Zendesk Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2021

There are 18 speakers on the call.

Operator

You everybody for joining us. Welcome to our Q3 2021 earnings call, and thank you for joining us again today. I'm Jason Tsai, Head of Investor Relations at Zendesk. Joining me on the call today are Mikkel Svane, Founder and CEO and Chairman of the Board Sheila Glaser, our Chief Financial Officer and Zander Lohrry, CEO of Momentum. During the course of today's call, we may make forward looking statements such as Statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers an ability to compete effectively as well as the anticipated benefits of our proposed acquisition of Momentum, which we announced earlier today.

Operator

The assumptions, risks and factors that could affect our actual results are contained in our earnings press release in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our annual report on Form 10 ks for the year ended December 31, 2020, in our upcoming quarterly report on Form 10 Q for the quarter ended September 30, 2021. We undertake no obligations to update these statements After today's presentation or to conform these statements to actual results or to changes in our expectations except as required by law, Please refer to today's earnings release and the acquisition investor presentation available on our Investor Relations website for more information regarding forward looking statements. During this call, we will present both GAAP and non GAAP financial measures. The non GAAP financial measures should be considered in addition to, not as a substitute For or in isolation from our GAAP financial information, you can find additional disclosures regarding these non GAAP financial measures, including reconciliations with the comparable GAAP financial measures in today's earnings press release and shareholder letter and for certain non GAAP financial Measures from prior periods and the earnings press release for such prior periods, all of which are available on our Investor Relations website.

Operator

With this brief introduction, I'd like to turn the call over to Mikkel.

Speaker 1

Well, yes, thank you, Jason, and welcome everyone to our call here today. We had an outstanding quarter. Our revenue growth accelerated for the 3rd straight quarter as we further established ourselves as a Key partner and we deepened our relationships with our customers. Revenue grew 32% year over year to 347,000,000 Dollars and that was driven by a combination of increased Zendesk Suite adoption and strong enterprise momentum as we signed customers to larger contracts With longer commitments, we had a 36% year over year increase in average deal size and we crossed a significant milestone as We're now serving over 100 customers with more than $1,000,000 in annual recurring revenue. So our results this Quarter really reflects the strengths of our strategy.

Speaker 1

Give customers a strong combined offering that is powerful yet simple to use That offers fast time to value and make it easy to create connections with their customers. And this is of course also why I'm excited to talk to you about our Agreement to hire or to acquire Momentum, the company behind SurveyMonkey. We have Momentum's CEO, Stan Delaury, with us Today, he's lurking here somewhere, as well as our CFO, Sheila Glaser, to share more about our joint vision and the transaction details. Both Zendesk and Momenta were founded to improve the customer experience and believe that software should be powerful while easy to use. Our cultures are very similar and our go to market strategies are complementary.

Speaker 1

Together, we have a significant opportunity to expand our markets And our collective growth over the long term and most importantly deliver more value to our customers. The reality for businesses today, especially given the events of the last few years, is that building meaningful relationships with customers is hard and everything is Moving online and experiences happen in moments. There are no easy way to paint a rich picture of a customer and we believe we can change that. Send us pioneered the best way to respond to what your customers say and do and Momentum and the SurveyMonkey platform is the best way to capture How they think and feel. Combined, we create a richer combined picture of the customer, a deeper understanding And the ability to better act and engage to build meaningful relationships.

Speaker 1

Together, we provide true customer intelligence. Not only is this combination a fantastic opportunity for our current and our future customers, it sets us on a course to Accelerate our revenue plan by reaching 3,500,000,000 in revenues by 2024,000,000 and 4,500,000,000 by 2025. And we expect the acquisition to be growth accretive already in 2023, our 1st year as a Unified company. And with that, I would like to turn the call over to Sander to talk about momentum and to talk about the success They have achieved. Hey, Sandeep.

Speaker 2

Hey, Mikkel. Thank you so much for having me. And first, let me just say what a pleasure it is speaking with all of you today. I want to reiterate how excited I am about the opportunities ahead for Zendesk and Momentum. As Mikkel said, we share similar cultures, values, and millions Our people believe in the mission that we are pursuing.

Speaker 2

It's the complementary nature of our product offering and we believe we will deliver enhanced value for our business, Customers, employees and shareholders. At Momentum, our fundamental strength is that we provide incredible insights into how customers think and what they want. While you likely know our core business SurveyMonkey, over the last few years, we've invested in product innovation and go to market resources to expand our product portfolio And move up market. And today, Momentum leads in 5 core areas: customer experience, employee experience enterprise surveys, market insights And brand insights. We provide 345,000 organizations worldwide, including IBM, Johnson and Johnson, LG, Toyota and Verizon, just to name a few, With intuitive people centric solutions that enable them to create valuable relationships with their customers.

