Zendesk, Inc.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Marc Cabi:]

All right, I think we are ready to go here as participants are joining into the panel here. Good afternoon, everybody. Welcome to our First Quarter 2021 Earnings Call. We're pleased to report our results today. Joining me on the call are Mikkel Svane, Founder, CEO, and Chair of the Board and Elena Gomez, 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 annual report on Form 10k for the year ended December 31 of 2020. Our upcoming quarterly report on Form 10Q for this quarter ended March 31, 2021.

[Mikkel Svane:]

With that exciting intro, thanks, Marc. I know you enjoy saying this as much as everybody enjoys listening to this. So, thank you again and welcome, everyone. Good afternoon. We are off to a very good start here to the year with 26% year-over-year revenue growth. It's up 3 points from last quarter. The strong underlying performance driving this revenue growth was driven by the broad-based strength across regions, as companies of all sizes are increasingly interested in evaluating and deploying our solutions. Solutions that are agile, easy, provide fast time to value and quick in this very quickly evolving online first world. Early here in Q1, we introduced the new Zendesk Suite messaging centric and radically simplified new type of complete customer service solution. With only 2 months since launch, the new Zendesk Suite already has attracted more than 3000 customers and now accounts for about 7% of our total recurring revenue. The robust adoption of the suite also contributed to the strong year-over-year growth in our average deal size. This quarter, we made a number of strategic appointments to our management team and to our board of directors as we set ourselves up for the next phase of growth. I'm excited, of course, today to share and very pleased to announce that Shelagh Glaser will join Zendesk as our new CFO on May 28th. Shelagh Glaser comes to us from Intel, where she has a hold by variety of leadership positions. Most recently, she was the CFO and COO of the data platform group. We're also very excited to have Alex Constantinople join our leadership team. As previously announced, he's joining us as our chief marketing officer and we have been big fans of Alex for a very long time. I want to use this occasion and this opportunity to welcome Brandon Gale and Steve Johnson to our Board. We are very, very lucky to have you. Before closing here, I want to take a moment to express my thanks and appreciation to Elena, who's now leaving us.

[Elena Gomez:]

All right, thank you. You didn't tell me you're going off script, so I got to get the emotion out of this script here. But anyway, we did enter 2021 with continued momentum. During Q1 our gross bookings growth accelerated for the 3rd quarter in a row and our turning contraction rate reverted back to pre-pandemic levels. We maintain great momentum with new customers and on the expansion side, our dollar-based net expansion rate was 114. Up 2 percentage points sequentially. First quarter revenue increased, as Mikkel said 26% year-over-year, accelerating from 23% in the quarter prior. Revenue performance was driven by broad-based strength across regions and all sizes of customers. GAAP gross margin for the fourth quarter was 79.6%, up 4.7 percentage points year-over-year. Non-GAAP gross margin was 81.8%, up 3.5 points year-over-year. Gross margin improvement was driven largely by revenue scale and increased optimization of our personnel costs in our product support organization and efficiency from our hosting infrastructure. GAAP operating margin expanded by 4.9 percentage points year-over-year. Non-GAAP operating margin expanded by 4.1 percentage points, driven largely by revenue outperformance and gross margin expansion. Free cash flow was $26 million in the fourth quarter. Now, moving on to guidance. Given our strong Q1 2021 results and continued momentum in our business, we are raising our 2021 revenue guidance to $1.298 to $1.318 billion, which represents approximately 27% growth year-over-year at the midpoint. While our 2021 strategy is defined by growth, we will continue to scale our business. We expect non-GAAP operating income in the range of $96 to $101 million. We expect free cash flow for the full year 2021 in the range of $105 to $115 million, which includes expected accelerated rent payments of approximately $7 million related to our real estate changes in San Francisco.

[Marc Cabi:]

Thanks, Elena and it's been great working with you and partnering with you over the years. We have accomplished a lot together. Before we open it up for questions, I do want to cover a few additional points around both our operating metrics and gross margin. As you know, we've been on a journey evolving our product offerings to be more solution oriented rather than product based. Going forward, we're leading with our new Zendesk Suite. To that end, we're replacing our paid customer count metric with a customer logo count. In addition with the elimination of our chat-only offering, you can and should expect our logo net ads over the near term will be suppressed as we let some of the entry level chat-only customers depart Zendesk over time. We're also evolving our enterprise proxy metric. We do believe $250,000 annual recurring revenue mix metric is a more representative way to reflect our progress and moving up market. The percentage just support ARR generated from customers with 100 or more support agents was approximately 45% at the end of the first quarter 2021. But again, we'll be sunsetting this metric and will only report on the new metric going forward beginning in the 2nd quarter of 2021. Lastly, just a little more detail on gross margin. We continue to realize efficiencies and our cost of goods sold as we scale, including our data infrastructure costs. Additionally, in our customer success organization over the past year, we've been evolving that to closely support our go-to market motions that include account retention and renewal as well as identifying future expansion opportunities. As a result, our GAAP and non-GAAP gross margin has benefited from this evolution, excluding the impact from this change in Q1 21, our GAAP and non-GAAP gross margins would have been 77.8% and 80.3%, respectively.

