Zendesk, Inc.
Q1 2019 Earnings Call Transcript

Published: 1 May 2019

[Operator:]

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2019 Zendesk Earnings 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. I will now turn the call over to Marc Cabi. You may begin your conference.

[Marc Cabi:]

Thank you, Mike, and good afternoon, everyone. Welcome to our first quarter 2019 earnings call. We are pleased to report our results. Joining me on the call today are Mikkel Svane, Founder, CEO and Chair of the Board; and 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 the 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 10-K for the year ended December 31, 2018, and our upcoming Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. 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 release for more information regarding forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from our GAAP results. 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 this intro, I turn the call over to Mikkel.

[Mikkel Svane:]

Thank you so much, Mark, and everybody. Thank you for spending the afternoon here with us. We started this year with 40% year-over-year revenue growth, up 2 points compared to the same quarter a year ago. Q1 this year fit a pattern we typically expect to see at the start of the year, larger mix of deals come from our small and mid-sized customers as we are building a pipeline for future enterprise opportunities throughout the year. The Suite continue to stand out. The Suite now has more than 3,500 paid customers as of the end of the quarter. It's a joy for customers who increasingly want omnichannel solutions and they, of course, helps us drive bigger average deal size by combining multiple products into the Suite.

[Elena Gomez:]

Thank you, Mikkel. As Mikkel stated, we delivered strong revenue growth of 40% in the first quarter. In fact, we accelerated our year-over-year revenue growth rate compared to prior period, four out of the last five quarters. Our growth was driven by continued favorable market dynamics, product innovation, and improving sales and marketing initiatives. We believe we've made significant advances around our business and its competitive position. A few highlights for the quarter. Strong and balanced revenue growth across all regions, exceptional performance from the Zendesk Suite, which continues to beat our internal expectations, continued strength in our land and expand model, with a net expansion rate at the -- at 118%, at the high end of our range and expansion of our opportunity set pipeline as we execute to meet our full-year objectives.

[Marc Cabi:]

Thanks, Elena. Before we take questions, a couple updates on metrics. As we discussed on our last earnings call, customers that purchase multiple products of Zendesk a la carte are continuing to be 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 for paid customer accounts. As of the end of the first quarter, we are pleased to report that an updated progress of the Suite and specifically call out that it now represents 3,500 customers in just under 10 months. We continue to progress on our efforts to also integrate Sell into our offering as part of Zendesk core services. We expect that integration will be completed later in 2019. Zendesk Sell customer count has also been added to our customer tallies and represents about 5,000 customers today. Both Sell and Suite customers are recognized in the other category of our customer account. With that, we'll open up the call for questions.

[Operator:]

Your first question comes from Phil Winslow from Wells Fargo.

[Philip Winslow:]

Hey, guys. Thanks for taking my question and congrats on a great start to the year. I just wanted to focus in on Suite and Sunshine. Obviously, Suite has been out there for 10 months, so you announced Sunshine back in November. And obviously, this was key, as you talked about to your push, up market. Now that these two products have been out there, both product and platform, they have been out there for a while, what is the feedback from customers? How are you thinking about just the large deal pipeline or larger deal pipeline for 2019? Thanks.

[Mikkel Svane:]

So, Sunshine and Sell, these are the two products that we -- for the Suite and Sunshine?

[Philip Winslow:]

Yeah.

[Mikkel Svane:]

All right. Yeah. So -- well, the Suite reception has been awesome. And it's -- I think it's both, it demonstrates how if we could really easy-to-use products together and make these products work really seamlessly together, we really add tremendous value to our customers. And when we can do it really favorable to, like it can really change the market.

[Philip Winslow:]

Great. Thanks. And congrats again on the great start.

[Mikkel Svane:]

Thank you.

[Operator:]

Your next question comes from Bhavan Suri from William Blair.

[Arjun Bhatia:]

Hi. This is actually Arjun Bhatia on for Bhavan. And maybe first question. Just wanted to start out with the build-out of the enterprise sales force, specifically the Named Account Executives. Just curious how that team changes, the visibility you have into the pipeline and maybe even how it impacts the -- your contract duration for your customers?

[Elena Gomez:]

Yeah. So, we have been bringing our Named Account Executives as we've been doing that for a little over, maybe actually little less than a year. But so far, we've had great success with them. Those are longer-term cycle. So yes, while we have more visibility than we had before they were here, they definitely continue to be, as you know, enterprise deals. Just by their nature, take longer to close and more tools to cross. But yes, our visibility is up. And in terms of contract duration, that's definitely something we're actively working on and you can see it in our RPO metrics. So, we're continuing to see customers make longer-term commitments with us. And over time as you can imagine, that will have great benefit for us from a lifetime value perspective.

