Zendesk, Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good afternoon. My name is Jesse, and I will be your conference operator today. At this time, I’d like to welcome everyone to Zendesk’s Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Marc Cabi, you may begin your conference.

[Marc Cabi:]

Thank you, Jesse, and good afternoon, everyone. Welcome to our third quarter 2018 earnings call. We’re pleased to report our third quarter results. Joining me today on the call are Mikkel Svane, Founder, CEO and Chair of the Board; and Elena Gomez, our Chief Financial Officer. Before we get into the results, let me pass along a few reminders. Our Shareholder Letter is available at investor.zendesk.com, or Investor website, which details our full results and commentary. As a reminder, we adopted the new revenue recognition standard, ASC 606 effective January 1, 2018, and all results today and forward-looking guidance are in accordance with the new revenue recognition standard. A full reconciliation for ASC 606 resides on our Investor website. 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 or 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 10-K for the year ended December 31, 2017, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and our upcoming Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. We undertake no obligation to update these statements after today’s presentation or to conform these statements to actual results or to changes in our expectations, except as required by law. Please refer to today’s earnings press 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, but 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 releases for such prior periods, all of which are available on our Investor website. With that introduction, I would like to turn the call over to Mikkel.

[Mikkel Svane:]

All right, perfect. Thank you so much, Marc. Good afternoon, everyone. We finished another quarter with really strong growth and believe therefore, we are set up for even more success in the future. Our revenue growth year-to-date exceeded our expectations and grew 38% year-over-year. Because of this, we are able to invest in more growth initiatives sooner. We’re seeing a few factors driving our growth. The demand for customer experience software is strong and experienced tremendous change as companies adopt new and modern ways to engage with our customers. Our products are built to help companies adapt and communicate with today’s consumers who expect quick and easy interactions across multiple channels. At the same time, we made major progress on our two key priorities for the year, maturing our omnichannel offerings and accelerating our move upmarket. The Zendesk Suite, our new omnichannel bundle has gotten off to a solid start and continues to perform ahead of our expectations. We believe it has put us in an even stronger competitive position and opened the doors to many new opportunities that we didn’t see before. We’ve also continued our momentum in moving upmarket with enterprise customers, landing larger-sized deals and new customers with potential to expand with us. We are seeing the benefits from advancing our enterprise product features and the upmarket efforts of our go-to-market teams. Our sales teams continues to drive new and expansion business and improve their productivity. Additionally, here in September, we acquired the company behind Base. It broadens our offering in customer experience with sales force automation software. While we have an immediate opportunity to cross-sell our products, this is also a strategic long-term investment for us. We are investing in Base’s product development and the market growth and plan to integrate sales software deeply into our product family, so we have a more complete offering for current and for future customers. Our progress continues to increase our confidence in meeting our 2020 goal of being a billion-dollar revenue company and our long-term objective of being a company with multibillion dollar sales. Personally, I feel very proud of the progress we’ve made so far this year and look forward to sharing a lot more exciting announcements with you in a couple of weeks when we host Zendesk Relate, our global user conference here in San Francisco. And with that, thank you, everybody. And I’m going to turn the call over to Elena.

[Elena Gomez:]

Thank you, Mikkel. I’d like to talk for a couple of minutes about guidance, given the acquisition of FutureSimple in Q3. We expect a minimal impact on revenue for Q4 and a more meaningful impact on operating loss in Q4 related to FutureSimple. I’ll expand on these now. Because of our results and the momentum we’re seeing in our core business, we increased our revenue guidance for the year. We now expect our full-year revenue for 2018 in the range between $591 million and $593 million, up approximately 38% year-over-year. As our revenue continues to exceed our expectations, we’ve been pulling forward investments in our product development and go-to-market initiatives. With our leadership in customer experience and favorable market dynamics, we see a big opportunity for continued high growth and market share expansion. Our objective is to achieve high growth, while improving our operating performance and cash flow and we balance growth with profitability. For the full-year 2018, we expect significant improvement in our GAAP operating loss and non-GAAP operating loss results compared to 2017, as we benefit from scale. However, we see slightly reduced – we have slightly reduced our guidance for the full-year 2018 GAAP operating loss and non-GAAP operating income loss compared to our previous guidance. Our acquisition of FutureSimple, the company behind Base, impacts our results as it has lower margins than Zendesk. Additionally, consistent with the standard practice of purchase accounting, we will account FutureSimple’s deferred revenues to fair value. Therefore, the gross margin contribution from FutureSimple will have a negative impact on our consolidated gross margin in the fourth quarter of 2018 and in 2019. Additionally, given our revenue outperformance in the third quarter, we pulled forward some investments that we believe will drive higher revenue growth and market share. Our free cash flow guidance for the year remains unchanged. We expect $28 million to $30 million of free cash flow for 2018. This compares to free cash flow of $18 million for the full-year of 2017, up approximately 61%. As a reminder, our Q4 CapEx requirement will be looking more in Q4 like it did in Q2. Thank you. And now, I’ll turn the call over to Marc.

