Zendesk, Inc.
Q3 2020 Earnings Call Transcript
Published:
- Marc Cabi:
- All right. Good afternoon, everybody. Its Marc Cabi and welcome to our Third Quarter 2020 Earnings Call. We're pleased to report our results. Joining me on our call today are Mikkel Svane, Founder, CEO and Chair of the Board; as well as Elena Gomez, 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 our ability to compete effectively. The assumptions, risks and factors that could affect our results are contained in our earnings press release and in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our upcoming quarterly report on Form 10-Q for the quarter ended September 30, 2020.
- Mikkel Svane:
- Thank you for this thrilling introduction. Thank you so much, Marc and thanks everybody for joining us here today. I know it's a super busy earnings day. So we all appreciate you spending your precious time with us here in our living rooms. And so we entered our last quarter of the year with momentum on our side. In the third quarter, we turned the corner on the biggest impacts of business with COVID-19. And your business growth continued and returned to pre-pandemic levels. Our expansion business return too strong growth, as our contraction trended closer to pre-pandemic levels too, all of these trends as well for the rest of the year. I'm particularly happy that we crossed the billion-dollar annual revenue run rate. We're doing this third quarter and also that we are guiding to exceed our billion-dollar revenue target for the full year. This is a constant journey we've been on since 2016, when we first set that inspiration. And while we are very pleased with our results, we also remain cautious. Our customers in challenge industries are still recovering. And we know that a resurgence in cases and the return on restrictions can very well make the situation worse for many of them. Through all of the challenges this year though it has been very gratifying to see how our products, how our solutions are helping customers, helping businesses adapt and react so quickly to the -- very quickly changing conditions. We see so many examples of companies quickly adopting and working through this crisis using our tools with grit and perseverance. So a big thank you to all our customers for trusting us as their partners through this. We will continue to do everything that we can to keep you fast, keep your agile and keep you smart in your customer engagement.
- Elena Gomez:
- Thanks, Mikkel. Thank you everyone for spending time with us. I'm coming to you from my basement. Best internet reception anyway. In this dynamic pandemic environment, the momentum and resilience of our business is showing. We're on track to exceed our objective to be a billion dollar company and provide full year guidance that reflects 25% year-over-year growth at the midpoint, which demonstrates the strength of our business model. Now more than ever, we are seeing companies want solutions with quick time to value which we are well positioned to deliver. Third quarter revenue increased 24% year-over-year and exceeded our expectations. Revenue outperformance was driven by a strong demand for our solutions and improved churning contraction rate during the quarter. We see signs that the initial shock of the pandemic is behind us. Although we continue to proceed with caution given the continued uncertainty around the pandemic and economic climate. Customer churn rate returned to normal levels in the third quarter, contraction rates significantly improved but remains elevated compared to historical trends. We’re encouraged that some of the customers that contracted with us in the second quarter expanded in the third quarter. Our net expansion rate improved to 112% in Q3 up from 111% in Q2, and continue to be in the healthy range of 110 to 120. ARR from 100 plus agency to remain flat at 43% in Q3 compared to prior quarter, given the very strong performance of our SMB business. Total RPO increased 43% year-over-year, short-term RPO increased 39% and long-term RPO increase 56% year-over-year. The increase in RPO demonstrates our customers commitment to partner with us for the long-term. We saw an elevated number of multi-year contracts this quarter compared to earlier this year. Now turning to gross margin. GAAP gross margin for the third quarter was 76% up 4.1 percentage points year-over-year. Non-GAAP gross margin was 78.7% up 2.8 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 extended by six percentage points and non-GAAP operating margin expanded by 4.5 percentage points. Margin improvement was driven largely by revenue outperformance gross margin expansion and prudent expense management. Margin also benefited from lower travel and event costs due to the pandemic. Free cash flow was 25 million in the third quarter.
