Zendesk, Inc.
Q3 2021 Earnings Call Transcript

Published: 28 Oct 2021

[Operator:]

Thank you everybody for joining us. Welcome to our Third Quarter 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; Shelagh Glaser, our Chief Financial Officer; and Zander Lurie, CEO of Momentive. 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 and ability to compete effectively as well as the anticipated benefits of our proposed acquisition of Momentive, which we announced earlier today. The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2020, and 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 for prior periods and the earnings press releases for such prior periods, all of which are available on our Investor Relations website. With this brief introduction, I’d like to turn the call over to Mikkel.

[Mikkel Svane:]

Well, yes, thank you, Jason, and welcome everyone to our call here today. We had an outstanding quarter. Our revenue growth accelerated for the third 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 million 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 36% year-over-year increase in average deal size, and we crossed a significant milestone as we are now serving over 100 customers with more than $1 million in annual recurring revenue. So our results this quarter really reflects the strengths of our strategy give customers a strong combined offering that is powerful. It’s 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 Momentive, the company behind Survey Monkey. We have Momentive’s CEO, Zander Lurie, with us today. He’s alerting here somewhere as well as our CFO, Shelagh Glaser, to share more about our joint vision and the transaction details. Both Zendesk and Momentive 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. 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 the customer, and we believe we can change that. Zendesk pioneer at the best way to respond to what your customers say and do and momentum and the survey market platform is the best way to capture how they think and feel. Combined, we create a richer, combined picture of the customer. That deep understanding and the ability to better act and engage to build meaningful relationships, 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 $3.5 billion in revenues by 2024 and $4.5 billion by 2025. And we expect the acquisition to be growth accreted already in 2023, our first year as a unified company. And with that, I would like to turn the call over to Zander, to talk about Momentive and to talk about the success they have achieved. Hey Zander.

[Zander Lurie:]

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 Momentive. As Mikkel said, we share similar cultures, values and millions of people believe in the mission that we are pursuing. Is the complementary nature of our product offering. And we believe we will deliver enhanced value for our business, customers, employees, and shareholders. At Momentive our fundamental strength is that we provide incredible insights into how customers think? And what they want? What do 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 Momentive leads in five core areas. Customer experience, employee experience, enterprise service, 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. Through our expansive set of customers, we’ve generated 5.5 billion survey responses to date and nine million 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.

[Mikkel Svane:]

Awesome Zander. Thank you so much. And with that I’m of course, super excited to welcome you and your team. But for now, we’re going to turn it over to Shelagh who will share more details about, of course, our strong quarter and this transaction. Hey go, Shelagh. And you’re muted.

[Shelagh Glaser:]

Sorry about that. And I’m unmated now. Thank you, Mikkel and Zander. I echo Mikkel’s sentiment. We look forward to welcoming you and the Momentive team into the Zendesk family. As Mikkelshared, Zendesk had a truly exceptional quarter. We generated $347 million in revenue this quarter, our third 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% 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. 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%. Our non-GAAP gross margin was 81.8% an increase of more than three 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 $38.9 million and GAAP operating margin was negative 11.2%. Our non-GAAP operating income of $27 million grew 8% year-over-year while non-GAAP operating margin declined by 1.7 points. The decline in margin was driven by higher sales, marketing and R&D expenses as we continue to invest in growth. Operating cash flow in the third quarter was $73.8 million and free cash flow was $65.4 million. Now let’s discuss guidance. We are increasing our full year 2021 guidance to $1.329 billion to $1.335 billion growing 29% at the midpoint, compared to last year up from our previous guidance of $1.310 billion to $1.318 billion, given our strong results this quarter and continued business momentum. Our fourth quarter revenue is expected to grow 30% year-over-year at the midpoint and be in the range of $366 million to $372 million. We expect our fourth quarter gap operating loss to be in the range of $43 million to $49 million. And non-GAAP operating income to be in the range of $22 million to $28 million. We expect full year free cash flow to be in the range of $140 million to $150 million an increase from our prior estimate of $120 million to $130 million. Our strong financial performance and outlook and second half with growth rate of 31% coupled with our intent to acquire Momentive means when you’re 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 had. The terms of the transaction provide for Momentive stockholders to receive 0.225 shares of Zendesk for each share of the Momentive, a ratio which represents a value of approximately $28 per outstanding share of Momentive stock based on the 15-day volume weighted average price of Zendesk common stock up to and including October 26, 2021. Upon closing this transaction Momentive stockholders will own approximately 22% of the combined company. We expect the transaction to close in the first half of 2022 subject to Zendesk and Momentive shareholders approvals and other customary and regulatory approvals. Zendesk continues to lead in the customer service industry and combined with Momentive’s apologize. My computer screen went blank.. Zendesk continues to lead in the computer service industry and combined with Momentive’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 billion 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 first full year as a unified company. We believe there are significant areas of revenue synergy that will be unlocked by this transaction as we’re able to accelerate Momentive’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 $3.5 billion in revenue in 2024, a full year earlier and $500 million more than our previous target. And we expect to reach approximately $4.5 billion in revenue by 2025, about 50% higher than we had previously targeted. Following the close of the transaction, we will work jointly with Zander and his strong leadership team on deeper integration of our teams delivering on the shared vision of customer intelligence. We’ll cover more details in 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 QA.