[Marc Cabi:]

Thanks, Elena. Before we take your questions, I would like to cover one housekeeping item and that relates to how we disclose our paid customer accounts. As we discussed on our last two innings call, customers that purchase multiple products at Zendesk a la carte are counted as a customer for each product they purchase. For instance, if a customer purchases Support, Chat, Talk and Guide a la carte, they would count as four paid customer accounts. As you’ll recall, with the introduction of the Zendesk Suite, customers may now buy multiple products in one SKU. We are reflecting the purchase of the Zendesk Suite by a customer as only one paid customer account, instead of multiple paid accounts for multiple products included with the SKU. We are currently including paid customer accounts of the Zendesk Suite in the all other products category. We anticipate the introduction of Zendesk Suite and other bundled products the change how we disclose customer count in the future, and we’re working to evolve the way in which we provide insight to you, our investors about our customer activities to match our evolving business. We expect to share more in 2019 as we close out the year. We have also excluded Base customers in our current customer account, as we anticipate reframing our overall customer account, reporting beginning in 2019. Finally, a reminder, we will host an Analyst and Investor Briefing on November 13, from 2

[Operator:]

Thank you. [Operator Instructions] The first question comes from Philip Winslow with Wells Fargo. Your line is open.

[Philip Winslow:]

Just wanted to focus in on the Suite. Obviously, this is the first full quarter that it’s been in market. And it seems based on the shareholder letter and your commentary that you continue to see good uptake of that. Why don’t you provide just more color in terms of whether sort of selling into the existing installed Base versus, call it, I guess, selling the suite to net new customers sort of upfront. Is there any sort of color on what you’re seeing driving, that would be great?

[Elena Gomez:]

I’ll start and you guys can chime in. We’re seeing strong performance from both our new customers and existing customers. Obviously, we’re thrilled about that, because it’s bringing conversations that would have taken two or three conversations all upfront into one conversation. And, of course, we’re also seeing higher ASP as we bring on more suite customers. So we’re encouraged by that, but it’s still even, we have one quarter-end, but it’s still early days for us to conclude on what the future is with Suite. But we’re super thrilled with where we are today.

[Philip Winslow:]

Yes, I agree.

[Operator:]

Your next question comes from Derrick Wood with Cowen and Company. Your line is open.

[Derrick Wood:]

Great. Thanks. It looks like you guys hired a lot in Q3. Obviously, some of that came from the acquisition, but even excluding that, it was – looks like it was up a lot on an organic basis. Can you give us a sense as to where the incremental resource investments are going? And then I know you have a new head of channels. Any color you want to shed on what the playbook is from here with the channel strategy? Thanks.

[Elena Gomez:]

Yes. So our hiring was across several functions within our organization, across sales and success, as well as our engineering organization. So I wouldn’t say, there was any one group that was particularly higher than the other. But we are positioning ourselves for having the capacity on the Street for the second-half of the year and actually frankly getting prepared for a strong start to Q1. In terms of – what was the second question or so, the second question?

[Derrick Wood:]

Channel?

[Elena Gomez:]

Channel. Oh, yes, we did. We’re actually very excited, we hired our VP of channel and it’s early days still. But we’re excited that he brings a wealth of experience and we’re, for the first time, going to have a partner summit at our conference here coming up in November, so we’re excited about that and just overall excited to start the year next year with partner channel strategy. As you know, we already have partners in our regions, and so we’re leveraging those and extending those as far a reach as we can. But we’ll have more information about our channel strategy in 90 days.

[Derrick Wood:]

Great. And if I could sneak one other one in. The – with FutureSimple, it sounds like you’re going to keep that as a separate organization. Any sense as to how long and then when you do fold it in, is it going to be a specialist model, or do you plan to have it kind of fully integrated with everyone? Some time – color would be good there? Thanks.

[Marc Cabi:]

So in the early days, the plan is to continue to run the Base go-to-market organization independent of vendors. But there are many cross-sell opportunities there we’re already beginning to observe in terms of referrals between our respective customers. So we’ll see how that plays out over the next quarter or two. Over time, as you know, we want to deliver a broad customer experience set of products. So, we’ll have more to say on that over the next period.

[Operator:]

Your next question comes from Samad Samana with Jefferies. Your line is open.

[Samad Samana:]

Hi. Thanks for taking my questions. Maybe a question on FutureSimple. Have you guys in your early announcements identified maybe how much of Zendesk’s existing customer Base would be an ideal potential customer for Base’s customers as well and/or how much overlap do you already have in the customer base? And then maybe a follow-up there.

[Mikkel Svane:]

Well, as for the first part, we believe there’s a big opportunity for the vast majority of our B2B customers, but also actually in a lot of our B2C customer segment, as they all have some kind of sales automation somewhere in the business. So we believe there’s a huge opportunity. We’re very much in the initial phase, focusing on all like the the low-hanging fruits and really focusing on setting ourselves up for the low fruits, so it’s kind of the long-term opportunity. And there is definitely some overlap in customer base. That is also how we got to learn to know each other and kind of got interested in doing these things. But like it’s less about that overlap and more about the future opportunity that we’re focused on.

