Fastest Revenue Growth in 11 Quarters — But It's Still 4.4%: Initiating Zoom at Hold on a Best-in-Class FCF Machine Waiting for AI to Bend the Curve
Key Takeaways
- Q2 FY26 was a clean beat-and-raise: revenue of $1.217B grew 4.7% YoY (4.4% in constant currency) — the fastest growth rate in 11 quarters and $17M above the high end of guidance — while non-GAAP EPS of $1.53 cleared consensus (~$1.38) by $0.16 and the FY26 revenue guide was nudged up to $4.825–4.835B (~3.5% growth at the midpoint, from 2.7% at the start of the year).
- The profitability and cash-generation profile is genuinely best-in-class for software at scale: 79.8% non-GAAP gross margin (+128bps YoY), 41.3% non-GAAP operating margin (+216bps YoY), and a 41.7% free-cash-flow margin on $508M of quarterly FCF (+39% YoY). The company sits on ~$7.8B of cash and securities and repurchased $463M of stock in the quarter alone.
- The growth engines below the core are working: Contact Center customers with >$100K ARR grew 94% YoY to 229 (9 of the top 10 deals were cloud displacements), Workvivo >$100K-ARR customers grew 142% to 168, and Zoom Phone sustained mid-teens ARR growth. But these remain small relative to the ~$4.8B base, and Enterprise net-dollar expansion of 98% is still below the 100% line that separates expansion from contraction.
- The AI story is real on engagement (AI Companion monthly active users +4x YoY) but management was explicit that the new paid layers — Custom AI Companion and Virtual Agent 2.0 — are a fiscal-2027 monetization tailwind, not a fiscal-2026 one. The revenue line is not yet bending; the call was a promise of catalysts to come at Zoomtopia (Sept 17), not evidence they have arrived.
- Rating: Initiating at Hold (constructive bias). At roughly the low $70s — near the 52-week low and an estimated ~8x EV/FCF after netting out the cash — the downside looks well-protected by the cash flow and the buyback. But a ~3–4% grower with sub-100% net retention and a monetization catalyst that management itself defers to next year does not yet have the earnings-acceleration trigger we would need to underwrite outperformance. We start at Hold and would upgrade on evidence the AI layer is converting engagement into revenue.
Results vs. Consensus
Q2 FY2026 Scorecard
| Metric | Q2 FY26 Actual | Consensus / Guide | Beat/Miss | Magnitude |
|---|---|---|---|---|
| Revenue | $1.217B | ~$1.205B cons. / $1.20B guide high-end | Beat | +~$12M vs. cons.; +$17M vs. guide |
| Revenue growth (YoY) | +4.7% (+4.4% cc) | ~+3.5% | Beat | Fastest in 11 quarters |
| Non-GAAP Gross Margin | 79.8% | ~78.5% (YoY 78.5%) | Beat | +128bps YoY |
| Non-GAAP Operating Income | $503M | ~$465M (guide high-end) | Beat | +$38M (+8.2%) |
| Non-GAAP Operating Margin | 41.3% | ~38% (guide) | Beat | +216bps YoY; ~+330bps vs. guide |
| Non-GAAP EPS (diluted) | $1.53 | $1.38 cons. / $1.37 guide high-end | Beat | +$0.15–0.16 (~+11%) |
| GAAP EPS (diluted) | ~$1.19 | — | — | Net income +63.7% YoY |
| Free Cash Flow | $508M | — | Strong | +39% YoY; 41.7% margin |
Year-Over-Year Comparison
| Metric | Q2 FY26 | Q2 FY25 | YoY Change |
|---|---|---|---|
| Total Revenue | $1.217B | $1.163B | +4.7% |
| Enterprise Revenue (% of total) | 60% | 59% | +1pt; +7% in dollars |
| Non-GAAP Gross Margin | 79.8% | 78.5% | +128bps |
| Non-GAAP Operating Income | $503M | $455M | +10.5% |
| Non-GAAP Operating Margin | 41.3% | 39.1% | +216bps |
| Non-GAAP EPS | $1.53 | $1.39 | +10.1% |
| Free Cash Flow | $508M | ~$365M | +39% |
| FCF Margin | 41.7% | ~31.4% | +~10pts |
Quarter-Over-Quarter Comparison
| Metric | Q2 FY26 | Q1 FY26 | QoQ Change |
|---|---|---|---|
| Total Revenue | $1.217B | ~$1.175B | +~3.6% |
| Non-GAAP Gross Margin | 79.8% | ~79.2% | +~60bps |
| Non-GAAP Operating Margin | 41.3% | ~40.0% | +~130bps |
| Non-GAAP EPS | $1.53 | ~$1.43 | +~$0.10 |
| Free Cash Flow | $508M | ~$489M | +~4% |
Quality of Beat
Revenue: The ~1% revenue beat is modest in isolation but carries a positive second-order signal: the 4.4% constant-currency growth rate is the fastest in 11 quarters, and CFO Michelle Chang attributed it to durable drivers (product diversification, up-market traction, Enterprise momentum) rather than one-time items. She did flag two minor tailwinds — an easier comparable as Zoom laps the multi-year growth trough, and a small one-time professional-services recognition — but characterized the underlying revenue improvement as structural. The honesty cuts both ways: management explicitly declined to roll the full beat forward into the back-half guide, telling the Street the H2 setup assumes Q2-like macro conditions rather than continued acceleration. This is conservative, but it also confirms there is no inflection being underwritten — just stabilization at a low-single-digit growth rate.