[A - Jason Tsai:]

Great. Thank you. And as we’ve done in the last few quarters, we’ve put all the analysts who are randomizer. The first analyst to ask a question will be Arjun Bhatia at William Blair. Please go ahead.

[Arjun Bhatia:]

All right. Thanks, Jason, and congrats on the announcement to the team. Mikkel, 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 Momentive from the acquisition that may not have been as beneficial if you were to partner with them?

[Mikkel Svane:]

Is somebody taking you away? No, Momentive 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 that is in that platform. And first 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 always been partners in many different ways. And we have, of course, big overlapping 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, but 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 rich picture of your customers. And that is the vision we’re very, very intrigued to execute on together.

[Arjun Bhatia:]

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, Mikkel and Shelagh 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 your competitors that are playing in the mid market enterprise space and how the combination of Zendesk plus Momentive might help accelerate the competitive differentiation in that market?

[Zander Lurie:]

Yes, sure. Arjun, it’s a great question. We started as a product led growth company and all of our customers, 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 five categories where we play with CX, it’s an employee experience market brand insights, et cetera. So, today a third of our businesses are enterprise contracts and we have world-class product market fit. We have the most discerning demand in customers in fin serv, 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 up-market to their 115,000 enterprise customers. And so, the go to market synergies here are proximate and compelling, and frankly just obvious. Mikkel and I have talked about it at length. 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 thousand 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&D efforts to build those integrations and just feel like there is a ton more value to offer our shared customers.

[Jason Tsai:]

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.

[Jeff Van Rhee:]

Here we go. It should be good. Congrats guys and just a couple for me, I guess first congrats on the announcement today. And I’m curious maybe Mikkel in your installed base, when you look at 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 you’re going to have to go in and potentially displace with this solution?

[Mikkel Svane:]

Like – 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 kinds of specifics with regard to our customer base and so on of course in our November Analyst Meeting.

[Jeff Van Rhee:]

Yes. Fair enough. Shelagh, just a question last quarter in the core business, I think, enterprise was a front and center topic and you called out a 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 them. Just talk about what you saw in linearity on the enterprise, any more color around cycles and how that played out versus expectations?

[Shelagh Glaser:]

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, continue to see very strong month threes. That’s kind of typical, I think, in enterprise business that you see strong month threes. But what we really saw throughout the quarter is just strength across all segments of the market. So that was a very strong Q3 for us. And I do anticipate that enterprise continues to be monthly 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.

[Jeff Van Rhee:]

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

[Jason Tsai:]

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

[Ryan McWilliams:]

Thanks for taking the question, so interesting combination. Mikkel, is there an individual customer vertical or customer type where you’re most excited about potential combined Momentive and Zendesk offer?

[Shelagh Glaser:]

Mikkel, you’re on mute.

[Mikkel Svane:]

I don’t know, sorry about that. Well, I think like – of course there are 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 is so attractive. Everybody in the world have been used – have been responding to a survey from SurveyMonkey at some point sooner or later. And like just the amount of customers that have been using these products over the years is mind blowing. So, I think, there are so many different types of use cases both internally and externally and tailor the different kinds of sectors. The same way that we see in our customer base that the types of use cases are so broad. So we look forward to kind of serving the entire market over time.

[Zander Lurie:]

I mean, one of the things, Ryan, that’s been so compelling for me is we’ve got to spend more time with our respective organizations is, you know, our customer chart looks like the S&P 500 spliced up by vertical. It’s every vertical. And then we have products from annual subscription to team all the way up to seven figure contracts. And as I think about Shelagh’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. And that’s what we do to Mikkel’s point better than any company in the world over 3 million active users on our platform every day sharing 25, 30 million responses about how they feel about your product, your curriculum, your non-profit, your pricing, your campaigns, et cetera. So, it’s our job to integrate. And when Shelagh showed us the chart of just how big that sweet component of that business has become, it’s just obvious that their customers will benefit from that integration. So we’ll be excited to execute on that next year.