- A - Marc Cabi:
- Thanks, Elena. And we're going to turn it over to Q&A now. As we did last quarter, we put all of our analyst names into a randomizer. And we'll be using that randomly selected order for today's calls. And our first analyst up today is Jen Lowe from UBS. If you can unmute yourselves, and if you'd like to turn on your video, we're happy to see you as well. Thank you, Jen.
- Jen Lowe:
- Great. And thanks to the randomizer for putting me in first. Maybe just to start on that last point, Elena. You know you mentioned rethinking the exiting the two leases in San Francisco, rethinking the footprint globally? I'm sure you're not the only ones at this point in time, as you think about what that might look like in terms of margins going forward. I know it's early, but it's the aspiration being that you would be a bit more cost efficient as well around your headcount, with that new real estate footprint, or would that be reinvested? How should we think about what that ultimately means for the business?
- Elena Gomez:
- Yes. No, I think it's a fair question. We're going to continue to balance our investments focused on growth. And so to the extent that we have savings, if you will, I think that's the question from real estate, where we will be investing that in the business. We will, if it makes sense and will continue to position us for growth, but at the same time, we're constantly looking at ways to scale so definitely would be some benefits in our operating income as a result.
- Jen Lowe:
- Maybe just one for Mikkel. Obviously, the environment is incredibly dynamic. It seems like the trend was improving over the course of the third quarter, but now we're hearing unfortunately, cases are starting to surge again. There's been rumblings of shutdowns in Europe, we're actually starting to see shutdowns in Europe. Has that or do you find that customers are a little bit more prepared for that now, given that we've been through it before, and maybe not freezing up the same way we saw earlier? Is there any change in the tone of business or how they're responding to? What might be another wave of shutdowns?
- Mikkel Svane:
- And that's, of course, the million dollar question, Jen. And we definitely see more preparedness in the market. Now, we all know what we're in, the same way that we know what we end like. We everybody is prepared and we see more preparedness in the market for what can come, but many uncertain factors, how hard it's going to be, it can be a rough winter in Europe, I can imagine. But, definitely more preparedness in the market. I think a lot of businesses have been very prudent in how they have prepared their operations for the S&I. We don't see anybody overly optimistic in the market, which is probably a good thing.
- Marc Cabi:
- Next up is Brad Sills from Bank of America, if you want to unmute and use your video, you're welcome to.
- Brad Sills:
- Oh, I tried to start the video but unable to looks like anyway. Thanks, guys for taking my question. I wanted to ask about the comments you made earlier on the expansion in some of the industries where you've seen contraction. I know in the past, you've talked about how the there's a decent amount of goodwill that's been building there, where you’ve been providing those concessions, customers, we will remember this and come back. Is there any color you can provide as to how that's gone within some of those hard it industries kind of where are we with some of that business kind of coming back and even thinking about expansion?
- Elena Gomez:
- Marc Cabi:
- I’d just add that, if you look at car share, airlines and just travel related industries, those are probably the hardest hit of our customers. But if you look outside of those impacted industries, there was definitely a return to more normal patterns that completely normal, but a return to much more normal patterns in Q3 over Q2.
- Brad Sills:
- Got it. Great, thank you. And then any color, you guys can provide on kind of progress with some of these bigger expansion deals in larger organizations. Great results this quarter on the billings and backlog. So any kind of color on kind of the bigger expansion deals and maybe even sunshine, are you seeing some of these bigger, larger firms committing more to the platform and going wider with Zendesk support.
- Elena Gomez:
- Now reflected in our RPO, Brad, you saw and I mentioned it on the script, you saw an elevated set of customers in terms of committing longer to us so we're really encouraged by that. I wouldn't call out any single product if you will, but just commitment to Zendesk family of products. Mikkel, you chime in there too.
- Mikkel Svane:
- I think in general, you can look at, as we also put in the shadow, we repeated here like our, our expansion business is returning strong growth that we're very optimistic about.
- Marc Cabi:
- So next up, we have Drew Foster from Citi.