Margins: The 79.8% gross margin and 41.3% operating margin are the cleanest part of the print. Gross margin expanded 128bps YoY despite rising AI inference costs, which Chang said are being actively offset by cloud-to-colo migration and a federated approach to model routing (applying the cheapest adequate model to each task). She disclosed a small one-time cost benefit in the quarter but insisted the bulk of the improvement is durable. The operating-margin beat of +216bps YoY was helped by timing of spend, so we would not annualize the full 41.3% — but the FY26 operating-margin guide of 39.5% (raised) confirms the structural level has stepped up. This is a company demonstrating it can self-fund the AI transition without margin erosion, which is the central bear fear elsewhere in software.
EPS: The $1.53 non-GAAP EPS beat of ~$0.16 is high-quality and multi-sourced: operating outperformance, effective cost management, and lower dilution from the buyback and disciplined stock comp. On ~308M non-GAAP diluted shares (down sequentially), the share count itself is now a tailwind to per-share metrics — a structural change from Zoom's post-IPO history of relentless dilution. GAAP net income surged 63.7% YoY, narrowing the GAAP-to-non-GAAP gap as stock-based compensation moderates. There is no tax-rate or below-the-line gimmickry inflating the figure.
Segment Performance
Revenue by Customer Type
| Segment | % of Revenue | YoY Growth | Net Dollar Expansion | Assessment |
|---|---|---|---|---|
| Enterprise | 60% (+1pt YoY) | +7% | 98% (steady) | The growth engine; carries the H2 raise |
| Online (self-serve) | 40% | +~1.4% | — | Stabilizing; churn flat at 2.9% lows; guided flat FY26 |
Enterprise — The Engine, But Net Retention Is Still Below 100%
Enterprise revenue grew 7% YoY and now represents 60% of the total, up a point. The number of customers contributing more than $100,000 in trailing-12-month revenue grew ~9% YoY and now accounts for 32% of total revenue (up a point) — a healthy up-market mix shift that is the structural core of the bull case. Management also flagged that Enterprise churn has declined year-over-year for multiple consecutive quarters. The one number that keeps Enterprise from being unambiguously bullish is the trailing-12-month net-dollar expansion rate of 98%, which held steady but remains below the 100% line. Below 100% means the average existing Enterprise customer is contracting slightly on net — seat optimization and down-sells are still marginally outrunning expansion and price.
"We saw approximately 9% year-over-year growth in the number of customers contributing more than $100,000 in trailing 12-month revenue. These customers make up 32% of our total revenue, up 1 point year-over-year. Our trailing 12-month net dollar expansion rate for Enterprise customers in Q2 held steady at 98%." — Michelle Chang, CFO
Assessment: Enterprise is doing the heavy lifting and the up-market shift is real, but the 98% NDR is the single most important number to watch over the next several quarters. The bull-to-bear pivot point for this stock is whether the new product attach (Contact Center, Phone, Workvivo, paid AI) can push net retention back above 100%. Until it does, the algebra of the business is "win new logos faster than the installed base optimizes seats" — a grind, not a flywheel.
Online — Stabilized, Not Reaccelerating
The self-serve Online business grew ~1.4% and continues to stabilize, with average monthly churn flat YoY at a continued-low 2.9%. A monthly Pro SKU price increase instituted earlier in the summer is on track to add the previously guided $10–15M of incremental revenue, and management saw only modest customer pushback — a sign the value proposition (added storage, embedded AI Companion in the Workplace SKU) is holding. Some customers shifted to annual plans to lock in pricing, but nothing extreme. Management continues to guide Online to roughly flat for the full year.
Assessment: Online has gone from a multi-year drag to a stabilizer, which is genuinely positive versus the post-pandemic cliff the bears feared. But "flat" is the operative word — it is no longer subtracting from growth, but it is not a contributor either. The price increase is a one-time step, not a recurring lever.