[Ryan McWilliams:]

Great. I really appreciate the color. Yes, definitely more actionable customer insights. Shelagh, 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 Momentive?

[Shelagh Glaser:]

Certainly, thanks, Ryan. 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 the straightforward. In terms of timing, we’re anticipating first half of 2022, we would anticipate in the Q1 timeframe, we would have the shareholder vote. And certainly, we want to move as quickly as possible. So that will be the focus across all teams.

[Ryan McWilliams:]

Thanks.

[Jason Tsai:]

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

[Derrick Wood:]

Yes. Good. Thanks. Well, congrats on a strong quarter. I wanted to really touch on the enterprise business. I look at – you guys did 40% billings growth last quarter, 30% this quarter on a much tougher comp, seems like the enterprise business is doing quite well. So could we just get a little bit more color in terms of where you’re seeing strength geographically? How your large deal activity is, sales productivity and hiring? Just get a sense for what’s really working and coming together there.

[Mikkel Svane:]

All the things like – I think like what we’ve – what we really seen in like post kind of get 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 as transparent, and they want to execute on it. At the same time everybody, 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 compounder creates like a user experience. So customers, they really need this. We’re seeing that for the small business. We’re seeing that for the enterprise. And like, we are really benefiting from our continuing investment in the enterprise, our continuing investment in the product and our worldwide presence. We’re very excited about the progress we see everywhere in the world.

[Derrick Wood:]

Okay. And on the acquisitions slide deck, I see a pitch that talks about customer intelligence vision. And 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 it, 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 you’re going to integrate everything, and really where you see the lowest kind of hanging fruit for cross-selling?

[Zander Lurie:]

Just a little bit of details and how are we going to integrate all the things? And Mikkel got to talk a lot more about this on November 18, New York. And I hope to see you that Derrick there’ll be a lot more details. But that it’s obvious that even customers that are both our products and not creating a richer picture of the customers like too many data – too many data store lives in different silos. 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. It’s within our reach and we want to execute that on very quickly and help our customers with a much richer picture. And that’s the ambition.

[Jason Tsai:]

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

[Parker Lane:]

Hi everyone. Thanks for taking my question. Can you hear me now?

[Jason Tsai:]

Yes. Go ahead.

[Parker Lane:]

Yes, perfect. Mikkel, I guess, in the customer conversations you’ve had out there over the last year, two years, obviously everyone’s taking 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 has done on an individual basis?

[Mikkel Svane:]

Yes. starting with your first question. That’s like we have caused bill 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 for a picture of the customers. 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 that business and like lead in a digital first online first economy, if they don’t become much better at creating much better pictures of their customer base 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.

[Parker Lane:]

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

[Mikkel Svane:]

I think, 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 hires, the pricing, the packaging, the reactions, the experience, all of these things, and like how – what they communicate that overlaid with, like the specific feedback they give to customers and create this much better picture that is not just serving one constituent, but serves the business. And then I lost my picture so I can’t talk that. All right. As I’m rebuilding my picture here, Jason, do you want to jump to the next question?

[Jason Tsai:]

Yes, Parker, I’ll chime in, Mikkel, if you don’t, I mean, just the way we use Zendesk at Momentive, 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&D efforts that 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 complimentary our products are across everything.

[Parker Lane:]

Yes. Makes sense. Congrats again.

[Jason Tsai:]

Great. Thank you. The next question comes from Samad Samanaover Jeffries. Please turn on your camera, and mute your mic.

[Samad Samana:]

Hi, good evening. Thanks for taking my questions. So, I want unpack maybe some of the numbers, the targets for $3.5 billion and then $4.5 billion. When you say growth accretive, if I think about the acquired company of us growing high teens, do we expect growth to accelerate as a result of the consolidation, or can you just help us understand what Zendesk should be growing to get to this $3.5 billion and then $4.5 billion, and what the assumptions are around the acquisition, just so we understand what growth of accretive means?

[Shelagh Glaser:]

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 Mikkel and Zander just talked 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, and then we’ve got the move up market, which we think we can immediately start to expand revenue synergies into it. So, we think the first full year, which will be 2023, because obviously 2020 will just be the close year and the initial integration. But we think by 2023, the combined company can really start to have accelerated combined growth. So that’s what we’re looking for. 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.