[Samad Samana:]

Great. And then maybe one for Elena. Just as I look at the operating income guidance for the fourth quarter and the updated number for the year. could you maybe help us understand how much of that was due to the incremental expenses from FutureSimple versus the pull forward expenses that you mentioned?

[Elena Gomez:]

Sure. So I don’t want to necessarily get into those details specifically. But I can tell you that we were committed to our core business and the guidance we set out for the year. So – and right now what we’re looking at is opportunistically setting ourselves up for a strong start in 2019. But definitely, as you can imagine, Base had a lower operating margin profiles than Zendesk. An so we had to take that into consideration with our guide.

[Samad Samana:]

Great. That’s helpful. Thanks again for taking my questions and congrats on the quarter.

[Marc Cabi:]

Thank you.

[Operator:]

Your next question comes from Bhavan Suri. Your line is open.

[Arjun Bhatia:]

Hey, guys, it’s actually Arjun Bhatia on for Bhavan. Just wanted to focus on Base a little bit more. I know you’ve talked about moving upmarket with this product down in the future. But just wondering, what are some of the key things that you need to – that need to happen either from a product functionality perspective or sales and marketing before you start targeting larger enterprise customers here?

[Mikkel Svane:]

That’s – this is a multifaceted answer. There’s a lot of different things we want to get more familiar with. We want to understand better and then we want to implement in our organization. And there’s definitely also things we’re thinking about from kind of products perspective and just feature functionality wise, but also in terms of getting the different products to work seamlessly together. But our MO has always been to be patient with moving upmarket, even today with our core support offering, we are patient in kind of a move upmarket. We want to do it the right way and the scalable way for the future. And that is like, we don’t want to break the neck here on going full enterprise with Base in day one, like we want to slowly take the route that makes sense for us. And that doesn’t mean, we don’t have enterprise business. We have big enterprise business, but we’re going to take our time in getting there the proper way. And I – in the meantime, there’s a huge opportunity just in the smaller businesses and the mid-sized businesses. I think, we’ve already proved that with our model today, and that’s really what we’re going to focus on.

[Arjun Bhatia:]

Okay, that’s helpful. And then as we’re just thinking about broader net new customers, especially larger customers that are coming onboard, are you seeing any recent change in terms of what these customers are placing when they adopt Zendesk? Are they replacing still? Is it still out of legacy tools or are you seeing customers come out from other suites or from other vendors?

[Marc Cabi:]

We think the story around why customers come to Zendesk hasn’t changed that much. A lot of customers we meet with in the enterprise category, large company category generally have some type of legacy dependence, on-prem dependence that they’re trying to free themselves up from. And we allow them to either augment or replace some of those siloed legacy systems with a more modern approach probably, because they’ve been disrupted by some newcomer in the disruptive industries that they operate. And we continue to see really good progress around that activity on a regular basis. And we talked a little bit about our pipeline at the beginning of the year and throughout the year, we’re seeing many more traditional companies that we’re speaking to looking how they can become more modern in their approach to customer activities.

[Arjun Bhatia:]

Great. Thanks for taking my questions.

[Operator:]

Your next question comes from Alex Zukin with Piper Jaffray. Your line is open.

[Alex Zukin:]

Hey, guys, thanks for taking my question. So two quick ones. First, you talked about increased enterprise pipeline and traction in the prepared remarks and the shareholder letter. So I wanted to ask about how enterprise performed in the quarter versus expectations and versus this period last year? And if you could also describe and kind of the pipeline a little bit more detail, given kind of the full-year of the new sales manager? And I’ve got a quick follow-up.

[Marc Cabi:]

So let me just really quickly remind everyone that a year ago third quarter was a pretty strong quarter for us after a tougher second quarter. So our comparisons were difficult quarter-to-quarter on a year-over-year basis. That said, I think, we performed extremely well. If you look at things that we look at internally that we don’t disclose around salespeople attainment, their productivity and other kinds of activities that we judge them by, those are all moving in the right direction.

[Alex Zukin:]

Perfect. And then if I think about – you guys mentioned the Base acquisition being an investment and growth durability pulling forward some growth oriented investments. Given the increasing enterprise pipeline, given kind of the increasing success in the suite product and Base coming online next year, how should we be thinking about the billion-dollar kind of fiscal 2020 target? Maybe how much of that target depend on continued robust IT spending in macro environment? I’m not asking kind of for next year’s guidance, but any kind of color you can provide given some of the increased confidence you seem to have would be great?

[Elena Gomez:]

Yes. I was going to start my answer with. I’m not going to share a 2019 guidance. But I – we continue to have the same confidence after five quarters of sort of consistent execution by this team. I’m encouraged. My confidence is up, and I think it’s a combination of things. It’s not any one single metric we look at. It’s both the pipeline we’re seeing, the resilience of the sales force team over time that has continued to execute. It’s the suite coming onboard and having early traction. So it’s really a host of all those things, the success we’ve had with our field marketing events and hosting over 5,000 customers all year. So it’s really a combination of all of those things that give me the confidence in the billion-dollar goal.