[A - Marc Cabi:]

With that, we will begin to open up for questions. As you know, we take these questions and put you through randomizer. So, the first question today comes from Parker Lane of Stifel. Let me find you, Parker, on here, so I can unmute you or you can unmute yourself.

[Parker Lane:]

Can you hear me?

[Marc Cabi:]

Yes.

[Parker Lane:]

Great. Thank you all. Mikkel, very great traction with the new Zendesk Suite in 2 months, I think 3000 customers and what you announced. You didn't talk about how that's resonating within the entire base? I mean, 3000 customers is very solid. I assume, a lot of those are more power users or customers that have been very engaged with you for a long time. But as we think about the conversion rate of customers over the next 2 or 3 years, what are you hearing out there in the field right now and how is that new product resonating with customers?

[Mikkel Svane:]

We have never launched such successful products or bundling or suite or anything like this before. The reaction has really been beyond our expectation and slightly overwhelming. So, we're very excited about all the customers using this. I think there's 2 trends here. First and foremost, we're really invested in the simplification of really making these things elegant, quick to use, easy to use, very easy to set up, very easy to get going and then we made messaging like an integral key natural element of the whole flow in which you can communicate with your customers. These are 2 key trends we see amongst both new and current customers. We are very bullish about the continued adoption of this suite. We believe that that will be kind of the default motion for all of our customers.

[Parker Lane:]

Yes, and that's very helpful. I think I saw in the announcement you had, there was 50% growth of customers. There are about 500,000, is that primarily customers that have expanded with you or are you seeing much more traction landing those enterprise type logos now with the suite offering that you have in place?

[Mikkel Svane:]

It's both. Our key business motion is very much a land and expand motion. So that is driving the majority of our growth as we move deeper into the enterprise. But it's, of course, also affected by new customer winds that are larger than they traditionally were.

[Parker Lane:]

Alright, thank you. Best of luck in your next move, Elena.

[Elena Gomez:]

Thanks.

[Marc Cabi:]

Thanks, Parker. Up next is Jen Lowe .

[Unidentified Analyst:]

Can you hear and see me?

[Marc Cabi:]

Yes, we can.

[Unidentified Analyst:]

Maybe just to follow up on that last question, around the new disclosures on the greater than $250,000 and greater than $500,000 and the growth rate you're seeing there. Certainly, I think, the growth is really impressive and it's great to get that. It's very helpful context. But if I just look at this period specifically, on one hand, your anniversary, the start of the pandemic, and movements to shelter in place and on the other hand, you have suite as a contributor on the large boosting ASP. So, I'm just curious, if we look at those growth rates, the 40% and the 50%, is that a representative number that we should think about as being the normal growth there or is it possible that there were some comps that might have made that a little higher than normal that we should be aware of and we need to examine it going forward?

[Marc Cabi:]

Jen, I'll touch on the comps a little bit. If you recall, last year, really the pandemic began to play a role much more in Q2 than in Q1. So, the comps get easier as you get into A2 actually than Q1. But that said, Q1 obviously was impacted at the very end by the pandemic as well. But in general, we feel very good about our track record and that's why we made sure to provide a multiple year track record of how our 250k ARR accounts have grown as a percentage of our total and there is definitely consistent performance there over that period. Q3 and Q4 can sometimes be more seasonally oriented for those type of accounts, but definitely is strong underlying traction there and is more representative of our large customer activities we're doing.

[Unidentified Analyst:]

Then one more for me, just again on the disclosure on the 3000 customers have already moved to suite and in particular, ones that are existing customers, they've made the move to suite. What sort of is the uplift? Is there any kind of rule of thumb on what the uplift looks like for an existing customer making that transition? It seems like it's out of the gate been pretty successful, 7% of ARR already? Is it going to go a lot higher than that? How should we think about that as being a tailwind to ARR growth over the next year?