[Samad Samana:]

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?

[Shelagh Glaser:]

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 billion by 2025. That’s the target that we had put out there. So, as we look at this new opportunity, as we bring Momentive into the Zendesk family, we’re now looking at $3.5 billion a year earlier, so an absolute bigger growth target and pulling it in 12 months.

[Samad Samana:]

Okay, great. And then maybe just 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 too, more marketing oriented used cases, just help us think about what you – how you see some of the, maybe synergies that develop here.

[Zander Lurie:]

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 the customer experience. So, we expect, we already of course, serve different constituents and we continue that. We definitely expect that to be accelerated with this acquisition.

[Jason Tsai:]

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

[Ken Wong:]

Hey, great. You actually I’m building off of Samad’s question just now. So, really appreciate the update on the $3.5 billion to $4.5 billion, I believe kind of when you guys introduced those numbers, the expectations were for the CAGR over that timeframe or the 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?

[Shelagh Glaser:]

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.

[Ken Wong:]

Okay. And then second, just as far as momentum is the idea to run it more standalone, because it 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 Suite bundle what’s the – what right way to think about that?

[Mikkel Svane:]

There’s definitely opportunities for kind of bundling and packaging these products and just integrating them much more tightly at the call. But they’re also separate businesses and we can talk a lot more about that in November.

[Jason Tsai:]

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

[Brad Sills:]

Oh, great. Hey guys. Thanks for taking my question here.

[Jason Tsai:]

Please turn on your camera.

[Brad Sills:]

Oh yes, sorry. I think I’m having video issues here. But anyway, good to see you guys. I wanted to ask about when you think about Survey Monkey, they have obviously a big freemium motion, minding that free base, and getting customers onto paid. Could this signify an opportunity for Zendesk to potentially start down there more and you kind of move down market more and then embark on kind of a similar strategy over time kind of moving down market, because the company’s been moving up market. Could this also kind of bring in that end of the market more so for just the core business?

[Mikkel Svane:]

Well, this has been a question we’ve been asked before, like freemium models, and like we are 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 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 a brand awareness that plays in. Can we translate that to the Zendesk business like that I don’t want to – I don’t think I can comment of that by now.

[Brad Sills:]

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

[Mikkel Svane:]

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 used 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 joined offering to no doubt about it.

[Brad Sills:]

Great. Thanks, Mikkel.

[Jason Tsai:]

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

[DJ Hynes:]

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 two customer bases today?

[Mikkel Svane:]

Not at this point. But there’s something we can talk a lot more about it in November in New York.

[DJ Hynes:]

Okay. And I’ll ask one for Shelagh as well, which is probably going to be deferred to November as well. But so the new targets that are out there, right. I think it implies like 28%, 29% growth for 2025, right. That $3.5 billion to $4.5 billion. When you ran that mass, like, how are you thinking about combined net revenue retention? Right. I mean, the profile of two businesses is very different today. I mean, you guys are north of 120, they’re at a 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?

[Shelagh Glaser:]

Yes. So, and you’re right. I’m going to answer 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, the kind of the motions are slightly different. So we’ve tried to really contemplate, 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, and that’s something, we haven’t actually yet been able to map out. And so that’d opportunity on top of what we were already talking about.

[DJ Hynes:]

Got it. Thank you.

[Mikkel Svane:]

All right. Thank you.

[Jason Tsai:]

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

[Kirk Materne:]

All right. Hopefully, excuse me. Thanks. I guess first Mikkel for you, could you just talk about this is your first real big deal. Can you talk about how to make sure that the momentum you’re seeing, this quarter doesn’t get sort of slowed down in any way, as you bring on another, as you bring on momentum into the business over the next year, how do you make sure that, this doesn’t become a distraction to the business at, as it can, it’s been accelerating the last couple quarters?

[Mikkel Svane:]

Well this quarter, first and foremost is of course already after the races. And like we have big trust in our continued execution throughout this quarter, as we look into next year, I think we are 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 and I’m pretty sure we have a Salesforce that are all pumped up to go out and have this conversation. 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 are very excited about that.

[Kirk Materne:]

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

[Zander Lurie:]

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. with a nice size 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. 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 2022.

[Kirk Materne:]

Great. Thank you.

[Jason Tsai:]

All right. Thanks, Kirk. The next question comes from Taylor McGinnis over at UBS. Please turn on your camera. Okay. We’ll move to the next one. Next caller Brian Schwartz over at Oppenheimer. Please turn on your camera. Brian?