[Alex Zukin:]

Great. Thank you, guys.

[Operator:]

Your next question comes from Kirk Materne with Evercore ISI. Your line is open.

[Daniel Greenfield:]

He, guys, this is Daniel on for Kirk. Thanks for taking my question and congrats on the quarter. I’ve actually got two. So, the first one is just on strength in geos. We’re seeing from multiple quarters some strong performance in EMEA and other geos. So can you just speak to – is that ramps getting – reps getting ramped up there, and I see you’ve opened new offices. So if you could comment on that? And then just a real quick, deals worth over 50K were up 15% this quarter, which is great. But it’s down a bit from 60% growth last couple of quarters. So any puts and takes there would be really helpful? Thanks.

[Marc Cabi:]

Let me start with that. And then maybe Mikkel has been travelling the world. So we’ll let him answer the geo question. So again, the comparisons on year-over-year for that 50K average deal size and larger, that is impacted by those tougher comparisons. But if you were to kind of look at our progress, the average deal size embedded within that 15% growth and number of deals has been really positive for us and is continuing to help us expand our key metric, which we disclosed, which is the percent of recurring revenue MRR generated from customers of 100 or more agents and support. That’s moved up nicely year-over-year by 3 points. And again, we continue to expect that to move up over time in an evolutionary manner. Do you want to talk about the geos?

[Mikkel Svane:]

Sure. Well, as you know like, we have about half our business outside the U.S., if am not wrong here. And I think that it’s doing business internationally is more complicated than in a big single market like the U.S., like, because we have many smaller, many different cultures, many different business climates to deal with. And I think it’s also the strength of our organization of our D&A and also our product, including our very early investments in localizing and both – everywhere from the product, to the product development, to documentation, to support everywhere in the organization to really support a lot of smaller markets. And that’s also the strength of our business and continue kind of solid growth that we see outside of the U.S. But at the same time, we’re very aware that we are still, in some of these regions, we’re still just – we have penetrated very, very modestly and have huge opportunity in front of us. So we continue to invest in our international business, because we see our growth opportunity there as huge. So it’s really exciting everything we’re doing in all these regions and just knowing that we have loyal customers, fantastic brands in every corner of the country talks to the opportunity we have to continue to expand our business and go deeper into those markets.

[Daniel Greenfield:]

Great. Thanks.

[Operator:]

Your next question comes from Tom Roderick with Stifel. Your line is open.

[Tom Roderick:]

Yes. Hi, guys, thanks for taking my question. So I kind of want to get back to one of the prior questions there. And Marc, you were just hitting on it with the MRR hitting from above 100 seats hitting up to 40% this quarter, so that’s up nice 3 points year-on-year. I know it’s early with the suite sale, but I’m sort of curious with how you would suggest we think about the suite sale and sort of impacting that number and also the dollar retention number as we look out into the next few quarters. I mean, I know the commentary in the newsletter sort of suggested that suite was really attractive to SMB and mid-market. Curious what you’re seeing in feedback from enterprise customers and as you look at that 40% number coming from over 100 seats, any impact yet from the suite? And how does that impact that and the customer retention number going forward? Thank you.

[Marc Cabi:]

Those were a lot of questions built into one question there. Let me just start and then I’ll see where everyone else wants to jump in. So two things. One, the suite as a SKU is really designed to allow a frictionless purchase at Zendesk products by SMB and mid-market customers. What the messaging around the Zendesk Suite has done has really allowed us to have a omnichannel conversation with all of our customers. And so what we’re seeing is that as we move up in deal size whether they buy the SKU or they buy an omnichannel combination of products, the messaging around our Zendesk Suite is really helping around engaging customers across multiple products. And that’s really what we want to see, because over time we also know that customers engage with more than one product tend to be stickier, tend to have much more value to us as a long-term customer. So I think it’s demonstrating all the things we wanted to demonstrate. It’s still early, but we’re really excited about the dynamic, both internally and externally around the omnichannel experience.

[Mikkel Svane:]

Yes. It improves our conversations with these customers, it improves the engagement they have with the product. So, does that impact – does it impact the long-term relationship we have with them? I believe so, let’s wait and see. It also improves kind of the contract value we have with these customers. So does that also have an impact? Yes. But like one full quarter and it’s too early to kind of extrapolate these things. But like, overall, real good positive business impact of the suite? Yes.

[Elena Gomez:]

Yes, and I would just add. The net expansion rate, which really looks at our cohort 12 months prior, there’s really – it’s too early for us to see the dynamics of expansion. But that is one metric we’re looking at carefully obviously, because if we’re getting a bigger deal upfront, would that change the extension dynamics? It could, but it’s not – it’s – again, it’s too early to tell or know about a year into it to really see that trend.

