Zendesk, Inc.
Q1 2017 Earnings Call Transcript

Published: 4 Aug 2017

[Operator:]

Good afternoon. My name is Leandra and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2017 Zendesk’s 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. [Operator Instructions] Thank you. Mr. Marc Cabi, you may begin your conference.

[Marc Cabi:]

Good afternoon, everybody. This is Marc Cabi. Welcome to our second quarter 2017 earnings call. We’re pleased to report our financial results for the quarter. Joining me on the call today are Mikkel Svane, Founder, CEO and Chairman of the Board; as well as Elena Gomez, our Chief Financial Officer. Before we get into the results, let me pass along a few reminders. Our shareholder letter is available on website at investor.zendesk.com, which details our full results and commentary. 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, our ability to attract and retain customers and our 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 Factor section of our prior and subsequent filings with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q and our upcoming Quarterly Report on Form 10-Q. 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 but not as a substitute or in isolation from our GAAP results. You could find additional disclosures regarding these non-GAAP financial measures, including reconciliations with the comparable GAAP financial measures in today’s earnings press release, 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 brief introduction, I’m going to turn the call over to Mikkel.

[Mikkel Svane:]

Thank you so much, Marc, and good afternoon everybody. We’re entering the second half of 2017 in the strong position. In the second quarter, we crossed a $100 million in revenue for the first time in our history, and we had more than $4 million in free cash flow. Meanwhile, we are encouraged by the key metrics we track to measure our ability to attract and surprise business. Both our monthly recurring revenue from 100 plus [indiscernible] (3

[Marc Cabi:]

Thanks, Mikkel. And with that brief introduction and the shareholder letter available to you on our website, we will open it up for questions. Leandra, can you pull for questions, please?

[Operator:]

[Operator Instructions] And your first question comes from the line of Kash Rangan with Bank of America Merrill Lynch. Your line is open.

[Kash Rangan:]

Hi, guys. Congratulations on hitting the $100 million quarterly milestone. Mikkel, encouraged to see that you’re reiterating your longer-term target of $1 billion in revenue. Can you talk to us specifically about that kind of product and distribution pivots that you have made that will help you not only potentially reaccelerate what seems to be implied billings but also your progress towards the $1 billion revenue goal. Because generally, companies, as they become larger, revenue growth rate decelerates. But implicit in your long-term confidence in reaching that $1 billion, there’s some assumption that the growth rate will not decelerate as meaningfully. So can you just talk to the product and distribution catalysts and what exactly has happened? That will be great. And that’s my only long question.

[Mikkel Svane:]

Thanks, Kash. Well, we are looking at the adoption of our additional products outside of our core support product. And we continue to see both the number of deals and the amount of dollar deals, we continue to see an increasing contribution from our new products. So we are very excited about that. We had a very good quarter like that. And we still see tremendous amount of opportunity of expanding every single one of those deals where we now land with more products. At the same time, we are seeing all the right indicators in both building the pipeline and landing the deals with tremendous growth opportunity that will continue to drive up our revenue contribution from 100-plus seat customers. So we’re seeing all the right indicators in supporting our objective and are confident about our 2020 revenue objective.

[Operator:]

Your next question comes from the line of Bhavan Suri with William Blair. Your line is open.

[Bhavan Suri:]

Hey, guys. Nice job there, congrats. I just want to piggyback on that question. Mikkel and team, the number of customers you’ve had in the other products jumped pretty materially. So I guess my first question will be sort of what’s the product uptake that you’re seeing? Which one is driving it or which combination? And then most specifically in the enterprise, is there one that they’re thinking that fit better than others? Is it sort of the Voice product, the Chat product? Sort of as you think through the various offerings, which one is being picked up a little more that’s sort of driving that nice upside than the other segments?

