Zendesk, Inc.
Q4 2021 Earnings Call Transcript

Published: 10 Feb 2022

[Jason Tsai:]

Welcome to our fourth quarter 2021 earnings call, and thank you for joining us today. I'm Jason Tsai, Head of Investor Relations at Zendesk. Joining me on the call today are Mikkel Svane, our Founder, CEO and Chair of the Board; and Shelagh Glaser, our Chief Financial Officer. 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. 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 upcoming annual report on Form 10-K for the year ended December 31, 2021. We undertake no obligation to update these statements after today's presentation or to conform these statements to actual results or to the changes in our expectations, except as required by law. Please refer to today's earnings release 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 in the earnings press release for such prior periods, all of which are available on our Investor Relations website. Lastly, this presentation may contain information regarding the business, operations and financial results of Momentive and its subsidiaries. Such information has been prepared by Momentive, and Zendesk does not represent or warrant the accuracy of such information. With this brief introduction, I will turn the call over to Mikkel for opening comments.

[Mikkel Svane:]

Thanks so much, Jason, and welcome, everyone, to our fourth quarter 2021 earnings call. First, as some of you may have seen in a separate press release that we issued this afternoon, our Board of Directors received an unsolicited nonbinding proposal from a consortium of private equity firms to acquire Zendesk for between $127 and $132 per share. With the assistance of independent legal and financial advisers, our Board thoroughly reviewed the proposal and concluded that the offer significantly undervalues the company and is not in the best interest of our shareholders. The Board continues to believe strongly that the continued execution of a strategic plan, including the proposed acquisition of Momentive, will generate substantial additional long-term value for shareholders. The Board unanimously recommends a vote for its proposal to approve the issuance of Zendesk stock in connection with the transaction at the shareholder meeting on February 25. We will not be commenting further or taking any Q&A related to the unsolicited proposal. And instead, we're going to focus on our strong quarterly and full year results, which we are very excited about. 2021 was a great year for our business. We finished with a strong fourth quarter with revenue of $375 million. We're growing that 32% year-over-year. For the full year '21, revenue grew 30% to $1.34 billion, exceeding the outlook that we gave at the start of the year. Shelagh is going to share much more details on our performance with you shortly. As a company, we were rewarded with strong growth throughout the year after being focused on putting customers first during 2020, during the onset of the pandemic. The ongoing shift to a digital-first economy amplified this growth. Brands around the world are choosing Zendesk to evolve how they engage with their customers. This is evident by the fantastic adoption we've seen with the Zendesk Suite and our continued success in moving upmarket. In just 11 months since we launched the Zendesk Suite, it has grown to 35% of our annual recurring revenue. That's a $500 million annual business from customers that stay longer and expand at higher rates. New and renewing customers are using Suite because it has powerful functionality that is easy to implement. 90% of our bookings are from new customers are on the Suite product, and Suite accounted for nearly 60% of our total bookings during the fourth quarter. In '21, we also scaled our successful enterprise customers, driven by the adoption of the Suite, combined with our maturing go-to-market motions. Customer accounts that generate over $250,000 in annual recurring revenue now account for 38% of our total annual recurring revenue. Throughout the year and especially in Q4, Financial Services became another great example of an industry where disruptors and established brands turn to Zendesk for our time to value. Our ease of adoption helps them acquire new customers faster and cross-sell earlier in their relationships. Our financial services broker business grew more than 50% in '21, and annual recurring revenue from Financial Services is now more than $100 million. Overall, our ability to retain and expand our existing customers has never been stronger. And that alongside the compelling adoption of Suite and our momentum in the enterprise means we have an extremely strong foundation for continued long-term growth. As a business, we are excited for what comes next and well positioned for continued execution. '21, we saw record talent acquisition across all levels in a very competitive market, and our employee base grew by 41%. Across the board, '21 was a strong year, and we are keeping the momentum going into '22. I want to close out by saying that we look forward to the upcoming shareholder vote on our proposed acquisition of Momentive. In addition to the information that we provided at our Investor Day, we also published 2 presentations to provide further insight on the rationale and the merits of the transaction, which we encourage investors to review. We are committed to the acquisition and are excited about the outlook for the combined company. We've had a lot of conversations with our investor community over the last few weeks. They've been really good to have, even if they weren't always super comfortable. We appreciate everyone's willingness to dig in and to engage. Open discourse is how we really get clear about perspectives and expectations. It's how we correct any misconceptions out there. And most importantly, it's how we make sure everyone knows exactly why we are so committed to the vision and the plan we have outlined for Zendesk and Momentive. That vision is to build a leader in customer intelligence. Zendesk powers billions of customer interactions every day. With Momentive, we can turn that into something much more powerful for our customers, real customer intelligence that will help redefine how to strategically run a business. And that is a future that we are ridiculously excited about. We feel strongly about this opportunity and the plan that we have in place to make it a reality and we hope our investors do as well. We are going to build a business with a $5 billion run rate by '25 with improved margins and a stronger growth rate. And we believe that is in everybody's best interest. And with that, I'm going to turn it over to Shelagh to discuss our financial results for the quarter and for the year in more detail. Take it away, Shelagh.