Speaker 2

Through our expansive set of customers, we've generated 5,500,000,000 survey responses to date and 9,000,000 daily AI predictions that help our customers make decisions quickly And confidently to achieve tangible results. We've been pursuing a strategy to expand our enterprise customer base and now with Zendesk, We believe we have an opportunity to accelerate this growth as we leverage our combined global footprint, our partners and relationships with the world's leading companies and brands. By joining Zendesk, we believe the best days are ahead for us and that together we are ideally positioned to deliver the customer intelligence company our customers want And deserve. It's great to be here. Awesome, Lambert.

Speaker 2

Thank you so much. And with that,

Speaker 1

I'm of course super excited Welcome you and your team. But for now, we're going to turn over to Sheila, who will share more details about, of course, our strong quarter and this transaction.

Speaker 3

Sorry about that. I'm unmuted now. Thank you, Mikkel and Zander. I echo Mikkel's sentiment. We look forward to welcoming you and the MementiV Team into the Zendesk family.

Speaker 3

As Mikkel shared, Zendesk had a truly exceptional quarter. We generated $347,000,000 in revenue Our 3rd consecutive quarter of revenue growth. Our strong momentum is driven by the success of enterprise strategy and increased Suite adoption. Suite now accounts for 25 percent of our ARR, up from 16% last quarter. Suite customers stay with us longer, Have higher ARR and upgrade at higher price points driving stronger expansion long term.

Speaker 3

Enterprise customers This quarter accounted for 37% of our ARR, up from 35% last quarter and 30% a year ago. As enterprise and suite customers account for more of our ARR, we expect the average length of our contracts to increase And churn and contraction to remain lower than what we have seen typically. Our net expansion rate for this quarter was 122%, Up from 120% last quarter, above our long term target of 110% to 120%. Now let's turn to margins, operating income and cash flow. Our GAAP margin this quarter was 79.8%.

Speaker 3

Our non GAAP gross margin was 81.8%, an increase of more than 3 points as compared to last year, driven largely by revenue scale, Increased optimization of our product support organization and efficiencies from our hosting infrastructure. Our GAAP operating loss was $38,900,000 And GAAP operating margin was negative 11.2%. Our non GAAP operating income of $27,000,000 grew 8 Percent year over year, while non GAAP operating margin declined by 1.7 points. The decline in margin was driven by higher Sales, marketing, R and D expenses as we continue to invest in growth. Operating cash flow in the Q3 was 73,800,000 And free cash flow was $65,400,000 Now let's discuss guidance.

Speaker 3

We are increasing our full year 2021 guidance to 1 $329,000,000 to $1,335,000,000 growing 29% at the midpoint compared to last year, Up from our previous guidance of $1,310,000,000 to $1,318,000,000 Given our strong results This quarter and continued business momentum, our 4th quarter revenue is expected to grow 30% year over year at the midpoint and be in the range of $366,000,000 to $372,000,000 We expect our 4th quarter GAAP operating loss to be in the range of $43,000,000 To $49,000,000 and non GAAP operating income to be in the range of $22,000,000 to 28,000,000 We expect full year free cash flow to be in the range of $140,000,000 to 150,000,000 An increase from our prior estimate of $120,000,000 to $130,000,000 Our strong financial performance And outlook in second half with growth rate of 31% coupled with our intent to acquire Momentum means we are operating from a position of strength And the best is yet to come. Let me take you through some of the details of the transaction and our opportunity ahead. The terms of the transaction provide for momentum Stockholders to receive 0.225 shares of Zendesk for each share of Momentum, A ratio which represents a value of approximately $28 per outstanding share of Momenta stock based on the 15 day volume weighted Average price of Zendesk common stock up to and including October 26, 2021.

Speaker 3

Upon closing this transaction, Momentum stockholders will own approximately 22% of the combined company. We expect the transaction to close in the first half of twenty twenty two subject to Zendesk and Momentum shareholders' approvals And other customary and regulatory approvals. Zendesk continues to lead in the customer service industry and combined with Momentives Apologize, my computer screen went blank. Zendesk continues to lead in the computer service industry and combined with Momentum's product offerings and surveys, feedback and market research, We will create a powerful new customer intelligence company where our addressable market nearly doubles to 165,000,000,000 Providing a significant runway for sustained growth. Mikkel has touched on the growth potentials for this transaction And I want to provide more context on why we believe it will be growth accretive in 2023, our 1st full year as a unified company.

Speaker 3

We believe there are significant areas of revenue synergy that will be unlocked by this transaction as we are able to accelerate Momentum's Enterprise Motion bring added capabilities and a complete customer intelligence platform to existing and prospective customers. We intend to reinvest expense synergy savings back into the business to further accelerate growth. Taken together, this transaction accelerates our path To approximately $3,500,000,000 in revenue in 2024, a full year earlier and $500,000,000 more than our previous target. And we expect to reach approximately $4,500,000,000 in revenue by 2025, about 50% higher than we had previously targeted. Following the close of the transaction, we will work jointly with Xandr and his strong leadership team on deeper integration of our teams delivering On the shared vision of customer intelligence.

Speaker 3

We'll cover more details on the transaction during our in person Investor Day on November 18th in New York City. You can find details on our IR website. We look forward to seeing you there. With that, I'll turn it back over to Jason for Q and A.