[Daniel Greenfield:]

Excellent. Thank you. Maybe a quick follow-up. I won’t make this a seven-part question. But just as you look at the sort of the impact of the sales cycle, is that something that you would also sort of naturally expect the sales cycle to elongate just a little bit? And how do you sort of prep and manage for that?

[Marc Cabi:]

I think, we’re seeing the exact opposite with the suite. It has shortened our sales cycles.

[Elena Gomez:]

Yes, it’s making – it’s taking friction out of that conversation. It’s an easier discussion with most of our customers.

[Daniel Greenfield:]

That’s great. Perfect. I really appreciate it. Thank you, guys.

[Marc Cabi:]

Thank you.

[Operator:]

Your next question comes from Stan Zlotsky with Morgan Stanley. Your line is open.

[Stan Zlotsky:]

Perfect. Thank you so much. Good afternoon, ladies and gentlemen. A couple of questions from my end. We want to be inclusive. A couple of questions from my end. On – just on the Base acquisition, we all saw the $80 million or so that you paid for the assets. Maybe just can you help us characterize how quickly was Base growing? And I realized that their profitability profile is worse than yours. But were they close to being profitable on any metrics? And then just a quick follow-up.

[Elena Gomez:]

Yes. So, I’m not going to get into the specifics here necessarily. But as you would expect, they were a company with much lower operating – not much lower, but lower operating margins than ours. But we do fully expect to see synergies between the two companies and that’s really what our hope is. But again, this is sort of a long-term play for us. So I would just caution you to not necessarily try to focus so much just on Base, because again, we have a core business that’s the lion’s share of our business. So I would just say that, we’ll know – we’ll share more about our guidance for next year in 90 days, but definitely different operating margin dynamics and different gross margin dynamics than we have.

[Stan Zlotsky:]

Got it. And just thinking about Q4 and billings, you guys are going to be lapping the toughest comp of the year on billings. Just maybe a little bit of guidance to how you guys want us to think about billings coming into Q4? Any kind of dynamics you want us to keep in mind? That’s it for me. Thank you.

[Marc Cabi:]

Yes. Again, from a comp’s perspective, Q3 and Q4 last year were good quarters. I think that Q3 was probably – had the remnants of some Q2 slippage into Q3. So that was a big quarter last year. Q4 is probably more of a like-to-like comparison from a normal operating level perspective. What I would say is that, Q4 is also a quarter that is heavy on enterprise and large deals. So that kind of comes together as we go through the quarter. But we have a great pipeline and we believe if we execute, we will be in a good place.

[Stan Zlotsky:]

Thank you.

[Operator:]

Your next question comes from Michael Turrin with Deutsche Bank. Your line is open.

[Michael Turrin:]

Good afternoon. Thanks. I just want to see if you could provide us with an update on the cloud migration to start. It sounds like the longer tale of customers there might extend into the first-half of next year. And just wanted to touch on some of the factors that might be extending that and how much confidence you have around the revised timeline there?

[Elena Gomez:]

Yes. So we are very confident in that timeline. We’ve moved over 90% of our customers as of right now. And we’re trying to be cautious with year-end and making sure that we’re not moving large customers at a time when it’s a busy season, if you will. So I feel confident about that. I think it’s been a learning as we go through the quarter, but we really want to make sure that we move these customer with limited to no downtime basically. And so in order to do that, we felt it was prudent to move some of the customers in the first part of next year to wrap it up by the first-half of next year.

[Marc Cabi:]

And just a reminder, I want to remind everybody that we set a very high bar. There was no planned downtime for any of our customers when they got moved from our own data centers to our cloud infrastructure provider. And I think that was very much appreciated by our customers.

[Michael Turrin:]

Got it. And then looking at the customer logos slide on the shareholder letter this quarter, I noticed a couple of financials customers. I’m just wondering, was that within your expectations? Is there anything new there? And are there certain verticals you feel might be becoming more receptive to customer experience solutions over time?

[Marc Cabi:]

I think, we’re very horizontal – we’re a very horizontal product. So it can be used by all kinds of different industry categories. I think, we’re – I see a lot of conversations in financials are around traditional finance organizations that are trying to create more consumer-facing capabilities, and we can help them there. And so, we can play in that market space really well. But again, we approach the market very horizontally today. We don’t have a verticalization strategy at this point. But all of these customers allow us to win the next customer in their industry category.

[Michael Turrin:]

It’s great. Thanks.

[Operator:]

Your next question comes from Jennifer Lowe with UBS. Your line is open.

[Jennifer Swanson Lowe:]

Great. Thank you. I actually want to follow-up on two of the earlier questions, so maybe I’ll just pick them in succession. First, maybe just following up on Stan’s question with Base. I – with regard to the cost side of the equation, I certainly understand the purchase accounting impacts, the revenue recognition in Q4. But can you just give us a sense of as we roll off into next year and start to see that, that Base come back to full carrying value on the deferred. Is that something that will materially impact growth next year that, that we should be thinking about from a revenue perspective?