[Shelagh Glaser:]

Great. Mikkel, thank you, and thank you, everyone, for your time today. We generated $375 million in revenue this quarter, 32% year-over-year growth, which was ahead of our expectation. For the full year, revenue grew 30% to $1.34 billion, significantly better than the outlook we provided at the start of the year. As Mikkel pointed out, our strength in the fourth quarter as well as for all of 2021 was driven by the success we've seen in growing our enterprise customer base and the introduction of the Zendesk Suite. As more of our ARR comes from Enterprise customers and customers on Suite, we've seen meaningful improvements in the fundamentals of our business. In the fourth quarter, our average deal size as well as our average length of contracts with our customers both increased compared to last year, and our ability to retain and expand these customers are at all-time highs. New customers this quarter continued to generate 10x the ARR as compared to the ones that are churned off on our discontinued plans. All of this leads to a more predictable business that is well positioned for continuing strong growth over the long term. We introduced Suite in early 2021, and it now accounts for over $500 million in ARR and 35% of our total ARR. While we are only a year in the Suite, we are encouraged by the initial data that we are seeing from Suite customers. They have higher gross expansion rates, longer contract terms and use more of our products. Our net expansion rate this quarter was 122%, similar to last quarter and above our long-term target range of 110% to 120%. The majority of our NRR continues to come from seat expansion. Over time, we believe NRR will converge back to the target range, though it may remain above 120% in the near term. Our NRR continues to benefit from more of our customers signing on with longer engagements and churn and contraction remaining at near all-time lows. Customer counts was over 250,000 ARR, now generate 38% of our ARR, up from 37% last quarter and 32% a year ago. Turning to our margins. Our fourth quarter non-GAAP gross margin was 81.6%, up 220 basis points year-over-year. Gross margin has continued to improve over time, largely driven by revenue scale, increased optimization of our product support personnel and efficiencies in our hosting infrastructure. During this quarter, we had $27 million operating profit on a non-GAAP basis. Our non-GAAP operating income grew 47% year-over-year, while our non-GAAP operating margin improved 70 basis points year-over-year. We generated $28 million in free cash flow in the quarter. For the full year 2021, we generated $140 million free cash flow, up 430% year-over-year. Our fourth quarter free cash flow was impacted by a systems update issue that temporarily impacted our collections in the quarter. That has now been fully resolved. As well, we had expenses related to our proposed Momentive acquisition. Finally, let me cover our guidance. We are confirming our full year 2022 revenue and operating income guidance that we shared at our November Investor Meeting. We expect revenue in the range of $1.675 billion to $1.705 billion, or approximately 26% year-over-year growth at the midpoint. We expect our operating margin for full year 2022 to be 7.5% on a non-GAAP basis, in line with our operating margin in 2021 and aligned to our November guidance as we continue to invest in our growth. Non-GAAP operating income is expected to be in the range of $117 million to $137 million for the year. We expect free cash flow for the full year to be in the range of $165 million to $195 million. For the first quarter of 2022, we expect to generate $381 million to $387 million in revenue for approximately 29% year-over-year growth at the midpoint. We expect non-GAAP operating income of $20 million to $26 million. I want to share a bit more detail on Q1 operating margin and free cash flow. For Q1, our GAAP and non-GAAP operating margins are seasonally lower due to the normal reset of payroll taxes and benefit costs. It is compounded this year due to increased investment and compensation for all employees as we focus on growing, attracting and retaining Zen's talent. On free cash flow, consistent with our practice in previous periods, we continue to only provide free cash flow guidance for the year as we believe it's best to assess cash flow performance over the longer term. However, I want to provide additional color since we expect our free cash flow in the quarter to be slightly negative. This is primarily due to the $14 million to $17 million in pre-close expenses related to the proposed acquisition of Momentive that we expect to incur. We expect free cash flow to rebound to normalized levels in the second quarter. Additionally, our full year guidance for free cash flow is to grow 28% at the midpoint. Based on the above factors, we expect our operating income and free cash flow to improve substantially over the course of the year, particularly in the second half as investments that we are making today translate to both top and bottom line growth. In closing, as Mikkel said, Q4 and 2021 were outstanding results driven by our team's continued strong execution. Zendesk is well positioned with strong leadership foundation in the market, and our 2021 strong performance builds our confidence in our '22 growth. With that, I will turn it over to Jason for Q&A. Jason?