[Marc Cabi:]

We have said in the past that you can get anywhere from 10% to 30% ARR uplift from customers. They're going to Sweden this quarter. We observe it about a 20% uplift. It'll vary from quarter to quarter and mix of customers coming in, but there's definitely a nice uplift available to us.

[Unidentified Analyst:]

Okay. Thank you.

[Marc Cabi:]

Sure. Next up is Drew Foster.

[Drew Foster:]

Hey, thanks for taking the questions. Nice quarter and also offer my best of luck to you, Elena, on your next chapter.

[Elena Gomez:]

Thank you.

[Drew Foster:]

First question for Marc or Elena. Since you've traditionally had a fairly significant portion of your billings that are less than a year, I wanted to explore the extent that duration is playing a role both in Q1 or embedded in your full-year guided growth rates. Generally, I think, we understand you're starting to see larger customers and existing customers commit to long longer deals with you, which is definitely great from a visibility perspective, but longer duration doesn't always mean ARR uplift and that dynamic could throw a head thicker or potentially inflate growth rates to the extent duration starts to elongate, especially as we're getting into easier compares throughout the year. Can you just put some color around that to the extent that the tailwind for you this year?

[Elena Gomez:]

Well, definitely over time, as we're moving up market, we're seeing longer term contracts. But remember that continued 50% of our business still comes from monthly customers and so you have to think of a mix of our customers. But, certainly, as least as long as the last couple of years we've been tracking this, we can see that our contract term length is moving up slowly. It's not going to be a steep move, but steadily as we're moving up market, you're starting to see longer term contracts. The sales team is very focused on longer term commitments, which as you know, has a positive impact as well to our long-term trend and contraction rates.

[Drew Foster:]

Okay. And then, follow-up for Mikkel or I guess a tossup question. As it relates to what you're seeing with messaging, can you give us a sense for either in the back half of 2020 or early here and 2021, how often messaging and sort of a key pillar of the customers reimagined contact center, customer engagement efforts, and what's the view on how the traditional customer service ticket routing scenario fits into the model? In addressing that, could you maybe offer what you're seeing in terms of messaging volumes, what's the what's the trend line look like since the start of the pandemic? Is it hockey stick and you're sustaining those levels? Just give us a sense of that piece?

[Mikkel Svane:]

Yes, we haven't shared any specific stats on that, other than saying that is definitely one of the fastest growing channels for us. All these different both social and private messaging channels and there's no doubt that that's the behavior that is kind of the SP Block ; reengineering, rethinking kind of that customer. So, it was a very much adapt into this new world that we're living in. There's no doubt that messaging is front and center and of course, it also challenges how we think about our products. It's like routing and escalations and so on around. Message based interactions are very different from like an email-based interaction. That's, of course, something we're working with all our customers. A lot of our customers also have to deal with that that's a different way of engaging with customers. It looks a little different. You have to think about staffing differently and measuring differently and all these different things, but we're going through that journey with all our customers and it's very exciting. I don't have more specific data on that to share today. That's something we can look forward to doing at some later point in time where we feel more confident about sharing these things, but there's no doubt that this is where we see the world is going and our customers agree to that. Yes, that was a great answer.

[Marc Cabi:]

Next question from Kirk Materne.

[Kirk Materne:]

Great. Thanks very much. I'll echo, Elena, congrats on a really great run at Zendesk and best of luck. Mikkel, maybe for you, as you all have now launched suite, are you able to have conversations maybe at the out start with customers and perhaps a higher level in the organization, are you starting to see who you're interacting with, maybe moving up to a more strategic level and maybe up to the CEO level as customer service takes on a higher imperative in this new dynamic, we're all dealing with? I'm just curious, I think that was happening already. I was wondering if suite helps accelerate that sort of evolution?

[Mikkel Svane:]

I think the pandemic has made your customer experience much more front and center for a lot of businesses, because it changes all your traditional metrics, it changes all your traditional way of thinking about the customer relationship. So, there's no doubt that that's a backdrop for the change we're seeing and how people have to think about customer interactions and have to think about these new channels, embracing new channels, and building customer relationships in a different way. I can't sit here and say like, yes, all this messaging is bringing us into the CEO, but we're definitely living in a world where the customer experience, the customer engagement overall these new online channels are much more front and center for our customers.

[Kirk Materne:]

Okay. Then Marc or Elena, if you look at any of the enterprise metrics, whether it's CRP or the average ARR above 250,000k, it's all trending in the right direction. Obviously, you're going deeper with your customers, you're getting broader with your customers. I was also just curious, are you getting into bigger customers? Meaning, are you landing at a larger customer level more often? You guys have had a lot of success in the mid-market and kind of grown with your customers. I was just kind of curious if you're actually seeing more enterprise or what we considered a Fortune 500 or Fortune 2000, Global 2000, however you want to sort of define it. Are you starting to get into those at a little bit more, I guess, normal cadence?