[Elena Gomez:]

No, I don’t see Base having a impact for our business. I think we –we’ll share more about that, obviously, next year in our guidance. But we plan to report a combined view of the business, and I don’t view it having a material impact on the top line.

[Jennifer Swanson Lowe:]

Okay. And then just following up on Michael’s question about the AWS transition. I think, there had been an expectation that we would see a gross margin improvement once that was completed. I know in the shareholder letter, you mentioned that there’s already sort of a wind down of the existing or the legacy data center assets. But just given the shift in timing, should we be reflecting that and how we think about with the gross margin outlook for the first-half as you complete that migration relative to taking it a little longer than maybe people had originally anticipated?

[Elena Gomez:]

Yes. So it’s a good question. We are continue to committed – we’re committed to the 100 basis points that we talked about despite the delay. So we’re really focused on gaining scale across our organizations that impact the COGS line. So that commitment won’t change.

[Jennifer Swanson Lowe:]

Okay. And then maybe just one more for me, because those are two quick questions and they’re half questions that you’re following up on other people. Is just sort of the commentary at the outset around the positive trajectory you’re seeing on the productivity metrics with the enterprise sales team? I think, there was some thought that now that you’re fully year into coming off of some of the challenges you had in the past that maybe it starts to stabilize. And I’m curious to get your perspective whether you’re just starting to see tougher comps now that you’re sort of past those days by a good amount, or has that trajectory and productivity improvements been pretty stable even as you get those tougher comps?

[Elena Gomez:]

Yes, I would say, I’ll answer your full question. So, yes, I think that we’ve seen definitely a stability and greater attainment from the sales org and we’re constantly pushing for that productivity. But yes, I think, Marc alluded to, we definitely have tougher compares, I think, we exited 2017 with a strong Q3 and Q4. But I still think we’re going to see continued productivity gains from our sales team as we exit and position ourselves for the first part of next year.

[Jennifer Swanson Lowe:]

Okay. Thank you.

[Operator:]

Your next question comes from Ross MacMillan with RBC Capital Markets. Your line is open.

[Ross MacMillan:]

Well, thanks so much and thank you for taking my questions as well. I actually had a couple of quick clarifications too. So just when we think about Base and its impact on Q3, Elena, I think, is it right to assume that our calculated billing math would really not be impacted in a material way by Base in Q3? And then…

[Elena Gomez:]

Correct.

[Ross MacMillan:]

…the other – correct. And then the other question I had was just going back on the profit outlook for Q4, because you’re raising revenue, I think, you had made a comment that you were still committed to the prior guidance on a sort of underlying basis and the revenue raise allowed you to invest incrementally organically, while spend most of the impact in Q4. Op income guidance is really from the acquisition. Is that the right way to think about it that the rev upside is allowing you to invest more and then most of the impact is really acquisition-related in Q4?

[Elena Gomez:]

Yes, absolutely. That’s exactly how the right way to think about it.

[Ross MacMillan:]

Okay, that’s great. And then I just had one on suite. I think, it was available obviously for the full quarter in Q3. And my sense was that you also allowed it to be consumed by existing customers not just sort of net new customers. And so if those two assumptions are right, I wondered – it sounds like it’s still outperforming your expectation. But how would you expect that to progress from here? And was that really fast star at the gate something that would just naturally sort of moderate as we kind of go forward, in other words, there’s a bit of a sort of a kind of a rapid start then just sort of moderates as we go forward? Thanks.

[Marc Cabi:]

I think, if you were to kind of look at the suite, it was introduced in May. The Zendesk Suite then became available for self-service customers within Zendesk to move to that in mid-August of this year. So mid – about a third of the way into the quarter, I guess, is the way I describe it. So a lot of the activity around the suite, or especially in the early days were around new customer activity. And now we’re having a mix of both the existing customers that are looking at it, as well as continue to see really healthy growth from new customers. What I can say is and what we will say is that, the suite has exceeded our expectations now two quarters in a row and we continue to raise in our expectations around its future performance.

[Ross MacMillan:]

Great. Thank you. Congratulations.

[Operator:]

Your next question comes from Brad Sills with Bank of America Merrill Lynch. Your line is open.

[Brad Sills:]

Hey, guys, thanks for taking my question. Just one on the enterprise business now that you’re about a year into seeing acceleration there. Have you noticed any change in kind of the up-sell trend within the installed base? These bigger customers, are there certain products that you’re surprised they’re adding more on, I’d say, the first year renewal or even year two? Any commentary on just add-on activity within the installed base for a large enterprise?

[Mikkel Svane:]

I don’t – like big picture, I don’t see the big – any big macro trends like changes in how they acquire. Like I think there is an overall interest in more like self-service, more automation investments in like our Answer Bot product. These things they’re trying to find ways of further utilize that and get like better customer experiences, better scaling of the operations. But at the same time, it also represents that we have invested more in that area. So it’s probably a very natural evolution and not like a major change in trend, if you will.

[Brad Sills:]

Great, thanks. And then one more if I may, please….

[Mikkel Svane:]

Thank you.