[A - Jason Tsai:]

Thank you, Shelagh. As we've done in past quarters, everybody was put through a randomizer. And the first question is coming from Stan Zlotsky of Morgan Stanley.

[Stan Zlotsky:]

Perfect. So a couple of questions from my end. Maybe just for Shelagh. As we think about the very strong results that you guys put up in Q4, why not bump up the guidance for 2022?

[Shelagh Glaser:]

So Stan, nice to see you. Thanks for the question. So I think as we've done in the past, what we really want to do is build our confidence through the year because obviously, there's a lot more year left. And so what we want to do is we get together with you every 90 days, so each 90 days, build our confidence as we move through the year. And so we're obviously giving you very strong guidance for Q1. We feel really good about that. And then throughout the course of the year, just as we did in prior years, just build confidence each quarter.

[Stan Zlotsky:]

Understood. And then just as a follow-up on net revenue retention. Once again, you have a very strong 122% NRR in Q4. With so much of the selling happening from Suites, right, and those are coming at much bigger chunks, how much -- help us think through how much did Suite pump adoption help net revenue retention this year? And with so many customers already on Suite, what can happen to net revenue retention as we move into 2022 and even beyond?

[Shelagh Glaser:]

Yes, it's a good question. We obviously haven't yet fully anniversaried Suite. We'll do that in the Q1 time frame, Q1 '22 time frame. But as you point out, because we're really getting a lot of stickiness with Suite and a lot of the Suite customers then still do have seat expansion, it may change those dynamics over time. I just don't think we fully played through because we've not yet anniversaried many customers on Suite. But I think to your point, we're seeing a lot of stickiness with Suite.

[Jason Tsai:]

Thanks, Stan. The next question is coming from Arjun Bhatia at William Blair.

[Arjun Bhatia:]

Congrats on the quarter. One thing that stuck out is the enterprise adoption. I'm curious if you can maybe just elaborate on the success that you're having upmarket. Are those larger customers that are driving that strength? Or are you seeing existing customers just buy more upsell, move to higher pricing tiers? So would just love to hear a little bit more detail on that upmarket traction.

[Mikkel Svane:]

Well, I can talk to a few points that may give you a little bit additional color. Like we mentioned this example of the financial services, it's also in our shareholder letter. And I think there's -- like we see a bunch of industries where you see the established enterprises are trying to keep up with the change of the disruptors that is very visible here in a digital-first economy, and that definitely boosts interest in Zendesk. We also see, because like in many industries, we kind of considered kind of the disruptors' choice. I think what we're also seeing is that like there is a trend which we spent most of 2020 and beginning of '21 on, it's just like simplifying the usage of our Suite, so that it's not only have everything together, but it's also like elegantly integrated so you can roll it out elegantly without a lot of overhead and very, very quickly. And we believe that's a major IT trend that we see in the Enterprise today. So these are 2 points I would emphasize here. Makes sense?

[Arjun Bhatia:]

Yes. It's very helpful. And then a quick follow-up for Shelagh. I know we're seeing FX headwinds play into guidance for a lot of companies. Can you just remind us of your FX exposure and billing practices? And what impact, if any, that's having on the guidance?

[Shelagh Glaser:]

So certainly, we have FX exposure. So that's a part of how we're thinking about things. We have only kind of EU-type currencies, so Europe. And then we are introducing the real, that's early days. So we don't have a lot of business on that. So it's not a material part of our revenue, I would say. But certainly, we're watching that and putting hedging in and making sure that we're well protected. But it's something we think about in our forecast, but it's not a major headwind for us.

[Jason Tsai:]

Thanks, Arjun. The next question comes from Samad Samana over at Jefferies.

[Samad Samana:]

Okay. Maybe first one for Mikkel. It's -- hiring is in focus for a lot of the companies that we cover right now. It's obviously a tight labor market. I'm just curious if you could give us any kind of color on where Zendesk is in terms of recruiting and retaining sales head count and whether you ended at plan, ahead of plan in the fourth quarter? Just trying to triangulate as we think about 2022.

[Mikkel Svane:]

There's no doubt, the employee market, it's very, very fluid right now. We see that. I think all our peers are seeing that. Despite that, we had a very strong recruiting year. We grew the team with 41% year-over-year. So our recruiting machine is really humming. But it is a very fluid market, and we appreciate that and are doing everything we can to engage with our employees and kind of set them up for success. And like how we get back to reality and start meeting each other, getting together again and building that company culture that -- where this is such a big element is, of course, something that we spend a lot of time on.