[Elena Gomez:]

I mean, I would say that we continue to evolve and we're doing both, as Mikkel said earlier, essentially, as you know, our roots are land and expand. So that continues to be a critical motion for us. But certainly, we're starting to, like you said, have conversations at the C-level as well as continue to occasionally land those larger deals, which I think you can see in the metrics in the shareholder letter, how that's playing out over time. So that's good momentum we're seeing. But again, we continue to focus on land and expand, but both are true.

[Kirk Materne:]

Okay. Thank you, all.

[Marc Cabi:]

Thanks. Next up is Brad Sills.

[Brad Sills:]

Oh, great. Hey, guys. Thanks so much. Congrats on a nice quarter. I wanted to ask about net revenue retention. Obviously, you saw a nice move up this quarter, still not at that 115 or high teens level that you had seen kind of pre previous to the pandemic. I guess my question is two things. One, what drove the uptick this quarter incrementally? Where were you seeing more expansion activity? Is it just simply the suite or more seats or customers coming back and could we see that metric get back to that kind of high teens level? I know the goal is 110 to 120. So that would be towards the high end, but what would it take to get back to that level?

[Marc Cabi:]

We have confidence in that number continuing to move upward over the year. I think there are a couple things going on. First, a broader product mix, that kind of is focused on the suite. Again, we get an uplift from our existing customers. But think about like some of the industry categories that were hard hit, they're just now beginning to return to normalcy and we would hope to see more normal expansion of just natural growth from those set of customers as car ride share and some of that hospitality and transportation industries come back. What I would say is that through that whole period, if you look at our contraction rates have already come down to pre-COVID levels. So now, we would expect the next step to be the expansion rates to come back to those pre-COVID levels, which we hope will happen over the next 2 to 3 quarters.

[Brad Sills:]

Great. That's great to hear. Thanks, Marc. Then one for you. Mikkel, please if I may. On Sunshine, I know heading into last year, there was a big push with Sunshine, a lot of new features that were released, an exciting offering and then with a pandemic, customers pulled back I think from some of the plans to deploy support in a more strategic way, more custom way. What are you hearing from customers on those types of projects? Are they coming back to these types of projects to think about deploying Sunshine and Zendesk in a in a more custom way and embedding into the fabric of front office applications?

[Mikkel Svane:]

Brad, I don't really have anything new to share on that. Our focus with the suite is also to make a lot of the sunshine components easily available for our customers without having to go into a new purchase conversation and also making some of these tools a little bit developer heavy and more easy and friendly to use for the majority of our customers. We're definitely seeing Sunshine in a lot more hands today. I think it's too early for us to say exactly talk about adoption, but it's becoming more part of the normal adoption of Zendesk. Happy to share more about the examples of usage and so on that we're seeing, maybe later in the year. Makes sense?

[Brad Sills:]

Absolutely. Thanks, Mikkel. And Elena, thanks so much. It's been great working with you.

[Marc Cabi:]

Thanks, Brad. Next up is Jonathan Kees.

[Jonathan Kees:]

Can you hear me?

[Marc Cabi:]

Yes. Hey, Jonathan.

[Jonathan Kees:]

Great. It looks like you can see me too. So, thanks for taking my questions. I'll start by saying I will miss you, Elena, and best of luck. With my questions, I guess I wanted to ask in terms of the pricing. Maybe this is much more for Mikkel. How much did pricing play in terms of this uptake of the 3000 customers? I mean, you're talked about it, you simplified it. I would actually hypothesize it's kind of you discounted, because you're still not charging by usage for messaging. You're still charging by seat. How big of a factor was pricing in terms of the uptake of new customers for suite?

[Mikkel Svane:]

First and foremost, Jonathan, you need to find your microphone. Something wrong, a lot of noise. Let me say if you think about the pricing as a discount, I am happy. I think we have achieved what we wanted to achieve. It's really about simplifying. Our pricing making it much easier to understand, much easier to buy our products and much more transparency around these things. These are key areas. We have sophisticated all our products and product directions over the years. These were one of the key aspects or one of the key demands in mind was to simplify these things. Obviously, it works. Like we see a growth in average deal size, not only from big implementations, but from the deals we can deal with the suite. So, we see an uptick with the new suite. We have achieved what we wanted here to make the perception of the product much easier, much simpler, much cheaper, if you will, but we are seeing all the improvements in average deal size that we had hoped to see.

