple-digits and reached 30 customers with over 10,000 paid seats. The year-over-year growth in revenue for the quarter was driven by a healthy mix between new and existing customers, with existing customers accounting for 26% of the incremental revenue, up from 19% a year ago.

Let's take a look at the key customer metrics for the quarter. We saw 94% year-over-year growth in the up-market as we ended the quarter with 2,507 customers generating more than $100,000 in trailing twelve months revenue. These customers represented 22% of revenue, up from 18% in Q3 of last year. We exited the quarter with approximately 512,100 customers with more than 10 employees, up 18% year over year.

In Q3, customers with more than 10 employees represented 66% of revenue, up from 64% last quarter and 62% in Q3 of last year. These trends suggest that our customers with more than 10 employees are expanding their use of our platform and adding more products and seats, aligned with our go-to-market strategy.

Our net dollar expansion rate for customers with more than 10 employees exceeded 130% for the 14th consecutive quarter as existing customers increased their spend with Zoom and we saw strong upsells of Zoom Phone and Zoom Rooms. For Q4, we expect this metric to be modestly below the 130% mark as the denominator of this trailing 12 month metric reflects the significant growth in our customer base.

Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 30% year-over-year. Our combined APAC and EMEA revenue grew 47% year-over-year to be approximately 33% of revenue, up from 31% a year ago. On a quarter-over-quarter basis, Asia Pacific had another strong quarter, driven by growth in Australia and Japan and bolstered by the investments we have made in our international teams. However, as we discussed in Q2, we saw headwinds to our online business in EMEA, mainly related to summer seasonality.

Now turning to profitability, which was strong from both GAAP and non-GAAP perspectives. I will focus on our non-GAAP results, which exclude stock-based compensation expense and associated payroll taxes, charitable donation of common stock, acquisition-related expenses, net litigation settlements, net gains on strategic investments, and undistributed earnings attributable to participating securities.

Non-GAAP gross margin in Q3 was 76%, an improvement from 68.2% in Q3 of last year and stable with Q2 of this year. We remain committed to our multi-year strategy of building out our data centers to support further improvements in gross margin. Research and development expense grew by 169% year-over-year to approximately $68 million. On a sequential basis, we added over $13 million in R&D expense, primarily due to expansion within our engineering and product teams globally. As a percentage of total revenue, R&D expense doubled year over year to 6.4%, demonstrating our commitment to innovation and product development.

Sales and marketing expense grew by 68% year-over-year to $237 million dollars or approximately 22.6% of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in global sales capacity and marketing across our core and new products.

G&A expense grew by 12% to $82 million or approximately 7.8% of total revenue. This was lower than Q3 of last year as we expanded our G&A functions prudently to meet our new scale. The revenue upside in the quarter carried through to the bottom line, with non-GAAP operating income of $411 million, exceeding the high end of our guidance of $345 million. This translates to a 39.1% non-GAAP operating margin for Q3, compared with 37.4% a year ago and 41.6% last quarter.

Non-GAAP diluted earnings per share in Q3 was $1.11, on approximately 306 million non-GAAP weighted average shares outstanding. This result is $0.03 above the high end of our guidance and $0.12 above Q3 of last year. The result includes a $70 million provision for income tax, a significant increase from last year, mainly due to fully utilizing our NOLs as well as a decrease in our stock-based compensation for tax purposes.

Turning to the balance sheet. Deferred revenue at the end of the period was $1.2 billion, up 39% year-over-year from $855 million, and slightly up quarter-over-quarter. Looking at Q4, we expect the year-over-year growth rate in deferred revenue to be in the mid-20s. This is driven by the cyclical decline in the average remaining term of our annual customer contracts, which are front-half weighted.

Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.5 billion, up 51% year-over-year from $1.6 billion. We expect to recognize approximately 67% of the total RPO as revenue over the next 12 months, as compared to 72% in Q3 of last year, reflecting a shift back towards longer term plans..