Product / Growth-Vector KPIs
| KPI | Q2 FY26 | YoY | Trend | Notable |
|---|---|---|---|---|
| AI Companion MAU | (not disclosed in absolute) | +4x | Accelerating | "In the millions"; Zoom Phone AI MAU +30% QoQ |
| Contact Center >$100K ARR customers | 229 | +94% | Accelerating | 9 of top 10 deals = cloud displacements |
| Workvivo >$100K ARR customers | 168 | +142% | Accelerating | Meta Workplace migration tailwind |
| Zoom Phone ARR growth | mid-teens % | Sustained | Steady | Gaining UCaaS share at scale |
| Enterprise $100K+ TTM customers | (32% of rev) | +~9% | Steady | Up-market mix shift continuing |
| Enterprise NDR (TTM) | 98% | Flat | Below 100% | The key watch metric |
Contact Center — The Standout, Displacing Cloud Incumbents
Contact Center is the most impressive vector in the quarter. The >$100K-ARR customer count grew 94% YoY to 229, and management disclosed that all of the top 10 deals were displacements of leading competitors — and, strikingly, 9 of 10 were cloud displacements, not the on-prem-to-cloud migrations one would expect. Of the top 10, 7 were won on AI, and 8 came through channel partners, evidence of a maturing route-to-market. The Elite SKU (where the AI value is concentrated) is growing triple digits, and a newly announced PwC collaboration has already co-sold several large deals, including a Fortune 50 technology firm.
"Our top 10 contact center deals were all displacements of leading competitors, and all but one were cloud displacements." — Eric Yuan, Founder & CEO
Assessment: Winning cloud-vs-cloud displacements is a much stronger signal than greenfield migrations — it means Zoom is taking share from incumbents who already cleared the cloud-adoption hurdle, on the strength of a unified platform and faster AI iteration. The 94% growth is off a small base, so the dollar contribution is still modest, but Contact Center is the clearest evidence that Zoom can be more than a meetings company.
Workvivo & Zoom Phone — The Quiet Compounders
Workvivo (employee experience / engagement) grew its >$100K-ARR customer base 142% YoY to 168, helped by the Meta Workplace shutdown that is funneling migrating customers toward Workvivo — a large 10,000+-license win at Japanese conglomerate Marubeni was a marquee example. Zoom Phone sustained mid-teens ARR growth and, per management, is increasingly the "gateway" product that pulls customers into Contact Center and the broader platform; its AI MAU grew over 30% sequentially. A 5-year, 7-figure-ARR Zoom Phone deal displaced Cisco and bundled Workplace and Contact Center Elite.
Assessment: These are the compounders that, in aggregate, can shift the growth algorithm — but each remains small relative to the ~$4.8B base. The "better together" cross-sell motion (Phone → Contact Center → Workplace) is the right strategy and the displacement wins validate it, but the math still needs years to move the consolidated growth rate meaningfully above the core's gravity.
Key Topics & Management Commentary
Overall Management Tone: Confident and steady, with the founder-CEO delivering prepared remarks via a Zoom Custom Avatar — a deliberate, slightly theatrical demonstration of the AI product that underscores where management wants the narrative to go. The posture on AI was forward-leaning and repetitive (Yuan returned to "AI Companion as a platform" on nearly every question), while the CFO was disciplined and quantitative, repeatedly declining to extrapolate the beat into the guide. The one place management was conspicuously careful was timing: every question about AI monetization was met with a clear deferral to fiscal 2027, and the Zoomtopia event (Sept 17) was invoked at least four times as the venue where the real news would come — a tell that this print was a placeholder ahead of the catalyst, not the catalyst itself.
1. Revenue Growth: The Deceleration Narrative Finally Inflects — Modestly
The single most important framing of the quarter is that 4.4% constant-currency growth is the fastest in 11 quarters. For a stock whose entire bear thesis has been "the pandemic pull-forward is permanently behind it and growth asymptotes to zero," a sequential improvement in the growth rate — even to a still-pedestrian ~4% — is a meaningful narrative shift. Management raised the FY26 revenue growth guide from 2.7% at the start of the year to ~3.5% now.
"We delivered strong results highlighted by revenue growing at its fastest rate in 11 quarters." — Eric Yuan, Founder & CEO
Assessment: This is the green shoot that supports our constructive bias rather than a neutral Hold. The trough is in and the trajectory has turned the right way. But "fastest in 11 quarters" is doing rhetorical work — the absolute level is ~4%, and the raise was modest. The narrative inflection is real; the fundamental inflection is not yet.
2. AI Companion as a Platform — Engagement Soaring, Monetization Deferred
Yuan's central message, repeated throughout the call, is that AI Companion is not a feature but a back-end AI platform that powers every Zoom product — Phone, Contact Center, Docs, Whiteboard — and is bundled free into paid SKUs, with monetization confined (for now) to the Custom AI Companion add-on. MAU grew 4x YoY into "the millions," with adoption extending well beyond meeting summaries into meeting prep, task management, and phone call summaries.