Speaker 4

Great. Thank you. And as

Operator

we've done in the last few quarters, we've put all the analysts through a randomizer. The first analyst to ask a question will be Arjun at William Blair, please go ahead.

Speaker 5

All right. Thanks, Jason, and congrats on the Announcement to the team. Mikael, maybe to start off with, can you just walk us through the decision to build versus Buy versus partner, right? What are you getting with Momenta from the acquisition that may not have been as Beneficial if you were to partner with them instead.

Speaker 1

Is somebody taking you away?

Speaker 3

No, like,

Speaker 1

you know, Momentum and its iconic SurveyMonkey platform has is ubiquitous in the market today. It is the world's largest feedback platform. And like you can you may be able to build some similar technology. You can never get the experience. You can never get The DNA, you can never get the chaine sais quoi that is in that platform.

Speaker 1

And 1st and foremost, of course, a fantastic brand. There is a level of experience that we will never be able to match in such a product. And this is like we've Like we've always been partners in many different ways, you know, and we have, of course, a big overlap in customers. But I think that like Really putting these things together and really executing on this vision of providing additional kind of A different depth and richness on your customer pictures by overlapping kind of what they say and do with what they With how they think and feel, it's incredibly powerful. And we believe that it will create a whole new dimension on Understanding and a whole new richer picture of your customers.

Speaker 1

And that is the vision we're very, very intrigued to execute on together.

Speaker 5

Very helpful. And, Zander, if you're available for a question, I would love to ask you one. For maybe those that are a little bit less familiar with the story, can you maybe just walk us through, I think, Niko and Sheila touched on The move up market into the enterprise, can you maybe just walk us through how you differentiate in the market versus Some of the your competitors that are playing in the mid market enterprise space and how The combination of Zendesk Plus Momentum might help accelerate the competitive differentiation in that market.

Speaker 2

Yes, sure, Arjun. It's a great question. You know, we started as a product led growth company and all of our customers, you know, 90% of our customers are on subscription contracts, annual contracts. And what we have done with that large footprint where we have millions and millions of active users and 850,000 paying customers Is move up market to build enterprise products. And I mapped out those 5 categories where we play with CX, employee experience, market, brand insights, etcetera.

Speaker 2

So today, a third of our business are enterprise contracts and we have world class product market fit. We have the most discerning demanding customers in Finserv, CPG, auto, direct to consumer buying our products. With Zendesk, we are plugging into this much more mature go to market And that really just accelerates our enterprise strategy. And so as I think about their global footprint in LatAm and APAC and parts of Europe where we don't compete, We build these products that are going to plug in that we can now sell upmarket to their 150,000 enterprise customers. And so the go to market synergies here are approximate Compelling and frankly, just obvious, Mikkel and I have talked about it at length.

Speaker 2

But to Mikkel's point around customer intelligence company, we bring products that just deliver a lot more Value to customers. We have over a 1000 quarterly sales calls where Zendesk comes up. We've had hundreds of requests for integrations with our CX product For Zendesk. So we're really excited to redouble our R and D efforts to build those integrations and just feel like there's a ton more value to offer our shared customers.

Operator

Thanks, Arjun. Let's move to the next question. Next one will be Jeff Van Rhee with Craig Hallum. Please turn on your camera and unmute your mic.

Speaker 6

There we go. We should be good. Congrats, guys. And just a couple from me. I guess, First, congrats on the announcement today.

Speaker 6

And I'm curious, maybe Mikkel, in your installed base, when you look to the base, How many what percent of your base is your initial impression have customer feedback solutions? How much of it is greenfield and how much are you going to have To go in and potentially displace with this solution.

Speaker 1

I think like A lot of our customers has something to some extent. And but I think like the level of integration we will be able to Provide and the ease of use, especially like just making these things incredibly simple for our customers, I think will have a big impact on how we can Together can provide a bundle offering that makes a lot more sense for our current customers. So like more details on these kind of specifics with regard To a customer base and so on, of course, in our November analyst meeting.

Speaker 6

Yes. Fair enough. Sheila, just a question. Last quarter in the core business, I think enterprise was a front and center topic, And you called out different linearity in the quarter than what you had seen previously. And I think you tried to reset the guide to get a little more cautious there as well as usage, but I think most of there.

Speaker 6

Just talk about What you saw in linearity on the enterprise, any more color around cycles and how that played out versus expectations?

Speaker 3

So So thanks for the question. Good to hear from you, Jeff. So definitely as we have been moving up market for quite some time, We saw a pretty dramatic shift as we moved into Q2 and so in the forecast that's really how we're driving ourselves now. I continue to see very strong month 3s. That's kind of typical I think in enterprise business that you see strong month 3s.

Speaker 3

But what we really saw throughout the quarter is just strength across all segments of the market. So it was a very strong Q3 for us and I do anticipate that enterprise continues to be month 3 heavy. That's really how we're kind of planning our workflow and planning our go to market function. But across the board, just outstanding quarter, really in all segments of our business.