We ended the quarter with approximately $5.4 billion in cash, cash equivalents and marketable securities, excluding restricted cash. We had operating cash flow in the quarter of $395 million, as compared to $411 million in Q3 of last year. Free cash flow was $375 million, as compared to $388 million in Q3 of last year. It's important to note that as we progress beyond the initial phases of the pandemic growth and continue to invest to support our new scale, our working capital is normalizing.

In Q4, we expect to incur a one-time $85 million cash outflow related to a legal settlement, which we disclosed and booked as a GAAP expense in Q1. As a reminder, due to the seasonality of renewals being front-end loaded and tapering through the year, our collections will follow the same trend. We also expect further capex investments in building out our data centers to support future gross margin expansion.

Now, turning to guidance. We are pleased to raise our outlook for FY '22. This outlook is based on our current assessment of the business environment. Specifically, it assumes that our direct and channel business will continue to grow, while our online business will be a headwind in the coming quarters as smaller customers and consumers adapt to the evolving environment.

For the fourth quarter of FY '22, we expect revenue to be in the range of $1.051 billion to $1.053 billion. We expect non-GAAP operating income to be in the range of $361 million to $363 million. Our outlook for non-GAAP earnings per share is $1.06 to $1.07, based on approximately 307 million shares outstanding and a tax rate of approximately 10%. Due to our multi-year history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the US blended tax rate in FY '23.

For the full year of FY '22, we expect revenue to be in the range of $4.079 billion to $4.081 billion, which would represent approximately 54% year-over-year growth, up from our previous guidance of 51% issued in August. We expect non-GAAP operating income to be in the range of approximately $1.598 billion to $1.6 billion which would represent approximately 63% year-over-year growth. Our outlook for the non-GAAP earnings per share is $4.84 to $4.85, based on approximately 306 million shares outstanding.

As always, Zoom is grateful to be a driving force enabling connection and collaboration worldwide with our high-quality, frictionless and secure communications platform. Thank you to the entire Zoom team, our customers, our community, and our investors.

Matt, please queue-up our first question.

Question & Answers

Questions and Answers:

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Operator

Our first question is from Sterling Auty with JP Morgan.

Sterling Auty - JP Morgan - Analyst

Yeah, thanks. Hi guys. Eric, you mentioned kind of evolving into a communications company. And I'm wondering, as you think about the over 400 million business phone users that around legacy technology, how do you anticipate capitalizing on that opportunity? Meaning do you expect a big portion of those will end up coming onto either a video platform like Zoom, Zoom Phone or will they start to just rely on their cellphones to make communication calls?

Eric S. Yuan - Founder & Chief Executive Officer

Yeah. Sterling. That's a great questions. As you see right in Q3 and a greater customer like a carrier. And they expanded to deploy Zoom Phone and it's not a hundred or thousands, it is tens of a thousand deployment, right? So you look at the phone industry, right? I mean, the cloud-based PBX industry, I think it's growing very well to replace legacy on-prem systems. Also, if look at those existing Cloud-based from providers, most of them develop technologies stack many years ago. However, those especially for large enterprise customers, when they migrate from on-prem to cloud, they do not want to deploy another solution, because the video and voice those two are converged into one service. In particular for those customers who already deployed Zoom Video platforms essentially technically Zoom Cloud's PBX system already there, we just need to enable and configure that. Otherwise, they are two fabulous solutions. That's why we have a high confidence that every time in light of our customers, they look at all those cloud-based phone solutions, Zoom always is the best choice. That's why I think the huge growth opportunity for our unified communication platform, video and voice together and to capture the wave of this cloud migration from on-prem to cloud.

Sterling Auty - JP Morgan - Analyst

Got it. Thank you.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Question is from Parker Lane with Stifel.

Parker Lane - Stifel - Analyst

Yeah, hi, thanks for taking my question. I was hoping you could dive into the video engagement center a little bit. The initial reception that customers have had the best solution, and who do you ultimately envision the target customer will be here, is it going to be more of lightweight small business, medium size business, they are looking for a contact center offering or do you envision they can get upstream over time?