- Drew Foster:
- Elena, I just wanted to double click on some of the latter comments that you made there around RPO. So, both current and total RPO growth in the quarter was really strong looks just sort of reaccelerated from Q2. And I know that you just mentioned there, you had some multi-year deals in the quarter. But are there any other benefits -- metric saw in the quarter in terms of maybe some of your larger deals landing and whether there were any big renewals in the quarter as well.
- Elena Gomez:
- We don't comment on specific customers Drew. But I can tell you and looking back at our RPO and the contract terms, over the last few quarters within this year, we definitely saw really good momentum in Q3. And it's broad based, I can't point to any one segment, but it's broad based. So there's nothing more to say other than more commitment from these customers. And actually encouraging to see this level of commitment in the backdrop that we're in.
- Marc Cabi:
- I’ just like to add there, we do thousands of transactions per quarter, because we have 170,000 customers. So we're not depending on any one customer to swing that result in any direction.
- Drew Foster:
- Understood, helpful. Thanks a lot. And then just a another follow up, Elena and the Q4 guide sort of implies a little bit lower of a growth rate than we're seeing here in Q3. So just wondering if there's any areas of the business where you're sort of taking an outsize level of conservatism there, maybe q4 where there's more large deals than normal?
- Elena Gomez:
- That's a fair question. We approach guidance with the same -- generally the same approach, but we are in a totally different environment. So I think, for me, it was really prudent to just put out a guidance when we've got an election year, we've got a pandemic, I just felt like it was prudent to be measured about that guidance. And we're not out of the woods, as we just talked about in Europe, et cetera. So that's what that guidance reflects.
- Marc Cabi:
- Next up, let me make sure I get right Tom Roderick is on.
- Tom Roderick:
- So, Mikkel, you've always been I mean, your business was very strong and relevant in Europe and international, early on, probably earlier than most companies for your size as you're growing up. So you've always had a great view with what's going on internationally. I think you call that European weakness, last year ahead of when a lot of companies saw it. So you got a pretty good feel for that. Would love to hear what you're seeing in real-time in particular, it sounds like you offered a little bit of caution relative to cases are on the rise, Europe is starting to see perhaps a little bit of a tick down. But anything beyond those sort of broader cautionary comments with what you're seeing internationally, or hearing from customers, I'd love to hear what the actual customer feedback is right now.
- Mikkel Svane:
- I'm not sure I can provide so much insight that doesn't exist already. It's definitely gone, like just over the last month things have been accelerating quickly in Europe. And that's definitely affecting the mood there. On the other hand, like there is as the other question before, like there is a kind of a readiness for it, like, we know, what we're going into, we kind of dealt with it. We all know there is light at the end of the tunnel, just have to get through these next, like very important months. So I don't have any other insights about we see great strengths around the world, even in places where we shouldn't see great strength. So I think that talks a little bit more to the fact that everybody is a little bit more prepared for what we are going through than they were six months ago.
- Marc Cabi:
- Tom, I just remind you of Europe, last year we did reorganize how we approached the SMB category of our business and that has had some payoff where we've enabled our self-service capabilities and improved on our customers being able to join us in a self-service environment. I think that's been very helpful for us through this period.
- Tom Roderick:
- Yes, that's a good reminder. Thanks for that. Quick follow-up just more on the product side, anything you can offer relative to the trend line of suite sales over the last 90 days, 180 days, what's happening with the demand for the suite and what's happening with deal sizes as a function of that?
- Marc Cabi:
- I'll take that. So we've been seeing some really good demand for our support suite. Within that support suite, there is a conversational messaging capability that's being built in as we bring more messaging channels natively. And so we feel that our bundled offers that around the support suite especially have been showing some really good demand and actually outperforming our standalone kind of demand for support only products. Next up is Alex Zukin from RBC.
- Alex Zukin:
- I guess, maybe the first one for whoever wants to take it. If you think about the business from an enterprise perspective versus velocity, can you talk about where you saw most of the outperformance, was it in deals that were kind of held up last quarter that that got done. And then also maybe just talk about the pipeline for both businesses and where you're kind of building confidence and strength.