[Samad Samana:]

Great. And maybe just a quick follow-up for Shelagh. When I look at the RPO both short term and in total, the seasonal uplift from 3Q to 4Q was just around 10%. That's a little bit more muted than the last several years from 3Q to 4Q. Just anything that we need to be aware of that would have impacted kind of the normal seasonality for RPO from 3Q to 4Q?

[Shelagh Glaser:]

Well, I guess it's a little bit -- 2020 was such a strange year. So it probably is always a hard compare. But no, there wasn't anything that we saw. We actually feel really good about both our short-term and long-term RPO. We feel like, again, we're signing customers with longer and longer contracts, so we feel really good about that. So there isn't anything specific to note there.

[Jason Tsai:]

Thanks, Samad. The next question comes from Hannah Rudoff over at Piper Jaffray.

[Hannah Rudoff:]

Just first one, kind of a follow-up on the last question. I guess, Shelagh, did you guys see any impact from Omicron in the fourth quarter?

[Shelagh Glaser:]

So certainly, I think everybody was, towards the end of the year, everybody was starting to either be impacted by it or somebody in their family member. I know that happened on my team. That probably happened on everybody's team. So we saw a bit of that. But I think we've got a pretty rapid motion for customer wins. So it really didn't impact the results for us. But certainly, we saw some team members be impacted by it and then also some things in the customer. But I wouldn't say it was any significant impact for our business.

[Hannah Rudoff:]

Okay. That's helpful. And then it's nice to see that you guys are gaining strong traction with Zendesk Suite. I guess what kind of expectations are you guys having for Suite this year? And then what does the path kind of look like to get Suite to more of 40% or 50% of ARR look like?

[Shelagh Glaser:]

I'll take that one. So we expect continued strong growth on Suite. We are anticipating that we're going to anniversary, so we're going to learn a lot about those customers. So we're excited about that. As I mentioned, early indications of those customers are that they have more expansion and they stay with us. So we're interested to see that, but we expect strong growth throughout the year, continued growth on Suite, and we expect that, that continues into 2023.

[Jason Tsai:]

Thanks. The next question comes from Max Osnowitz from Stifel.

[Maxwell Osnowitz:]

Just staying on Suite for a second. That 90% of new customer bookings is obviously greater than 60% of total bookings. What is -- is there a common trend that you're seeing for the customers that aren't adopting Suite right now, that are maybe hesitant? And is there a path to get them on the Suite eventually?

[Mikkel Svane:]

I would say it's all natural behavior that we have customers that are -- that know and are very specific about what they want and don't have Suite in their plans right now. And we also, of course, working with a lot of the customers about the proper timing of moving to the Suite because there's a little bit of a slight bit of change management in the organization. But there's no other kind of -- there's no other big issues that are preventing customers from moving to Suite.

[Maxwell Osnowitz:]

Got it. And then just thinking about kind of the impact of COVID, I know some investors are thinking that there's been a demand pull forward across different industries. Have you noticed anything like that in the customer service and support industry? And can you maybe talk about how customer conversations have shifted over the last 4 to 6 months?

[Mikkel Svane:]

I wouldn't describe us as a company that saw a big like pull in during the pandemic. We had -- as we kind of was very transparent about, we had a lot of customers in the sharing economy, in the transportation industry, in the entertainment industry and travel and so on, that was highly impacted by COVID. And what we did during that transition was to focus on our customers and kind of helping them as much as we can for the long-term relationship. We also got calls from a lot of customers that saw a tremendous amount of demand. Certainly, for 1 day to the other, certainly serving all of the U.S. NTR solutions. And so like some of our customers within like couple of quarters suddenly had a 50 million more customers to serve. So it's like we saw some -- we definitely saw a lot with our customers. But I do believe -- we think much more about kind of the long-term implications through demand in the market. And that goes both for kind of like digital engagement going forward, but especially around kind of part the enterprise of buying IT going forward, which is much more focused on agility, fast time to results and keeping up with customer expectations. And that's -- we believe these are not like short-term COVID blips. These are 2 long-term megatrends.

[Jason Tsai:]

Thanks, Max. The next question comes from Strecker Backe from Wolfe.

[Strecker Backe:]

So Shelagh, you noted in your prepared remarks that your net expansion rate has been primarily driven by seats. So can you give us any color into -- or insights or figures around how much room you still have left? And what kind of opportunity that represents? And then beyond just seats, what levers are you moving with right now that will help drive this metric higher in 2022?