Eric S. Yuan - Founder & Chief Executive Officer

Yeah. This is a good question. So we are very excited at Zoomtopia to announce our Zoom Video Engagement Center. Because, the reason why we decided to invest resources on that is based on our customers feedback. In terms of a gross trajectory, I would say it's very similar to what we did before for our Zoom Phone, right? We built a greater solution to leverage the same platform, and you can start up on existing customers, SME customers soon afterwards you can roll it out lot of enterprise customers that is our contact center vision, right? Essentially, I think this market - that contact center market is growing very well. However, a lot of enterprise customers guess what, they still deploy on-prem solutions. For the next several years, I feel the opportunity is huge for us, right? Especially customers deployed Zoom Video and Phone together as an natural extension for our unified communication platform to help very significant and secure and the same platforms solution, which is our solution to the contact center space.

Parker Lane - Stifel - Analyst

Got it. Thanks Eric.

Eric S. Yuan - Founder & Chief Executive Officer

By the way, we do have quite a few greater customers in the pipeline.

Operator

Next question is from task with Imtiaz Koujalgi with Guggenheim.

Imtiaz Koujalgi - Guggenheim - Analyst

Hey guys, can you hear me okay?

Eric S. Yuan - Founder & Chief Executive Officer

Yeah.

Imtiaz Koujalgi - Guggenheim - Analyst

I've question for Kelly. Kelly, can you give us some more color on your mix across different products? We've had strong growth in Zoom Phone, Zoom Rooms for the last couple of quarters, is the combination of phone plus rooms now more than 10% or just below 10% of the overall business? [Speech Overlap] is that less than 10% or has it crossed the 10% threshold?

Kelly Steckelberg - Chief Financial Officer

Well, none of our product segments on their own is greater than 10% because it's likely that we would break that out, if it were. If you add a few of them together, yes, there are a few of them that you put them together they would exceed greater than 10% but on an individual basis, not any of them is greater than 10% at this point.

Imtiaz Koujalgi - Guggenheim - Analyst

Thanks. Thank you.

Operator

Next question is from Meta Marshall with Morgan Stanley.

Meta Marshall - Morgan Stanley - Analyst

Great, thanks. I wanted to ask just about the traction of customer adds. We've seen the customer adds slow down a little bit and just wondering how you think about kind of sales and marketing resources, directing them more towards upsells, which is clearly showing a lot of traction versus kind of new customer acquisition and just how you think about that in the budgeting practice and how we should think about that going forward?

Kelly Steckelberg - Chief Financial Officer

Yeah, so it is exactly the strategy that we've been planning for and thinking about media [Phonetic], when you think about for Zoom Phone for example and Zoom Room, the strategy is to sell into existing installed base, which by definition just means these customers are going to - to grow larger and larger and contribute more over time. In the - depending on which segment of our business the upmarket business the majors and enterprise they work on account basis, so they get to retain those accounts, which is great because they build these long-term multi-year relationships with them, they understand their needs and they continue to grow those accounts as they continue to see what they need and then in the lower like the mass market, we do have both expansion as well as acquisition teams, which work really well because that allows them to focus on growing certain teams to grow, but other teams to be really out there hunting and renewing add to our new logos. And then from a marketing perspective, we've grown so much in brand awareness that now, we're really focusing on ensuring that everybody knows - those about Zoom Meetings now also knows about Zoom Phone and Zoom Rooms and the other solutions that we can bring to bear for them.

Meta Marshall - Morgan Stanley - Analyst

Great, thanks.

Operator

Next question from Alex Zukin with Wolfe Research.

Alex Zukin - Wolfe Research - Analyst

Hey guys, thanks for taking the question. So two - one question, but it's multi-part Kelly for - and it is both for you. The question first is, after the summer, what - how should we think about the visibility in the model, particularly around churn with the sub 11 cohort? And then if we look at the guidance that you gave, implicitly for billings, it looks like it's about a 6% year-over-year growth. If I look at the guidance for revenue, it looks like 19% growth, maybe there is some upside to that, maybe it's over 20%, it's your toughest comp, but as investors start to look at next year, the Street has you at 17%, so your implicit billings guide suggest the potential for single-digit growth. Is next quarter the trough that we start to build off of? I think that's a question I'm getting at least from a lot of investors.