[Arjun Bhatia:]

Great. That's helpful. And then maybe if you could just provide an update on how the partner channel build-out is going and how that initiative is tracking relative to your expectations this year?

[Elena Gomez:]

Yeah. It's where we expected in a sense that we know that takes a while to build out that ecosystem. We continue to have success in all of our regions with our resellers that we have today and continue to build on those relationships. And then we're continuing to build out our global system integrators. That's obviously a little bit longer cycle than the resellers we have today, which are already in market, but we're pleased with where we are. We are clear that we have more work to do and it's going to be an evolution for us.

[Mikkel Svane:]

Arjun, I think one thing that we are really thrilled about is, with the introduction of Sunshine, we've gained more interest -- inbound interest on the possibilities of working with Zendesk on more strategic opportunities. So, we believe that, that will help us as we build SI relationships.

[Arjun Bhatia:]

Great. Thanks, Marc and Elena. And congrats, guys.

[Operator:]

Your next question comes from Kirk Materne from Evercore.

[Kirk Materne:]

Hi, guys. Thanks very much. Congrats on the quarter. Elena, obviously the RPO growth on both fronts that term -- and market term looks really good. Can you just talk about sort of just the trends in the quarter that might have impacted that? When you look at the guide for next quarter on a revenue basis, obviously, it shows some deceleration. So, I'm just trying to, I guess, balance the really strong -- well, it looks like bookings activity versus maybe a little bit of a slowdown in revenue growth.

[Elena Gomez:]

Sure. So just as a reminder, we still have a lion share of our book of business in monthly terms with us. So, just keep that in mind. They are not really reflected in our RPO. So, that's an important distinction there. I think the drivers of RPO really have to do with a focus on building longer-term commitments with our customers and that's really a high priority for the sales org and that's an important way to continue to grow our enterprise customers. But also we're seeing that customers that want to make a commitment with us over time. Over time, may have greater expansion opportunity for us as well. So, we have yet to see a lot of that benefit. I think over time, we'd be able to have those opportunities, go back to those multi-year customers and actually expand with them.

[Kirk Materne:]

[Mikkel Svane:]

Well -- no, it's great. It's proven all of the theories, all the hypotheses we had going into it. And so, we are already now seeing new customers coming to Zendesk and being first-time customers of both our Zendesk Support product and our Zendesk Sell product, buying these products alongside each other and like that. We will start to see -- we will see more and more of that. We are going to fuel that interest, of course. And it's great to see that -- well, the market validates what we believe is that, at least, like small and medium-sized businesses, they want to buy these products together and like have them work really seamlessly together, getting your customer service and your customer sales people to work really in unity.

[Operator:]

Your next question comes from Alex Zukin from Piper Jaffray.

[Dylan Reider:]

Hi. This is Dylan Reider on for Alex Zukin .Congrats on the quarter, guys. First question on dollar-based expansion. Last quarter, you guys suggested that healthy DBNE for Zendesk could be in the 110% to 120% range and last couple of quarters have been towards the high end of that. Just with the amount of products you guys released in the second half of last year, as those products ramp and are sold to customers over the next several quarters, should we expect dollar-based net expansion to potentially exceed 120%? Or just any color on how new products might affect wallet share of existing customers is helpful.

[Elena Gomez:]

Sure. So, we actually stick with that range because we expect it to ebb and flow over time. So that's number one. So, we don't anticipate changing that range. But the expansion dynamics are not sort of mutually exclusive. There's a whole host of things that happened in any one customer conversations. So as an example, a customer could add agents but at the same time, upgrade their plan or at the same time, add a product and so we look at all of those. We continue to have a lot of our expansion through just natural growth, but we are seeing more and more of that product expansion as well. But at the end of the day, I think net of it all, especially since our denominator is growing, we'd like to keep that range at 110% to 120%.

[Dylan Reider:]

Okay. That's helpful. And then just an update on Sunshine. Any changes in the competitive landscape, commentary on demand you're seeing at enterprise. Thanks.

[Marc Cabi:]

I think it's too early to really comment more on Sunshine, other than, it's opened up a lot of conversations.

[Mikkel Svane:]

Yeah, exactly. Like this thing that it's built in the public cloud on AWS, it's open, it's flexible, super developer friendly, like there is so much pent-up demand for this. So like starting to have all these conversations, getting customers to work on it, working with partners, fully embracing it, it's the beginning of something beautiful and a lot of Sunshine in our future.