[Brad Sills:]

Sorry go ahead. Yes, one more if I may just on Connect. Since Connect is the new – newer offering, how is that trending and what are your expectations from here for Connect?

[Marc Cabi:]

We’re doing some really interesting stuff with Connect. And like Connect is a different product in the way that we get much deeper involved with the customers using that. It also means it’s a little bit of a different sales cycle and so on it. And Connect is really an investment in the future and kind of leading a change in how the world of customer service support is moving from a very reactive world to a more and more proactive world. But that change is not going to happen overnight, but like it’s increasing the existing the kind of used cases we get involved with Connect.

[Brad Sills:]

Great. Thanks, Mikkel.

[Mikkel Svane:]

Thank you.

[Operator:]

Your next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

[Jeff Van Rhee:]

Great. Thanks for taking my questions. A couple of shots at some quantification here and then one other question. Back to the bundling, any quantification you can share with respect to new customers to give some, say, some percent that are taking the bundle? And similarly on, I guess, FutureSimple, as you look at Q4, can you put any bounce around what the implied underlying revenue in there for Q4 for that business is? And I have one follow-up.

[Marc Cabi:]

Yes. So let me start with the SimpleFuture first. So in Q3, the revenue contribution from SimpleFuture was less than $1 million in total. And for Q4, it will be somewhere between $1 million, but no more than $5 million.

[Jeff Van Rhee:]

Okay. And on the bundling, any qualification you can share?

[Marc Cabi:]

It’s been across the board positive from a bundling perspective. Remember that, when we created the Zendesk, we also did a lot of work under the hood. These products now work really well together. And they’re going to do much more around the customer data platform, the common reporting across those products that is just elevating the capabilities of the suite offering. So it’s not just we’re putting four products together and selling it at the suite. We’ve done a lot under the hood to make these products work well together. And that’s really, I think, what is leading to the additional success around adoption that we haven’t seen so far.

[Mikkel Svane:]

Yes, good point.

[Jeff Van Rhee:]

Okay, got it. And then, I guess, just lastly, I just wanted to touch on professional services a second. Obviously, the mix coming from 100-plus enterprise deal – seats/enterprise, nice progress there. What does the professional services organization look like? What does it look like as a percent of revenues? How are you thinking about that as we go into 2019?

[Elena Gomez:]

Yes. So you definitely hit on something we talked about a lot. As we’re moving up market, we’re definitely seeing more of our customers pull us into professional services engagement. So we’re definitely seeing upward traction. We’re investing and building out that function. And so we haven’t disclosed the percentage of our revenue related to professional services, but it’s roughly less than 2% or 3%, and over time we want to move that obviously up, because we know our customers will benefit from a successful implementation upfront. And we want that high adoption upfront and we believe a professional service engagement is key to onboarding customers successfully. So we definitely see some general traction from our customers on it.

[Jeff Van Rhee:]

Okay. Thank you.

[Operator:]

Your next question comes from Brent Bracelin with KeyBanc. Your line is open.

[Brent Bracelin:]

Thank you. Two questions, if I could. One to start out with just the move-up market in the enterprise, the 100-plus seat metric crossed over, I think, 40% of support revenue for this first time. That compares, I think, to 3.5 years ago, you were at 25%. So with this kind of new mix shift here happening, I know it’s progressive. But you did talk about big ambitions in large enterprise. So walk us through why do you think you’re having the success in the larger enterprises? And what’s the number one reason why you are kind of winning there versus the existing competitive solution set that, that certainly exists today there?

[Marc Cabi:]

Well, we’re all fighting to answer that question. Elena, you want to start?

[Mikkel Svane:]

Well, I think so – I think that like when Zendesk started many, many years ago, like one of the key things that drove us was just like the ease of use and getting up and running quickly. Like I think these like taking the complexity out of software, taking the complexity out of the service, and just making a thing – making – taking a lot of choices for the customer and helping them just get results really, really quickly. I think that initially, like the traditional enterprise motion is to seek the opposite, is to seek complexity, is to seek a million things to configure and full customization and all these different things. But we’re seeing a trend over and we’ve seen that over the last five, 10 years where enterprises are more and more focused on kind of agility, the time to market, hit the ground running and keeping up with the customers, because like the customers are changing and the customers are running and the customers have new expectations every single day. So I think, for the enterprises, Zendesk is just a good example of a big trend in enterprises, where they adopt Zendesk technology to keep up with customer demands, because Zendesk represents a new generation of tools that are easier, faster and gives them the results quicker. And I think that talks to a lot of our success. Then, of course, execution, execution, execution another big part of it.

[Brent Bracelin:]

Got it. So a little bit of a combination of execution, ease of use, which you’ve been talking about for quite sometime. I guess, that parlays into my second question, which is a little philosophical but certainly a question we’re starting to get more from investors around the macro, higher tariffs, higher interest rates. I guess, the question for me is, as you think about that narrative around ease of use, simplicity, how does that play relative to the customer service and engagement category? How economically sensitive is that category if the economy does slow at some point? Are you seeing any sort of change in customer conversations so far in October?