- Elena Gomez:
- Yes, I can start and you guys can chime in. So Alex, the business, if I look at the strong performance of Q3, it's really across all of our segments. So I just shared that with the Board a couple days ago that that one of the things we really were encouraged by is that we did see a broad based return, if you will of the business. We don't want to make one quarter a trend. And so we're cautiously optimistic. But yes, I do think there were certain deals that in Q2 where maybe put on pause, if you will, that came back. But I don't want to point to any one deal. I think the performance you saw in Q3 was really broad based. In terms of pipeline, we're encouraged with what we saw in Q3. But again, one quarter is not a trend. We don't like to talk about pipelines specifically anyway, but I'll let Mikkel or Marc add more colors if they want.
- Mikkel Svane:
- I don't have anything else to add to that one.
- Alex Zukin:
- Maybe just in to follow up, given this was kind of a unique quarter, given the puts and takes from last quarter to this quarter. And the unique year ago compare, I know you don't guide to it, but there's quite a dispersion between what your billings growth is, what your current RPO growth is, what your current RPO billings growth is. And so as we think about Q4, as we think about growth going forward, I know, you guys don't want to make a trend out of a quarter, but that's what we do. And so what would you point us to on some of those forward looking -- what would you caution us, remind us in terms of seasonality, and then also, what's the right way to think about, your kind of growth outlook? Are you a second order beneficiary of the demand environment, you figured out how to sell, you know what to expect, et cetera? Or what's the right way to kind of put into perspective?
- Elena Gomez:
- So I think you got like five questions in one, but well played. So I think the first thing is, this is not a normal year. So like, that's, we all know that. So while typically we talk about seasonality, I'm paying attention to that, but I'm not expecting everything is going to be exactly the same now, encouraged by what we did in Q3, of course. And I'm not going to guide obviously to next year, but what I will tell you is the initial shock of the pandemic and COVID was in Q2, and as time goes on, that impact on our financials is less and less.
- Marc Cabi:
- Yes, Alex. I think it's really important to remember that some of that contraction we took on in Q2 from the travel, those categories, we continue to carry that until those companies bring back their employees and bring them back their agents. And so that has an impact here near term. And as we kind of see a recovery in those categories that will help us. Next up is Chris Merwin.
- Chris Merwin:
- I wanted to ask you, I think I have a little trouble with my video. But as long as you can hear me, I'll go ahead and ask. I think last quarter you talked about the customer segments to , and it sounded like there was some relative strength in SMB and in the enterprise segment, little less than mid-market. Curious, this quarter, given the broad base recovery we saw and pretty much all your metrics in particular RPO. Can you talk a bit about what you saw by customer segment? Did do you see some stronger mid-market performance particularly with larger and longer duration deals? Just curious, anything you'd call out there? Thanks.
- Elena Gomez:
- Yes, Chris, I would just repeat what I said earlier, which is we really did see the performance in all of our segments this quarter, which we're encouraged by it's obviously not a trend and the backdrop that we have in the macro environment, but definitely the mid-market and all of our segments had strength in Q3.
- Chris Merwin:
- Great. And then maybe just one follow up, the shareholder letter there was a number of mentions of Sunshine conversations that seemingly as part of some of the deals that you called out, I guess, when we think about Sunshine, being utilized more as the core CRM platform for your customers, anything else you can share there and is the expectation still for that to become a more material contributor next year? Thanks.
- Mikkel Svane:
- Yes. So maybe I could just -- no doubt that the messaging and the capabilities we both offer and use for the Sunshine conversation platform is a big part of our future. We're going to talk a lot more about that in the coming months and next year, and that's something we're very excited about. It is where the trends are going.
- Marc Cobi:
- Up next is Stan Zlotsky from Morgan Stanley.