[Dylan Reider:]

Okay. Thanks, guys.

[Operator:]

Your next question comes from Samad Samana from Jefferies.

[Marc Cabi:]

Yeah. I think that if you kind of look at what we're doing around product, there are three things. One, we continue to scale the product. So being on, fully on cloud infrastructure now, our ability to scale continues to improve and we can demonstrate that globally to each of our customers. Secondly, as you look at the product, we're really looking at how we bring data into the equation, in the value of the data we hold on behalf of our customers and their ability to use that data to serve a better customer experience, definitely something that our teams focus on quite a bit, Guide and the Answer Bot and all those things are really seeing some good growth. And then, finally, we're always interested in making sure that all of our products work well together. Mikkel said this earlier in the call. So, that's a big initiative as we integrate Sell and some of the other products that we've acquired in the past into the core Zendesk environment. That's the power of Zendesk. When a customer picks up Zendesk, they're able to use these products seamlessly across channels, across the different use cases they might develop.

[Mikkel Svane:]

Zendesk has always positioned itself as a company that approaches the market horizontally. We have a lot of use cases across a variety of industries and across a variety of use cases, internal and external. We're always going to position the product that way. That said, the product can be heavily customized for vertical use cases. And I think that's where partners in the future will be able to really help us. They'd be able to create vertical swim lanes for us to pursue around financials, around healthcare and other categories that have more specific requirements. So, we will look for partners to help verticalize for certain instances, but our approach is always to kind of remain somewhat horizontal in our approach.

[Marc Cabi:]

Yes.

[Operator:]

Your next question comes from Stan Zlotsky from Morgan Stanley.

[Stan Zlotsky:]

Hey, guys. Good afternoon, and thank you so much for taking my question. So, a couple on the metrics. The MRR from greater than 100 seats staying at 40%. Is it fair to say that, that's a function of Q1 being an SMB, more SMB heavy quarter, combined with just rapid adoption of Suite's within the velocity customer cohort?

[Elena Gomez:]

Yeah, definitely. Q1 definitely, typically is a seasonal -- seasonality is an important factor there and SMB Q1 is a big quarter for us. So, you nailed it.

[Stan Zlotsky:]

Okay. Perfect. And I don't think I saw the -- greater than a 50k deal disclosure in the shareholder letter, but perhaps I missed it. Could you guys just maybe throw it out for us?

[Marc Cabi:]

So, we're really pointing investors to RPO as a -- kind of as a guide to that. But I can tell you that both 50k and 100k demarcation points for average deals were up nicely year-over-year versus a year ago quarter. And the average deal size was about flat from a year ago, but we're not going to -- we're kind of retiring that metric and really getting people focused on RPO going forward because we think it's a better and it's a GAAP measure of our performance.

[Stan Zlotsky:]

Okay. Perfect. And then last one for you, Elena. For -- full year for guidance, on the profitability side, operating income guidance bumps up the bottom end, free cash flow unchanged, maybe just walk us through how you think about profitability as we head into the rest of the year and with the inputs that went into your guidance for the full year? Thank you.

[Elena Gomez:]

Yeah. Sure. So -- so we are not changing our guidance for the full year. We're sticking to the guidance we just issued. But you're right, I think there is -- as we get into the second half of the year, obviously, we're going to see more of that operating leverage and a lot of that comes from a few different things. It's not one single thing. But one thing I'll point out is our data center migration, as you saw, that was complete, we still have some wind down to do in Q2. So, we'll see that benefit in the second half of the year and then there is some leverage coming out of our G&A awards as we continue to focus on scale in our back office. And then there is a slight overweighting of our events in our marketing in Oregon in the first half. And also we do much of our hiring in the first half, especially in the sales work. So, that will be definitely more measured as we get into the second half of the year.

[Stan Zlotsky:]

Perfect. Thank you.

[Operator:]

Your next question comes from Brent Bracelin from KeyBanc Capital Markets.

[Marc Cabi:]

So, there is a -- in the RPO growth, Elena alluded to this earlier. We have just about half of our customers that our monthly contracts. Those don't actually show up in RPO from a reported perspective. You pickup just a partial month of those. What has been happening is we are looking at annual longer contracts with many of our customers. So, there's always some mix toward annual that's helping your near term RPO as well your short-term RPO.

[Marc Cabi:]

So the other category, you've seen a pickup in growth in that category because of the Suite since Q2 of last year. In addition -- and so that represents as of the end of Q1 about 3,500 customers on the Suite. And then we folded in, as of Q1, our customer account, pending customer account for our Sell product, which was acquired in September last year. We did not restate prior years for that customer account.