[Mikkel Svane:]

I think we just answered all the questions.

[Jason Tsai:]

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

[Unidentified Analyst:]

Hi, this is on for Alex. Can you hear me? You see me?

[Jason Tsai:]

Yes. Great.

[Unidentified Analyst:]

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

[Zander Lurie:]

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 offer 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. This is a business that’s in hyper growth. ACVs demonstrably higher than our core surveys product. The market research product that that Brad asked about a moment ago is really, this is a $50 billion 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 takes software. We’ve built 50 solutions and then some professional services. 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, et cetera. So it’s a handful of solutions that frankly, every industry, every size company in every go that’s the market we’re going after and Zendesk is really going to help us accelerate that.

[Unidentified Analyst:]

Thank you.

[Jason Tsai:]

Great. And the next question comes from Patrick Walravens at JMP. Patrick, are you there? Patrick?

[Mikkel Svane:]

What’s the name again? I’m sorry Jason?

[Jason Tsai:]

Patrick Walravens.

[Mikkel Svane:]

Yes, one second.

[Jason Tsai:]

There you go. Patrick, you want, can you unmute and turn on your camera please?

[Mikkel Svane:]

Hello, one second, I got to promote – should be able to know. Patrick, can you talk?

[Patrick Walravens:]

All right, sorry, can you hear me now?

[Jason Tsai:]

There we go.

[Patrick Walravens:]

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.

[Mikkel Svane:]

Congrats on your promotion.

[Patrick Walravens:]

Thank you. All right. So, Mikkel, 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 lived 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 six or seven months were lost. So and if you look at what Zendesk stock is doing in the aftermarket now, it’s below a hundred momentum is very accurately tracking like 20 to 30 now. So the question is, why Zander how are you going to be able to convince. Why should your shareholders – favor of this deal at this price? That’s number one, and then Mikkel, how committed Zendesk to doing this right. 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 I think that’s the big question.

[Zander Lurie:]

Yes. I’m going to try and make the lawyers as nervous as possible here already. Here’s what I could say. We ran a thorough process and the board enthusiastically supports this transaction in many reasons because of what we have just been discussing. 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. 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 sides.

[Mikkel Svane:]

Hi, I can’t add more, much more to that. Like we are very committed to doing this. No doubt I 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. These are two companies that can work really well 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 are very committed to say through.

[Patrick Walravens:]

All right, great. Thank you for that perspective.

[Jason Tsai:]

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

[Taylor McGinness:]

Yes, everyone can you hear me?

[Jason Tsai:]

Yes. We can hear you.

[Taylor McGinness:]

Okay, perfect. Awesome. Yes, a little bit of technical difficulties in my end, but just when looking at the 4Q guide of 31% at the high end Shelagh, can you maybe talk about the assumptions embedded in the guide? I know you mentioned earlier for 3Q being strong 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 quarters.

[Shelagh Glaser:]

Yes. Thanks, Taylor for the question. So I anticipate that this is our new reality as we’ve moved up market. That month three 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 month that we would have. And I do anticipate that it again we’ll have a heavy month three, and obviously that’s always kind of heavy raise to the yearend sort of December. So I would anticipate that and it’s all hands on Zendesk. So I think the teams are excited. We had such a strong Q3, so we’re coming into Q4 with a lot of momentum.

[Taylor McGinness:]

Got it. Awesome. Thank you.

[Jason Tsai:]

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

[Stan Zlotsky:]

Hey guys. All right good. I think we’re all set a little bit of technical issues there as well. So just actually just wanted to ask specifically on CRPO I mean, obviously from a year-on-year perspective, very strong 40% year-on-year growth, 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, or ACV 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?

[Shelagh Glaser:]

And 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 every time we’ve seen Q3 seasonality and certainly I think as we continue to move market, we’re going to see more seasonality in Q3.

[Stan Zlotsky:]

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

[Shelagh Glaser:]

So Q3, I think I had mentioned in Q2 that I had, really looked 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.

[Stan Zlotsky:]

Okay, perfect. Thank you, guys.

[Jason Tsai:]

Great. Well, that’s all the questions we have for today. I, as Mikkel and Shelagh both talked about and feel free to sign up for our November 18 Investor Day. It’ll be a limited in person event in New York, and you’ll get to be able to speak with Mikkel and Shelagh 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 there. Thank you.

[Shelagh Glaser:]

Thank you.