Zoom Video Communications (ZM) Q4 2022 Earnings Call Transcript

Zoom Video Communications (ZM 1.98%)
Q4 2022 Earnings Call
Feb 28, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Kelcey McKinley

Hello, everyone, and welcome to Zoom's fourth-quarter fiscal year 2022 earnings release. As a reminder, today's earnings webinar is being recorded. And now I will hand things over to Tom McCallum, head of Investor Relations. Please go ahead, Tom.

Tom McCallum -- Head of Investor Relations

Thank you, Kelcey. Hello, everyone, and welcome to Zoom's earnings video webinar for the fourth quarter and full year of FY22. 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 first quarter and full-year 2023; our expectations regarding financial and business trends; our market position opportunities, growth strategy, and business aspirations; product initiatives and the expected benefits of such initiatives and our stock repurchase program. 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 that we make on today's webinar. And with that, let me turn the discussion over to Eric.

Eric Yuan -- Founder and Chief Executive Officer

Thank you, Tom. Before I begin, I want to welcome Bill McDermott, CEO of ServiceNow, who will join our Board of Directors tomorrow. I look forward to working together with Bill, a visionary in the technology space and a successful software executive. I'd also like to thank Bart Swanson, who is stepping down from our Board of Directors tomorrow, for his years of service on our Board and I wish him the best in his future endeavors.

Let me also thank our global Zoom team, customers, partners, and investors for their support as we celebrate the 10-year anniversary of our inception and the three-year anniversary of our IPO. Now I'd like to share with you three key pillars of the Zoom strategy, which we are building out to drive our future growth. The first pillar is really about being a full unified communications platform. We made enormous strides over the past several years evolving from a meetings company into a multiproduct platform, including video conferencing, events, chat, phone, and more.

The missing piece was the contact center. That was until our announcement last week. More on that in a moment. The second pillar is hybrid work because we believe hybrid work is going to become more flexible and less about location.

So no matter where you are, office, traveling or home, Zoom wants to make sure you have a consistent experience. Whether with the Zoom Rooms or on a Zoom-connected device, we want to make sure you are part of the composition and able to collaborate anywhere and everywhere. The third pillar is business workflows and how we leverage our API marketplace, our Zoom ads, and our SDK. Many technology companies tell me that they want to integrate Zoom into their platform to improve the communication and collaboration experience for their customers.

For instance, we recently announced a Zoom DocuSign integration. This will allow customers to review a document during a Zoom Meeting and approved it as part of the simple bidirectional business workflow. We are in the early innings of this transformation of work and communication. We believe there is a massive opportunity, and we plan to address it with the same level of innovation, scalability, and simplicity that has made Zoom the trusted platform for hundreds of thousands of businesses around the world.

As a key part of our UC stack, I'm super excited about the announcement we made last week. We announced the general availability of Zoom Contact Center, an omnichannel customer engagement solution that is optimized for video and integrated right into the Zoom client. It brings unified communications together with modern contact center capabilities, helps customers connect over video, and also support channels like voice, SMS, and web chat. Zoom Contact Center is simple for admins to configure and deploy.

They can easily create menus, greetings, and prompts right in the Zoom Admin portal. The product can also integrate chat and video into an existing digital presence, like a website, helping organizations have conversations with the customers in the right place and at the right time. This is just the beginning of our plan to modernize the contact center and enrich the experience for our customers and our customer's customer. Speaking of customers, we ended the year with a lot of great wins.

First, I want to thank Medtronic, a global leader in healthcare technology for expanding their partnership with Zoom. In 2020, Medtronic chose Zoom Meetings, Zoom Rooms, and Zoom Webinars to enable its global employees to communicate and collaborate better. In Q4 of fiscal 2022, after a careful vendor selection process, they decided to add 60,000 Zoom Phone licenses to a new multiyear agreement. Thank you, Medtronic, for trusting Zoom to deliver modern integrated UCaaS solution to support our global communication needs.

Thank you, Intuit, the global technology platform that makes TurboTax, QuickBooks Mint, Credit Karma, and Mailchimp, for entrusting Zoom with their video communications over the past several years and recently adding Zoom Phone to create a unified communications platform across their organization. Thank you, Arizona State University, which was recently recognized by U.S. News & World Report as the country's most innovative school and has been a strong supporter of Zoom products over the years. As a leading research university, a highly effective communications platform is very important to drive collaboration between their students, staff, and community.

ASU chose Zoom to be a complete communications platform with 50,000 Zoom Meetings, 700 Zoom Rooms, and 15,000 Zoom Phone licenses, as well as Zoom Webinars. I also want to recognize LIXIL Group Corporation, a Japanese manufacturer and pioneer of building materials and housing equipment. As a Zoom Meetings and Zoom Rooms customer, LIXIL has embraced hybrid work for communication and collaboration while leveraging the ease of use of the Zoom platform to enhance their customer experience with video tours of their showrooms. In Q4, LIXIL added 10,000 Zoom Phone licenses, committing to a unified communications platform.

Thank you, Medtronic, Intuit, Arizona State, and LIXIL. I'm very grateful to have such a great group of customers. I love you all. Thank you.

The world wants a full communications platform, one that's integrated with other workflows, supports hybrid work, and is secure and easy to use. Zoom is hard at work ensuring our customers exceed the soaring expectations of how businesses collaborate internally and communicate externally. To sustain and enhance our leadership position in this new area of digital transformation, we plan in FY '23 to build out our platform to further enrich the customer experience and expand our go-to-market motions, which will enable us to drive future growth for Zoom. I want to thank our Zoomies for their hard work over the past 10 years.

We have grown to nearly 6,800 strong and are more focused than ever on delivering happiness every day to our hundreds of thousands of customers around the world. And with that, let me pass it over to Kelly. Thank you.

Kelly Steckelberg -- Chief Financial Officer

Thank you, Eric, and hello, everyone. Let me start with a few of the financial highlights for FY '22 and the results for Q4, then we'll provide our outlook for Q1 and FY '23. We delivered another year of strong results. Revenue grew 55% to $4.1 billion as we exited FY '22 at an annualized run rate of $4.29 billion.

We grew non-GAAP operating margin to 40.4%, up from 37.1% in FY '21, as we scale our operations. And we achieved an adjusted free cash flow margin of 38%. In Q4, total revenue grew 21% year over year to $1.07 billion, exceeding the high end of our guidance of $1.053 billion. The growth was primarily driven by strength in our Enterprise business, which continued to grow significantly faster than our Online business.

We also saw strong demand for Zoom Phone, which had a record quarter adding over 550,000 paid seats. Much of this Zoom Phone growth came from strength in large customers with a number of customers with more than $100,000 of ARR growing 149% year over year and the number of customers with more than 10,000 paid seats growing 122% year over year. We also added a major global bank as a Zoom Phone customer. We saw 66% year-over-year growth in the up-market as we ended the year with 2,725 customers contributing more than $100,000 in trailing 12-months revenue.