"AI Companion is a platform... It's Phone, Contact Center, almost every service will benefit from our AI Companion... We only monetize for Custom AI Companion. But AI Companion is extremely important for us to empower our other services. That's a way for us to further monetize AI Companion." — Eric Yuan, Founder & CEO
Assessment: The platform framing is strategically sound — it explains why Zoom can win Contact Center deals on AI and why churn is improving — but it is also a way of describing AI value that does not show up as a separate revenue line. Free-bundled AI improves retention and competitive positioning; it does not, by itself, accelerate revenue. The investable question is whether the paid layer (next topic) converts.
3. Custom AI Companion & Virtual Agent 2.0 — Explicitly a FY2027 Story
The paid AI products — Custom AI Companion (which connects to a customer's knowledge bases, Salesforce/ServiceNow/Workday, and custom templates) and Virtual Agent 2.0 (agentic voice for Contact Center) — only became generally available around April 2025. Management was unusually direct that these will not move the FY26 numbers.
"Those that just GA-ed in the April time frame... we're pleased with the customer examples... But really, we just continue to emphasize what I've said previously, which is those won't really come in until '27, given law of large numbers, building product, et cetera." — Michelle Chang, CFO
Assessment: This is the crux of the Hold. Management is telling investors the AI monetization catalyst is a FY27 event. That is intellectually honest and de-risks the FY26 guide, but it also means there is no near-term earnings-acceleration trigger embedded in the current numbers. We want to own this on evidence the FY27 layer is converting — which, by management's own timeline, is several quarters away.
4. Profitability: 79.8% Gross Margin While Funding AI
The most under-appreciated achievement of the quarter is that Zoom expanded gross margin 128bps YoY while absorbing rising AI inference costs. The offsets are concrete: migration of workloads from public cloud to colocation, a federated model-routing architecture that applies the cheapest adequate model per task, and continuous AI-cost scrutiny.
"We're still hitting 79.8% gross margin, up over 100 basis points year-over-year. That's because we're offsetting AI investments and AI usage with cost optimization... migrating cloud to colo... the federated approach and making sure that we're applying the right model to the right tasks so that we can get both best quality and best cost." — Michelle Chang, CFO
Assessment: This directly rebuts the "AI will crush software gross margins" bear case as it applies to Zoom. The federated-routing and colo levers are durable. We model gross margin holding in the high-70s/low-80s even as AI usage scales — a key reason the FCF thesis is robust.
5. Capital Allocation: An FCF Machine Buying Itself Back
Zoom generated $508M of free cash flow (41.7% margin), ended the quarter with ~$7.8B in cash and securities, and repurchased 6M shares for $463M under its $2.7B authorization — accelerating the pace QoQ. With the stock near 52-week lows, the buyback is being executed at what management clearly views as a discount.
"In Q2, we again accelerated execution of our existing $2.7 billion share buyback plan, purchasing 6 million shares for $463 million, an increase of approximately 389,000 shares quarter-over-quarter." — Michelle Chang, CFO
Assessment: This is the spine of the downside protection. A company converting ~42% of revenue to FCF, sitting on ~$7.8B net cash (roughly a third of the market cap), and shrinking the share count is structurally hard to lose much money owning. The buyback at these levels is accretive and signals management's own valuation view. It is also, candidly, the reason a no-growth Zoom can still compound per-share value — but buybacks are a return-of-capital story, not a growth story, and the market pays a lower multiple for the former.
6. Contact Center: Better-Together Voice + CX Driving Displacements
Beyond the 94% >$100K-customer growth, the strategic message is that Zoom's unified, organically-built stack (virtual agent, quality management, workforce management, core platform) wins against incumbents who assembled their suites through acquisition and deliver inconsistent experiences. The PwC alliance adds enterprise implementation muscle.
"We have our own virtual agent. We have our own quality management, workforce management and the core platform integration... very consistent experience. That's another reason why customers really want to select Zoom as their contact center solution provider." — Eric Yuan, Founder & CEO
Assessment: The organic-stack argument is credible and is the kind of durable structural advantage that compounds. Contact Center is the vector most likely to surprise to the upside over a multi-year horizon.
7. Zoom Phone: The Gateway Product Gaining Share at Scale
Zoom Phone sustained mid-teens ARR growth despite already being a UCaaS leader at scale, and management framed it as the entry point that pulls customers into the broader platform — meetings to phone to contact center. New connections between Zoom Phone, Virtual Agent, and Revenue Accelerator deepen the attach.
"A major 5-year, 7-figure ARR Zoom Phone deal displacing Cisco, which also includes Workplace and Contact Center Elite." — Eric Yuan, Founder & CEO
Assessment: Mid-teens growth on a large base is a quietly excellent result and one of the most reliable contributors to the consolidated number. The Cisco displacement underscores that the platform bundle is a competitive weapon, not just a cross-sell convenience.