[Marc Cabi:]

Let me talk about some of the products as they’re being used today and then Mikkel can kind of give a view on longer-term. So Bhavan, currently, if you look at what’s happening is, as you know, as we move to this small type product focus, our sales people are much more focused on solution-based selling and selling a family of products. And what we’re seeing is improving attach rates with our support product leading to include Chat. We’re starting to see more talk at the lower end of our customer base, and that is starting to grow in terms of its size and capability of serving larger customers. And then Guide and its associated features like Answer Bot are really resonating with customers because it fulfills this opportunity for our customers to have a much knowledge – smart knowledge-based help center kind of self-service capability. And so we’re seeing a lot of interest around that. So all of those products like Guide and others are the products you see in the other product category where attach rates are starting to improve significantly. Mikkel, do you want to talk a little bit more about the long-term vision of we’re embracing our data and…

[Mikkel Svane:]

Well, I think there’s no doubt that as we kind of – as we approach our customers with a more kind of solution approach, we’re also getting more engaged in conversations about how to transform their customer experience and even like digital transformation of their infrastructure stack. So we are setup for, especially with our larger customers, from deeper relationships that makes us very confident and shows all the indicators of a tremendous expansion opportunity.

[Bhavan Suri:]

That’s helpful. I guess, sort of staying on that strategic front, or at least we fast forward, pick sometime from 27 years maybe the idea of a support website disappears maybe the link disappears and maybe through [indiscernible] (10

[Mikkel Svane:]

Well, I think that you’ve seen with the early release that will come out and general availability later this month of Answer Bot that, Marc alluded to that, the capability of dealing with a lot of these questions, issues that are standard and it comes out for most people in a very efficient automated way. Currently, with the current Answer Bot functionality, that’s based on a reactive basis but there’s no doubt that we think about the future as a proactive customer service world, a proactive customer engagement world. You will see more and more of kind of the traditional customer service paradigms driven by data, driven by machine learning, to be proactive and change channels from where we today work on websites and those kind of things and still a lot analog on phone, et cetera. You’ll see a more and more of this experience being embedded in your mobile apps, in your mobile, in your products, in your games, et cetera. So we’re very excited about that. We’re very excited about working with a lot of these vary forward-looking companies that thinks that way, whose whole business is embedded in a mobile app or in a game. So we learn tremendously from working with these customers. And we also sense that, that’s the kind of businesses that traditional enterprises, just want to learn from, want to be inspired from and want to build the future businesses on.

[Bhavan Suri:]

That’s helpful. Thanks guys, thank for my question and nice job.

[Marc Cabi:]

Thank you.

[Operator:]

Your next question comes from the line of Ian Strgar with UBS. Your line is open.

[Ian Strgar:]

Hi, guys, thanks for having me on the call. Given that enterprise as a percent of MRR ticked up this quarter. Can you guys just talk about any particular areas that you’re seeing success in closing deals in enterprise or maybe in growing the enterprise pipeline? Like what types of companies are interested and which are the most – which are the ones you’re most engaged with now?

[Elena Gomez:]

Yes. I can take that. So for the question, what we’ve seen is the pipeline that we’re looking at not only for Q2 but even for the balance of the year has a broad range of what we would call more household names than we’ve seen, which is kudos to the sales team. But also, we’ve had great success in really continuing the – land and expand motion and in particular, with some of our customers who started with us support and then attaching those products that Marc talked about. So it’s a combination, it’s not one specific selling motion, but it’s a combination of a lot of things coming together.

[Ian Strgar:]

Okay, got it. That’s helpful. And if I could just add one more on – I believe there were some recent leadership changes at one of your large competitors. I was just wondering, if that was something that affected you guys at all in Q2 or you expect might affect you this year.

[Marc Cabi:]

We have a great competitor down the street from us. But we believe, we have an ability to compete effectively. We have a pretty good idea of the type of customers, where our message resonates well, and we’re continuing to build our relationships with those kind of companies. These are companies that are traditional companies looking to make digital transformations to meet the new competition that they’re facing. We provide a very good solution for those type of companies to improve their customer experience.

[Ian Strgar:]

Thanks a lot, guys.

[Operator:]

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

[Stan Zlotsky:]

Hi, guys. Good afternoon and thank you so much for taking my question. So maybe if we can get, Elena to continued to be involved in the conversation. So when we look – when we listen to what you guys are saying, there’s a lot of excitement about the pipeline for the second half of the year. But at the same time, investors are looking at the revenue guidance for the full end – for the full year, and the top end of the guidance is not moving up. It’s just the bottom end is moving up. Help us to understand the excitement that you have about the pipeline for the backend versus what you’re baking into your guidance for the full year?