These customers represented 23% of revenue, up from 18% in Q4 of last year. We exited the quarter with approximately 509,800 customers with more than 10 employees, up 9% year over year. In Q4, customers with more than 10 employees represented 67% of revenue, up from 63% in Q4 of last year. As we approach our three-year anniversary as a public company, a lot of incredible things have occurred at Zoom.

We've seen unprecedented growth and brand awareness for Zoom Meetings and incredibly strong momentum for newer products. We've also expansively built out our direct, channel, and ISV go-to-market motions, which we collectively call Enterprise. These customers have high lifetime values as they tend to increase deployments, extend terms and churn at much lower rates over time. Starting today, we will provide metrics that more closely align with the way our internal view of the business has evolved following this period of unprecedented growth and expansion.

This will include the number of Enterprise customers and the net dollar expansion rate for Enterprise customers. In the appendix of the investor deck, you will find two years of historical data for these new metrics. Additionally, through the end of FY '23, we will continue to provide the number of customers with more than 10 employees in the appendix. In Q4, the number of Enterprise customers grew 35% year over year to approximately 191,000.

Revenue from Enterprise customers grew 38% year over year and represented 50% of total revenue, up from 44% in Q4 of FY '21. We expect revenue from Enterprise customers to become an increasingly higher percentage of total revenue over time. Our Online business, which we define as customers self-serviced through our Online channel represents the other half of our revenue, up from approximately 25% in Q4 of FY 20 before the pandemic. The self-service model is very attractive from profitability and cash flow perspectives.

And while we have seen Online grow more slowly than Enterprise in recent quarters and expect that to continue going forward, we are continuing to invest in and innovate around this channel to drive growth. We will also be presenting our net dollar expansion rate for Enterprise customers rather than our net dollar expansion rate for customers with more than 10 employees. First, let me start with the historic metric. Our Q4 net dollar expansion rate for customers with more than 10 employees was in line with what we discussed in Q3, being just under 130% at 129%.

Going forward, we will report the trailing 12-month net dollar expansion rate for Enterprise customers, which in Q4 was 130%. Both domestic and international markets had strong growth during the quarter. Our Americas revenue grew 21% year over year. Our combined APAC and EMEA revenue grew 23% year over year to be approximately 33% of revenue, stable with Q4 of last year.

On a quarter-over-quarter basis, Asia Pac revenue grew slightly faster than the overall company, but we saw headwinds to our Online business in EMEA, partially associated with the holiday seasonality. Let me share a few international highlights with you. We closed our largest overall deal ever in EMEA with 200,000 Meetings licenses and our largest Zoom Rooms deal in APAC with a customer deploying more than 3,300 Zoom Rooms to drive hybrid work across their offices. We have also expanded our partnership with Deutsche Telekom by committing to developing a joint solution specifically for the German market.

We continue to view international expansion as a major opportunity for future growth. 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 or losses on strategic investments, income tax benefits from discrete activities, and undistributed earnings attributable to participating securities. Non-GAAP gross margin in Q4 was 78.3%, an improvement from 71.3% in Q4 of last year and 76% in Q3 of this year.

The sequential improvement was mainly due to optimizing usage across the public cloud and our co-located data centers, as well as the seasonally lower usage during the holidays. We expect this figure to return to the mid-70s in the short term before improving in the mid to long term as we continue to build out our data centers. Research and development expense grew by 133% year over year to approximately $72 million. As a percentage of total revenue, R&D expense nearly doubled year over year to 6.7%, demonstrating our commitment to innovation and product development.

We plan to further invest to enhance our platform, including our recently announced Contact Center product. Sales and marketing expense grew by 58% year over year to $251 million or approximately 23.4% of total revenue, primarily driven by increased marketing programs and sales headcount to drive future growth. We remain committed to investing in worldwide sales capacity and product marketing across our comprehensive communications platform. G&A expense grew by 22% to $95 million or approximately 8.9% of total revenue.

Non-GAAP operating income expanded to $420 million, exceeding the high end of our guidance of $363 million. This translates to a 39.2% non-GAAP operating margin for Q4, compared with 40.9% a year ago and 39.1% last quarter. Non-GAAP diluted earnings per share in Q4 grew to $1.29 on approximately 306 million non-GAAP weighted average shares outstanding. This result is $0.22 above the high end of our guidance and $0.07 above Q4 of last year.

Turning to the balance sheet, deferred revenue at the end of the period was $1.2 billion, up 34% year over year from $883 million. Looking at both our billed and unbilled contracts, our RPO totaled approximately $2.6 billion, up 51% year over year from $1.7 billion. We expect to recognize approximately 63% of the total RPO as revenue over the next 12 months as compared to 70% in Q4 of last year, reflecting a shift back toward longer-term plans. As a reminder, due to the seasonality of renewals being front-end loaded and tapering through the year, our collections follow the same trend.

Since our renewal linearity is unique, let me provide you once again with some color on next quarter's deferred revenue. We believe it will peak in Q1 at 12% to 13% year-over-year growth and moderate over the rest of the year, reflecting the smaller renewal base. 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 $209 million as compared to $399 million in Q4 of last year.

Adjusted free cash flow, which excludes a one-time $85 million cash outflow related to a legal settlement that was disclosed and recognized as a GAAP expense in Q1, was $274 million as compared to $378 million in Q4 of last year. Now turning to our FY '23 guidance, this outlook is consistent with what we are observing in the market today. Specifically, it assumes that our Enterprise business will grow substantially faster than our Online business. It also assumes that our year-over-year total revenue growth rate will modestly accelerate in late FY '23.  For the first quarter of FY '23, we expect revenue to be in the range of $1.07 billion to $1.075 billion.

We expect non-GAAP operating income to be in the range of $345 million to $350 million. Our outlook for non-GAAP earnings per share is $0.86 to $0.88 based on approximately 309 million shares outstanding. As mentioned last quarter, due to our multiyear history of profitability, we have fully utilized our NOLs. We expect our tax rate to approximate the U.S.

blended tax rates in FY '23. For the full year of FY '23, we expect revenue to be in the range of $4.53 billion to $4.55 billion, which would represent approximately 11% year-over-year growth. We expect non-GAAP operating income to be in the range of approximately $1.43 billion to $1.45 billion, representing a non-GAAP operating margin of approximately 32%. While our revenue grew 558% from FY '20 to FY '22, our operating margin also increased from 14% to 40%.