[Operator:]

Your next question comes from Derrick Wood from Cowen and Company.

[Derrick Wood:]

Thanks. On Sunshine, I know it's early, but could you drill a little bit more into the traction you're seeing so far, maybe what kind of new applications are being built around Zendesk and maybe how you go about engaging the developer community since it is a different audience than you've typically sold to?

[Mikkel Svane:]

Yeah. Undoubtedly, a lot of new motions for the company. But we have teams that are incredibly excited about engaging both with the developer community and with our partners. And as we also said, there is a lot of inbound interest from our customers. So, we are like working really hard to kind of get all our documentation in place, all the use cases so on. So, this is really something we kind of talk a lot more about in New York next month and bringing both customers and partners to the events here. So, lot to talk -- a lot more about that in May.

[Derrick Wood:]

Okay. And then, Elena, you mentioned that you had a higher mix of SMB in the quarter as you typically see in Q1. Can you just talk about how you see on the enterprise side? How you see your pipeline build for the rest of the year and if there is any different shape to that business than you saw in 2018? Thanks.

[Elena Gomez:]

Sure. Not necessarily other than I would say, last year we had a bit more enterprise momentum in Q1. So, I had a bit more visibility. That said, I always expect our enterprise wins to be more second-half weighted, and in many cases even Q4 weighted. So -- and that's typical. I don't think that, that's something different in terms of the seasonality of our business. So, we've got more visibility. We've got names on the ground. And so I feel like that's helpful too.

[Derrick Wood:]

Okay. All right. Thank you.

[Operator:]

Your next question comes from Ross MacMillan from RBC.

[Ross MacMillan:]

Thanks so much. I'm just curious on the big increase in the long-term RPO, given this wasn't a big enterprise quarter. Was that a function of -- what drove that, I guess? Because I would normally think that would be on -- was it renewals or was it -- what drove the kind of big move on long-term RPO?

[Marc Cabi:]

I think our sales team's philosophy has been that, as we either talk about expansion of renewal deals or with new customers to really think about customer commitments beyond the year, which is a very different motion but norm in the sales team have been really successful engaging those conversations. So in general, we see more and more contracts even smaller in size with multiple year terms associated with them. And I think that's a good hygiene to have within the company because it just creates a more strategic relationship between ourselves and the customer.

[Ross MacMillan:]

Okay. Great. And Elena, you did mention that enterprise deals maybe little bit more numerous last Q1 than this Q1. Any particular reason for that in your view? Was pipeline coverage similar? So, was there a close rate difference or was it pipeline difference itself? Just love any other color on that? Thank you.

[Elena Gomez:]

Yeah. I think a little bit was Q4. Some of those deals last -- in the year ago Q4 fell into Q1. So, that helped us but -- and as you know with those deals, if there are meaningful deals, they can swing the growth rate in the quarter. So, there is -- other than that, there's nothing really to call out that's different.

[Ross MacMillan:]

And then maybe just one last one on, you mentioned Mikkel did the different motions in the company right now. If we think specifically on cell, how are you making alterations to the go-to-market given the buyer might be slightly different. It might be a different buyer pool. How are you doing that across the different -- different pieces of your sales force enterprise versus velocity, for example.

[Mikkel Svane:]

Yeah. Well -- so, I think it doesn't -- everything doesn't start with the sales force. There is a lot about kind of making the product experience really fantastic, making the messaging, making the positioning, making the awareness in the market really coherent and then let our customer kind of experience the products together. That's a big part of our DNA. That's a big part of what we do. And then like, once these things becomes much more tangible, it's a lot easier for our sales force to have that conversation to our customers. And of course, it requires a little bit broader conversation, but these are sales tools. It's not so unfamiliar for our sales people.

[Ross MacMillan:]

Great. Thanks so much. Congrats.

[Marc Cabi:]

Thanks, Ross.

[Ross MacMillan:]

Thank you.

[Operator:]

Your next question comes from Jennifer Lowe from UBS.

[Jennifer Lowe:]

Great. Thank you. I wanted to actually not ask about Sunshine or Sell or Suite. But I'm not seeing a difference. So this quarter, you announced the addition of your first Chief Customer Officer, and that's sort of the trend we've seen in the broader space of that role being created to sort of capture the voice of the customer. And so, I guess there are two questions related to that. First, what sort of the opportunity you saw there to create that role? And what's that bringing to the C-Suite that maybe you didn't have or didn't have enough of previously? And then related, as you go out to your customers and have those discussions, is that something that you're seeing, that your customers are doing as well and how does that influence the type of conversations you have with those customers at all?