[Elena Gomez:]

Yes, Stan. So we’re confident in the guidance for the full year. We did, as you know, exit some sales employees in place in the back half of Q4 – the back half of last year and are ramping, a lot of that – of the more enterprise-like sales folks in the first half of this year. And I want to see that play out a little bit more in Q3. But I still feel confident in our guidance that we provided.

[Stan Zlotsky:]

Okay. Got it. And then a lot of times have been spent on the enterprise business. But walk us through some of the momentum that you’re seeing on the velocity side of your organization.

[Elena Gomez:]

Yes. That continues to – that’s one another thing that gives me confidence in our overall guide is that we have this huge transactional business that’s highly predictable. And that has continued to sustain, and we’re continuing to optimize that and make that more efficient. And that has continued that steady clip that we wanted to, which has allowed us to give that confidence in the guide as well as have predictability inline of sight into revenue, not only at the beginning of the quarter. But really at the beginning of the year as well.

[Stan Zlotsky:]

Got it. And then last one for me. On the calculated billings numbers, anything you saw in the quarter where your billing terms changes – changed or maybe you had some FX headwinds or tailwinds, just any kind of dynamics on the calculated billings number. Thank you so much.

[Elena Gomez:]

Yes, thanks. No, no real change. I think we continued to see a mix of our customers doing both monthly billings, semi-annual billing and annual billings. So we’re not demanding a change in annual billing. So the overall mix hasn’t changed. We still see about half of our customers’ annual billed and the other half monthly billed. So that trend hasn’t changed this year.

[Stan Zlotsky:]

And nothing on FX?

[Elena Gomez:]

No, nothing on FX, that’s impacted us.

[Stan Zlotsky:]

All right. Thank you so much.

[Operator:]

Your next question comes from the line of Nate Cunningham with Guggenheim. Your line is open.

[Nate Cunningham:]

Hi, guys thanks for taking my question. It looks like your support net adds decelerated relative to last quarter. Are there any dynamics there that we should be aware of?

[Marc Cabi:]

From a paid customer count perspective, we don’t really use that as a major KPI we watch. We always want to attract new customers. There has been a focus on quality of customer. And so we are seeing some sales force productivity bringing in larger customers. And so we really focus on how – that the new customer value we’re bringing than just a pure customer count we’re bringing in.

[Nate Cunningham:]

Okay. And when you’re going after an enterprise deal, who are the one or two competitors you’re seeing the most often? And when you win, why do you win?

[Mikkel Svane:]

Well. So our competitive landscape hasn’t really changed and that also means that our preferred engagement with enterprises are to get into the innovation groups work with new products, new services, new offerings, new departments, within an organization. Quickly prove our worth and grow up from there. That also means that we need a tremendous amount of legacy solutions out there. There we are – there are green screen elaboration, client server solutions, all kinds of stuff and especially when you get outside the U.S. There’s a lot of different systems we run into. If we go head-to-head with enterprises software out there, it is the traditional companies, it is the Oracle’s, the Salesforce, these other guys. And when we win those deals, we win because our time to productivity is fast, our total cost of ownership is dramatically lower than the other solutions that you meet out there. And more importantly, we come in with an architecture and an approach to how they drive platform decisions that gives them agility, that gives them confidence in our ability to help them keep up with the pace of change in the environment today, both for customer relationships and for technology.

[Nate Cunningham:]

Thanks, Mikkel.

[Operator:]

Your next question comes from the line of Samad Samana with Stephens Inc. Your line is open.

[Samad Samana:]

Hi, there. Thanks for taking my questions. So guys, when looking to your proxies, it talks [indiscernible] (20

[Marc Cabi:]

Samad, can you – are you referring to our – can you rephrase that question? I think I understand but I want to make sure…

[Samad Samana:]

Sure. Yes. Let me take another crack at it. So in the company’s proxies, they talk about the attainment of their net recurring revenue targets that are set by the board for the named Executive Officers. And that metric had been running shy of the goal, and I’m curious, as you ended 1H 2017, how you stood against that goal for the first half of 2017. So basically, the bookings target you set internally.