8. Online Stabilization & The Pro Price Increase
The Online price increase is on track for the guided $10–15M of incremental revenue with minimal pushback, and churn held at multi-year lows of 2.9%. Management reiterated a flat-Online full-year framing, treating the self-serve cohort as a stable cash contributor rather than a growth lever.
Assessment: The successful price increase with low churn proves pricing power exists in the self-serve base — a small but real positive. It is a one-time step, however, and does not change the structural "flat Online" outlook.
Guidance & Outlook
| Metric | Q3 FY26 Guide | FY26 Guide (raised) | FY26 Prior | Change |
|---|---|---|---|---|
| Revenue | $1.210–1.215B (~3% YoY) | $4.825–4.835B (~3.5% YoY) | ~$4.80B (~2.7–3%) | Raised |
| Non-GAAP Operating Income | $465–470M (38.6% margin) | $1.905–1.915B (39.5% margin) | lower | Raised |
| Non-GAAP EPS | $1.42–1.44 | $5.81–5.84 | lower | Raised |
| Free Cash Flow | — | $1.74–1.78B | lower | Raised |
| Deferred Revenue (Q3) | +4–5% YoY | — | — | In line |
Management raised all four headline FY26 metrics — revenue, operating income, EPS, and free cash flow. The revenue raise to ~3.5% growth at the midpoint (from ~2.7% to start the year) is the headline, but the EPS raise to $5.81–5.84 and the FCF raise to $1.74–1.78B are the more consequential figures for a value-oriented investor. Notably, the buyback is not reflected in the share-count and EPS guidance, so the actual per-share outcome could be better than guided.
Implied H2 ramp: The Q3 guide of ~3% YoY growth is actually a deceleration from Q2's 4.7%, which surprised some on the call. CFO Chang explained the H2 outlook assumes Q2-like macro conditions and is driven entirely by Enterprise, with Online held flat — a deliberately conservative posture rather than a sign of deterioration. The professional-services one-timer and FX that helped Q2 do not recur at the same magnitude.
Street at: Consensus sat near the low end of the new FY26 range; the raise pulls the Street up modestly. The market's debate is whether ~3.5% is the new structural growth rate or a waypoint to mid-single-digits as AI monetizes.
Guidance style: Classic Zoom — beat by ~$17M, raise the full year by less than the beat, and frame the back half conservatively. The five-quarter pattern of beating the guide high-end suggests the FY26 numbers are a floor, not a ceiling.
Analyst Q&A Highlights
AI ROI and the Shift from Summaries to Agentic Workflows
The first question pressed on what concrete return customers are seeing from the AI products, and what the macro/IT-budget backdrop looks like for collaboration spend. Management leaned into the platform narrative — AI Companion improving the entire meeting lifecycle and extending into Phone and Workplace — and characterized customer appetite as broadly focused on using AI to improve productivity, with most customers either already enabled or in the process of enabling AI Companion (which is bundled free except for the customized tier).
Q: "You're seeing your AI solution really take off. Can you share what's the ROI that your customers are seeing... what's the use case? And then from a macro perspective, anything you can share in terms of what you're hearing from customers on their appetite, IT budgets for collaboration?"
— Peter Levine, Evercore ISI
A: "In terms of monthly active users, it's 4x more this quarter compared to the quarter last year... customers all look at how to leverage AI to improve productivity and work effectiveness... our AI Companion is part of their offering. We do not charge customer extra except for customized AI Companion."
— Eric Yuan, Founder & CEO
Assessment: The answer confirmed enormous engagement (4x MAU) but conspicuously did not quantify ROI in revenue terms — because most of the value accrues as retention and competitive positioning, not as incremental billings. A revealing non-answer that frames the entire monetization debate.
The Online Price Increase and Customer Behavior
A recurring line of questioning probed whether the summer Pro-SKU price increase was tracking to the previously guided $10–15M of incremental revenue and whether it was provoking churn or plan-switching. Management reaffirmed the range, noted low churn held, and described only modest shifts to annual plans with minimal pushback — attributing the smooth absorption to the value packed into the Workplace SKU (AI Companion, expanded storage).
Q: "You instituted a price increase for the monthly Pro SKU earlier this summer... you were expecting that to add $10 million to $15 million of incremental revenue. Have any of your assumptions changed? And have you observed customers switching to annual plans to avoid the increase or any other dynamics?"
— Ioannis (Yanni) Samoilis (for William Power), Baird
A: "I'd reiterate that same range of guidance from $10 million to $15 million still on track... We did see some shift to long term, but nothing I would say extreme... we didn't see a lot of pushback, and I think that's really a statement of — it's a relatively small price increase. But it has to do even more with the value that we've put in the Workplace SKU."
— Michelle Chang, CFO
Assessment: A clean confirmation of pricing power in the self-serve base with no churn penalty — a small positive. But it is a one-time step-up, not a recurring growth lever, and management was careful not to imply otherwise.