We are pursuing a massive opportunity, and we will continue to focus on the appropriate balance between growth and margins as we build out and deliver on the potential of our platform. Our outlook for non-GAAP earnings per share is $3.45 to $3.51 based on approximately 312 million shares outstanding. As indicated in our earnings press release today, our Board has authorized a $1 billion share repurchase program that we intend to execute on beginning this quarter. This not only underscores the confidence that our Board and our management team have in the future of Zoom but also allows us to leverage our strong profitability, cash flow generation, and strength of our balance sheet to deliver returns back to our shareholders.

We are excited about the large and growing opportunity ahead of us as we continue to execute on our strategy and growth outlook. 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 team, our customers, our community, and our investors. Kelcey, please queue up our first question.

Kelcey McKinley

Thank you, Kelly. Again, we will now move into the Q&A session. As a reminder, to best hear from everyone, please limit yourself to one question. Our first question is going to come from Meta Marshall with Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thank you. Kelly and Eric, we're coming up on the anniversary date of COVID and close to the kind of renewal dates that a lot of your customers are going to have. So can you just speak to some of the trends you're seeing? We're just trying to get a sense of is this a good Phone entry point? Are you seeing normalization of kind of Room attach rates? Or what are you seeing as far as the release of video licenses or Meetings licenses? Just any trends that you're seeing as some of these major renewals kind of come up at the end of this month and into the next one.

Kelly Steckelberg -- Chief Financial Officer

Yes. Thank you, Meta. So we continue to see strength in our renewals, especially in the Enterprise business. And as you heard from some of the highlights we talked about earlier, we had very strong performance from Zoom Phone in Q4 as well and also Zoom Rooms as customers are really thinking about the future of hybrid work and how they're going to keep everyone select connected as they bring them back to the office.

This is a really important strategy for them. And you heard Eric talk about some of that, and maybe Eric wants to touch on the strategy around that. But continue to see strength both in renewals and the Enterprise, as well as additional Phone seats and Zoom Rooms.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. That's it for me. I mean just in terms of -- maybe just another quick question in terms of what kind of metrics you're looking at as you make some of these sales and marketing investments to just determine what return you're going to see on those or what benchmarks you're kind of measuring yourself against them. And that's it for me.

Kelly Steckelberg -- Chief Financial Officer

Yes. I mean one of the key things we always look at internally is sales productivity, looking at it both from a U.S. and an international perspective. And then on the marketing side, we look at -- internally, we also look at things like opportunities and leads that get generated from any of those.

And then, of course, maybe the actual benchmark we're always looking at is sales and marketing as a percentage of revenue.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thank you.

Kelcey McKinley

And Michael Turrin with Wells Fargo has the next question.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey, there. Thanks. Appreciate you taking the question. I was hoping to ask one on Contact Center and just some more detail. Can you help just frame out initial observations around positioning? Is there a certain size Contact Center you're targeting? Are there advantages you see within video or lessons learned from having Phone in the market you would point to? And just in terms of the go-to-market motion, how different is that? Or how well geared are you from some of those initial conversations? Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Yes, Michael, those are great questions. We are super excited about our Contact Center announcement last week. And first of all, this is based on our customers' feedback. Several years ago, after the launch of Zoom Phone, many of our customers told us they would like to standardize their Zoom platform for unified communications.

Really the missing piece is Contact Center. We listened to our customers. Our team worked so hard. And finally, we announced the Zoom Contact Center.

But in terms of growth, similar to what we did to grow our Zoom Phone business, right, and for the first year, for sure, right, we are going to target those customers who really want to standardize their Zoom platform. The problem started from Meetings. For those customers who deploy both Meetings and Phone, now they look at the Contact Center. Also, at the same time, we are working very hard adding more and more features.

I think probably for those customers, as long as they want to embrace the cloud business Contact Center, as long as they want to standardize their Zoom unified communications platform, they would likely have Zoom Contact Center, right? And that's our strategy. And that's the omnichannel video, and it's very strong. We also support SMS, voice, and web chat. Again, a lot of hard work, and we are going to continue innovating and to drive our Zoom Contact Center growth.

And based on the early data feedback, our customers are also very excited. We wanted to deploy a solution and really understand the unified collaboration. Also, at the same time, we build this solution from ground up, right, and a very consistent compared to the video and phone. We're very excited about this opportunity.

Michael Turrin -- Wells Fargo Securities -- Analyst

Very helpful. Best of luck to you there. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you, Michael. Appreciate it.

Kelcey McKinley

Our next question will come from Sterling Auty with JPMorgan. Sterling, go ahead. Thank you for turning on your camera.

Sterling Auty -- JPMorgan Chase and Company -- Analyst

Thanks. Hopefully, you can hear me OK, given the wind noise. But Kelly, I didn't quite hear Meta's question. I was just wondering, within the guidance for this coming year, can you give us a sense what the Enterprise growth specifically looks like within that guide?

Kelly Steckelberg -- Chief Financial Officer

Yes. So specifically in Enterprise, we expect that part of our business to grow at approximately 20% year over year. And then that -- you can back into that what we're expecting from our Online business is for it to be flattish for the year, but it might have some variability quarter over quarter.

Sterling Auty -- JPMorgan Chase and Company -- Analyst

Got it. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Sterling, by the way, our Enterprise growth is pretty strong as we add more and more new services like Contact Center is the first one, right? We are not going to stop here. This is our company DNA. We truly understand the Enterprise customer needs. We are going to add more and more Enterprise services to further grow our Enterprise business.

Thank you.

Sterling Auty -- JPMorgan Chase and Company -- Analyst

That makes sense. Thank you.

Kelcey McKinley

Jim Fish with Piper Sandler has the next question.

Quinton Gabrielli -- Piper Sandler -- Analyst

Hey, good afternoon, everyone. This is Quinton on for Jim Fish. Thanks for taking our questions. The labor market right now remains difficult, especially as you're looking to hire and retain some of the top engineering and sales talents.

Can you talk about any changes or impacts you've seen in Zoom's ability to maintain your top talent? And then how do you plan on differentiating and acquiring the new talent? Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Yes. Kelly, feel free to chime in. So James, you are right, given the great resignation, it's pretty challenging across the industry, right? And again, we always double down on our company culture, and it is extremely important for us, right, how to make sure we deliver happiness to our customers. My no.

1 priority is really to think about our employees, how to make sure our employees are happy, right? We are doing so many things to really help our employees. And also, again, over the past few years, we more than probably triple the size of the company, right? Many employees joined Zoom remotely. Again, that's not easy. But the good news is soon it's going to change.

Especially if you look at our remote employees, how to make sure we offer the flexibility and also make sure support our employees' needs by always listening to their feedback from our employees. We also have a happiness crew, always trying to understand what's the pain point or whatever we can do differently to think of our employees. But doing that, I'm pretty sure -- and we are going to make sure our employees are happy, and we'll be OK. And that's always our formula.

Kelcey McKinley

Moving on to Ittia Kidron with Oppenheimer.