Kelly Steckelberg - Chief Financial Officer

So in terms of - let's talk about churn portion the visibility and as we talked about on the Q2 call, the historical trends that we've seen in our business have changed pretty dramatically, but what we saw - as we came through kind of the second half of Q3 was that some of the churn that we were experiencing earlier in the quarter was really summer seasonality and as we saw people move back towards vacations kind of in the back half of September that we saw that strength and that usage returning. So these are all learnings that we will use now to apply to our modeling for FY '23 as well as the fact that you remember we looked at - we showed you some of those detail aging of the 10 years of the cohorts at Analyst Day and as those continue to aid that adds a lot of stability in that underlying business. And by next year, over 50% of them are going to have moved beyond sort of that 15-month mark, which is where that churn really, really stabilize. So that's really good news in terms of the volatility, it is going to continue to decrease over time. In terms of FY '23, I know that's the big question on everybody's mind, but we are not going to fold any comments in terms of FY '23 guidance until Q4, at which point of course we've had to give Q1 and full FY '23 guidance.

Eric S. Yuan - Founder & Chief Executive Officer

Who is next?

Operator

Sorry. Matt Stotler with William Blair. I was on mute.

Matt Stotler - William Blair - Analyst

Hi everybody, good to see you. Thanks for taking the question. Maybe just one on the free user base. I know that you guys have always carried a support number of free users and open that up during the pandemic, you talked previously about thinking through monetizing this base of users, anything you can share in terms of, I guess, on one hand and an update on the size of that base that potential opportunity? And then updates on how you're thinking about the ability to monetize over time?

Kelly Steckelberg - Chief Financial Officer

Eric, you want to talk about monetization of free users over time.

Eric S. Yuan - Founder & Chief Executive Officer

Yeah, sure. So Matt, first of all, when we started free user base is always like a marketing platform right, to promote our brand and gives us a network effectiveness of our service platform. So that's how we introduced free service premium and 40 minutes limitation. I think for now, given the brand recognition and given what had happened in last year, I think we got to take step back, look at our free user online business, right. And essentially on one hand, we would like to double down our enterprise market because that business is doing extremely well. On the other hand, we got to be very accretive to look at how we leverage our huge free user installed base [Indecipherable] we started you know the advertisement program for free users from international market and [Indecipherable] we're going to look at that previously as well because not only we have folks on kind of conversion read about Phone free to pay that that's more of a traditional mode, right. We're going to be creative, the huge opportunity right and to think about how to modify that a free user base differently. I think that you know I think our team put a lot of efforts on that. And that's something we are very excited.

Matt Stotler - William Blair - Analyst

Thank you.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you, Matt.

Operator

Next question is from Siti Panigrahi with Mizuho.

Siti Panigrahi - Mizuho Securities - Analyst

Yeah, thanks for taking my question. Just wanted to ask about your investment on go to market side. So as you are coming off of this two strong renewal quarters, one of the areas you are investing right now and as you are normalizing both, is it certain regions or certain verticals. So could you give some kind of color on that?

Kelly Steckelberg - Chief Financial Officer

Yeah, we certainly are continuing to invest in the sales organization especially outside the US. There you have seen strong growth in international and we really have the opportunity to continue to - leverage the brand awareness has grown significantly, not only in the US but also globally. And so that's a huge opportunity for us as well as ensuring that we have the right sales team to support Zoom Events, Zoom Phone and soon our Video Engagement Center as well. So those are all the areas of investment we are thinking about, especially for FY '23.

Siti Panigrahi - Mizuho Securities - Analyst

Thank you.

Kelly Steckelberg - Chief Financial Officer

Thank you Siti.

Operator

Up next we have Ryan MacWilliams with Barclays.

Ryan MacWilliams - Barclays - Analyst

Hey good to see you guys again. Kelly, just on your existing customer growth, anything to call out there maybe into the fourth quarter and I would imagine Meetings still makes up the bulk of your growth of existing customers, but anything to call out maybe in the changing mix between Meetings versus Phone and Rooms with these existing customers? Thanks.