[Jonathan Kees:]

Can ask just a quick follow-up. Hopefully, you can hear me clearly hear through the mic. In terms of the improvements you made, like the hosting efficiencies and the revenue scale for gross margins, can we say that is going to be considered now going forward or is it more of a onetime thing for Q1?

[Marc Cabi:]

I think we made some great strides around our gross margin over time. We had the benefit of moving to cloud infrastructure and we've finished the swing on that. There will be incremental improvements we'll always look for in cogs. But, yes, I would expect this they will be in the low 80% gross margin for the time being.

[Jonathan Kees:]

Super. All right, thank you.

[Marc Cabi:]

That's a non-GAAP gross margin.

[Jonathan Kees:]

Yes, got that.

[Marc Cabi:]

All right. Next up is .

[Unidentified Analyst:]

Hi, thank you for having me on. Elena, I look forward to working with you in the future and hope you get some well-deserved R&R in the meantime. Marc, congrats on the on the new role. With that out of the way, maybe just as we unpack the net expansion, can you help us understand maybe how much of that was from the customers that were negatively impacted in 2020 versus just the traditional expansion you would see out of the other 80% on a regular seasonal basis? Then I have one follow-up question.

[Marc Cabi:]

I think a lot of our expansion is really showing up from just good healthy business characteristics. Not all of our customers that got hit hard last year really returned fully. So, I think that we just have a very healthy expansion dynamic. People are bringing back employees, which means they're using more agents. We're getting a higher ASP from customers moving to the suite and really, those are the primary factors here that are helping our expansion rate, and gives us confidence that we'll continue to move our expansion rate to that mid to high level where we were prior to the pandemic.

[Unidentified Analyst:]

Understood. And then maybe a different way to ask it, the customers that actually did really well that may have been COVID beneficiaries. I bought a Peloton during all of this and I think there's Zendesk customer when I chatted with the service bot and so I'm curious how you're seeing trends with maybe what we're COVID beneficiaries and if you're starting to see that taper or we just continue to compound that growth as well maybe just help us understand if there's anything that's reverting to the mean inside of that database?

[Marc Cabi:]

I'll have Mikkel answer that, but I think we believe that a lot of the changes in the market are durable.

[Mikkel Svane:]

Yes. I think this pandemic has taught us all something. It's changed a lot our habits permanently and a lot of these habits will stick around. You mentioned Peloton, there's no doubt that this year has been a breakout year for Peloton, but the convenience, the kind of the pleasure they have brought to our lives and how we can do these things that's permanent and that will change people's mindset around these things. So these are the trends that we're talking about with our customers. What have changed on a more permanent scale or more permanent timeframe with the kind of the convenience etc., we can bring to our customers. Because these things will last. We will never go back to how things were before, like how we shopped, how we consumed, how we watched movies, how we get our stuff. All these things changed permanently. We will take what we have learned the best from the pandemic and that will play a big role in how we do things going forward. So, that's what we are seeing. That's what we are talking to our customers about and hope that helps.

[Unidentified Analyst:]

Yes, great. Thank you so much and appreciate you guys taking my questions and nice start to the year.

[Marc Cabi:]

Thank you. Arjun, you're up next.

[Arjun Bhatia:]

Hey, guys. Good to see everyone. The growth metrics that you disclosed on the $250 and $500k ARR customers. Very impressive. Is there any way that we can get a little bit more granular into that? Are you seeing broader steep deployments that's driving that? Is it customers that want advanced functionality? So they're coming in at those higher pricing tiers? Just how should we think about some of the growth that you're driving in those larger customers?

[Elena Gomez:]

Yes, I can start and Marc and marker Mikkel, you can add, but essentially, we're seeing what we've always seen, which is customers start out with us and they grow with us. That's continuing to be through seat expansion, through more product adoption. That hasn't really changed other than what Mikkel just talked about, which is some of the COVID impacts that are durable or continuing, obviously, to show up in our expansion rates. That would be just characteristically what we do is when we land a customer, we expand them. But as we talked about earlier, there's certain cases where we're seeing customers of larger sizes come to us. So, it's a little bit of both. Over time, as we now launch the suite, we've evolved our product that's resonating more with these larger customers.

[Arjun Bhatia:]

Okay, perfect. That's very helpful. Then I know we've talked about suite a lot. But I was just curious, what you're seeing in the sales suite, whether that's seeing the similar level of upmarket success with larger customers or if it's still relatively an SMB midmarket solution today?