[Shelagh Glaser:]

So I would quote Norm. Norm would say we're not sold out in any customer. So I think as we continue to do kind of our land-and-expand motion with customers, I don't think we're tapped out at any specific customer that we have. And certainly, as they add agents, they're going to want to get those agents onboarded to the tools. So as Mikkel said, there were some impacted kind of organizations that are kind of coming back with a bit of the waning COVID. So that's an opportunity for us as they bring agents back in. And then certainly, moving customers to Suite is always an opportunity, not all customers are on Suite. So that movement to Suite, we've talked about it in prior quarters, and we saw that this time -- this quarter, too, that that's on average, about 20% increase as people move to the Suite product, so we can kind of get some pricing improvement with that. And then there's obviously different tiers of Suite. So we still do think long term that the range is 110% to 120%, but we're not in any way capping that opportunity.

[Jason Tsai:]

And the next question comes from Kirk Materne over at Evercore.

[Stewart Materne:]

Okay. There we go. Shelagh, can you talk just a little bit about the investments for next year? I know you went over this a little bit at the Analyst Day. But given the high net retention rate right now, it seems like you get a little bit more operating leverage just off the growth you're seeing? And can you just talk maybe a little bit more specifically like where you're making investments? And sort of how you're thinking about the payback on some of those?

[Shelagh Glaser:]

Certainly. So I think one of the biggest things we're investing is that Enterprise motion that Norm talked a lot about at the Investor Day. We think the opportunity there is tremendous. And if you look at the kind of the progress we've already made, we think we can accelerate that progress. So we're making the investments. And as Norm talked about in Investor Day, it's not just the feet on the street, it's all the supporting cast to make sure that there's -- you win an enterprise deal every day. So you need to make sure that you're fully supporting that customer once they onboard our capability. So we're making investments in that. That's a big investment area. And again, we think the time is ripe for us making the investment. That acceleration we're already seeing, we really want to capitalize on that. We're obviously investing and continuing to improve our products for the Enterprise because they have a lot of specifics that they need. So we're putting investments in place that will adhere to sort of the standards that enterprises want to have. We're making large investments in our reliability. That's across the board for every customer, but obviously, even more important for enterprises as we're helping serve our consequential workflow for them. And then we're obviously doing investment, I mentioned even putting some investment into compensation because as some of the earlier questions, it's a competitive market. We want to make sure that we're properly investing in our talent.

[Stewart Materne:]

That's helpful. And then maybe just one quick one for you. Obviously, a lot of discussion on your end about shareholder value and things like that. Regardless of what happens in a few weeks on the vote, have you and the Board talked about buybacks and leveraging your balance sheet and things like that in a little bit different way? I realize you have a lot of balls in the air right now. So maybe that's at the bottom of the list of discussion points. But it is -- you are generating cash. There's other things you could potentially do on that front. So I was just curious if that's come up or if you want to punt that question, I'll give you that option, too.

[Mikkel Svane:]

Totally want to punt that. We are very, very focused on the upcoming transaction here and getting the vote. And this is -- that's definitely how we believe we can create the most shareholder value, building a $5 billion run rate company by '25, improve margins, higher growth rate. We think that's going to be great for everyone.

[Jason Tsai:]

Thanks, Kirk. The next question comes from Ken Wong over at Guggenheim.

[Ken Wong:]

Shelagh, you mentioned bringing agents back as a source of growth. And it does seem like a lot of these customers are still aiming to ramp back up. How much of that rebound is possibly being held back by either their own business dynamics? Or is it more labor bottlenecks, shortages? How should we think about kind of what gets -- what helps move service reps kind of back into your customers?

[Shelagh Glaser:]

Well, I think both of those things are at play. I don't know that I know the balancing act between them. But certainly, we know that everybody who was impacted in COVID hasn't been able to fully come back. We see that in our daily lives, that some things are still not all the way back. So certainly, that ability to come back and bring people back is part of it. But to your point, the labor market is pretty tight. So there's lots of competition for talent. So I would say it's probably a combination of that. I don't know where -- which side of the balance any one particular company is on.

[Ken Wong:]

Got it. And then maybe just touching on customer logos. I know you guys have already messaged that, that should kind of continue to go down. Can you remind us when we should see that dynamic stabilize and then possibly improve?

[Shelagh Glaser:]

Yes. So I think I mentioned also in my prepared remarks that the new customers we're adding are 10x more ARR than some of those low-end kind of discontinued marketed plans. So we expect that's going to continue through this year. Our expectation was that we may get through that in 2022. But obviously, that's something we'll monitor every quarter. And so as we've said before, this is really a strategy to make sure that we were focusing on those high impact, high return customers.

[Jason Tsai:]

Thanks, Ken. Next question comes from Ryan MacWilliams over at Barclays.

[Ryan MacWilliams:]

Mikkel, in the prepared remarks, you mentioned conversations with investors over the last few months on the pending Momentive deal. So what's feedback been like so far? What's some main points or some positives that people focus on?