- Stan Zlotsky:
- So a couple that I wanted to double click into. First one on current RPO specific array, I think Alex started too, to allude to it. But was there any meaningful shift in customers going from monthly to annual contract thing that benefited that? Or was it just pure more bookings?
- Marc Cabi:
- Yes. I don't think that I observed a very big shift in our shorter than 12-month business mix. So I think that was just more of an indicator of the strength of our momentum of the business in the quarter.
- Stan Zlotsky:
- Got it. Okay, that's great. And then just also double click again some of the questions that were asked. Specifically into Q4 array, it's a big enterprise selling cycle. How are you thinking about that part of the business which is usually really strong in the quarter?
- Elena Gomez:
- Yes. I mean, I think our guidance definitely was done with the backdrop in mind, Stan. And so we've just got to kind of see this through. I'm super encouraged and proud of the team for what happened in Q3 across all segments, as we said. And Q4 typically is our big enterprise quarter as you know, but this is a different year. So we're just trying to be cautiously optimistic about that and not get ahead of our skis.
- Stan Zlotsky:
- Got it. So for that particular segment did you -- is it fair to say that you apply like an extra layer of conservatism for that segment versus what you may have done in prior years?
- Elena Gomez:
- I wouldn't say that. I think we'd be falsely precise to be honest. So I wouldn't go there. I would just say our guidance reflects a prudent view of the business right now.
- Marc Cabi:
- I don't see Shebli on the call. So we're going to move to Samad from Jefferies.
- Samad Samana:
- It's good to see you. And I hope you're all doing well. I wanted to ask maybe more of a high level question, as we think about some of that strength in new bookings. And as we think about the source of new customer adds, how should we think about that in relation to we're hearing from companies, whether it's Shopify or big commerce, as they're adding more new merchants, we've seen record new business formation actually, in the U.S. during the third quarter? Can you maybe help us think about the mix of your new customers added in 3Q in relation to maybe the sources, some of these other companies that would be adjacent to Zendesk are adding and just how was that for the third quarter?
- Marc Cabi:
- I'll start this. So I think that, we saw a lot of good demand from new customers. And a lot of it has to do with working with customers differently. The end customer interactions are evolving, whether it's messaging channels, whether it's curb pickup and the other kind of tools that companies need to employ. And I think we're important eco provider for that ecosystem. So I do think we benefit from that. I'm not going to say that's like the only thing that we've benefited from the overall health of the business was much better in Q3, than in Q1 and Q2 of this year. So I think we saw a nice general recovery. So I don't want to attribute all of our upside to that.
- Samad Samana:
- And I guess maybe just as a follow up to that, as you think about your customer base, when you think about where they are in terms of different pieces of technology, how long after somebody maybe either whether it's starting an online store, or if they're moving to buy online pickup, or curbside pickup. I guess how quickly can they set up something like Zendesk to support that? I guess, we're just trying to triangulate on whether some of the success with some of these other companies as a leading indicator, or a lagging indicator for future customer growth.
- Mikkel Svane:
- This is really speculation, like I wouldn't make any correlations between these businesses. We do believe that we are in a time right now where we see that reflected in our own business, too, with short cycles, quick iterations, very quick deployments, a lot of activities, a lot of traffic on the platform, people need speed, agility and smartness. They don't want to spend years and years on big massive projects, they want to move fast, especially in our category is certainly about engaging the customers. And like, that's a trend we're seeing right now. It has implications to our business. And we believe it has long-term implications to how we think about IT and IT spending the next many, many years.
- Marc Cabi:
- Next up is Phil Winslow.
- Phil Winslow:
- A question to Mikkel and is a follow up to Elena. Mikkel some of your research in the benchmark data shows that ticket volumes are up significantly, year-over-year, I think in the high teens 16% to 17%, it hasn't really been going down. The question for you is what are your customers doing to deal with that? So in the meantime your resolution doesn't go up? Is that what's driving the interest in things like Sunshine conversations, chat, just different types of channels that are maybe asynchronous versus synchronous? And then, Elena, if that is maybe what's driving some of the issues? And those how do you think about penetration of those add-ons into the customer base? And how do you expect that to evolve? Thanks.