[Mikkel Svane:]

Consider, but yes, like we, I think it was we -- we took our time in finding kind of the perfect candidate for that. And I feel really, really happy about having Elizabeth join us, it's still very early days for her, but she hit the ground running and are very busy with the projects. I think that -- like that having that voice of kind of the customer and like there is somebody's job that gets up every morning and think about the pure customers parents would like, how are we facing the customer. So, what extent do we make sure that we always put our best effort forward. We always put our best foot forward that we always face them. That well always look them in the eye that we never turned our back to our customers. Having somebody that owns that your notion in the company is incredibly powerful. And like -- we've always been a customer-focused company. Yes, as we are growing, as we are rapidly evolving as a company, all these people is fantastic to have it anchored with a person, with an officer that owns a big part of the organization. It works really well. So, I think it's a matter of, where we are as a company, as we're scaling and yes, we see that with a lot of our customers through that, somebody who owns kind -- owns the customer relationship beyond all the other motions of the company. We definitely see that across industries across different go-to-markets. Elena, I don't know if you had some --

[Elena Gomez:]

Yeah. No, I think that's not uncommon for, especially of our scale to have someone who's like Mikkel said, focused on the voice of a customer. I think one thing that Elizabeth quickly is focused on is the customer life cycle. And as we're getting bigger and having more enterprise customers, it's a different type of customer success plan, if you will, and journey and us being really mindful of the fact that we have both SMB set of customer success priorities. But we also have enterprise success priorities. And Elizabeth has quickly been able to distinguish the two and really has a point of view of how we approach that. So, encouraged by her being on board and its early days, but I expect that, that will over time have a long-term impact to, obviously, our churn and contraction rates over time.

[Operator:]

Your next question comes from Koji Ikeda from Oppenheimer.

[Koji Ikeda:]

Thanks for taking my questions. I had a question here on Apple Business Chat. So, Zendesk is one of the 20 or so providers into the Apple Business Chat beta program. And I guess my question is, how is that been scaling thus far in terms of technology, capabilities and integration into Apple Business Chat? And on the demand side, are you seeing customers ask for this Apple Business Chat capability now? Or do you think Apple Business Chat is more in an evangelism stage from a Zendesk perspective? And then finally, are you also doing anything similar with the Google's rich messaging services? Thanks.

[Mikkel Svane:]

Again, this is something we've brought up a lot more about at a later point in time. But I believe that, like our DNA is very much to democratize these technologies, make it easy for everybody to adapt these things and hit the ground running and use these kind of channels frictionlessly. That's not where a lot of these things are today, whether it's Apple Business Chat, or with WhatsApp, or others like it, every -- all of these channels, all of these platforms have various kind of manual onboarding processes, et cetera. And so, yes, we are working with customers around enabling them on all these channels, but like -- we really feel that these channels are going to explode and we are going to see much more broad adoption of these once we can kind of help these partners streamline the processes and help democratize access to these things, while preventing, of course, TAM and all these potential misuse that are in these channels. So, that's kind of -- that's our strategy. That's how we are working, so very excited about kind of demand we see in the market. The customers we're working with on it, also working on helping kind of streamline and democratize access to these things, so people can adopt it quicker.

[Koji Ikeda:]

Great. Thank you for taking my question.

[Operator:]

Your next question comes from Tom Roderick from Stifel.

[Tom Roderick:]

Hey, guys. Thanks for taking my questions. So, in looking at all the top line metrics, you beat this quarter very easily. You've raised next quarter above where the Street's at. You've raised it for the full year guidance. So, top line continues to come in very, very strong. And then if I sort of look at the -- the operating income guidance just kind of holding it right where you were. So, I guess the question is sort of understanding that the demand environment remains really solid, where do you want to put some of these incremental resources to it? Is it simply investing back in sales and marketing? Do you want to spread this around a little bit? We'd love to sort of understand your sort of philosophical thoughts trading-off, some of the puts and takes on letting the margins run versus reinvesting back in the business here? Thanks.