[Marc Cabi:]

So we usually don’t comment on that other than in our filings. But what I would say is that when we set goals with the board. We do set some goals that allow us to work toward those numbers. But we’re very pleased with the outcome of Q2 and will continue to work on ramping our sales force. As you know, one of the recent issues around, our sales force reorg from last year is we have a sales force that’s not fully ramped. And part of that was the additional turnover that happened in Q3 and Q4 and re-ramping those sales people and bringing on sales executives to support our growth for 2017. We are ramping net productivity ratio. So that is expected to begin to deliver better results as we move into Q3 and especially in the Q4.

[Samad Samana:]

And then I just had one more. I thought that you guys, it look like there’s an opening for a VP of Professional Services. I’m curious what the – if you’re going to be moving more into Professional Services, and if that role has been filled and if PS revenues in factored to back half guidance. And with that, I will let you answer and hop out of the queue. Thank you.

[Mikkel Svane:]

Yes, yes. So Professional Services has always been a very small part of our revenue, it continues to be a very small part. But it is as we grow more and more into the enterprise, there will be increased requirements for us to deliver Professional Services either via our own organization or with partners. And to make sure that we continue to have the organization that could support. That overall growth of the company and the overall growth of our enterprise customers, we have formalized this role.

[Elena Gomez:]

Yes. And in terms of guidance, it’s just not meaningful this year. I think as we onboard the VP of Pro Serve, which we’ve identified a few people already. So we’re close. But I don’t anticipate that to have a meaningful impact to revenue in 2017. But I do expect, as Mikkel said over time, as we get more enterprise customers to that – for that revenue stream to be more meaningful for us as we make our way to 2020.

[Samad Samana:]

Great, thanks very much to answer my question. I appreciate it.

[Mikkel Svane:]

Thank you.

[Operator:]

Your next question comes from the line of Philip Winslow with Wells Fargo. Your line is open.

[Philip Winslow:]

Hi, guys. Thanks for taking my question. Just two parts on the go-to-market. If you look at Page 5 on your shareholder letter, you talk about obviously some of the turnover you have in the sales force you mentioned earlier. Later that – later last year, but that do you expect to see reap rewards in the second half. Just what did you see in Q2, let’s say, versus Q1 and Q4 that gives you confidence. And then also Elena, the Velocity business, last call, you said that – can you saw some good – some solid growth there as you exited Q1. Just curious what you saw in Q2 versus normal seasonality and kind of the exit rate in Q3 here?

[Elena Gomez:]

Yes. Typically, Q1 tends to be a more transactional type of quarter for us. Especially, as we’re moving upmarket, we’re seeing the seasonality of a lot of our peers see, which is deals get pushed to the latter part of the year. So that’s definitely factored into our guidance as well. So that the transactional business in Q2 performed as expected, very steady, very predictable. And then what was your – you had another – you had a two-part question.

[Philip Winslow:]

Yes. Just in terms of the sales force and productivity there. Any improvements that you saw during Q2 relative to Q1, Q4 and just heading into the second half, the commentary in the shareholder letter.

[Marc Cabi:]

So Phil, one of the things we’ve done is as part of our reorg, we’re putting our strategic account executives in market in region, similar to the way we had them arranged in our international markets. And that is beginning to pay off in terms of the pipeline bills. And I think it is also contributing to the type of names we have in the pipeline. We’re beginning to see many traditional household names where companies might be looking to have a digital transformation project or things like that where we can have much better conversations with them. So the broadening pipeline of those names have been the initial results and of course, we need to make sure that those sales executives execute the business that’s in front of us as we move through the next two quarters.

[Philip Winslow:]

Got it. Thanks guys.

[Operator:]

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

[Parker Lane:]

Hi. It’s actually Parker Lane in for Tom Roderick. Thanks for taking my question. I was wondering if you could comment on that progress of the Amazon Connect partnership you announced in late March and what benefit, if any you have seen in the early days of that relationship. Thank you.

[Marc Cabi:]

I don’t have any stats on specifically on Amazon Connect. I can’t tell you that the partner addition of our Talk program, where we earn revenues to have tight integrations with our CTI vendor partners, is something that we’re beginning to pursue more aggressively. There are call centers where you may want to have a large pool of agents on voice where a company like AWS Connect or Five Nines or 8x8 have these larger features capable available, and we try to integrate with them and still catch a small revenue from those integrations.