Kelly Steckelberg - Chief Financial Officer

Yeah, I mean Zoom Phone continues to be really strong growth driver in general, especially as organizations are thinking about what's going to be their future of work strategy and enabling their employees to work from anywhere over time. And then Zoom Rooms, of course, is also really important consideration. Now, as companies are thinking about welcoming their employees back into the office. The conference room strategy has become even more important than it was pre-pandemic as it's unlikely we'll - unlikely we're all going to be sitting around conference rooms together in the future. And so having any sort of a hybrid approach means that you need to make sure that it's inclusive and the best way to do that is through the Zoom Rooms technology, things like smart gallery which are really some of the you know opportunities that we're helping our customers solve today.

Eric S. Yuan - Founder & Chief Executive Officer

So just to quickly add on to Kelly said Ryan, you look at a hybrid work the conference room is extremely important. And that's why I look at Zoom Rooms is uniquely positioned, is much better than any other solution out there to support a hybrid work, not to mention the Zoom Events also can support the new hybrid events services as well. Right, that's why huge opportunity for us to support a hybrid work new paradigm shift.

Kelly Steckelberg - Chief Financial Officer

Thanks, Ryan.

Operator

Next question is from Tyler Radke with Citi.

Tyler Radke - Citi - Analyst

Hey everyone. Thanks for taking my question. Kelly. I wanted to ask you about just some of your comments on the churn rates. I guess first did they perform in line with your expectations this quarter. Just kind of giving the moving pieces with summer seasonality? And then as you think about Q4, would you expect churn rates to get better because of less kind of summer seasonality in Europe? And then I just wanted to clarify, when you talked about the online business being a headwind, does that mean that you expect the online revenue to decline year-over-year, does it just mean it's going to grow slower than the rest of the business?

Kelly Steckelberg - Chief Financial Officer

So in terms of how the online churn performed in Q3 it performed better than our expectations coming in at the beginning of the quarter. And we were happy to see that it was more seasonality aligned rather than true potential departures as people were making other choices or going back to meeting in person. So the seasonality nature of that was good news to see in that rebounding in the middle of the - kind of at the middle to the back half of September. And then we expect Q4 to be relatively consistent with Q3 in terms of churn. However, we do see some impact from the holidays towards the end of December and those holidays vary by the global - by global location, but we do see kind of slowdowns based on that. In terms of what we expect from online going forwards, we do expect online revenue to grow more slowly than the direct and channel businesses as we look to the future, which is what we saw in Q3 for example, as well. But we will give more specifics around that when we give guidance on the Q4 call.

Tyler Radke - Citi - Analyst

Thank you.

Operator

Next question is from James Fish with Piper Sandler.

James Fish - Piper Sandler - Analyst

Hey guys, nice quarter. Just wanted to go back to - wanted to go back to Matt's question on advertising. First, how would this actually work, can you give more color that would be an banner within the application pre or post video and be more display based advertising or performance-based? And then also, just want to understand how much of this is really [Indecipherable] prevent some of your more commercial and enterprise customers from lowering their number of meetings seats to free seats rather than just trying to monetize more of that online consumer SMB base? Thanks.

Eric S. Yuan - Founder & Chief Executive Officer

James, so, for now we're just focused on the pure free meetings. Right? Meaning that meaning free meeting hosts, we will have meeting of the free participant. Let's say, if you and I joined the meeting because we already paid the enterprise customer or [Indecipherable], we will not show that this [Indecipherable] it is more like a post - post meeting attentive page, right? Because we do have, in some plans but we want to start step by step gradually right. For now I'm sure that these free ads that are posted in the page from international market is purely for the free meetings, and they try to learn and, some experience. And again, we got to be creative that's so many areas where we can be creative. Right? Because you got a data meeting participant, in terms of number of free users, it is pretty healthy. Even for those best users, right? Maybe if they do not pay for our service anymore. They still use our service. Right? That's why the meaning is, Zoom still offers good to while - we got do think about how to monetize it differently. Again, this is something new for us, and we would like to explore more in the next few quarters.

James Fish - Piper Sandler - Analyst

Thanks Eric.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Next question is from Rishi Jaluria with RBC.