Ittia Kidron -- Oppenheimer and Company -- Analyst

Thanks, Kelcey. Kelly, I have a couple of questions for you. First, I think you mentioned in your prepared remarks that you're looking for reacceleration in the second half of the year. Maybe you can walk us through the kind of the puts and takes on what's behind that assumption.

And the second question will be regarding the Online business. I know you're only giving expansion rate, the dollar base expansion rate on the Enterprise side. But given that Online is still 50% of your revenue, could you at least give us kind of a rough range of where Online dollar expansion rate typically falls just so we get a sense of how to model that out?

Kelly Steckelberg -- Chief Financial Officer

Sure. So in terms of the second half acceleration, we're looking at in the up-market or the Enterprise, I should say now. It will be driven largely by continued expansion and growth in our existing customers, as well as contribution from some of our new products that we're really excited about, including Contact Center. And then in the Online business, what you're going to see is -- remember, we talked about at Analyst Day last year how once those cohorts get to a certain age of 16 months and older, there's a lot of stability that comes with those retention rates.

By the time we get to the second half of this year, all of those cohorts that we acquired during the pandemic are going to have hit that eighth cycle. So it's really going to start to bring stability to the Online business in a way that we haven't seen historically. And then in terms of the net dollar expansion rate for the Online, we won't be disclosing that. So in other words, I think the best I can give you is based on what Sterling just asked, which is what's the growth rate for that business.

And as I mentioned, we expect it to be flattish for next year with some variability quarter over quarter.

Ittia Kidron -- Oppenheimer and Company -- Analyst

Got it, very good. Thank you.

Kelly Steckelberg -- Chief Financial Officer

Yes.

Kelcey McKinley

Baird's William Power has the next question.

Will Power -- Baird -- Analyst

Great. Thanks for taking the question. Great to see the strong Zoom Phone numbers again. I guess I'd love to get more color around the key drivers there.

It sounds like particularly u-market. How are you competing there? What would have been kind of the key differentiators? So just trying to understand growth within existing customers versus landing new customers. And I guess this is a multipart one. First of all, where does distribution stand? I mean how important has that been expanding distribution? How much further is there to go using the channel, et cetera?

Eric Yuan -- Founder and Chief Executive Officer

Yes. So that's -- yes, that's a great question. Actually, Q4 was a record quarter, right, in terms of number of Phone new seats, more than half a million. If I recall correctly, we're around 550,000 and newly added seats for Zoom Phone.

I think, first of all, not only for our existing customers but also for new customers as well, because of the trust we built and established with our customers over the past several years. When customers think about how to transform their business to fully embrace digital transformation, how to migrate their on-prem phone system to the cloud, they always want to deploy the best solution. Plus most of the customers already deployed the video content solution and also they want to have one consistent experience. That front-end experience is very consistent.

The back end also is very consistent. The product is very reliable and ease of use, security and also a lot of very cool features. And that's the reason why customers, want to deploy the Zoom Phone. As long as a customer wins us through the vendor selection process, we have high confidence.

Look at Intuit. Look at Medtronic. It's not 1,000 licenses. That's 10,000 licenses, right? And again, that business still will continue doing very well.

And also, we are not going to stop here. We'll add more and more features, more innovations, plus combined with Zoom Contac Center. We do see accelerated growth for both the Phone and also our Contact Center down the road.

Will Power -- Baird -- Analyst

Great. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you.

Kelcey McKinley

We'll now hear from Ryan Koontz with Needham.

Ryan Koontz -- Needham and Company -- Analyst

Hi. Thanks for the question. I want to ask about your business workflow strategy there, Eric. And for your API and SDK, what type of applications are you using that for typically? Is this primarily with tech companies? Any color there would be helpful.

Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Yes, Ryan, that's a great question. Looking at our growth strategy, right, three things, three pillars, right, and a unified communications platform. We just added the Contact Center. We're going to add more and more.

The second pillar, you'll read about the hybrid work. The third one is extremely important, which is business workflows platform, right? And we have SDK, some healthcare customers and they would like to embed an SDK into their kind of medical health offering. We have API, also marketplace. But the most important thing is really about the Zoom Apps, right? We just announced a Zoom DocuSign integration.

Essentially, during a meeting time, it's very easy. One click, I look at a document, I can prove that. More and more integrations like that during a meeting time or all outside the meeting time as well, right? And that's the key to our platform growth. And another reason why we invited a great leader, the CEO of ServiceNow, right, to join our Board, right? ServiceNow is probably the best workflow application provider, right.

How to learn from ServiceNow? How to embed more and more other business workflow applications to the Zoom platform and also vice versa? I think that can truly help our customers, right? Rather than they leave the Zoom interface, go to another business context, right? They can stay within the Zoom interface, can get the job done, right? Also, we are doubling down on our SDK platform, right, like education, healthcare, a lot of vertical industry start-ups. They would like to embed Zoom into their offering. That's why we are very excited about our business workflow platform.

Ryan Koontz -- Needham and Company -- Analyst

Glad to hear. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you.

Kelcey McKinley

Brad Sills with Bank of America has the next question.

Mike Cherny -- Bank of America Merrill Lynch -- Analyst

Yes, hi. It's Mike on for Brad Sills. Two, if I could. So first on your churn by cohort, I'd love to hear your thoughts and the assumptions around that.

And then second, the visibility into the attach rate for Contact Center.

Kelly Steckelberg -- Chief Financial Officer

Sure. So Brad, if you -- or Mike, sorry, if you remember back in Analyst Day last fall, we shared a chart that shows how as cohorts age, when they get to that 16 months and older, they really stabilized in terms of retention rates. And if you go back and look at that, you're able to see what we shared with not only the retention rates but also where we are in that aging process. And so it's very easy for us now to look forward and predict how those retention rates are going to impact the overall base of the Online business.

And so that's exactly what we've assumed. They just continue aging because we've seen really strong stability in those retention rates as they get to that 15 to 16 months age. So it hasn't changed. Even as the business has that kind of overall volatility, it doesn't change in those older things.

So we're just following that line. 

Mike Cherny -- Bank of America Merrill Lynch -- Analyst

And the assumptions in the attach rates for the Contact Center.

Kelly Steckelberg -- Chief Financial Officer

Yes. So we -- it's so early right now. We haven't done it in terms of an attach rate yet. We just look forward to the back half of this year and assume that we start to see some revenue there.

And we saw -- really, we had many really strong Enterprise customers sign up for the beta. So we're excited to see how it goes moving forward.

Mike Cherny -- Bank of America Merrill Lynch -- Analyst

Great. Thank you so much.

Kelcey McKinley

Matt VanVliet with BTIG has the next question.

Matt VanVliet -- BTIG -- Analyst

Hi. Thanks for taking the question. I guess as you look at the many investments you made on the international side of things. Where do you feel like you are from a sales force maturity and efficiency relative to a lot of the efficiencies you've already shown in the U.S.? And just as each of those markets matures, maybe any kind of regional or country-by-country specifics would be great.