- Mikkel Svane:
- Elena, maybe I can start here. But no doubt feel that we are seeing a flurry of activity and like a lot of traffic on our platform. And a lot of that is because it's moving from other channels that way, you don't have the option today like moving a lot from offline to online. And it becomes natural, simple. Like this is where you engage with your customers, your customer engagement is now online, primarily, there's no doubt that like as business is thinking about, like, how can we provide a fantastic customer experience this way? And like, especially for a lot of the new ones that are seeing a ton of new volume. They're thinking about like, how can we increasingly automate this give our customers much more self-service. And that's, of course also where we help them with all these tools we're providing a great self-service experience, but that's also traffic on our platform. So we've got to continue to see a ton of traffic, ton of products to sell to our customers very excited.
- Marc Cabi:
- Phil, I'm just going to add from a penetration point of view from our customers. Messaging channels are all fairly new. So we're in the first couple innings of this, but definitely consumer demand to message with companies rather than wait on hold for. Yesterday I called Delta Airlines 58 minutes that's not acceptable this day and age. The customers are also looking at using our explore products, so they understand more of the data behind those customer conversations. And like Mikkel said, the Help Center, the ability to self-serve is very critical in this world. So I think, we're seeing a lot of that demand out there. And we have a nice portfolio of products to serve that. So we're pretty excited.
- Phil Winslow:
- So Elena, all add in a ton of add-on to the model next year, right?
- Elena Gomez:
- Be careful.
- Marc Cabi:
- A number that we also offer a lot of bundled support, suite offerings that raise the average selling price on its own. So as you think about building your models, a lot of our customers are coming to us with a more bundled mentality around the support suite, for example, and other products, other bundles that we might create in the future. All right. Up next is Koji from open Oppenheimer.
- Koji Ikeda:
- Hey, just real quick one question from me on the dollar based net expansion rate expanding by a point to 112%. That's really fantastic. And I think that should mean that the trough number of last quarter is hopefully behind the business. So I guess -- can you walk us through the mechanics of the expansion? Was it seat expansion, more products, maybe a combination of both of that? And really thinking about the downside, too? I mean, what would it really take from here for that metric to dip back to the 111%, we saw last quarter. Thank you.
- Elena Gomez:
- Yes. So Koji, you're right. I mean, I think that number is obvious. First of all, it's in a healthy range for us. We don't like to take any one quarter and say this is a trend. But that said, I think it was impacted by the contraction we saw early in the year and continue to have a little bit of a lag on that. Just remember that that's an annual metric, right, if we look back a year. So that dynamic, as Marc said earlier, is going to continue with us for a little bit. But we're encouraged by the expansion, we saw with some of those customers that contracted in Q2, at least a quarter of them are back now they're not back to pre-COVID levels in terms of expansion. But we'll keep an eye on that. For that to get to continue to decrease would mean another elevated level of churn and contraction. And we don't know that, right, wth this environment, we just don't know. It's hard to predict.
- Marc Cabi:
- Next up is Derrick Wood from Cowen.
- Derrick Wood:
- Great, congrats, good to see everyone. Want to ask my first question on pricing. And I know, you know, just kind of curious how you've dealt with that throughout the pandemic. I think you kind of had been more forgiving and given concessions and working to preserve TCV was some of the things you talked about early on, how has that evolved to where we are today and are you enforcing more pricing? Are you less focused on these TCV flexibility contracts? How should we think about how that's evolved?
- Elena Gomez:
- Yes. So, you are right in Q2, we had to do a lot more of that, especially early on, when COVID hit and there was a lot of uncertainty. It's not to say that won't happen to the extent we have customers, but it's gone down significantly from the Q2 levels and to the extent we could our approach was to preserve the total TCV for those customers, and do the right thing, and we do believe that will pay off over time.