Speaker 6

Sounds good. I'll leave it there. Thanks.

Operator

Great. Thank you. The next question comes from Ryan McWilliams at Barclays. Please turn on your camera and unmute your mic.

Speaker 7

Thanks for taking the question. So interesting combination. Mikhail, is there an individual customer vertical We're customer type where you're most excited about potential combined momentum and Zendesk offer.

Speaker 3

Mikkel, you're on mute.

Speaker 1

I know, sorry about that. Well, I think like Of course, there's different things we can do for different segments and different industries. And like that's something, of course, we can talk more about also later. I think like the ubiquitousness of like these products is what really, you know, is so attractive. You know, Everybody in the world have been used have been responding to a survey from SurveyMonkey at some point sooner or later.

Speaker 1

And like just the amount of customers that have been using these products over the years is mind blowing. So I think there's so many different type of use cases, both internally and Certainly. And tailor the different kind of sectors the same way that we see in our customer base that the types of use cases So broad. So we look forward to kind of serving the entire market over time.

Operator

I mean

Speaker 2

one of the things Ryan that's been so compelling for me as we've got to Spend more time with our respective organizations is, our customer chart looks like the S and P 500 spliced up by vertical. It's every vertical. And then we have products from the annual subscription to team all the way up to 7 figure contracts. And as I think about Sheila's 115,000 Customer base, we have a product that every single one of those customers will use because if your company needs Zendesk, you need to collect Feedback about how your customer feels. You want to understand how she's engaging with your platform.

Speaker 2

And that's what we do to Mikkel's point better than any company in the world, over 3,000,000 active users on our platform Every day sharing 25,000,000, 30,000,000 responses about how they feel about your product, your curriculum, your nonprofit, your pricing, your campaigns, etcetera. It's our job to integrate and when Sheila showed us the chart of just how big that suite component of that business has become, it's just obvious that their customers We'll benefit from that integration. So we'll be excited to execute on that next year.

Speaker 7

Great. I really appreciate the color. Yes, definitely more actionable customer insights. Sheila, as we think about the deal, can you just talk about the decision between all stock versus cash? And then maybe how should we think about the timing for the shareholder votes between Zendesk and Momentum?

Speaker 3

Certainly. Thanks, Ryan. So So as we thought about it, as Mikkel and Zander have laid out, we think there's enormous value, to be Created for our customers, our shareholders, our employees and really that became the most Straightforward mechanism to do that with was all stock because to that extent, we're all participating in that value creation. So that was really this Straightforward. In terms of timing, we're anticipating first half of twenty twenty two.

Speaker 3

We would anticipate, in the Q1 timeframe, we would have a shareholder vote. And certainly we want to move as quickly as possible. So that'll be the focus across all teams.

Operator

Thanks, Ryan. Moving on to the next question will be coming from Derrick Wood over at Cowen. Derrick, please turn on your camera and unmute your mic, please.

Speaker 8

Yes, good. Thanks. Well, congrats on a strong quarter. I wanted to really touch on the enterprise business. I look at Yes, you guys did 40% billings growth last quarter, 30% this quarter on a much tougher comp.

Speaker 8

Seems like The enterprise business is doing quite well. So can we just get a little bit more color in terms of where you're seeing strength geographically, Lee, how your large deal activity is, sales productivity and hiring, just get a sense for what's really working and coming together there?

Speaker 1

All the things like I think like what we You know what we've really seen like post kind of on our way out of this pandemic is that like us doubling down on Simplifying the packaging, making it very easy, bring a lot of powerful functionality in a very simple to use package Works for our customers. It's easy, it's transparent and they want to execute on. At the same time, everybody in the industry Who deals with customers are experiencing how this whole behavior is changing. Like as I said in my opening script here, like Everything is online today and like all these experiences are little points in time that collectively a compound and creates like a user experience. So customers, they really need this.

Speaker 1

We're seeing that for the small business. We're seeing that for the enterprise. And like we are really benefiting from our continued investment in the Our continued investment in the product and our worldwide presence. We're very excited about the progress we see everywhere in the world.

Speaker 8

Okay. And on the acquisition Slide deck, I see a pitch that talks about customer intelligence vision and how The combination of you guys, you can collect data from customer interactions, you can build context around it and then you can take action on these insights. Could you just give us a little more sense on how all those pieces are going to work? What products do what? How are you going to integrate everything?

Speaker 8

And really where you see the lowest kind of hanging fruit for cross selling?

Speaker 1

There's a little bit of details on how we're going to integrate all the things. We got to talk a lot more about this on November 18 New York and I hope to see you there Derek. There'll be a lot more details. But it's obvious that Even customers that are using both our products are not creating a richer picture of the customers like too many data store lives And what we really want to do is to bring these things together and create a much richer picture. And like we have the ability to do that.

Speaker 1

It's within our reach and we want to execute that very quickly and help our customers with a much richer picture and that's the ambition.

Operator

Great. Thank you, Derek. The next question will be coming from Parker Lane over at Stifel. Please turn on your camera and mute your mic, please.