Thanks.

Kelly Steckelberg -- Chief Financial Officer

So the international team has grown tremendously over the last few years. We certainly continue to see opportunities. And we talked about this before, but as a quick reminder, with the growth and the brand awareness over the last two years, it's really enabled us to go in and put reps where we see opportunities without having to see markets with marketing dollars. I think the big area of opportunity that still exists for us internationally is the channel.

That is where we -- there's a cross-functional initiative in the company to really focus on the channel, especially focused around in Phone and that can be master agents, that can be carriers. Deutsche Telekom and our strong partnership there we just announced is a great example of that effort, and we're going to continue to focus on that, especially over this next coming year because that's a really important part of the distribution strategy for Zoom Phone.

Matt VanVliet -- BTIG -- Analyst

Thank you.

Kelcey McKinley

And Matthew Niknam with Deutsche Bank has the next question.

Matt Niknam -- Deutsche Bank -- Analyst

Hi. Thanks for taking the question. You've talked about M&A being the greater part of the story going forward. I'm just wondering with the pullback in market valuations for some higher growth adds, how are you thinking about inorganic opportunities? And are you seeing more of these opportunities surface, particularly in the private market? And then maybe if I can just sneak in a follow-up.

On the customers with more than 10 employees, I believe that declined slightly sequentially. Just wondering if there's any color you can give in terms of maybe what drove the bulk of those departures in terms of customer size. Thanks.

Kelly Steckelberg -- Chief Financial Officer

Sure. So in terms of inorganic and now to deeper M&A, we really are continuing to be focused on this. And I think the strength of our balance sheet in terms of cash leaves us a lot of opportunities regardless of what's happening with our stock price, honestly. So we will continue to focus on opportunities for augmenting talent or technology, which is what we've said all along.

And then in terms of the decline, you are right, it was slightly down, the metric of customers with greater than 10 employees. And if you back up for just a quick minute, remember that when we went public, we picked that metric as a proxy for our direct business and that customers with fewer than 10 were the proxy for our Online segment. And what's happened over time as we've seen this tremendous growth in Online as a channel, it started to kind of overlap there, which is why we don't think it's really the appropriate metric to use any longer going forward. But that decline was driven by churn that we saw in the Online segment of our business with customers that have more than 10 employees.

Eric Yuan -- Founder and Chief Executive Officer

Yes. Matt, to add to what Kelly said, I think it's time to really look at the Online business and also our direct business, driven by sales channel. And Online business, meaning those customers never interact with our sales rep, right? They just go online to use their credit card to buy. I think that's probably the best -- it's the right time for us, look at the Online business and also direct channel business, right, rather than just the team with 10 employees because it's still a little bit confusing, right? Sometimes they also talk to our sales rep.

Sometimes they go online to buy. And it's time for us to look at the pure Online business, meaning they never interact with our sales rep, right? I think that's a better way, the better metrics down the road.  

Matt Niknam -- Deutsche Bank -- Analyst

Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you, Matt.

Kelcey McKinley

Peter Levine has the next question with Evercore.

Peter Levine -- Evercore ISI -- Analyst

Great. Thanks for taking my question. So maybe just to piggyback off the Contact Center discussion. I think it's been reported that you're selling seats at $70 per month per agent.

So that's obviously a huge discount from the industry average, call it, $200. So is the pricing an indication that Zoom just doesn't have all the features, functionality and it just doesn't warrant the premium price? Or is this just Zoom being aggressive and just trying to get market share? And I would assume my second part of my question is I would assume over time, the idea is to get the full voice functionality AI, WHO and kind of move that pricing up to kind of where the industry is today. Thanks.

Kelly Steckelberg -- Chief Financial Officer

So Peter, I would say that Zoom has always been disruptive in pricing, and Contact Center is absolutely no different. If you look across the market in how we price Meetings, how we price in Phone when we introduced it, we're approximately half the price of any of our competitors' list price. And that continues to be the case with Contact Center as well. I mean over time, we absolutely will continue to add features and functionality.

It's the exact same approach that we took with Zoom Phone in terms of the launch and how it grew over time and expanded its features and functionality. The same is true with Contact Center. But you should not take the price as reflecting anything in terms of the quality of that product.

Eric Yuan -- Founder and Chief Executive Officer

Yes, Peter, Kelly is right. Our growth strategy is always better product, better price and also much better service.

Peter Levine -- Evercore ISI -- Analyst

Thank you.

Kelcey McKinley

Shebly Seyrafi with FBN Securities has the next question.

Shebly Seyrafi -- FBN Securities -- Analyst

Yes. Thank you very much. So with your guidance for fiscal '23, it looks like you're guiding for about 11% or so revenue growth. In my model to fit your bottom line guidance on getting around 40% opex growth, it's like four times your revenue growth.

And that's an unusual kind of multiple. It's like four to one. And usually, that's indicative of a company's belief that they could grow fast, meaning like 20%-plus in the future. So my question really is is the goal here to invest way ahead of your expected revenue growth in '23 with the idea of accelerating your revenue growth to 20%-plus at some point in the future? And related to this, I know you're guiding for Online being flattish this year.

Is your goal to get that to at least double-digit growth in the future?

Kelly Steckelberg -- Chief Financial Officer

So as we mentioned in the prepared remarks, Shebly, we absolutely expect there to be an inflection point and for revenue to start to reaccelerate in the back half of the year. We're not prepared to give multiyear guidance at this point. But what you should expect is we're modeling for the exit growth rate to be higher than the full-year growth rate for FY '23.

Eric Yuan -- Founder and Chief Executive Officer

Yes. Just quickly, prior to the pandemic, our growth strategy is very clear, right? Double down on Enterprise. Every two years, we're going to introduce a new service, right, to really add more value, right, also upsell. Over the past three years, we have had to really think about how to help the world, help the people stay connected.

That's the reason why we spend a lot of time to make sure, right, offer the school free services and also -- and the focus on Online business as well. Right now, we're seeing the end of COVID crisis, right, we got to go back, double down our Enterprise growth strategy. Also, at the same time, we have to adjust our previous Enterprise growth strategy, which is every two years, we're going to add a new service. Now probably every one year, we need to add one more new service, right? That's the way for us.

That's the reason why we adjust our growth strategy, right, to double down, triple down on our Enterprise customers.

Shebly Seyrafi -- FBN Securities -- Analyst

Okay. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you.

Kelcey McKinley

And moving on to Karl Keirstead with UBS.

Karl Keirstead -- UBS -- Analyst

Thanks. Kelly and Eric, the EMEA and APAC growth has been a big part of the Zoom story as the U.S. market has become more penetrated yet. In this past quarter, the growth in both those regions decelerated pretty sharply.