Rishi Jaluria - RBC - Analyst

Hi Eric and Kelly, good to see you, both. Thanks for taking my question. Just wanted to ask about Zoom Chat. I was really excited to see that launched at Zoomtopia two months ago, really kind of selling this vision of becoming this broader enterprise communication platform. I actually noticed that Zoom Chat is live, it's something people can deploy, I know it's an add-on feature. Can you give us any sense of color in terms of customers actually using it today, what that sort of usage within your existing customer base looks like? And what you're doing to actually drive usage out of Zoom Chat among your customers to just make the whole platform more valuable for them? Thanks.

Eric S. Yuan - Founder & Chief Executive Officer

Yeah, Rishi that is a good question. First of all I can tell you Zoom as a company, we were using our chat of long time and so many employees we do enjoy that. And overall, this is a part of our overall UC platform vision because some customer, I think we did not do a good job to mention that and promoted that because customer - some customer even did not know that, right before. But however if you look at our Chat usage, sorry, we did not publish a number yet. It's pretty healthy, not only for SMB individual users, but also enterprise customer it deploy both video and phone and also Zoom Chat is one platform, right. And in terms of functionality, I think we have a high confidence on the one hand we do collaborate well with other chat solutions and we integrate very well on the other hand for some customers they see, they really want to deploy the solution for vendor for video, voice and chat. We do have this flexibility, right. I think also our team, we are innovating as well, adding more and more vertical functionalities, right as we announced at Zoomtopia. Again it is something important for our overall UC platform and we are going to invest more.

Rishi Jaluria - RBC - Analyst

Wonderful. Thank you.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Next question is from Karl Keirstead with UBS.

Karl Keirstead - UBS - Analyst

Okay, great. Maybe Kelly, on metrics like deferred revenues and RPO are certainly not the most important to watch with Zoom, but they can be indicative of changes in the business. So it's still important to keep an eye on them. And you made some color about DR and RPO next quarter that I'd love if you could elaborate. I think on, DR you mentioned that it will grow mid 20s due to a cyclical decline in average remaining term of annual contracts. I'm not sure, I totally understand what that means, so I'd love to ask for a clarification. And then likely as well on RPO, you mentioned that we would see a shift back to long-term plans, I'm wondering if you could elaborate on that as well. Thanks so much.

Kelly Steckelberg - Chief Financial Officer

Yes, so for deferred revenue there's two things to remember, which is the seasonality trend of our renewals is that Q1 is the largest quarter for renewals and Q4 is the lowest. So in terms of new deferred coming onto the books, Q4 is the lowest quarter because of that. As well as the fact that Q1 is the largest quarter when deferred gets added to the balance sheet, but if there are annual contracts, by the time you get to Q4 most of that has already been amortized and recognized. There's only 25% of it in theory about left when you come into the quarter. So the combination of the fact that anything added in Q1 is almost fully amortized and will get refilled and renewed back in Q1 and the fact that Q4 is the lowest renewal quarter. Those two things are what's driving this trend of renewals, sorry of deferred, which I know is probably counterintuitive to any other company that you see because of the seasonality that we have. So if you remember at Analyst Day we showed you an actual chart that showed that how our renewals lay out for the year and that's what that illustrates and so renewals like deferred is going to going to look the same, collections is going to look the same, because they're all being built off of that trend. Does that makes sense?

Karl Keirstead - UBS - Analyst

Yeah. And so be the fact that DR growth would slow to mid 20s is due to what?

Kelly Steckelberg - Chief Financial Officer

It's due to the fact that Q4 is our lowest renewal period as well as all those annual renewals that came on in Q1, which is the biggest quarter are now almost fully amortized and recognized.

Karl Keirstead - UBS - Analyst

Okay. That's helpful. Thank you on DR. And on RPO, Kelly.

Kelly Steckelberg - Chief Financial Officer

And then this has a strong impact on billings and RPO as well because the - same thing like be adding to it - the billings and the collections are happening earlier in the quarter and the remaining term is being amortized throughout the year. So there is - it's the source amount of contract left during Q4.