Speaker 9

Hi, everyone. Thanks for taking my question.

Speaker 4

Can you

Speaker 5

hear me now?

Operator

Yes. Go ahead.

Speaker 9

Yes, perfect. I guess in the customer conversations you've had out there over the last year or 2 years, obviously, everyone's taking In the digital first approach to customer engagement. And can you talk a little bit more about how customers prior to this deal were Gathering feedback on their customer service interactions. And I guess, why was now the right time? Why was now the time that you needed to bring these two parties Together and really accelerate what both of you have done on an individual basis.

Speaker 1

Yes. Starting with your first question that's like we of course build provided basic functionality to our customers For years, we've provided integrations with great products like the Momentum SurveyMonkey products and other products too. But I think this is a little bit more about just the operational stuff and kind of connecting the dots. This is really about helping our customers use the data much, much better. And that's the whole ambition here, creating a much richer and fuller picture of the customers.

Speaker 1

The timing is right because like so there's so many shifts in the market right now And everybody understands that they can't fully execute on their business and like lead in a Digital first, online first, economy. If they don't become much better at creating much better pictures Of that customer based on the data they have. And like we are executing on this and we look very much forward to creating like Quick wins for our customers as we close this transaction.

Speaker 9

Yes, very helpful. And then I think the support and service use case is pretty straightforward, but You anticipate that ultimately this pulls you more into the sales use case where you have a product today and maybe even adjacent categories like marketing more fully?

Speaker 1

Well, I think you shouldn't think about this as like customer service is not there just to be customer service. Customer service is there to provide feedback to the entire organization About the product, the sales side of the pricing, the packaging, the reactions, the experience, all of these things. And like How what they communicate that overlay would like the specific feedback they give to customers can create this much better picture It's not just serving one constituent but serves the business and I lost my picture. Sorry for that. All right.

Speaker 1

I'm rebuilding my picture here. Jason, you want to jump to the next question?

Speaker 2

Parker, I'll chime in Mikkel, if you don't mind. I mean, just the way we use Zendesk at Momentum, our customer operations team feeds us so much intel and data about How our customers are engaging with our products, where they're getting insights and that feeds our R and D efforts, it feeds our go to market efforts. So to Mikkel's point, like over the last 18 months, especially during COVID as the whole world is kind of going through this digital transformation. I think we've seen how much Our businesses do talk to each other and how complementary our products are across every Yes,

Speaker 9

makes sense. Congrats, Ken.

Operator

Great. Thank you. The next question comes from Samad Samana over at Jefferies. Please turn on your camera and unmute your mic.

Speaker 10

Hi, good evening. Thanks for taking my questions. So I want to unpack maybe some of the numbers, the targets for 3,500,000,000 and then 4,500,000,000. When you say growth accretive, if I think about the acquired company was growing high teens, do we expect growth to accelerate As a result of the consolidation, can you just help us understand what Zendesk should be growing To get to this $3,500,000,000 $4,500,000,000 and what the assumptions are around the acquisition, just so we understand what growth accretive means?

Speaker 3

Sure. Samad and we'll lay it in a lot more detail in our November investor meeting. Obviously, We're looking forward to seeing everybody there. But what the real goal is, the ambition that we just talked through that I think that Mikaela and Zander just Talk through is the ability to very quickly start to cross sell products. We've got a global footprint That can immediately offer revenue synergies into.

Speaker 3

And then we've got the move up market, which We think we can immediately start to expand revenue synergies into so we think the 1st full year, which will be 2023 because obviously 2022 will just be The close year and the initial integration, but we would think by 2023, the combined company Can really start to have accelerated combined growth. So that's what we're looking And as you point out, we have slightly different growth rates to begin with. But as we start to combine ourselves, it's that combined growth rate.

Speaker 10

Okay. So just to make sure for the sake of clarity, you're assuming that the companies will Grow faster individually even as a combined company. So it'll accelerate the growth of both companies. Is that a fair conclusion based on what you just said?

Speaker 3

No, it's the growth rate of the new combined company. So, it's growth accretive to what our long term growth plan. As you recall, our target had been to get to $3,000,000,000 by 2025. That's the target that we had put out there. So as we look at this new Opportunity as we bring momentum into the Zendesk family, we're now looking at $3,500,000,000 a year earlier.

Speaker 3

So an absolute bigger growth target And pulling it in 12 months.

Speaker 10

Okay, great. And then maybe just a follow-up on the two businesses. How should we think and maybe Zander you can chime in here and Mikkel as well, but just the are we going to be expanding Who Zendesk is selling into? So is this expanding the wallet share that you potentially press up against beyond just Call it customer service departments to more marketing oriented use cases. Just help us think about how you see some of the maybe synergies that develop here.

Speaker 1

Yes, no doubt. And I think there is a big push in kind of getting these different parts of the organization to work much more seamlessly together. So you're not like operating in silos And you don't have this very kind of broken up decoupled customer experience. So we expect we already of Of course, serve different constituents and we continue that we definitely expect that to be accelerated with this acquisition.