Why the Beat Isn't Rolling Forward Into the Guide
The most pointed exchange of the call challenged the conservatism directly: with a ~$17M revenue beat, a ~$0.16 EPS beat, and FX as a tailwind, why was so little of the upside flowing through to the back-half outlook? Management framed it as prudence and consistent methodology — Online held flat, the raise concentrated in Enterprise, and an explicit assumption that H2 macro looks like Q2 rather than better.
Q: "You raised by 25% to the top line, beat by 20% on the quarter, have FX in your favor. Walk us through why we're not getting more of a roll forward of the top-line upside here? Is it just prudency or anything to think about for the back half of the year?"
— James Fish, Piper Sandler
A: "We've used a consistent forecast methodology, and we've assumed macro conditions that are strong in their demand and durable with respect to our drivers, but still a dynamic economic environment... last quarter I said we saw some scrutiny — no losses, but additional scrutiny in some geographies. And I'm pleased to say that we saw a partial abatement to that in Q2. As such, we've expected that H2 outlook will be in line with what we saw in Q2."
— Michelle Chang, CFO
Assessment: Management chose conservatism and disclosed a genuine positive (partial abatement of the geographic deal-scrutiny it flagged last quarter). The unwillingness to extrapolate is reassuring on guide quality but confirms there is no inflection being underwritten — just stabilization.
AI Monetization Timeline and the Hyperscaler Pricing Debate
A question framed the strategic tension cleanly: as AI adoption progresses across both Online and Enterprise, how does it change the monetization timeline and the competitive positioning against two hyperscalers with opposite AI-pricing philosophies (one charging incrementally more, one bundling for free)? Management returned to the platform thesis — AI Companion as the engine that lets Zoom out-innovate on Contact Center, Phone, and core meetings — and again pointed to Zoomtopia for the substantive update.
Q: "If I think about the way AI adoption is progressing inside your customer base... how is that changing your opinion around the timeline of monetization to the extent they can start to bend the growth curve, and the competitive framing against two hyperscalers with two very different opinions on pricing — one incrementally higher and one it's part of it for free?"
— Alex Zukin, Wolfe Research
A: "Zoom AI Companion is a platform... empowering almost every product... that's the reason why our Contact Center is doing so well — if you look at our top 10 deals, 9 out of 10 switched from other cloud vendors... When we look at AI Companion as a platform, how to empower all other point of services, either Phone or Contact Center... we are going to win."
— Eric Yuan, Founder & CEO
Assessment: Management answered the competitive-positioning half convincingly and the monetization-timeline half evasively — deferring, once more, to Zoomtopia. The non-committal posture on "bending the growth curve" is exactly why we initiate at Hold rather than Outperform.
The RPO / Billings Divergence From the Revenue Beat
A follow-up flagged an apparent divergence: the largest revenue beat in years was not matched by an equally strong RPO/current-RPO signal, raising the question of whether forward bookings were quietly weaker than the headline implied. Management explained RPO growth of ~5% is strong on its own terms, is lapping a very high comparable, and reflected the highest RPO bookings in many years — with the current-RPO optics distorted by the comp rather than by soft demand.
Q: "Is there anything we're not seeing that is maybe creating a headwind in terms of the CRPO metrics in billings, that maybe is not painting the same picture as the largest revenue beat you've had in years? There seems to be a little divergence — anything to help us marry those two data points?"
— Alex Zukin, Wolfe Research
A: "RPO growth of 5% is strong. I would also point out that it's lapping a very high comparable and that our RPO bookings are sort of the highest in many years. From a current RPO, it's really just the strong comparable at play there."
— Michelle Chang, CFO
Assessment: A credible explanation — the comp distortion is real and bookings being at multi-year highs is a genuine positive. But RPO at +5% growing only modestly faster than revenue caps how much forward acceleration the bookings signal can promise. It corroborates "stabilizing," not "inflecting."
Contact Center: What's Driving the Cloud-vs-Cloud Displacements
An analyst expressed surprise that Zoom is winning Contact Center deals against other cloud providers rather than just on-prem migrations, and asked what is actually driving the displacements — failed implementations, AI, a cleaner stack, easier deployment. Management attributed it to incumbent dissatisfaction (outages, cost, slow innovation, wrong architecture) colliding with Zoom's organically-built, consistent platform and culture.
Q: "The fact that you're winning contact center deals against other cloud providers is very surprising... what's driving the cloud displacements? Are those failed implementations? Is it the AI capabilities, a cleaner tech stack, easier to implement?"
— Arjun Bhatia, William Blair
A: "It's not surprising to us at all. We know we are going to win... customers were not happy with the existing cloud contact center providers... either quality is not good, outage, or too expensive, or worst innovation or architecture is wrong, AI adoption is slow... When they test Zoom, they say 'Wow, I cannot believe that, you almost had every feature we need.'"