[Mikkel Svane:]

I just want to repeat what I said in my prepared remarks here that we -- like a lot of these -- like it's -- we really appreciate our investors digging in and engaging in these conversations. And like that's going to continue over the next couple of weeks. We realized that we surprised some of our investors with this acquisition. So giving them time to dig in and understand it better and really engaging with us in these conversations, it's been very rewarding, and we believe it's very productive, and we believe that's going to continue over the next couple of weeks.

[Ryan MacWilliams:]

Perfect. I'm hearing about Zendesk opportunity and the customer intelligence strategy over last few presentations. But just one more on the deal. I know you're fully committed to getting this acquisition passed over the next 2 weeks. But in the event it doesn't go through, have you thought about potential next steps and what comes next at Zendesk?

[Mikkel Svane:]

We have a strong operating plan for '22 and we're going to continue to execute on that. That's for certain. And if for one reason or the other, the deal doesn't go through, we're going to continue to execute on our vision about building customer intelligence, but the path is going to be different. And we'll have to kind of revisit some of our strategies there. But like we're very, very committed to our vision. We believe we can build strong, strong shareholder value with that, and we believe that Momentive acquisition fits very, very neatly into that.

[Jason Tsai:]

Thanks, Ryan. Next question comes from Michael Funk over at Bank of America.

[Michael Funk:]

Yes. Can you hear me now?

[Jason Tsai:]

Yes.

[Michael Funk:]

Yes, apologies, my camera is not functioning, so I apologize for that. Just on your earlier comments about the unsolicited offer. I understand you're not going to comment on the offer specifically, but you did say that you view -- your ability to generate excess value, in addition to where the offer came in. So maybe you can just come back and quantify for us the benefits of the Momentive transaction and some of the metrics that may actually benefit from that deal?

[Mikkel Svane:]

And I want to keep it high level here. We have produced a lot of material that kind of -- that lays out our path over the next couple of years towards building a company with a -- almost $5 billion run rate by '25, with a higher growth rate than we as an independent company and with better margins, too. So we believe that there's a tremendous amount of shareholder value, shareholder value creation from building that, and we believe it's going to be responded to very, very well by our customers and can become a new category and us, Zendesk, as a category leader there. So we are very -- we believe that we have laid out that in our various presentations that are available for us, and we're very focused on that.

[Michael Funk:]

Sure. No, I appreciate it. Are there near-term metrics we can look to and then say, 12 months after the close, for example, the cross-sell opportunity, which you've highlighted in your presentation, in your prior remarks, obviously, the combination of the products, the metrics we can look to post close, that should improve and prove that point you made earlier about excess value creation.

[Mikkel Svane:]

And like we have committed to our shareholders in our conversations that we will be very, very transparent about the synergies that we are creating and help them understand quarter-by-quarter, our improvements on those metrics. And we're very appreciative of our shareholders' interest in monitoring that and working with us on that journey.

[Michael Funk:]

I apologize again for the camera.

[Mikkel Svane:]

No worries. Thank you so much.

[Jason Tsai:]

And the next question comes from Derrick Wood over at Cowen.

[James Wood:]

Great. First question on the -- we've talked a lot about the enterprise business. I wanted to ask about the Velocity business and just kind of how that growth curve has been tracking? Small business certainly got hit harder during COVID that had a nice bounce back, and now we've kind of moved more into a normalized environment. So how would you characterize the trend line on Velocity and maybe how that growth compares to the enterprise?

[Mikkel Svane:]

Do you want to start out here, Shelagh?

[Shelagh Glaser:]

Yes. So we saw exactly what you just said, Derrick, that sort of journey that you laid out. Obviously, as we're coming into more normal times, we still see good growth there, and we think it's back to somewhat more normal growth trends than maybe that more kind of other side of that COVID decline. We see kind of a normal growth plan happening there.

[Mikkel Svane:]

We are very excited about our continued relevance and like winning strategy in both the SMB, mid-market and enterprise markets. And we're very excited that we can continue to execute on all 3 markets at the same time. It gives a lot of stability and strength to our business. And that is the strategy that we've been pursuing over the last 6, 7, 8 years, that we can move up into the enterprise without sacrificing our growth in the other segments.

[James Wood:]

Got it. And maybe just kind of double-clicking on the enterprise go-to-market side, and it sounds like you'll continue to focus on the Suite sales. Any other changes to be aware of that you're thinking about going into 2022, maybe thinking about how to bring Sunshine more into the fold or any other new playbooks to highlight?