[Marc Cabi:]

It's still very much like an SMB and midmarket solution. That is where our focus is for short term. Longer term, of course, more and more interesting things. I think, especially as we integrate the products deeper, there'll be some new opportunities for getting into some new type of deployments where we are today, but that's future.

[Arjun Bhatia:]

Understood. Thank you and congrats, Elena. Best of luck in the future.

[Marc Cabi:]

Thanks, Arjun. Next up is Brent .

[Unidentified Analyst:]

Thank you. Hopefully, the mics working here okay? I guess we'll start with Elena and finish with Mikkel. Elena, first off, it's just been a pleasure working with you over the last 5 years. Amazing journey you've had here scaling the business. I think what 5x in 5 years, it was under $200 million business when you joined and certainly well over a billion today. The good news is that we hope you get a break. The bad news is there's a lot of board opportunities that would love to have at your scaling expertise. I suspect you're going to be busy. My question for you is the high end of the guide here does suggest growth could accelerate back above 30% back to pre-COVID levels in Q2, what parts of the business are leading this recovery? Is it enterprise? Is it international? Is it higher close rates? Are you seeing the top of funnel build here? Just trying to assess the optimism and what's driving the optimism as we're going into Q2.

[Elena Gomez:]

Thanks for the question. It's broad based, Brent. I can't point to one thing and say this is the thing. In fact, that's what's actually very encouraging and given me the confidence when you think about as we started looking at the complexion of the quarter, we started looking at all the segments, they all performed really well. We started looking at all of our regions and so we're seeing what I would say very broad-based success across our business. But also the suite is also very encouraging. Just thinking about over 3000 logos already with 2 months of activity and already 7% of our recurring business. That just is so encouraging for us as well as the increase in average deal size. All of that is really what gave me the confidence and the guidance philosophy hasn't really changed. As we always talk about we look at the probabilities and every quarter has a little complexion between enterprise and SMB, but it's really broad based.

[Unidentified Analyst:]

So on that, for you, Mikkel, you talked about Zendesk Suite now becoming the default sales motion and you've had messaging as an addon but walk me through the appeal here. Is Zendesk Suite appealing to the largest customers. Is it appealing to all customers? What's so different about Zendesk Suite that you didn't have before, that you have today, that's resonating and at 7% of ARR today? Five years from now, is it 30% Could it be 50%? Just trying to understand why is it resonating now and different when you've had this addon messaging component stuff for a while?

[Mikkel Svane:]

Well, yes, I think as we see a few more quarters, we can talk a little bit more confidence about the trend here. We feel very good so far. I think a lot of what Zendesk is about is this concept of democratizing technology, democratizing the capabilities that are normally more complicated, more expensive, easier to kind of adopt and use and so on. I think that's one of the main driving North Stars for the suite. It's not just about putting these things together, it's really about one side making these things work elegantly together and making it as easy to set up a call center or messaging power customer service center on email based or switch between the three and don't have to think too much about it. You don't have to plan all these areas. It's relatively easy, the technology of the product is guiding you. That's one thing. I think on the other side is we probably have with all the capabilities and all the features and all those bad stuff we can do. We put too much friction into the sales process. So, it became a little overwhelming for a lot of customers. Like we simply put too much choice and confusion, up to put a little bit on the extreme here. These two things are really helping with the adoption of the suite. This where we put all our effort going forward.

[Unidentified Analyst:]

So you reduce friction in the product and friction in go-to market, pricing, packaging and those two things combined seem to be resonating. Very helpful. Thank you.

[Marc Cabi:]

Thanks, Brent. We're going go on to Patrick Walravens.

[Patrick Walravens:]

Oh, great. Thank you. So first off, Mikkel. I haven't been on my Peloton in about a month. But I am getting emails from one of the instructors, which is like missing you on a leaderboard, miss you doing this workout, xxxx Olivia, and I have a feeling you may be driving that. That's an awfully personalized email. You have a ton of leadership changes here. You have a new CFO, you have a new CMO, the old CMO is becoming your new COO, your president of products is now your CTO, and you now have a deputy CFO. Congratulations, Marc. When did you decide to make all these changes and what were you thinking?