— Eric Yuan, Founder & CEO
Assessment: The founder's conviction here is notable and the supporting stats (9 of 10 cloud displacements, 7 of 10 won on AI, 8 of 10 via channel) back it up. Contact Center is the vector where the platform-AI advantage is most clearly translating into competitive wins today, not someday.
AI Inference Costs vs. the Rising Cash-Flow Guide
A question probed the apparent tension between Zoom's ambition to be "AI-first" — with all the inference cost that implies — and its simultaneously rising free-cash-flow guidance. Management explained the offsets in detail: cloud-to-colo migration on the COGS side, federated model routing to match model cost to task, and R&D efficiencies (including AI-assisted productivity internally) funding continued AI investment.
Q: "No matter how efficient you are, how do we square the cost of inferencing and all these models away with the continued raise in cash flow guidance? How should we think about the long-term financial implications as AI usage among your customer base grows?"
— Rishi Jaluria, RBC Capital Markets
A: "We're still hitting 79.8% gross margin, up over 100 basis points year-over-year. That's because we're offsetting AI investments and AI usage with cost optimization... migrating cloud to colo... the federated approach and applying the right model to the right tasks so we can get both best quality and best cost... We're going to live the same reality that our customers are living."
— Michelle Chang, CFO
Assessment: The most reassuring answer of the call for the FCF thesis. The cost levers are specific and durable, and the proof is in the margin print. This is why we can underwrite high-70s/low-80s gross margins through the AI transition — the core of the downside protection.
What They're NOT Saying
- A dollar figure for AI revenue: Management quantified AI engagement (4x MAU) exhaustively but never disclosed AI revenue — no AI ARR, no Custom AI Companion attach rate, no contribution figure. The omission is the entire monetization question: until there is a number, "AI is a platform" remains a retention story, not a growth story.
- When net-dollar expansion crosses back above 100%: Enterprise NDR has been stuck at 98% and management offered no timeline or pathway for getting it above the 100% line. That single metric is the difference between a grind and a flywheel, and they did not engage it directly.
- The Q3 deceleration to ~3%: The Q3 guide implies growth slows from Q2's 4.7%, yet management framed the quarter around "fastest growth in 11 quarters." The reconciliation (conservatism, one-timers not recurring) is plausible but was volunteered defensively rather than addressed head-on.
- Microsoft Teams: The single largest competitive threat to the core meetings franchise — Teams bundled free into Microsoft 365 — went essentially unmentioned. Management talked extensively about Contact Center competitors but steered clear of the elephant in the core business.
- Specifics on the FY27 AI ramp: Everything substantive was deferred to Zoomtopia (Sept 17). Investors were asked, repeatedly, to wait three weeks — a reasonable ask, but it means this print deliberately withheld the catalyst.
Market Reaction
- Pre-print setup: ZM entered the print trading in the low $70s — near the low end of its 52-week range (which bottoms around $69) and modestly negative on the year, with depressed sentiment reflecting the multi-year "post-pandemic de-rate" narrative. The historical post-earnings pattern is poor: the stock has posted a negative one-day reaction in roughly three-quarters of the prior five years' prints.
- After-hours move: Shares rose ~1.5% in the regular session ahead of the release, then slipped roughly 1% after hours despite the top- and bottom-line beat and the raised FY26 guide — a muted, orderly "sell-the-beat" response with no outsized volume spike.
The lukewarm reaction is rational given what the print actually contained. The beat was clean but small on the revenue line; the headline raise was less than the quarter's beat; and the Q3 guide implied deceleration. With the AI-monetization catalyst explicitly deferred to FY27 and previewed for Zoomtopia three weeks out, the market had little reason to re-rate on the numbers alone — the genuinely good news (best-in-class FCF, margin expansion through AI investment, accelerating product vectors) is already broadly understood, while the thing that would move the stock (revenue inflection from paid AI) remains a promise. A stock near 52-week lows that beats, raises, and barely moves is a stock waiting for a catalyst it has been told is coming later.
Street Perspective
Debate: Is ~3.5% the New Structural Growth Rate, or a Waypoint to Mid-Single-Digits?
Bull view: The growth trough is unambiguously in — 4.4% cc is the fastest in 11 quarters, the FY guide has been raised twice, and the paid AI layer (Custom AI Companion, ZVA 2.0) is a FY27 accelerant that isn't in any estimate yet. Mid-single-digit growth with 40%+ FCF margins is a re-rate candidate.
Bear view: The Q3 guide decelerates to ~3%, NDR is stuck at 98%, and the core meetings business faces structural pressure from free-bundled Teams. The "fastest in 11 quarters" framing is dressing up a number that is still ~4% and may be a ceiling, not a floor, once the easy comps lap.
Our take: The bull has the trajectory and the bear has the level. We side with "stabilized low-single-digits with optionality on AI" — which is precisely a Hold. The data does not yet support underwriting the mid-single-digit re-rate, but the green shoots are real enough that we carry a constructive bias and a low bar to upgrade.