[Mikkel Svane:]

I would reemphasize here that the biggest trend we are seeing is enterprises being attracted more to easier yet powerful solutions that they can roll out really, really quickly, that they can scale with really, really quickly, that are very, very agile, that doesn't take years to change, that is very responsive to their needs and to their customer needs, that provide this transparency and empowerment of everybody involved, and where they -- so it's almost at a point where they don't have to think about it as an IT solution, but truly live up to kind of the promise of SaaS. And we're very excited about it. I think this is one of the megatrends coming out of the coming out of the pandemic, and that's a major driver of our business right now.

[Shelagh Glaser:]

Yes. And the only other -- I'm sorry, I got a frog in my throat, just when I was talking. Pardon me. The only other thing I would mention is one other thing that we're putting further investment in 2022 is our partner. Building out our partner relationships, that's been a growth area for us, and we think there's more opportunity. So in addition to everything Mikkel said, I'd just add, kind of further building out that partner relationship.

[Jason Tsai:]

Thanks, Derrick. Our next question comes from Jeff Van Rhee over at Craig Hallum.

[Jeff Van Rhee:]

So a couple of questions for me. I'd like to maybe zoom way out. I remember late '18, early '19, you had given a target model that discussed -- hey, look, for a 30% grow or sub, we'll give you 500 basis points of margin per year. And I think since then, the actual give's been about 1/4 of that. And then to your point, Shelagh, I think we're guiding roughly flattish minimal operating margin. Here's the question is, since that view back then as to what it would take to drive a 30% growth business versus now what it takes to drive 30%. Can you put your finger on exactly what's changed? You touched on the move to enterprise. Maybe that's a little more expensive? Just labor is certainly a little more expensive, particularly recently. But maybe just to zoom out on anything -- any perspective you can give there?

[Shelagh Glaser:]

Yes. So I think as we move forward, and I kind of laid out our stand-alone Zendesk model at Investor Day and then our long-term ambition is to get to the 20% operating margin. Investing in enterprise really requires a lot of upfront capability because, obviously, we need to build out our products such that enterprises feel comfortable in adopting it. We need to build out the sales motion and then all the supporting cast. And we see -- and it's always been the company's philosophy to balance growth and profit, making sure that we have an eye on both, and making sure that we're putting the right investment in that we're growing the top so that we then have the scale to grow the bottom line. So we kind of laid out, the long-term ambition is the 20%. And as we drove into this year, what we were really struck by was the progress we made in '21 in enterprise, which was I think, quite remarkable. And we felt like the opportunity is really there. As Mikkel pointed out, for the customers that we've won, what they really appreciate about us is the time to value, rapid ability for them to bring their agents on and TCO. And we think that's a big opportunity. So we want to make sure to take full advantage of that opportunity.

[Jeff Van Rhee:]

Okay. On the Suite, one question on Suite. So if you look at -- obviously, great adoption. What have you learned about the adoption of incremental? Obviously you get more since you get all kinds of things, but what have you seen? Can you quantify the adoption of incremental features and the pace at which people do that on Suite versus previously?

[Mikkel Svane:]

Yes, yes. Definitely. And all the signs that we're looking at and all the things that you're asking about here are things that we've also said like it all looks positive. We do want to have like a full year and like preferably a little bit more before we say these things with the highest degree of confidence. But both like the adoption of capabilities, the expansion within an organization and the adoption of more agents on the solution, like all these things points to positive as we can see in the data right now.

[Jeff Van Rhee:]

Yes. Last one, and I'll let somebody else jump here or get to the order. Shelagh, on the seasonality, I remember the messaging last quarter around RPOs. Was that because of the move to enterprise, you're seeing particularly back-end loaded Q4 centric business. If I look at the sequential growth of RPOs Q3 to Q4, it's kind of in line, maybe a little less than what you've seen historically. So I guess there's 2 questions embedded in there. Was the seasonality what you expected? Or asked differently, were the bookings what you expected in the quarter? Or did you hit your bookings number in the quarter?

[Shelagh Glaser:]

Yes, we were largely in line with our expectations. It is a big quarter, as you mentioned. It's a big renewal quarter for us. So yes, we didn't see any significant change from what our expectation was.

[Jason Tsai:]

Thanks, Jeff. Next question comes from Pat Walravens from JMP.

[Patrick Walravens:]

Congratulations on the quarter. So Mikkel, there's -- with sort of multiple balls in the air here for you, Momentive, these third parties who are approaching you, the core business, I'm just curious, I think shareholders might client helpful too. What are your -- as CEO, what are your top 1 or 2 priorities right now? What do you think are the most important things for you to be focusing on and getting done?

[Mikkel Svane:]

So we had 2 published yesterday. And a bunch of kids losing their minds. So that's a big priority in the house now.

[Patrick Walravens:]

Yes, that's huge.