[Mikkel Svane:]

It's not all driven by the same thing. First and foremost, Elena's announcement was, of course, not something we had planned and we did try to nail her to her computer, but no success there. We did some changes there, forced by Elena's departure. I think the rest of the changes we're doing is that we are complementing that the team has some great talent and we're shaking up a little bit possible organization where we believe that like some of our product peoples get closer to our customers and some of the culture we have kind of nourished in more some of our customer facing operations. At the same time, it's also very important that we have a CTO for enterprise engagement and we can play a much more offensive, aggressive play there and really lean in on a lot of the gray space there is between product capabilities and how customers want to use products today. It's all driven by our growth ambitions. It is all driven by our ambitions to have a stronger storyline in the market to be much better partner for the enterprises and of course, building a company for future growth.

[Patrick Walravens:]

Can I ask that the deputy CFO, that's the first one. What was the thinking behind that?

[Mikkel Svane:]

Well, I don't think it's a first. I think it has broadened a tremendous amount of stability to the transition we're doing here. A way of kind of making sure that in a transition that there's somebody to support both the outgoing CFO and the incoming CFO and can be a connecting tissue for both leadership team and the team in the finance organization. Then I believe that it will set us well up for the future to have more leadership, more people that can kind of think bigger for what we want to do with our teams.

[Patrick Walravens:]

Thank you for that perspective.

[Mikkel Svane:]

That was that was a lot of information.

[Marc Cabi:]

I got to keep moving. We got 6 more people. So, thanks for the great questions. Derrick, you're up next. Can I just ask you guys limit to one, because we're going to run out of time otherwise?

[Derrick Wood:]

Oh, shoot. Okay.

[Marc Cabi:]

I'll do better next time and keeping the meeting going.

[Derrick Wood:]

Elena, I just wanted to say, you'll be missed. It was great working with you and I hope to cross paths down the road. Maybe then Mikkel, I'll throw up to you. Zendesk relate was normally a demand generation event for you guys. I don't think you held a virtual event this year. We'd love to hear just kind of how you're invested in marketing and different areas of demand generation. I know Alex hasn't started yet. But you have a new CMO coming on board and what are you expecting out of her in terms of new initiatives?

[Mikkel Svane:]

I think everybody in tech sector and a lot of other people are thinking about, how should our future event strategy look like in light of different behaviors, and then also to ensure that we can all celebrate together but understanding that often, there's a lot of wasted calories. We didn't plan for relate this year, because that would be around now that we will do so, have an event. It's definitely not the time to have a big offline event. We have created, we have a sea of smaller events online. That has worked out really, really well for us. We have much better engagement. They're much more targeted, they're much more focused, and they're much more interactive. That has worked out really well for us. How we think about it for the future? Yes, definitely, we're going to have Alex involved in figuring that out.

[Derrick Wood:]

Thank you.

[Marc Cabi:]

Thanks, Derrick. Thanks for understanding. Dan Reagan is in for DJ.

[Unidentified Analyst:]

Hey, guys. Thanks for taking our question. I get the strategy of putting messaging at the core of the suite with the goal of driving utilization before focusing on monetization and then the pricing dynamics. Are there any stats that you can share around utilization that would show that you're seeing traction adoption? And then how does this compare to your initial expectations?

[Mikkel Svane:]

I don't think we have more stats to share. Like we shared some, we had a report out early this year. Our benchmarking report, where we could show that, for example, messaging was the fastest growing channel among our customers. So, I can refer to that, but we don't have anything on the new suite. It's still too early days to share data over that. Make sense?

[Unidentified Analyst:]

Got it. Thanks, again. Elena, our team wishes you the best.

[Elena Gomez:]

Thanks, Dan.

[Marc Cabi:]

Next up, .

[Unidentified Analyst:]

Hi, can you guys hear me okay? I can't seem to get the video going.

[Marc Cabi:]

Yes, we can hear you fine.

[Unidentified Analyst:]

There we go. I'm alive. I guess I just wanted to touch on the strong billings dynamic, also really good current RPO growth in the mid30s. To what extent should we lean on those particular metrics as a potential leading indicator of revenue growth maybe not this year, but maybe first half of next year, any thoughts there would be great?

[Elena Gomez:]

I'll start, I would just say RPO continues to be a great proxy for us. In fact, I would, encourage you to look at that because our billings as you now, many of our customers are monthly and that billings number can move in any given quarter. But RPO is a good proxy for us in particular, and just remember, it doesn't always capture all of our customers. You have to look at a couple of different data points, but we definitely encourage you guys to look at RPO especially as our proxy for enterprise.

[Unidentified Analyst:]

Great. Thanks a lot, Elena, and thanks for all the help.

[Marc Cabi:]

Next up, Alex .