Karl Keirstead - UBS - Analyst

Okay. I think I got it. Thanks, I appreciate it.

Kelly Steckelberg - Chief Financial Officer

You are very welcome.

Operator

Next question is from Shelby Seyrafi with FBN Securities.

Shelby Seyrafi - FBN Securities - Analyst

Thank you very much. So what is your latest thinking about possibly reviving the Five9 deal, just with a higher price? And what's your current thinking about build a versus buy decision in the contact center market?

Eric S. Yuan - Founder & Chief Executive Officer

Shelby, that's a good question and unfortunately Rowan [Phonetic] is not in the call, otherwise probably both is better for us to answer this question, but anyway we look at everything from a customer perspective. Even this deal did not go through however and we still have many mutual customers and we have a greater integration with Five9 and also I think you know from a data perspective is everything is same as before, right. But in terms of the deal actually nobody knows that. And let's see and we do not know, but also - but as I mentioned earlier right. And we have a full stack to support a union part of communication important to customer deployed Zoom Video already, [Indecipherable] deployed Zoom Phone. They also asked about our strategy about our content vendor solution and this reason why we're adopting our video engagement is under, which is our answer to the contact center solution. Anyway, I think you know this is where we are now, but I am so sorry really hard to know you know how to reengage or do the deal with Five9 because two public company. And again, and for now we are doubling down on our video engagement center and also working together with all other contact center solution providers like Five9 to offer a better integrations, seamless experience to our mutual customers.

Shelby Seyrafi - FBN Securities - Analyst

Thanks.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Next question is from Matt VanVliet with BTIG.

Matthew VanVliet - BTIG - Analyst

Yeah, thanks for taking the question. I guess pertaining to the channel and especially with Zoom Phone, are you seeing much traction in terms of potential net new customers coming in where Zoom Phone is sort of the entree into that customer or even as a part of initial deal especially at the sort of mid-market enterprise level? Thanks.

Eric S. Yuan - Founder & Chief Executive Officer

Yeah, go ahead.

Kelly Steckelberg - Chief Financial Officer

Okay. So yes, we have absolutely seen the channel be a really important part and a really important growth driver for Zoom Phone especially. This is why - focusing on the channel both in the US and growing that internationally is really an important aspect of our growth strategy for the long term here as well. And then we do have the ability and we have seen customers that want to start to sell and start with Zoom Phone first, and that has been a great opportunity. It's, you know it's a small percentage of our customers that are starting that way, but it's a great opportunity for them. If that's what they're interested in, it is to get them in and get them used to Zoom and then expand over time in terms of understanding the full platform offering that we have.

Matthew VanVliet - BTIG - Analyst

Thank you.

Operator

Next question is from Matthew Niknam with Deutsche Bank.

Matthew Niknam - Deutsche Bank - Analyst

Hey, thanks for taking the question. I want to go back to the question before that was asked. Not necessarily related to Five9, but having moved past that acquisition maybe, Eric, how you're thinking about inorganic opportunities on either the UCaaS or the CCaaS front to really consolidate the market and expand your platform inorganically relative to some of your organic investments the company has talked about? Thanks.

Eric S. Yuan - Founder & Chief Executive Officer

Again, actually you know, [Indecipherable] teams is great, I still have great friends. So we're still working together and we will target mutual customer, that's for sure. But regarding our growth strategy for consolidated UCaaS and CCaaS. First of all, I think you know, we're on a UCaaS, in terms of CCaaS, the reason why announced Video Engagement Center because of that, right because for some customer they wanted consolidate everything together, and we do have an offering also how do accelerate that growth in addition to allocating our own resources to grow that business organically for sure, right. If there is any good, let's say, you know the technology the platform for next generation of functionalities very accretive features. Well, we're open minded and Kelly have - has a big balance sheet, right to support that effort. Again, if you know for any other cool technology companies that can help us for the beef up our investment on that upfront, we are very open minded.

Matthew Niknam - Deutsche Bank - Analyst

Great, thank you.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Next question is from Will Power with Baird.