[Mikkel Svane:]

No. I think like our investors want to see us execute. And like I'm very happy about having built a team that can just ensure that we can continue to execute a strong operational discipline, strong execution discipline. That is the foundation of whatever we want to do. So that's -- I think that's one thing. And then, of course, we need to get to the vote and get the acquisition done with. And I think that's the key top things for everybody to think about right now.

[Patrick Walravens:]

Okay. Great. And then if I can add just a follow-up, it's only somewhat related. You're closing these really big deals in big companies that supposedly are standardized on like Salesforce's software. And I'm just curious, how does that work? How do you get in and do such big deals in companies that are supposedly standardized on another kind of customer engagement solution?

[Mikkel Svane:]

Pat, I think this standardized on a specific vendor is like that's a term from the '90s like, I don't -- nobody does that anymore. Like nobody -- nobody wants to put on those handcuffs voluntarily. So like, no, I think that like -- and that's the promise of SaaS software. And actually, the early promises of SaaS software, we see that some of that realization right now. And we are good at playing with others. We've always been very good at playing with the others. And like, I think businesses today are much more focused on what they can get out of the solutions that all are kind of that like -- usually kind of focus on the technical integration and whatever back-end choice they had. Because us, the public cloud and so on, has taken care of a lot of those things. So they're not really top of mind for businesses anymore.

[Jason Tsai:]

Great. And our last question comes from Taylor McGinnis over at UBS.

[Taylor McGinnis:]

I just want to focus on Suites. So the sequential growth and uptake that you guys have experienced has been really solid. But I guess with Suite ARR now at over 500 million, that means the non-Suite part of the business, of course, has been declining year-over-year. So can you maybe just provide color on where we stand in terms of migrating the existing installed base to Suite and the runway there just in the context of when we start to lap that, how we should think about that next year? And then maybe like a second part to that question, you've talked a lot about the new logo adoption and not being strong with Suite. So maybe you can talk about the opportunity still there.

[Shelagh Glaser:]

Sure. So we still feel like we're early days in Suite. We've got a lot of runway, and we expect continued growth on Suite in 2022. I know we've said that we think there's a certain set of our customers who might not adopt Suite. I think, as Mikkel said, we're not even 1 year anniversaried on Suite. So I don't know if we feel as declarative about that. We think a lot of customers are finding Suite -- Suite fits their needs, right, and solves a lot of problems for them. So we're very open for every customer adopting Suite over time. But 2022 is still another really strong year of growth in Suite, and we think 2023 is. And to your point, over time, as Suite grows, obviously, it becomes our largest line of business, if you will, which I think we're very happy to have happen because we think that gives customers solutions that bring them great value. And we always want to be providing a lot of value to our customers.

[Taylor McGinnis:]

Got it. And then my second question is just when looking at the guide for 2022 for the full year at 27, so it's only a modest decel. So when thinking about Suite and some of these other variables that contribute to that growth, any color that you can provide on some of the assumptions embedded there? And I know you talked about earlier, hey, you have to lap Suite, right, in order to see some of like the impact or what that could look like. So is there any risk to the guide from that perspective?

[Shelagh Glaser:]

So I mean, we feel really comfortable with the guide that we're providing. And obviously, execution is very important to us always. So we feel like we've got good strong line of sight for the guide. To your question on Suite, Suite is certainly -- continued Suite adoption is certainly one of the key assumptions in the guide and then also this continued move in enterprise, along with our traditional strength in SMB and the mid-market. There isn't any 1 business that doesn't have opportunity to continue to grow in the guide that we have. And yes, we feel good, strong line of sight. And like I said, I think it's the first question that I get asked. Our expectation is we get to be with you every 90 days. And then we use the performance for the last 90 days to help build the confidence going forward, similar to what we did in 2021.

[Taylor McGinnis:]

Awesome. Congrats in the quarter.

[Shelagh Glaser:]

Thank you, Taylor.

[Jason Tsai:]

Great. Thank you, everybody. I'll turn the call back over to Mikkel.

[Mikkel Svane:]

I don't have so much more to say. Again, like we appreciate everybody leaning in and engaging with us on both like a quarter here, but also the strong metrics going forward and, of course, the upcoming transaction here, the acquisition of Momentive, that we look very much forward to complete. So thanks, everybody, for joining us today. Very proud about our quarter. Congratulations, teams, in this. This was a fantastic Q4 and a tough Q4 in many parts of the world where we were all affected by Omicron and had families and friends and children sick, and so thanks so much, team. You did a great job. Thank you.

[Shelagh Glaser:]

Thanks, everybody.

[Jason Tsai:]

Thank you.

[Shelagh Glaser:]

Bye.