Kelly, I know you talked a little bit about seasonality in Europe. Do you mind elaborating on what's happening in international? And when you set your 11% growth target, what's embedded in that number in terms of your non-U.S. growth even if you can be directional?

Kelly Steckelberg -- Chief Financial Officer

Yes. So in Q4, we did see -- we saw strength in Asia Pac, and we even saw strength in EMEA too. As you remember, we announced our largest deal ever for EMEA, which is super exciting. So strength in the Enterprise segment of the business.

But we absolutely saw an impact from holiday seasonality, which we expected. We talked about that in the call on Q3, as you remember. In terms of looking forward, international absolutely is a really important part of our growth strategy, and we do continue to expect it to grow at a rate that is higher than the U.S. And so that's -- and we will continue to also add, invest in sales capacity internationally at a rate that is higher on a percentage basis than we would be doing in the U.S.

as well.

Karl Keirstead -- UBS -- Analyst

Got it. Okay. Thanks, Kelly.

Kelly Steckelberg -- Chief Financial Officer

Yes.

Kelcey McKinley

And our next question comes from Rishi Jaluria with RBC.

Rishi Jaluria -- RBC Capital Markets -- Analyst

Wonderful. Thanks so much for taking my question. Guys, I wanted to go back to -- look, I appreciate the new reporting -- the way of reporting things. I think it makes a lot more sense.

But just when we think about the above 10 and sub-10 employees segment, it was down sequentially again, but it's actually slightly up versus Q1 and up year over year. How is this relative to your own expectations? And how should we be thinking about that segment going forward? And maybe alongside that, when we see these above 10 employees customer count down sequentially, I know a big chunk of those are Online customers, which totally makes sense. Based on your observations, what are you seeing those customers doing? Are they unplugging? Are they moving to a competitor? Or are they just downgrading to a free version of Zoom? And maybe there's a monetization opportunity down the line? Thank you.

Kelly Steckelberg -- Chief Financial Officer

Yes. I mean it's -- so in terms of like -- this is why this number doesn't make sense anymore because it's gotten so mixed up between the customers and the channel. I think the size of the customers in the channel. That's what has gotten really convoluted with this metric going forward and why we're not going to really talk about it going forward.

So in terms of how we see it going forward, honestly, Rishi, we aren't even modeling around this metric any longer. We are completely moving to think about Enterprise and Online because, as I said in the prepared remarks, that really reflects how we think about the business and how we are measuring and managing it. So that's what makes the most sense. And what you should really continue to see is ongoing growth in the Enterprise business.

We're super excited about the strength that we see there and double-digit growth for next year. And that Online is going to be flattish, and that's what we expect. In terms of what these customers are doing, especially in the smaller customers, we see them -- we even come back. We even come back, right? We make it very flexible for them to do that.

And so at any point in time, they might be taking a break, but they might come back when it makes sense for them. And that's what we want. We want it to be easy for them to come and go as they see the need for our products.

Rishi Jaluria -- RBC Capital Markets -- Analyst

Wonderful. Thank you.

Kelcey McKinley

And we will now hear from Tyler Radke with Citi.

Tyler Radke -- Citi -- Analyst

Hey, good afternoon, everyone. Thanks for taking my question. Kelly, I wanted to ask you just a couple of points on the FY '23 outlook. I guess, first, how are you thinking about price increases and just generally pricing power philosophically? And then second of all, the reported revenue this quarter relative to your guide was some of the smallest upsides we've seen as a public company.

So just any changes in guidance philosophy or how you're approaching the guide for this year would be helpful. Thank you.

Kelly Steckelberg -- Chief Financial Officer

Yes. In terms of the outlook from a pricing perspective, we currently don't have plans to increase our prices across the board. We are -- especially for the Online segment of our business, we are looking at opportunities for localized pricing and selling in local currency, which I think will be really full in terms of especially some of the smaller customers in those markets and getting those plans rightsized to those markets. But no plans to increase our prices across the board.

And then in terms of the beat that you were mentioning for Q4, as we've grown and scaled as a business, I think you're starting to see our guidance and our beats get more correlated to the size of the business and reflect the growth rates that we're experiencing going forward.

Tyler Radke -- Citi -- Analyst

Thank you.

Kelly Steckelberg -- Chief Financial Officer

Yes.

Kelcey McKinley

And moving on to Alex Zukin with Wolfe Research.

Alex Zukin -- Wolfe Research -- Analyst

Hey, guys, can you hear me OK?  

Kelly Steckelberg -- Chief Financial Officer

Hi, Alex. Yes.

Alex Zukin -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking the question. I've got just a competition one and then a numbers one. So Eric, maybe for you first.

Given the increasing importance of the Enterprise business, the increasing spend there, the product diversification, what's the right way to think about this post-pandemic competitive environment vis-a-vis Microsoft as well as your other competitors? Is it the same sales cycles longer? More -- give us a flavor of what you're seeing and how you're planning for the full year.

Eric Yuan -- Founder and Chief Executive Officer

Yes. So again, Alex, we're not focused on the competition, right? We're always focused on -- really focused on our customers, right? And so as I said, we double down on innovation. That's pretty much -- that formula is very sustainable. But however, if we would really just focus on some of our competitors, I would say, first of all -- and you take Microsoft, for example, right? And some interested customers are standardized on Microsoft.

Some interested customers are standardized on the Zoom platform. For some interested customers, you look at Okta as a vendor, right, and look at the Okta Microsoft Office 365 deployment in terms of coexistence end up in Zoom. That percentage is increasing year-over-year around 45%, right, meaning all those Okta Microsoft Office 365 customers need to deploy both Zoom and Microsoft solutions, right? And also on many fronts, we partner with Microsoft as well, right? I think that's why the market is huge, right? And some customers really like the Zoom platform, great. They like Microsoft in their chat, yes.

They deploy it in a Zoom video and voice. I think that will continue. Also at the same time, right, it could either be a Contact Center. We are going to add more and more new services, right? And in addition to the focus on a horizontal collaboration platform, we also want to focus on more value add like Contact Center and also some other services as well, right? And by doing that, on the one hand, we can compete against some of those bigger competitors.

On the other hand, we can also integrate more and more with them as well, right? That's our strategy, yes.

Alex Zukin -- Wolfe Research -- Analyst

Got it. And then, Kelly, so I just want to go back to the point that Sterling asked about the guidance with respect to Enterprise versus Online, the 20% and flat. Just help us bridge that to where billings guidance for Q1 is negative, billings guidance for the full year, I think, pencils out to the low single digits, CRPO sequentially decelerated. What is the number we should focus on, the forward-looking metric, to give us confidence in that reacceleration of revenue growth that you're calling for and, particularly, the sustainability on some of the Enterprise and Online trends?