- Derrick Wood:
- Great. And then, maybe just to kind of hit on geo performance. You talked about pretty broad base from a customer segment standpoint and a go-to-market sales motion standpoint. But how about geo, I look at that calculated growth across looks like EMEA and APAC accelerated a little bit. U.S. decelerated, but those can be backward looking numbers. And so just curious from a booking standpoint, how you characterize geo performance in Q3.
- Elena Gomez:
- I think we had good performance generally around the globe, I would say, EMEA definitely had a strong -- we had unevenness, I think was last year and we brought in some leaders there. And we saw pretty strong performance in Q3 and LATAM too, but I wouldn't say, any outliers, if you will, I think all around, we had globally strong performance from our regions.
- Marc Cabi:
- Next up, let me see is -- DJ Hynes.
- DJ Hynes:
- Hey, so when you talked about customers making longer term commitment. And I guess I'm curious what the trade offs is there. Are you having to bundle more product or those relationships more back end loaded as a favorable pricing just like any broad color on how those contracts are structured to get longer term deals done in this environment?
- Elena Gomez:
- They're all a little bit different. I don't know that if there's one thing to point to, I think it's really the focus on improving the customer experience and moving quickly, as opposed to the way we're setting up the contract terms. These are companies who are realizing the urgency of sort of the meeting their customers with digital channels and things like that. So there isn't any one trend and they're all a little different, as you know, when you get to larger customers. So there's nothing I would point out here that's unique.
- DJ Hynes:
- Yes. Okay. And then, Mikkel, maybe one for you. Curious what you're seeing on Answer Bot, we had 5.9 tonight, as well. And they talked about interest in virtual agents, they made an acquisition in the space, customers trying to do more with less. Are you seeing the same kind of interest there? And what's adoption with Answer Bot look like?
- Mikkel Svane:
- Yes, we're very happy about Answer Bot adoption. We have a lot more coming up to improve in that field, a lot more that can help with automation and kind of improving for --optimizing for the customer experience. Not all automation gives a better customer experience. And we're very focused on providing that bit across by simply providing making a lot easier, snappier for customers to help themselves. So very happy about it. It's been a -- for a lot of our customers, when they've see this massive spike in traffic that they've seen, it's been a lifeline for a lot of them, that they had this extra level of help that gives the customer some kind of confidence that it's not -- they're not just waiting, but I think they have an opportunity to help themselves too. So very happy about them.
- Marc Cabi:
- Next up is Ken Wong from Guggenheim.
- Ken Wong:
- So it was pretty clear that 3Q isn't a better place than 2Q, would love to get a sense of what the shape of the improvement look like through the quarter maybe even to the extent you can comment on October? Any sense of what that really in terms of the improvement like?
- Elena Gomez:
- I'm definitely not going to comment on October. But in Q3, but that was a nice try. In Q3, we had a -- we did a great quarter out of the gate. And obviously, pacing always is an important factor for us. But that was encouraging, I think there was, it's almost like our customers kind of got back to normal things settled in and people got kind of used to working from home from their living room. So there was a little bit of, we're not back to normal. So I don't want to signal that but definitely more adjustment to the environment we're in. People got more comfortable making decisions, et cetera. And we saw that pretty much out of the gate.
- Ken Wong:
- Got it. And then, maybe just circling back on the new paid customer dynamic, I guess on that metric, how close are we to normal and any sense of kind of when we might get there?
- Marc Cabi:
- I think it's always difficult to predict normal set of new customers we bring in over time, especially since we're starting to sell more of the suite where we have multiple products being sold. But we were very happy with new customer activity in this quarter. I think that we have an opportunity and a compelling story is customer service becomes a much more integral part of the demand environment. So I think we are well positioned this quarter, new business was definitely a key contributor to our growth rate. Next up is Brent from Piper.