[Elena Gomez:]

Yeah. I'll point you back to our framework. Just to -- and then I'll get into how we think about investing. But in terms of our framework, right, the way we think about it is, to the extent, we grow more. It dictates somewhat how much leverage we are going to give back. And so -- and that framework was something we talked about in our Analyst Briefing Day. But at the highest level, I think we need to continue. Customer expectations are changing. They keep going up, so we need to continue to invest in our product and making sure, as Mikkel said, we introduced products that have low-friction kind of work seamlessly within our family of products in our platform. But of course, we're also moving upmarket and so we need to make sure we have that enterprise muscle and investing in partners and things like that. And Sunshine and building out our partner ecosystem around that is also a place of opportunity for us to invest. So, it's really balanced and at the same time, we're leveraging as much as we can in the back office. So, that's the -- at the highest level, how we think about it.

[Tom Roderick:]

Yeah. It's a good point on the back office. So, AWS, the migration there is complete. And I think you said we ought to get about 100 basis points of gross margin expansion in the second half. Is that just a function of duplicative systems just being shut off all at once on a cliff, so we'll get all those 100 bps to once. Or is that sort of gradual over a couple of quarters there?

[Elena Gomez:]

It'll be gradual over a couple of quarters. We're balancing other things within our COGS line, if you will, right, because we've got success investments in there, et cetera, but for the full year, I'm still committed to delivering that approximately 100 basis points.

[Tom Roderick:]

Okay. Great. Last one for me. Just thinking about this RPO growth. Again congratulations, great number on that front. Is there anything that you can -- that you're already doing or that you can do in terms of the installed base to convert more and more of those month by month customers into an annual subscription. Is there any carrot at the end of the stick that you can use or you already doing that to drive that number? Thanks.

[Elena Gomez:]

Yeah. I mean that's Norm's DNA, right? He is really trying to get a lot of our customers that come up for renewal to longer-term contracts. And once you have a customer committed for multiple years and the conversation around billing is a lot more of a natural conversation. So, we start with term and then we'll focus on billing as a secondary priority.

[Tom Roderick:]

Wonderful. Thank you, guys. Appreciate it.

[Elena Gomez:]

Sure.

[Operator:]

Your next question comes from Brad Sills from Bank of America Merrill Lynch.

[Brad Sills:]

Well, hey, guys. Thanks for taking my question. Wanted to ask about the Suite. You've obviously seen some real success there. Is that driven largely by some of these mid-market firms, running point solutions for perhaps Chat and Talk. And seeing the value of having one integrated Suite, are they turning off some of these point solutions or are they kind of coming out this new and saying, look, we're going to build an omnichannel strategy outreach with our support system and have the rest integrated, so this is more of a greenfield opportunity?

[Mikkel Svane:]

I would say -- so, I think if we dig down into it, I think there is a lot of different kind of -- customers are different like many different approaches to it and that's definitely greenfields in there. We definitely also have people like upgrading whatever they are on today and we also have people going all in on the Zendesk Suite, like whether it maybe you have had one or two products before. So, I think it's a lot of different use case. I don't have kind of more precise data for that. We see -- we feel that we see it across the broad, across the board. And it's really kind of indicating a trend of like omnichannel is the new standard. Omnichannel is the new black and that's basically where customers are starting today and the sweet fits really, really neatly into that proposition.

[Brad Sills:]

Great. Thanks, Mikkel. And then one on Sunshine in the partner channel. Obviously, partner channel hasn't been significant in the past and I think you see that changing more gradually. But with Sunshine, it seems like the opportunity would be there for some of the global SIs. Are there -- are there any that you're surprised or excited about where they're building solutions today and perhaps ramping on as Zendesk practice than maybe that you had seen in the past?

[Mikkel Svane:]

We see -- definitely see the early signals on that. We are going to talk a little bit more about it in May at our Showcase event. But again, this is a journey. We're in the early days of the journey and we're going to see -- we feel comfortable that we will be able to talk a lot more about this throughout the year.

[Brad Sills:]

Great. Thanks, Mikkel.

[Operator:]

Your next question comes from Steve Koenig from Wedbush.

[Steve Koenig:]

Thanks for taking my question. I want to drill down on the partnerships. And could they increased really dramatically in Q1? And the majority of those were international. Maybe talk a little bit about, maybe what's the balance of -- in terms of the kinds of partners you're adding? Are they fulfilling demand as you're growing international? Or are these actually an enabler or precursor, or a catalyst for demand generation? And what's the lead time then for driving bookings and should we expect international acceleration? And then I have one quick follow-up if you don't mind.

[Marc Cabi:]

So, I think some of our international markets were billing partners early on and we approach the LatAm market with partners in the early days. We learned a lot from that and we see again those partner kind of activities in some of the APAC markets that we operate. And what we're trying to do is bring that into more mainstream operations in EMEA and eventually in the US. And they can create incremental demand for us over time, probably more in the international markets. But we'll see how that works out domestically as well. But then we also look at the SI partner opportunity, which again is a long investment, both Elena and Mikkel have said. So, we want to make sure that we allow those investments to kind of build over time.