Debate: Does the Free-Bundled AI Strategy Build or Destroy Value?
Bull view: Bundling AI Companion free into paid SKUs is a moat play — it improves retention, wins Contact Center displacements, and seeds the installed base for the paid Custom tier. The platform approach lets Zoom out-innovate point competitors, and monetization follows engagement with a lag.
Bear view: Giving away the most valuable new capability for free is a tacit admission that Zoom lacks the pricing power to charge for it, and the strategy permanently caps the AI revenue opportunity. Engagement that never converts to billings is a cost center, not an asset.
Our take: The free-bundle is defensively correct in a market where one hyperscaler gives AI away — Zoom can't charge a premium for table-stakes AI. The investable upside is entirely in the paid layer (Custom AI Companion, agentic Contact Center), which is real but unproven. We need to see attach and ARR before crediting it.
Debate: Is the Valuation a Margin of Safety or a Value Trap?
Bull view: At roughly the low $70s, ~$7.8B net cash (a third of the market cap), ~8x EV/FCF, ~12x non-GAAP P/E, and an accelerating buyback, the downside is heavily protected and per-share value compounds even at zero growth. This is deep value with a free AI option.
Bear view: Cheap stocks with no growth catalyst stay cheap. Without an NDR recovery or AI revenue inflection, the multiple has no reason to expand, and "compounding via buyback" is a low-multiple, low-excitement outcome the market will keep discounting.
Our take: The cash flow and buyback make this much closer to a margin-of-safety than a value trap — it is genuinely hard to lose meaningful capital here. But a margin of safety is a reason not to be short, not a reason to be long with conviction. The catalyst to convert "cheap and safe" into "cheap and rising" is the AI monetization management deferred to FY27. Hold, with the buyback underwriting the floor.
Model Update Needed
| Item | Prior Assumption | Updated View | Reason |
|---|---|---|---|
| FY26 revenue growth | ~2.7–3.0% | ~3.5% | Management raised the FY guide; Q2 fastest growth in 11 quarters |
| FY26 non-GAAP operating margin | ~38–39% | ~39.5% | Raised guide; cost discipline funding AI investment |
| FY26 non-GAAP EPS | ~$5.60 | $5.81–5.84 | Operating beat + lower share count from buyback |
| FY26 FCF | ~$1.65B | $1.74–1.78B | Raised guide; H1 strength + tax-payment timing |
| Enterprise NDR | Model toward 100%+ | Hold at ~98% near-term | No disclosed pathway above 100% yet |
| AI revenue contribution | FY26 modest | Defer to FY27 | Management explicit: paid AI layer is a FY27 story |
Valuation impact: The raised FY26 EPS and FCF guide lift our fair-value range modestly, but the absence of a near-term AI revenue catalyst keeps the through-cycle growth assumption at low-single-digits. We frame fair value on FCF: at ~$1.76B FY26 FCF and ~$7.8B net cash, even a conservative ~12–14x EV/FCF supports a value comfortably above the current low-$70s price — but a re-rate above that requires the growth-rate or NDR inflection we do not yet model.
Thesis Scorecard Post-Earnings
| Thesis Point | Status | Notes |
|---|---|---|
| Bull #1: Best-in-class profitability & FCF machine | Confirmed | 79.8% GM, 41.3% op margin, 41.7% FCF margin, ~$7.8B net cash, $463M buyback |
| Bull #2: New vectors scale into a growth contributor | Confirmed (early) | Contact Center +94%, Workvivo +142%, Phone mid-teens — but still small vs. base |
| Bull #3: AI monetization bends the growth curve | Developing | Engagement soaring (4x MAU); paid revenue explicitly a FY27 story |
| Bear #1: Core growth stuck at low-single-digits | Confirmed | ~4% growth; Q3 guide decelerates to ~3%; NDR 98% < 100% |
| Bear #2: Teams/Google bundling pressures core meetings | Neutral | No acute deterioration this quarter; churn improving; but threat unmentioned |
| Bear #3: Free-bundled AI caps the revenue opportunity | Unresolved | Defensively rational, but monetization unproven |
Overall: Thesis initiated. The downside-protection pillars (profitability, FCF, balance sheet, buyback) are confirmed and robust; the upside pillar (AI-driven growth re-acceleration) is promising but, by management's own framing, a FY27 event. The setup is a high-quality, deeply cash-generative business at a depressed valuation, lacking only a near-term growth catalyst.
Action: Initiate at Hold (constructive bias). Own it on evidence the paid AI layer converts engagement into revenue, or that Enterprise NDR turns back above 100%. The cash flow and buyback make the downside well-protected; the missing catalyst keeps us from Outperform. Watch Zoomtopia (Sept 17) and the FY27 setup closely — this is a name we want to be early on if the inflection arrives.