[Unidentified Analyst:]

Hey, guys. Thanks for taking the question. So Elena or Mikkel. It's unusual to have such strong enterprise activity happening so early in the year you as you all know enterprise software is a Q4 business. What do you ascribe some of this success? Is it more bounce back? Is it better sales talent? Is that the demand environment? How would you kind of categorize it? Then how would you talk about your pipeline and what you're seeing now for the rest of the year underlying some of the confidence? Because if I look at the CRPO bookings, it looks like you actually accelerated in Q1 versus almost every quarter last year on your toughest comp.

[Elena Gomez:]

I'll start and Mikkel, you can definitely chime in. I think Marc said it earlier at the end of Q1 last year, just remember, COVID started to hit us towards the tail end of March last year. I just give kudos to my sales team, their resilience through the pandemic and exiting Q4 and into Q1, executing like a machine. We really invested in hiring reps early, that was part of our strategy has always been to hire early to make sure we have that quota on the street, January 1. So I think that that's part of it. The other part of it is we're seeing success across all of our regions, which is always generally helpful. We look at the regions as a portfolio, when they all perform well, that obviously helps with our results. But that's what I would call out is really that as well. You're starting to see a little bit more optimism. I don't know that we're completely out of the woods, but we're definitely starting to see more optimism with our customers.

[Marc Cabi:]

I'm just going to add, if you think about last year, when you hire early and you keep people in their seats there, they come more productive and they generate their own pipeline. So, we're seeing all of that execution, improving over time, which really is what gives us a lot of confidence.

[Unidentified Analyst:]

Perfect, thank you guys. Congratulations, Elena and looking forward to working with you again wherever you land.

[Elena Gomez:]

Thanks, Alex.

[Marc Cabi:]

All right. Thanks, Alex. Next up is Stan.

[Stan Zlotsky:]

Awesome. For everybody's sake, I'm going to stay off video. Elena, we will definitely miss you. It was awesome working with you all these years. Best of everything, and hopefully our paths will cross in the future. One quick question from my end. I wanted to come back to Sunshine CRM for a second. How are you guys thinking about the product into 2021? What are your expectations internally as far as the adoption and the contribution to the revenue growth for this year from sunshine CRM? Could you just remind us what's your latest thinking on pricing for Sunshine CRM specifically going into this year? Thank you.

[Mikkel Svane:]

Our plans for sunshine is primarily focused on getting into people's hands and having people start using it more naturally as part of extending and building capabilities alongside the suite. Making it really, really accessible. Making it very, very easy to use is kind of our key focus for this year. Once you grow out of the basic capabilities, there's an upsell opportunity, which is of course important for us. But I would say we will be for this year, much more focused on getting it into the hands with people and getting them to use it.

[Stan Zlotsky:]

Got it. Thank you.

[Marc Cabi:]

Thanks, Stan. Last question today comes from Chris Merwin .

[Unidentified Analyst:]

You guys hear me okay? Looks like I can't see the video.

[Marc Cabi:]

.

[Unidentified Analyst:]

There we go. Okay, thank you very much. In terms of my question, love to hear a bit more about the SMB business. Basically new enterprise disclosure, we can see the incredible growth you're seeing in the enterprise segment. It would imply a slower growth for the rest of the business. Can you just talk a bit about how much of a focus that area is for you? Should we just think about the enterprise mix continuing to go up and up and up and that SMB areas can be more covered by other vendors in the future? Just curious how you're thinking about that set customer segment strategically?

[Elena Gomez:]

I would just say, it's really important understand that that segment continues to be important to us. We, in fact, invest in making it super easy for those customers on board with us. Because a lot of those customers, as we talked about expand with us over time. So, there's not a scenario where we become an only enterprise company. We will always focus on continuing to grow our SMB business because we know a lot of those ultimately turn into enterprise. It doesn't mean we can't go out market, but we continue to make sure that that experience, that web try and buy experiences, is really efficient and that we can continue to onboard those customers.

[Marc Cabi:]

Chris, one of the things that is important about that segment is we have a lot of graduates out of SMB into commercial, and some of them may even go into the enterprise over time, because they're growing rapidly. The successful internet businesses, e-commerce businesses, other companies that we do business with, so being relevant in SMB is always going to be part of our story and it's, I think, a very important driver of our future growth.

[Unidentified Analyst:]

Perfect. Well, thank you both and Elena, all the best to you on your next chapter.

[Elena Gomez:]

Thanks a lot, Chris.

[Marc Cabi:]

All right. I want to thank everyone for joining us. Again, this is bittersweet for me because this is my last call with Elena, but it's been a great ride, Elena, and thank you everyone for listening into the Zendesk call today and we will see you all next quarter. Take care.