[Steve Koenig:]

And Marc, would you expect international can lead the growth rate over domestic and maybe even accelerate from here? And then just lastly, I'll pass and my follow-up, which is, can you give us any color on the breakdown on your revenue run rates, Support versus other products.

[Marc Cabi:]

So in terms of international, international can grow faster than the US. But I would say that in Q1 specifically, we saw very strong performance in our Americas, in our domestic market here. So, it was a really strong quarter for our team here in the US. But we have an opportunity internationally to open up new countries over time. And each year we put a direct investments into a few new countries and we'll continue to do that as warranted. And we use partners also to expand our presence there. And then from a support perspective, we are definitely diversifying it from a product perspective. You're seeing the Suite is becoming a larger component of our revenue, as it reaches 3,500 of our customers now using an omnichannel solutions. So, we are going beyond support into other categories. Another product that I think has done extremely well here recently is our Guide product, our Help Center product and its associated capabilities with Answer Bot. Those have been very successful for us.

[Steve Koenig:]

All right. Well, thank you very much.

[Operator:]

Your next question comes from James Rutherford from Stephens.

[James Rutherford:]

Hey. Thanks for taking the questions. Just a couple for me. And the first on Zendesk Sell. Just curious maybe early to ask this question, but what's your appetite for beefing this product up and taking it, sort of more upmarket into the enterprise and what kind of lift might that take for you to get that product ready for prime time on the enterprise front?

[Mikkel Svane:]

We definitely had the appetite for it, one step at a time and like really getting it solid and cross product integrated really well onto the Sunshine platform for SMB mid-market customers is really priority number one here. But long term, our ambition is, of course, to go all the way.

[James Rutherford:]

Okay. Thanks. And then one more follow-up on the many kind of bundled questions you've had so far. But you talked last quarter in your Shareholder Letter about offering some omnichannel bundles that are appropriate for the enterprise. Can you talk about what's been developing there, and whether that's helped kind of build the Enterprise? Pipeline, you've talked about at different points through the call? Thank you.

[Marc Cabi:]

So, I think what we said last quarter was that a lot of conversations to the enterprise have been led by Suite and that enterprise customers don't necessarily purchase the Suite as a SKU, but they will assemble an omnichannel bundle that resembles that Suite. And what we find there is that our sales people just have much more success having the omnichannel conversation because they demonstrate through the existence of the Suite that our products work well together. And so that has been really helpful in terms of winning new business and expanding with our existing customers. And that tactic is still -- that strategy is still used by the sales teams today.

[James Rutherford:]

All right. Excellent. Thanks for the color.

[Operator:]

Your next question comes from Michael Turrin from Deutsche Bank.

[Michael Turrin:]

Good afternoon. Thanks for taking the questions. You've mentioned AIS priority for 2019. Can you expand on some of what you're working on there with the Answer Both and perhaps if there are additional capabilities or examples worth highlighting, maybe walk us through a few key examples there as well.

[Mikkel Svane:]

Well, you're going to see a lot more of kind of the Answer Bot technology throughout our products, making simple suggestions, pre-selecting for our customers, making choices model and easier. So, we are enabling that technology across the product, making it more integrated in our widgets which et cetera. So it's automatically kind of helping in the customer service processes. And in general, kind of our AI investments, it's really about further automation like making a lot of the automated -- the task to automate a lot more of the task we make them smarter and make them do that on the basis of like real data for -- that helps Guide decisions and help Guide workflow. So in high level, that's really our ambitions around AI.

[Michael Turrin:]

Okay. Great. And I know there have been quite a few questions on RPO already, but that metric looks particularly good this quarter, especially relative to some of the seasonal trends we're used to seeing from billings in Q1. Given that strength and what's historically more of an SMB focused quarter, why wouldn't that show up even more any updated guidance for this year. I know that you're putting up sustained high-growth within Zendesk. I'm just curious if we can revisit some of the dynamics there.

[Elena Gomez:]

Sure. I mean, I think that, starting with sort of a typical quarter last year, this was more of an SMB, more of a typical quarter SMB focused. And so as we think about guidance, our philosophy hasn't changed. We're still thinking about enterprises where we see the upside. If you look at our overall performance across all of our regions, I feel like Americas had a very strong start to the year. I think the regions, if there's a place where I'm paying attention to, particularly in APAC, that's a place that we're looking at, but other than that I don't think there's anything different. And as it relates to RPO, as a reminder, some of -- not all of our business is in there, right? Some of it is monthly. 50% actually is monthly.