Kelly Steckelberg -- Chief Financial Officer

Yes. So remember that, unfortunately, billings is not a good forward-looking metric. And it's due to the fact that we have this 50/50 split in our business. And the Enterprise business is -- the billings associated with that are what you would expect in a normal SaaS business.

And they're both on a year -- annual to multiyear. In the Online business, it is not. There are many of those customers that are still buying and paying on a monthly basis. So it really doesn't make sense for a metric, and that's why you're going to continue to see volatility in that metric.

And because of that, I think what we've tried to give you was at least some color around deferred revenues, so you can understand that because also the seasonality and the linearity that we have in our renewals and our billings. Unfortunately, the best that I have to give you is our revenue guidance, and that's it. I'm trying to give you metrics that better reflect now how we think about that.

Alex Zukin -- Wolfe Research -- Analyst

Okay. Thank you, guys.

Kelcey McKinley

We'll now hear from Kash Rangan with Goldman Sachs.

Tom McCallum -- Head of Investor Relations

Hey, Eric, before Kash jumps on here. I just wanted to let you know, Kash, unfortunately, was on the participant side. So we just pulled him in as a panelist. But he used our Zoom Chat product to come on over.

So welcome to the world of Zoom Chat.

Kelly Steckelberg -- Chief Financial Officer

Thanks, Kash.

Kash Rangan -- Goldman Sachs -- Analyst

Thank you. Hey, Kelly. Hello, Eric. How are you doing? Nice to be on.

Eric Yuan -- Founder and Chief Executive Officer

I'll give you a Zoom Chat t-shirt after this meeting. Thank you, Kash.

Kash Rangan -- Goldman Sachs -- Analyst

There you go. Love it. I love it, love it. So Eric, I think 2020 was a year of transition, right? I was really intrigued by something you said back in September, how you were positioning Zoom for the next era of communications.

And you have a lot of products in the product road map, the video exchange center and you have the event platform, et cetera. I'm curious to see -- to get your thoughts on how you're preparing Zoom for the next chapter. What are the product milestones we should be expecting from the company and the go-to-market transformation or strategic initiatives, your partnerships, et cetera, to help Zoom be ready for that vision that you laid out in September?

Eric Yuan -- Founder and Chief Executive Officer

Yes. Kash, that's a good question. Given that you are using Zoom Chat, right, it's always our unified communications platform. Not only that, but when it comes to the unified communications platform, chat, phone and video conferencing events, webinars, and all those missing parts of Contact Center we just added on, right, to the UC platform.

And also look at the other two pillars and also the hybrid work and the business workflows as well. Essentially, in the next several years, we are working very hard to transform our business from a meetings company to a platform company, right? And in terms of metrics, you got to look at our Enterprise growth. Online business used to be service-wise very small. It was more like a byproduct of our Online marketing platform.

Because of COVID, right, that revenue grows very well, also very profitable. Now given that COVID is over, we have to go back to triple down our Enterprise growth in terms of more new services, in terms of embracing the platform, right? You will see in the next several years, we are going to introduce more and more Enterprise services. And also from a technology perspective, like AI and also some more integration with other business workflow applications, I think overall it adds to a wider range of Enterprise customers. I think that's a way for us to look at our growth for the next few years 

Kash Rangan -- Goldman Sachs -- Analyst

Thanks so much.

Eric Yuan -- Founder and Chief Executive Officer

Thank you, Kash.

Kelcey McKinley

Matt Stotler with William Blair.  Please go ahead.

Matt Stotler -- William Blair -- Analyst

Hey, Eric, Kelly, Tom. Good to see you guys. Thanks for taking the question. Maybe just one. As you think about building out the full UC stack, obviously, you've got many of the key components, video, phone, everything around those two Contact Center now that I think you're pushing into.

When you look at -- especially some of your Enterprise competitors, some of the large buy-in that you get from IT around those other solutions is because they're based on things like foundational productivity tools like email or file-sharing or scheduling and full feature chat, things like that. So how do you think about how those fit into your road map or if not directly, how you satisfy those needs for your Enterprise customers as you keep moving that market?

Eric Yuan -- Founder and Chief Executive Officer

Yes, Matt, first of all, for now, we're focused on the unified communications platform, right? And they're now like our focus and concern. That's the reason why Kash is using Zoom Chat, which is our persistent group chat. It's part of our unified communications platform, right? Customers can standardize their Zoom, send your chat message, send your chat message in a group. I continue, I have a phone call in our Contact Center.

That's our unified communications platform, right, as part of the first pillar of our platform strategy. In terms of filesharing or email filing, first of all, we are integrating very well with other vendors, right? How to further embed those solutions into the Zoom platform play, is also our strategy down the road. More to come and stay tuned, yes.

Matt Stotler -- William Blair -- Analyst

Got it. Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you.

Kelcey McKinley

Siti Panigrahi with Mizuho. Please go ahead with your question.

Siti Panigrahi -- Mizuho Securities -- Analyst

Hey, Eric and Kelly. I just wanted to ask you about the growth drivers. Can you rank or rate -- you talked about so many products besides video. You talked about Phones, Chat, Contact Center, so many other products.

So how do you rank this growth driver near term versus maybe medium term, like two, three years out?

Eric Yuan -- Founder and Chief Executive Officer

Yes. Near term, as I mentioned earlier, right, looking at our platform, three key pillars: unified communications platform, hybrid work, and business workflow platform. In terms of the near-term driver, we got to focus on double down, triple down our unified communications platform for the time being. And the future driver is not only that but also how to support hybrid work, how to support the business workflow platform.

Those two things will help us to further grow our business down the road in addition to unified communications platform.

Siti Panigrahi -- Mizuho Securities -- Analyst

I mean what about Contact Center. When should we expect that to have some kind of material contribution?

Eric Yuan -- Founder and Chief Executive Officer

Contact Center is part of our unified communications platform, right? And again, as customers already deploy their meetings on the Phone, they would like to deploy the Contact Center. Overall, we put the Contact Center into other missing pieces of the unified communications platform. Together, right, we will drive our UC growth. But new growths will come from the second pillar and the third pillar.

Siti Panigrahi -- Mizuho Securities -- Analyst

Thank you.

Eric Yuan -- Founder and Chief Executive Officer

Thank you.

Kelcey McKinley

Taz Koujalgi with Guggenheim has the next question. Thanks, Taz. 

Taz Koujalgi -- Guggenheim Partners -- Analyst

Hey, guys. Can you guys hear me?

Eric Yuan -- Founder and Chief Executive Officer

Yes.

Kelly Steckelberg -- Chief Financial Officer

Yes, go ahead.

Taz Koujalgi -- Guggenheim Partners -- Analyst

I have a question for Eric and then a follow-up for Kelly. Eric, as you launch your own Contact Center, what does that mean for your partnership with Five9?