Operator

Thanks, Ahmad. Moving on to the next question. Ken Wong with Guggenheim. Please turn on your camera and unmute your mic.

Speaker 11

Hey, great. Actually, building off of Samad's Question just now. So really appreciate the update on the 3.5% and 4.5%. I believe kind of when you guys introduced those numbers, the expectations were for CAGR over that time frame, are they mid-20s? So should we think about this kind of accretive commentary to mean that Mid-20s is kind of marginally higher or what's the right way to think about it?

Speaker 3

Yes, I think that's the right way to think about it. And again, we'll lay out a lot more details as we get together with everybody in a few weeks in New York.

Speaker 11

Okay. And then second, just as far as momentum, is the idea to run it more standalone? That does seem like a Fairly distinct product from what Zendesk is currently selling? Or do we envision a scenario down the line where this is part of the Sweet bundle. What's the right way to think about that?

Speaker 1

There's definitely opportunities for kind of Bundling and packaging these products and just integrating them much more tightly at the core, but they're also separate businesses and we can talk a lot more about that in November.

Operator

Great. Thank you, Ken. The next question comes from Natalie Howe and Brad Sills over at Bank of America.

Speaker 12

Great. Hey, guys. Thanks for taking my question here. Yes. Sorry, I think I'm having video issues here.

Speaker 12

But anyway, good to see you guys. I wanted to ask about When you think about SurveyMonkey, they have obviously a big freemium motion, mining that free base and And getting customers on to paid. Could this signify an opportunity for Zendesk to potentially start down there more You kind of moved down market more and then embark on kind of a similar strategy over time, kind of moving down market. As the company has been moving up market, Could this also kind of bring in that end of the market more so for just the core business?

Operator

Well,

Speaker 1

This has been a question we've been asked before like premium models and like we're going to do what works best for the business. And like I think that for the momentum SurveyMonkey brand, like there is something to kind of putting that in the hands of people that has been incredibly Powerful, especially also because there's a lot of there's a big constituents out there of like individual users that can see a tremendous benefit of this and where there is kind of A huge value to a kind of in brand awareness that plays in. Can we translate that to the Zendesk business like that? I don't want I don't think I can comment on that by now.

Speaker 12

Got it. Okay. Thanks for that. And then just The other aspect of SurveyMonkey is that it's not just customer experience, it's also employee experience. Do you see potential for Zendesk to kind of move into that end of the market as well more aggressively?

Speaker 1

And I lost my camera again. Sorry about that. I think anyway, but we already have a big footprint in the kind of In employee use cases, and like this is definitely something, especially within HR and Shared service centers and so on. And this is definitely something where we will this is definitely an area where we will see uptake of this joint offering too. No doubt about it.

Speaker 12

Great. Thanks, Michael.

Operator

Great. Thank you. The next question comes from DJ Hynes over at Canaccord. Please turn on your camera.

Speaker 13

Hey, guys. Congrats on the transaction and nice standalone results. Mikkel, you alluded to customer overlap At one point, is there any way to put a finer point on just how much customer overlap there is in the 2 customer bases today?

Speaker 1

Not at this point, but this is something we can talk a lot more about in November in New York.

Speaker 13

Okay. And I last one for Sheila as well, which is probably going to be deferred to November

Speaker 9

as well. But so the new targets that

Speaker 13

are out there, right, I think it implies like 28%, 29% growth For 2025, right, that $3,500,000,000 to $4,500,000,000 When you ran that math, like how are you thinking about Combined net revenue retention, right? I mean, the profile of the 2 businesses is very different today. I mean, you guys are north of 120, they're at 100. Do you think you can keep that combined net revenue retention kind of in the historic ranges you've been talking about? Like what was the thinking there?

Speaker 3

Yes. So and you're right, I'm going to answer your question, DJ, and say we'll provide a lot more detail in November. But certainly, as we look at both companies, We both have really strong offerings that customers frankly love. So, we operate on a slightly different basis. It's You know, the kind of the motions are slightly different.

Speaker 3

So, we've tried to really contemplate, you know, how the products are purchased And therefore how they're used by customers in our estimates. Certainly over time as the prior question thinking about new products that we may offer And combining things, that's something we haven't actually yet, been able to map out. And so that'd be opportunity on top of what we're already talking about.

Speaker 13

Got it. Thank you.

Operator

Great. Thank you. And the next question comes from Kirk Materne over at Evercore. Please turn on your camera.

Speaker 12

All right.

Speaker 14

Hopefully, you can see me. Thanks. I guess first Mikkel for you. Could you just talk about Yes. This is your first really big deal.

Speaker 14

Can you just talk about how to make sure that the momentum you're seeing this quarter doesn't get sort of Slow down in any way as you bring on another as you bring on momentum into the business over the next year. You know, how do you make sure that that, you know, this doesn't become a distraction to the business as it can, you know, it's been accelerating the last couple of quarters?