[Michael Turrin:]

Okay. Great. Thanks. Excellent results.

[Operator:]

Your next question comes from Jeff Van Rhee from Craig-Hallum Capital. Jeff Van Rhee, your line is open.

[Jeff Van Rhee:]

Can you hear me there? Can you hear me now?

[Mikkel Svane:]

Yeah. Now we can hear you, John.

[Jeff Van Rhee:]

Okay. Great. Thanks. So, couple for me on the customer count metrics, obviously, with the Suite and then layering in new products, you acquired products and organic costs. Just hard to get a clean, what I would call sort of clean time, sir's. I know you've thought a lot about metrics. Just any sort of preview on things that you might be able to give us with respect to the customer count and a little better customer segmentation?

[Marc Cabi:]

So, I think in general, our customer count has been growing at a slower rate than revenue. Part of that is the consolidation of the customers, as we do things like the Suite, where we would have reported three or four products. Now, we're reporting that as a one-customer scenario. But more importantly, I think as Zendesk grows, even though we continue to stay committed to the SMB small business community, we are moving up market and our deal sizes are getting larger and we're interested in the higher value deals. And we're also interested in making sure that the metrics around the customer makes sense. So, about two years ago, we made a decision to move away from our very low-end of churn and contraction was high. So, we made some decisions that do alter the trajectory of customer count and we stated that, that's an important metric to watch, but not the only metric to watch. But those are kind of the things that are going on within that metric that creates some mixed signals, if I want to call it that.

[Jeff Van Rhee:]

Got it. And if I could then just two product-specific questions. You touched on the Answer Bot. Just I know it has a somewhat unique pricing model. Just sort of your learnings there from that pricing model and other places you might be able to deploy something similar. Or just what you've learned because I know it was somewhat innovative pricing there. And then on the Talk product, juts with respect to the kind of the typical size and nature of a use case, how are you seeing that product used?

[Mikkel Svane:]

Let me start with the Talk. So, Talk has generally been a product. So, it's a call center product, but we've generally focused on a smaller use case around the call center for that product as customers get into the large hundreds and thousands of agents. There are companies that really focus on the networking and routing requirements of call centers that we partner with, rather than offer the call center product ourselves. And we have a paid version of that interconnection that we use for those use cases. So, we are able to participate in that revenue opportunity. So if -- okay, I think that -- so once our customers get engaged or involved with the product, they really understand the value of it, like when some things they realize, they can with the flick of a switch shave off 10% 20% of the volume. They really appreciate kind of the attractiveness on the pricing model. I think maybe there is a little bit of a hurdle in kind of understanding the pricing model, when you don't appreciate kind of the efficiency of the product. But like, we are still very encouraged by having that propositions for our customers.

[Jeff Van Rhee:]

Got it. Thank you.

[Operator:]

The next question is from Patrick Walravens from JMP Securities.

[Patrick Walravens:]

Okay. Great. Thank you for fitting me in. Yeah? Right now. So, Mikkel, here is the one for you. I've been reading this book and maybe you've read it. This book is adopted up by Roger McNamee, which is making me think a lot more about data privacy and sort of the role of the companies that we cover should have with respect to people's data what it. So, what do you have to think about as the CEO, as you chart out the product roadmap for Zendesk from a privacy point of view?

[Mikkel Svane:]

Well, it's a good question. And we are -- it's, of course, something that we focus on with our ability to give or to let our customers have a lot of information on their customers in terms of how they use the product, how they use their website, how engaged they -- how they engage with them, et cetera, et cetera. And so we have like a guiding philosophy about that, like, if it provides true value for the customer, it provides a better customer experience. It's in their interest. But it is definitely something that we will be challenged on it. We will challenge ourselves on more and more as we go deeper on the platform because our ability to collect a lot of data and help provide a better customer experience on that, of course, is widening and extending with that. So, it's an area we keep challenging ourselves on. We have high standards. We have high ambitions and I'm not afraid of heavy hard conversations internally.

[Patrick Walravens:]

Okay. Thank you.

[Operator:]

And that was our last question. At this time, I will turn the call back over to the presenters.

[Marc Cabi:]

All right. Well, thank you very much for joining us for our first quarter call. We will hope to see you guys either at Showcase in May. The time and date is available on our website. If not, we will talk to you next quarter. Have a great day.

[Operator:]

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