- Brent Bracelin:
- And I appreciate the randomizers but with given been back of the list here next quarter, maybe we should go alphabetical that might not be fair to Zukin. So, but all good. Two questions if I could, I guess first. Mikkel, I'd love to get your view around larger brands, we're seeing larger brands embrace this whole direct-to-consumer wave here for the last six months, Zendesk is the gold standard for direct-to-consumer support for the digital natives. My question is, are you seeing a change with some of these larger brands that are struggling, that have maybe a greater need or want to modernize their support apps as they try to engage consumers with these new digital channels?
- Mikkel Svane:
- Well, I think that we all see that apologize for the noise here there's a UPS truck outside my window. I think we all see them in the market, like across the spectrum here. Like we all read stories about Disney and Home Depot, et cetera and that definitely accelerating kind of that needs to see that direct-to-consumer, other types of consumer model. We've seen that across the board.
- Brent Bracelin:
- Fair enough. We'll dive into that maybe offline a more that feels like it's a bigger opportunity here. I'd love to Explorer. And then I guess Elena, as we just think about maybe the broader support business, 2600 net adds here on the support side, that's actually higher than we've seen in each of the last three quarters. So as you think about the acceleration and just net support adds, what drove that in Q3? It seems a little unusually strong here and love to get any color on, what drove that acceleration just across the support business.
- Elena Gomez:
- Yes. I don't know if I have any more color for you, Brent, other than we had, momentum in our business for the quarter across all of our segments. And we're really pleased by a lot of the self-service and investments we're making to make our web try and by motion, very friction free, et cetera. And that continues to be a really important part of our journey here. So other than that, I don't know if there's anything I'd point out different other than we saw really strength across all of our segments in the quarter.
- Marc Cabi:
- And next up is Arjun from William Blair.
- Arjun Bhatia:
- Quick one, maybe for Mikkel, it seems like the new customer activity has picked up, just when you're looking at across these new customer adds, can you get a sense for how much these customers are making a new platform decision where they're saying, Zendesk is my customer service platform of choice versus maybe trying to solve somewhat of a more immediate and urgent, digital problem that has just arisen because of the pandemic? Are you able to decipher that at all?
- Mikkel Svane:
- Yes, Arjun. I'm not going to sit here like, well, 10,000, businesses decided we would be their platform of choice but that's not the climate we live in today. I think that 10 customers come to us, because they trust us to be somebody who can give them and help them with quick results and really get up and running quickly and harvest the results. And they believe in our agility and our flexibility continue to scale with them. And that's been our primary strength since we started this business through kind of be a very agile tool for our customers. And that's what we're focusing on. And the climate we're seeing today is a lot of activity. And that goes all the way from small business to the large enterprises. And we are a good partner for our customers on that path. But again, like, as I said before, I believe this is not just a moment in time picture, I think this is a trend for the future. And that's how we're going to think about our IT investments going forward like nobody wants to do these three year projects anymore.
- Arjun Bhatia:
- That's fair. And maybe on that last point between SMB mid-market enterprise and we've talked about in the past about accelerating kind of the enterprise motion with your sales team and account-based marketing, things like that. When you're looking at the current environment, have those resources shifted at all? Are you focusing more on small businesses mid-market or is it still, let's push into larger companies and the enterprise?
- Mikkel Svane:
- Well, I think we are investing across the board here. Also, because like, we see a lot of activity in the enterprise that isn't like what we would characterize as traditional enterprise activity. There's a lot of movement. There's a lot of activity like that. So we are continuing to invest across the board, I think where there's definitely like a web -- where we definitely kind of need it for the small and the mid-sized businesses like this. There will always be things we believe we can do better for the large enterprises and we will of course continue to invest in that.
- Marc Cabi:
- I think I didn't see anybody join that was on my list that we missed. So, at this point, we're going to close this call. Just a reminder, a replay of this call will be available on our Investor Web site shortly after this call. And if you have any follow up questions, you can email IR at Zendesk.com and Allison on our team will make sure that we get you on our calendar for a callback. And thanks again and we'll see you next quarter.
Other Zendesk, Inc. earnings call transcripts:
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