Speaker 1

Well, this quarter, 1st and foremost, is of course already off to the races. And like we like We have big trust in our continued execution throughout this quarter. As we look into next year, I think we're much more focused on the opportunities and the Excitement that this creates. This is a conversation that is very natural to us, to our prospects, to our customers. And like we have a I'm pretty sure we have a sales force that are all pumped up to go out and have this conversation.

Speaker 1

And like there's so many things we can do in our joint kind of online activities Where we can really help our customers with bringing like this basic concept of just like overlaying data and Get a much more richer customer picture that is so basic but so important and like we can really make that easy for our customers. So we're very excited about that.

Speaker 14

Okay. And then, Zander, can you just remind us that aren't as familiar just about your international sort of exposure maybe relative to Zen that would seem to be one area Maybe have some easy uplift between the two companies.

Speaker 2

Yes, sure. About 36% of our business is generated outside the United States. That includes Canada. Our primary sales operations are here in the U. S.

Speaker 2

With a nice sized footprint in half dozen countries in Europe and then we have a very small team in Australia. And so we intend to benefit from the footprint that Mikkel and team have in LatAm and APAC and other countries in Europe, I think this is a big opportunity. Some of you are old enough to remember where kind of everything happened in the U. S. And it took a decade or 15 years for the rest of the world to catch up.

Speaker 2

Those days are over. A lot of the rest of the world is there. There are millions of organizations that need our software and Zendesk already has 115,000 of them And growing faster. So this is just a huge opportunity to accelerate our channel building. Our product strategy is ahead of our demand generation And that is going to be a big accelerant once this deal closes in the first half of twenty twenty two.

Speaker 3

All right.

Speaker 4

Thank you.

Operator

All right. Thanks, Kirk. The next question comes from Taylor McGinnis over at UBS. Please turn on your camera. Okay.

Operator

We'll move to the next one. Next caller, Brian Schwartz over at Oppenheimer. Please turn on your camera. Brian?

Speaker 1

I I think we just answered all the questions.

Operator

All right. Next one is Stan Zlotsky over at Morgan Stanley. Are you here with us? Okay. Alex Zukin over at Wolfe.

Operator

Are you there?

Speaker 4

Hi, this is Strecker on for Alex. Can you hear me? Do you see me? Yes. Great.

Speaker 4

So first question is for Zander. We touched on it a little bit earlier with Arjun's question, but can you dig in a little deeper into Some of your products beyond survey that some of us may not be as familiar with, that you think will fit in really well with Zendesk?

Speaker 2

Yes, I mean, we have a handful of solutions that attack these big markets. Customer experience, obviously, folks are familiar with CX Leaders. These are Purpose built software solutions for a buyer, whether it's a Chief Product Officer or Chief Experience Officer, somebody who is really tasked with Understanding the sentiment of their key customers and then what actions to take. A lot of those folks are looking for a solution that integrates with Zendesk or looking for a solution that integrates With Salesforce or Microsoft, in Dynamics, those are, we call our product Get Feedback. We've seen a ton of success here.

Speaker 2

This is a business that's in hypergrowth. ACV is demonstrably higher than our core surveys product. The market research product that Brad asked about a moment ago It's really, this is a $50,000,000,000 TAM where increasingly people are using software to understand the needs of a certain cohort of customers. And so if you're looking to reach A cohort of customers about a product launch or a campaign you're going to launch, you really want to understand, and that takes a panel. We have the largest, most liquid panel in the United States, Take software, we've built 50 solutions and then some professional services.

Speaker 2

So this is a really high ACV market for us growing quickly. And then as I mentioned, of course, there's employee experience That is a big market, brand metrics, tracking the health of your brand, etcetera. So it's a handful of solutions that frankly every industry, every size company in every geo, That's the market we're going after and Zendesk is really going to help us accelerate that.

Speaker 4

Thank you.

Operator

Great. And the next question comes from Patrick Walravens at JMP. Patrick, are you there? Patrick? Your name again, I'm sorry, Jason?

Operator

Patrick Walravens. Yes, one second. There you go. Patrick, can you unmute and turn on your camera please? Hold on one second,

Speaker 4

I got to promote him.

Operator

You should be able to now. Patrick, can you talk?

Speaker 15

All right. Sorry, can you hear me now?

Operator

There we go.

Speaker 15

Thanks. What's going on by the way is that it takes a minute for us to get promoted as panelists. So that's why there's the delay.

Speaker 2

Congrats on your promotion.

Speaker 1

Thank you, thank you. All right,

Speaker 15

so I love the idea, Zander, of you being part of Zendesk and helping move this forward and I think we're seeing in a lot of other parts of software that The demand for getting this kind of feedback into other solutions. I think the concern a lot of investors Are going to have on this call is that we all just live through Zoom Five9, right, which was an all stock deal with a modest premium And Zoom stock went down, ISS recommended against it, Five9 didn't get enough shareholders, the deal fell apart And 6 or 7 months were lost. So I and if you look at what Zendesk stock is doing in the aftermarket now, it's It's below 100 and Momentum is very accurately tracking like 2,230 now. So The question is why Zander, how are you going to be able to convince, why should your shareholders vote in favor of this deal at this price, that's number 1? And then Mikkel, how committed is Zendesk to doing this, right?