Eric Yuan -- Founder and Chief Executive Officer

The partnership is still doing well because some customers already deployed Five9 as with people with Zoom. We want to make sure that we keep improving that experience, right? However, some brand new customers who deployed on-prem solutions with the likelihood to consolidate everything to Zoom platform, yes, we would like to get to those customers, right? And again, this market is huge for Contact Center. You look at all those modules, right, or one of the contact centers, it's huge, right? And sometimes customers already deploy Five9. They already going to deploy more the features from Zoom, also deploy the Zoom Contact Center, or deploy Genesis.

That's all I presumed OK. Again, we will focus on our installed base. We're focused on those customers who truly believe Zoom's UC vision, who would like to standardize on the Zoom platform, right? That's our go-to strategy.

Taz Koujalgi -- Guggenheim Partners -- Analyst

And then one for Kelly. Kelly, if I look at your free cash flow margins for this year, there's about a 4-point gap between the operating margin and free cash flow margin. Going forward, as we have a bigger mix of Enterprise, I guess, versus the Online cohort, does that gap get -- why don't you see a bigger delta between operating margins and free cash flow margins in fiscal '23?

Kelly Steckelberg -- Chief Financial Officer

The gap in operating margin year-over-year is really being driven by our ongoing investment in R&D. So at a little over 6% this year, it's still not within our target range. Our targeted range for R&D is 10% to 12%. So that's a big driver for -- as we're continuing to invest and innovate for the future.

And a little bit of that will be offset in the overall improvement in the gross margins for the long term, but we still are in the middle of that multiyear strategy of moving from the public cloud into our own co-located data centers. So that's going to take a little bit more time. And then sales and marketing is also going to increase a little bit as a percentage of revenue as we continue to focus on sales capacity as we talked about. And also really, as we're building it from this amazing brand awareness that we garnered for Zoom Meetings, we want to make sure that everybody also understands the great value they can get from Zoom Phone, from Zoom Events as well as in Contact Center.

So you should expect to see more targeted product marketing in the future.

Taz Koujalgi -- Guggenheim Partners -- Analyst

But in terms of -- I know you don't guide to free cash flow margins. But that delta between operating margin and free cash flow margin, should that remain consistent going forward? Or should that delta widen because now you have more Enterprise customers who are probably paying upfront more and you get a better cash flow margin?

Kelly Steckelberg -- Chief Financial Officer

Yes. Over time, we expect our relationship between operating margin and free cash flow to go back to what was pre-pandemic. So if you go back and look at the variability or, I should say, the differential you saw there, that's what you should expect to see as we move through probably sort of getting through the back half of FY '23. It should start to normalize like that again.

We still have some investments in the early part of this year around continuing to build out our data centers. We're doing some office build-outs as well. So you should expect to see capex a little bit higher than kind of the normalized rate. But eventually, we'll get back to that normal relationship.

Taz Koujalgi -- Guggenheim Partners -- Analyst

Thanks, Kelly. Really helpful.

Kelly Steckelberg -- Chief Financial Officer

Yes.

Kelcey McKinley

And we have time for one additional question, which will come from Parker Lane with Stifel.

Parker Lane -- Stifel Financial Corp -- Analyst

Yes, hi. Thanks for taking the question. With the return of business travel and mandates being rolled back, curious to hear what your customers are thinking about in terms of their event plans for this year. Are you still anticipating that your customers will do more virtual-only and hybrid events than they did pre-COVID? And how is that sort of translating into the demand you're seeing for events in 2022?

Kelly Steckelberg -- Chief Financial Officer

We really expect that as people start to travel, they're going to travel for certain events but not for all of them. So we really expect the future to be hybrid, and that's why we're really excited about our Zoom Events strategy and that it can accommodate both in-person as well as virtual attendees. And that's what we really think is going to be the future because people, I mean, are excited to be out and be traveling again, but they want to do it when it's convenient for them and when it makes sense in their life. And I don't think it -- we expect people to return back to the way it was pandemic.

And it's going to be some combination just as work is, we expect events to be the same.

Eric Yuan -- Founder and Chief Executive Officer

Parker, just to quickly add on to Kelly -- to what Kelly said. If you look at the events, for sure, that will be hybrid. Like last summer, I joined the Salesforce Dreamforce hybrid event. I had a great experience, right? A lot of people joined online and also they have several hundred people there in person, right? But in the future, even if that is still a hybrid event, I would say the percentage of -- and those people who are going to show up in person will be more and more.

But again, it's still a hybrid. Also, a lot of people are joining online as well. I do not think we'd be back pre-pandemic. All the events, just everyone wants to be there in person, I do not think that's the case based on the conversations with some of our customers.

Parker Lane -- Stifel Financial Corp -- Analyst

Yes. Thanks, Kelly. Thanks, Eric.

Eric Yuan -- Founder and Chief Executive Officer

Thank you, Parker.

Kelly Steckelberg -- Chief Financial Officer

Thanks, Parker.

Kelcey McKinley

And again, that does conclude our Q&A. So Eric, I'll turn it back to you for any closing comments you may have.

Eric Yuan -- Founder and Chief Executive Officer

Yes. Thank you. I really appreciate your time. Thank you for your time.

Thank you for your support. I truly appreciate it. Thank you. Take care.

Kelly Steckelberg -- Chief Financial Officer

Bye, everybody.

Kelcey McKinley

Thank you so much, Eric. And again, everyone, that concludes today's earnings release. We thank you all for your participation. Enjoy the rest of your day.

See you next time.

Duration: 67 minutes

Call participants:

Kelcey McKinley

Tom McCallum -- Head of Investor Relations

Eric Yuan -- Founder and Chief Executive Officer

Kelly Steckelberg -- Chief Financial Officer

Meta Marshall -- Morgan Stanley -- Analyst

Michael Turrin -- Wells Fargo Securities -- Analyst

Sterling Auty -- JPMorgan Chase and Company -- Analyst

Quinton Gabrielli -- Piper Sandler -- Analyst

Ittia Kidron -- Oppenheimer and Company -- Analyst

Will Power -- Baird -- Analyst

Ryan Koontz -- Needham and Company -- Analyst

Mike Cherny -- Bank of America Merrill Lynch -- Analyst

Matt VanVliet -- BTIG -- Analyst

Matt Niknam -- Deutsche Bank -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Shebly Seyrafi -- FBN Securities -- Analyst

Karl Keirstead -- UBS -- Analyst

Rishi Jaluria -- RBC Capital Markets -- Analyst

Tyler Radke -- Citi -- Analyst

Alex Zukin -- Wolfe Research -- Analyst

Kash Rangan -- Goldman Sachs -- Analyst

Matt Stotler -- William Blair -- Analyst

Siti Panigrahi -- Mizuho Securities -- Analyst

Taz Koujalgi -- Guggenheim Partners -- Analyst

Parker Lane -- Stifel Financial Corp -- Analyst

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