[Parker Lane:]

Got it. And then…

[Marc Cabi:]

Specific on AWS Connect.

[Parker Lane:]

Got it. And then as far as international customers are concerned, you highlighted success in countries like Japan and Australia and New Zealand. I was wondering, if you’re seeing any differences in the type of challenges those customers face in international markets, and what stage of the customer engagement lifecycle there in terms of technology adoption. Thank you.

[Mikkel Svane:]

I do think that a few years ago, still saw few countries that were behind on the cloud adoption curve, behind on adopting some of the new channels, behind on just a general approach to kind of modern customer engagement. But I think that has changed a lot over the last couple of years. Like countries like, for example, I can say Germany, where until a few years ago, there were still kind of the cloud adoption has been a little bit slower than we have seen elsewhere. With that said though, we’re seeing a ton of innovation in different areas and sometimes, when you going to take some more risk in other regions of the world and try something new and maybe a bit better at kind of taking risk in other areas versus rolling it out in the entire organization that definitely helps us working with these kind of organizations. So I really feel that, we’re dealing with some very mature markets and some of the hesitation, we saw in some markets a few years ago has definitely changed. And our long-term commitment, our long-term investment in these markets like, for example, Japan, has really paid off.

[Operator:]

Your next question comes from the line of Brent Bracelin with KeyBanc Capital Markets. Your line is open.

[Trevor Upton:]

Hi, this is Trevor Upton on for Brent. Thanks a lot for taking our questions. So one more on the sales force, the last quarter, the average deal size was, I think, smaller than it had been and so lot of the flow – the number of deals was good, there was some the upside from the deal size this quarter, the number of 50,000-plus deals are up 45% year-on-year and the average deal size was flat with last year. You mentioned that there’s still more maturing to go on the sales force. I was wondering, if you could – just kind of what inning are we in and maybe expectations for the second half?

[Marc Cabi:]

Yes. So think about, we did a lot of replacement hire in Q4, early Q1, and we’re also doing growth hire in Q1 and Q2. So generally, our experience is that a sales executive to reach productivity in about six to nine months here at Zendesk. So that’s been kind of what we use as our approach to measuring their success.

[Trevor Upton:]

Okay, great. And then you previously mentioned high long-term expectations for Explore. Can you give us an update on momentum you’re seeing there?

[Mikkel Svane:]

Well, Explore will be – we are very excited that our customers later this year will see a lot of functionality powered by – by the Explore products. And we’re really focusing on making our initial batch of customers incredibly successful and helping them understand that transformation that a new generation of these customer intelligence tools can get them. And so we’re really focused on getting the product that putted it in the hands of our customers and help them transform their businesses, and of course, monetize that upsell opportunity thereby, so first and foremost, excited about getting it out into the hands of our customers later this year.

[Trevor Upton:]

Okay, great. And then just finally, could you update us on migration to AWS and timing around gross margin improvement?

[Elena Gomez:]

Yes. So we are still in the middle of our sort of discovery with – discovery is not the right word but in the middle of our understanding with AWS what our data center strategy is. We intentionally are using this year to make some investments, evaluate our long-term strategy. As you know, we have a Colo – a couple of Colo locations, and so we have this year duplicative costs, if you will, related to our infrastructure. At some point, we will be in a position to make a more clear decision. But we’re using this year as a year to understand our longer-term strategy. So I would expect this year gross margin to still have some pressure on it. And hopefully next year, we’ll be a year old, we’ll begin to see some of that duplicative costs falloff.

[Trevor Upton:]

Great, thank you.

[Operator:]

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

[Matt Spencer:]

This is Matt Spencer on for Pat Walravens. Thank you very much for taking my question. If we look at your goal for $1 billion in 2020, can you just help us understand the drivers of that growth and also what role does M&A play in helping you achieve those targets? Thank you.

[Elena Gomez:]

So we say – we basically assume that there’s no material M&A assumed in our 2020 goals. We believe we have the current set of products that will get us there. But it does rely on what Mikkel started the call with, which is our ability to continue to execute around our multi-product adoption in land and expand story. And one thing that we are paying close attention to is that we don’t have all of that revenue associated with that multi-product in our current run rate. So today, support continues to be the majority of our revenue stream. So as we execute to this strategy, we will see some of these emerging products have more meaningful revenue to us and so that is how we are building our plans for 2020. But M&A is not a big part of that story. It doesn’t mean that we aren’t canvassing the market for opportunities that will advance our product roadmap. Obviously, we’re always doing that. But at this point, we believe the products we have will get us to our goal.