Speaker 15

And in the end, obviously, Zoom wasn't that committed to it because they weren't willing to pay more. So I think it's a very direct question, but that's the big question.

Speaker 2

Yeah. I'm going to try and make the lawyers as nervous as possible here. Ready? Here's what I can say. We ran a thorough process and the board enthusiastically supports this transaction in many reasons because of what we have just Been discussing.

Speaker 2

We see a compelling combination. I don't think it takes a lot of squinting to understand the power of our combined product offering. And so I don't care what happens in the short term movements. This team and me in particular is super, super committed to executing this transaction, Closing this transaction and then serving the hundreds of thousands of customers, we're excited to bring a better product offering to. Mikkel's vision for customer intelligence company, I believe is super compelling.

Speaker 2

It enhances the value for our shareholders. Our employees are going to have incredible opportunities and we're going to serve customers. So I can't speak to the Zoom Five9 transaction. I think a lot of different attributes here. I've got a lot of confidence we're going to be able to not only close this transaction but make it a success for shareholders on both

Speaker 1

I can add much more to that. Like we're very committed to doing this, no doubt about it. I don't want to comment on like short term kind of market reactions. I think this everybody who takes a look at this and of course we need Our investors, of course, to take a look at this, will see the synergies. It's very kind of it's very straightforward.

Speaker 1

These are the 2 companies that can work really We'll together and provide a lot of value to customers and in many ways we've already proven that we can do that with how we operate over the last couple of years. So I feel very confident about this and we're very committed to see it through.

Speaker 15

All right, great. Thank you for that perspective.

Operator

Thanks Patrick. I think we're going to circle back to the couple of folks that So we didn't get to yet. So, Taylor McGinnis, are you on now? Can you turn on your camera?

Speaker 16

Yes. Eiman, can you hear me?

Operator

Yes, we can hear you.

Speaker 16

Okay, perfect. Awesome. Yes, a little bit of technical difficulty in my end. But Just when looking at the 4Q guide of 31% at the high end, Sheila, can you maybe Talk about the assumptions embedded in the guide. I know you mentioned earlier 3Q being strong.

Speaker 16

And so just in the context of last quarter being back end loaded, were There any deals that were pushed that ended up like closing this quarter and how we should think about seasonality between 3Q and 4Q In the context of some of what's happened the last couple of quarters?

Speaker 3

Yes. Thanks, Taylor, for the question. So, I anticipate that This is our new reality as we've moved up market that month 3 is a big month. So clearly Q4 is a huge quarter for us In that there's quite a bit of renewals and then there's quite a bit of new customer momentum that we would have. And I do anticipate that It again, we'll have a heavy month 3 and obviously that's always, you know, kind of heavy race To the year end sort of December.

Speaker 3

So I would anticipate that and, it's all hands on deck. So I think the teams are excited. We had such a strong Q3, so we're coming into Q4 with a lot of momentum.

Speaker 16

Got it. Awesome. Thank you.

Operator

Great. And our last question will come from Stan Zlotsky over at Morgan Stanley. Stan?

Speaker 12

Hey, guys.

Speaker 17

All right, good. I think we're all set. A little bit of technical issues there as well. So actually just wanted to ask specifically on CRPO. I mean obviously from a year on year perspective, Very strong 40% year on year growth.

Speaker 17

But if we kind of look at it, change in CRPO sequentially plus revenue And if we use that as a proxy, right, there it's about 20% year on year growth in that ACV or ACV bookings metric So your billings metric. Is there anything that we need to be mindful of as far as like the growth of CRPO in the quarter? Was there anything one off or one time That we need to be mindful of?

Speaker 3

So I think there's some Q3 seasonality. It's hard to compare anything to 2020 just because there were so many different factors going on, but over time we've seen a Q3 seasonality and certainly I think as we continue to move up market we're going to see more seasonality in Q3.

Speaker 17

Got it. And what about the obviously in Q2, we heard Some issues with the Talk product and that impacted the results there. How did that track in Q3? And how are you thinking about that, Sheila, for Q4 now?

Speaker 3

So Q3, I think I had mentioned in Q2 that I had Really, look to de risk that. So, we saw good results in Q3, in line with Expectations and I'm continuing to sort of manage that pretty closely to make sure that we've got a good line of sight For the numbers there. So I think it's responding well to sort of the new motion we put in place.

Speaker 12

Okay, perfect. Thank you guys.

Operator

Great. Well, that's all the questions we have for today. As Mikkel and Sheila both talked about and Feel free to sign up for our November 18th Investor Day. It will be a limited in person event in New York and you'll get to Be able to speak with Mikkel and Sheila as well as Zander as well as the broader Zendesk management team. So we look forward to seeing you there and speaking to you again then.

Speaker 3

Thank you. Thank you.

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Earnings Conference Call
Zendesk Q3 2021
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