[Mikkel Svane:]

Well, I think that one of the advantages of Zendesk is that it’s like – Zendesk compared to so many traditional surprise solutions out there is ridiculously cheap to set up and get running with. And I think that is one of the things that kept us – we launched the product in 2007. We set up our shop in San Francisco in 2009. Those were interesting times, but we thrive through that. And part of that is the agility, the ease of use, the elasticity the product, you can turn it, dial it up and down as you please. And I think that customers appreciate that and have made us relatively resilient throughout the years to different macroeconomic trends. Does that means that we’re blind to that? N, we are not. We’re a business that prepares also for things happening in the market. But we feel that we are well set up for the future.

[Brent Bracelin:]

Thank you.

[Operator:]

Your next question comes from David Hynes with Canaccord. Your line is open.

[David Hynes:]

Hey, thanks, guys. So I want to ask a high-level question, Mikkel, which is essentially why Base? I know you guys had a preceding partnership, but clearly there are a lot of CRM vendors out there to choose from. So what was it about Base that made them the right team and product for Zendesk?

[Mikkel Svane:]

Again, there’s, of course, a whole checklist of different things we go through when we go for things like that. But I think there has to be a fundamental alignment around kind of how we think product and how we think customer adoption of those products. And like Base and their team has been ridiculously focused on the great customer experience. And that has been one of the things that every single customer has said that this is like super easy to set up, very quickly solves, a pleasure to work with. And then just like that, sales people are raving about the product, but this is actually something that makes them want to use the product. That is a great product. It feels like it’s a sign for them. This is a dynamic that we know from our own customer base that we know from our early customers that finding that magic moment where actually your team starts requesting that this – the team start requesting to use the product. It’s just a huge differentiator, and it’s a huge competitive – a synchronous kind of competitive dynamic that is very, very – that is incredibly helpful for our sales process. So we believe tremendously kind of that seamless organic adoption of our product that sets our sales up for great adoption within the organization and great up-sell within the organization. So I would say, that’s one of the key things that I and the product team look forward in that product.

[David Hynes:]

Yes, that’s helpful. And then on the suite side, any difference between what you’re seeing direct versus the self-serve business there? Curious if one’s carrying more of the early momentum than the other?

[Mikkel Svane:]

That would be too early to say that, like we – it’s a fantastic conversation for our sales people to have. It’s a great sales tool to have the suite and have these things work seamlessly together. But at the same time, our customers go through that experience through the trial and they could just peg it on their way out to their shopping cart, super powerful tool. So I think it’s been working equally strong across our different sales motions.

[David Hynes:]

Yes, perfect. Okay, thanks, guys.

[Mikkel Svane:]

Thank you.

[Operator:]

Your next question comes from Pat Walravens with JMP Securities. Your line is open.

[Patrick Walravens:]

Oh, great. Thank you. Hey, Mikkel, how much of a challenge is retention for you these days? And how do you do it?

[Mikkel Svane:]

So Marc is not leaving us. Retention of customers?

[Patrick Walravens:]

All of them for you.

[Marc Cabi:]

I don’t think we’ve seen any like – I would think of like, we do regular kind of surveys and we have these different, what do we call them…

[Mikkel Svane:]

Self-survey.

[Marc Cabi:]

…surveys we do internally. And like this and I think we’re very transparent about how we process that information, the initiatives we implement to improve where we feel that there is improvements to be made and I think our staff appreciates that. At the same time, people have a lot of fun, like we’re having. We’re working on so many great things, all the stuff we’re going to – that’s going to be a bunch of interesting things had been made and we’re looking very much forward to that event. And like more and more customers are getting engaged or involved with, more and more of our employees are getting involved with customers. I think, it’s a very – it’s very exciting. It’s a very kind of interesting time to be working at Zendesk, because even though we’ve kind of a big company now with 2,600 employees, we’re still just at the beginning of opportunity, and I think people have that appetite and want to see kind of how far we can drive this. So I think people have a fun time right now.

[Elena Gomez:]

I would just add, Pat. We have a distributed workforce, too. So some of the talent wars, if you will, that a lot of San Francisco-based tech companies experience, we’re in a fortunate position where we have a distributed workforce and several offices around the globe. So that does help balance out any of the competitive dynamics that we see here at headquarters.

[Patrick Walravens:]

Great. And if I could ask just one sort of related question. Congratulations on filling the CMO role. Are there any other sort of senior executive roles that you’re still looking to fill?

[Elena Gomez:]

Yes. We are actively looking for a Chief Customer Officer. That’s probably the only one and actually a CIO, those are the two key roles that are open at the moment.

[Patrick Walravens:]

Yes, great. Thank you.

[Marc Cabi:]

All right. Thank you. Jesse, I believe we’re out of questions. I want to thank everyone for joining us on our third quarter earnings call today, and look forward to speaking to you in about three months in February.

[Operator:]

This concludes today’s conference call. You may now disconnect.