[Matt Spencer:]

That’s very helpful. Thank you.

[Operator:]

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

[Scott Wilson:]

Yes. Hi, guys. This is Scott Wilson on for Alex. Mikkel, could you speak to the appointment of Tom Keiser as COO, what he’s done over the last 15 months or so, how you see his role changing and how he’s going to complement you in his new role?

[Mikkel Svane:]

Sure. So Tom’s been with us for 15 months, initially taking on the CIO role then taking over all our technical operations, all our technology – all our data center operations, all our technology operations and have been kind of critical in driving a lot of our cross-departmental projects here. And I think he has become naturally a go-to person for a lot of people in the organization for the rest of C staff help driving cross-organizational projects and has shown a very natural ability to deal with these things, that’s given tremendous amount of confidence from me, from the rest of C staff, from the entire organization. As of the same time we are growing and we are growing quickly. And the complexity of our organization, of our operations continue to grow. So as we set ourselves up out for the future and as also, I need to prioritize my time so that I can ensure that I can continue to spend time with customers, that I can continue to spend time on our product and I could continue to spend time on our long-term strategy, getting Tom into that role is future proving our organization and really continue to drive operational excellence that is getting harder as you grow as a company. So he’s going to continue to take on more and more of kind of our operational kind of teams across the organization we’ll start to slowly roll into his organization and will help us with the – with all our driving – with driving all our projects that require collaboration across the organization, ensure that we drive them consistently with proper metrics, that we drive them consistently with proper operational plans and that we drive them consistently also with regard to external communication and internal communications. So very excited to have Tom join us. And it – for me and I think for the rest of the C staff, having somebody who naturally grew into that role has been incredibly – compared to the alternative, is such a fantastic thing to see for us. So very excited about it.

[Scott Wilson:]

That’s great, sounds like a natural fit. Maybe one for Elena or Marc. The 116% dollar-based expansion metric showed a small acceleration this quarter continue next trend there. Can you help us unpack that metric? Still additional support the biggest driver there. Curious how the new products are influencing that metric at this point?

[Marc Cabi:]

So if you were to look at the three components of the dollar-based expansion rate, that’s net of churn and contraction, of course, the largest component is growth in support agents. The second component is moving customers through different subscription plans. And the third component, which is still the smallest, is additional products. So that’s the component that, over the next couple of years, can become much more meaningful to us, as we continue to execute on our growth plans.

[Scott Wilson:]

Great. Thanks, guys.

[Marc Cabi:]

Thank you.

[Operator:]

[Operator Instructions] And your next question comes from the line of Derrick Wood with Cowen and Company. Your line is open.

[Rakesh Kumar:]

Hi, this is Rakesh Kumar sitting in for Derrick. You talk about sales hires in key regions outside of San Francisco. So I was wondering how confident are you with your covering model now? And do you feel you have the right amount of coverage or should we expect any changes going forward?

[Elena Gomez:]

You’re talking about our sales reps coverage in the region, is that right?

[Rakesh Kumar:]

Yes.

[Elena Gomez:]

Yes. So we – so if you recall last year when we made our org change, we really changed North America to a territory-based structure. So we’ve had consistency in our regions in terms of our coverage. And we continue to expand our coverage obviously to make sure we hit our goal so we’re not capacity constrained in any of our regions.

[Rakesh Kumar:]

Great. If I could have a follow-up, you also talked about increased customer interest for Outbound and adding additional sales specialists for the product. So what are you seeing in a market that’s driving these investments?

[Marc Cabi:]

So as you know, Outbound – are you talking about Outbound product, correct?

[Rakesh Kumar:]

Yes.

[Marc Cabi:]

Yes. So Outbound is the company that we acquired last quarter, which complements all of the things we were doing with our Connect development. Basically with the combined offering, we’re now able to go out to the marketplace with that. It is a sales process that requires specialists as we first incubate any new product. And so we’ve begun that journey. And that journey will continue to move along over the next six to 12 months. And as we move it into a broader sales base, all of our sales teams will be able to sell or position our Connect product within our portfolio products. But it’s – we’re taking the same consistent approach we did with our Talk product and Chat product in prior years where in its early period, we supported with sales specialists and other programs to make sure that we’re successful launching it.