Will Power - Baird - Analyst

Great. Good afternoon. So, Eric, you referenced a number of new customer wins you really called out Carrier, I guess, in particular, as you suggested it was an extensive process. So we're really just love to better understand the importance of being able to bundle Video and Zoom Phone for Carrier and what in your estimation, really kind of sets you apart from the other vendors they were considering?

Eric S. Yuan - Founder & Chief Executive Officer

That is a good question. So first of all, I would like to take a step back and share with you how we grow our platforms. It is not like some other cloud vendors, probably they target those traditional on-prem solutions. Our Zoom Phone growth comes from not only for on-prem the growth, but also for other existing cloud as the full solutions probably also created for us right and we have both those customers coming from both side. I mean aside of that for a lot of - a lot of enterprise customers in particular for our existing Zoom Video customers when they look at it, the phone they - this very live [Indecipherable] customers with very complex environment probably to have multiple on-prem solutions. They are going to be very careful, they want to partner with a company with a vision, with the reliability, security, plus they also want to make sure video and voice, those two can be converged. And after they test our service, they realized based on the criteria, Zoom is longest solution that account and truly satisfy their needs. However, the processes is pretty long, because again [Indecipherable] full deployment is a very complex and even if they were in [Indecipherable] customers we want to be very careful but after they go through the RFP process, Zoom is best positioned. I think we see that at very often over the past several quarters. I think it's not will probably the pattern for the future and gross as well because we have a high confidence as well as enterprise customers no matter how complex their existing on-prem full systems are as long as it goes to the process, you better have a solutions, I think we have high confidence, they are going to go with our solution.

Will Power - Baird - Analyst

Thank you.

Eric S. Yuan - Founder & Chief Executive Officer

Thank you.

Operator

Next question is from Patrick Walravens with JMP.

Pat Walravens - JMP Securities - Analyst

Great, thank you. Hey, Eric, what would you say was your primary source of competitive differentiation as video conferencing solution a while ago and what would you say it is today is a communications platform?

Eric S. Yuan - Founder & Chief Executive Officer

So Patrick that is a good question. Video conferencing itself, I would say it sounds very easy, but however it is really hard because it just works. You know, and that's the reason why our customer lack of platform. Even if some of the competitors try to added features, guess what. And you, you've got to make it work, anytime, any device and take this earning call for example how many of our competitors will dare to host earning call on this plan. We're free, right. The reason why we have a confidence not only Zoom but also some of our customers like my good friend, Jan, they also hosted earnings call on Zoom platform because of very reliable, great video, audio quality, a lot of other video features like early next year we're going to announce our metaverse functionality. And Patrick you can show up as your digital [Indecipherable], if you want to the right. I think on the one hand, I think it is reliability, it works, anywhere, anytime, and a plus always be the first window to come up with innovations that the reason why winning on that space. I think in the future, I would see more and more innovations and process supported by development platform, when you see platform also, we will help us leapfrog our competitors again as it's not like that you have a [Indecipherable] random person, you see, you can develop or something similar, is not like that you need a huge investment to be on par with our plans.

Pat Walravens - JMP Securities - Analyst

It just works.

Eric S. Yuan - Founder & Chief Executive Officer

Exactly, it just works is. It's just a three word, it is not that straightforward, it is pretty hard.

Operator

Next question is from Steve Enders with KeyBanc.

Steve Enders - KeyBanc - Analyst

Okay, great. Thanks for - thanks for taking the question here. I just wanted to check back on the Carrier deal and how that came together, it sounds like on the phone portion, it got a large portion of the [Indecipherable] base there, but I guess what would it take for - for Zoom Phone to be deployed wall to wall within that customer? And I guess what are kind of the learnings of that as you apply that to other customers that are considering Zoom Phone?

Eric S. Yuan - Founder & Chief Executive Officer

I think the, first of all, for the very large enterprise customers in particular for those customers who deployed in multiple very complex on-prem solution, the sales cycle portraits it is not only to on-prem to cloud right it is a multiple solution, it's not to mention, you need to spot of the global participant. However, I think that the Zoom solution is much better positioned. I think it normally take a li

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ZOOM COMMUNICATIONS INC

Q3 2022

Earnings Transcript

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