[Rakesh Kumar:]

Thanks.

[Operator:]

Your next question comes from the line of Jonathan Kees with Summit Redstone. Your line is open.

[Jonathan Kees:]

Great, thanks for taking my questions. And I’ll add my kudos for the quartered results. Just want to ask about a couple of things here. One, if you can go into more detail specifically about this first half. The wins with the enterprise, obviously, that’s picking up your MRR from 100 seats as the bigger part. I’m just curious, in terms of the time frame with this closure of deals, especially with new enterprise names, especially with household names, is that being more than you expected? Is that being a challenge? Not so much the enterprise names who are growing up with you but completely new ones who may not know the author name of Zendesk but maybe know more the household names of slightly better household names of your peers and have a history with it. In order to get, I guess, first into those innovation groups, those product groups that you mentioned, how much time is spent just telling them who Zendesk is?

[Mikkel Svane:]

Well, we – that talks to kind of the opportunity and the potential. There’s a bunch of businesses that’s never heard about Zendesk. I still have to explain what we do to my mom. But think about it. We are still very much a business that is driven by inbound. We’re very much a business where prospects and leads coming to us one way or the other. So we really – in most cases, it’s relatively easy because they understand the context of who we are and they understand the context of what we try to do and the innovation that we represent. If we look at like – if we look at our pipeline, of course, like this, and we talked about this already last year like we are starting to see more like back-ends loaded business and then like both in the quarter and especially in the year, and of course, that also talks about the current pipeline. Marc, you want to say something?

[Marc Cabi:]

I just want to add to that. Jonathan, if you look at kind of the pipeline, we have significant amount of our business that have expansion opportunities where we’re having conversations with those existing customers. Those have a much shorter duration in the pipeline. But what you’re referring to so the new customers that are new to Zendesk. And we always assume that those have a longer gestation period in the pipe. And that’s kind of consistent with what we messaged for the last couple of years. But we are seeing more of those companies taking on digital transformation projects and being very successful with them. So as we get more reference accounts like in the airline business or in the mobile communications space, we’re seeing an ability to repeat those kind of customer events with new customers.

[Jonathan Kees:]

Okay, great. If I could ask one more. With those new customers, with those ones who have no history with you are at least for the RFPs, what’s not so much who you’re competing against but what’s been your win rate if you can even just talk qualitatively about it, that would be great.

[Marc Cabi:]

Well, that’s an unfair – I’m going to give you an unfair answer because we always want our sales force to be as efficient as possible so they self-select out of deals with a lower probability of win today. And so we have been doing that pretty successfully. So the win rates have been going up for our late-stage pipe, but it is a self-selected metric.

[Jonathan Kees:]

Well, we go for the low hanging fruit, I’m sure that works. Good luck guys. Thanks again for taking my questions.

[Marc Cabi:]

Thank you.

[Operator:]

Your final question comes from the line of Austin William with Craig-Hallum.

[Jeff Van Rhee:]

Actually, it’s Jeff Rhee, jump on a little late. Just had two quick one for you. Maybe Mikkel, just if you would start. With respect to AI, machine learnings, some of the natural language understanding things, we’re hearing a lot more about within the customer engagement suite. Just maybe touch on your vision here, and in particular within the portfolio where you see the greatest relevance for those technologies and how you intend to approach it.

[Mikkel Svane:]

Well, there’s no doubt that like – so with machine learning, especially if you’re looking at stuff – the current stuff we’ll be doing like, for example, Answer Bot where we try to like – we tried to help customers help themselves to the answer. To really understand customer behavior, we – the larger population of customers we can do that, the better. So the whole collective customer user base of Zendesk helps us tremendously in building those models and like it really helps us that we have billions and billions of transactions we can look at in terms of behavior. But we also like – if you ask small customers with few customers, if you ask more business with few customers, machine learning is not going to drive a lot of efficiency for you. It is when you start to have a lot of customers, starts when you have to have a lot of interactions, that’s really where we can apply our model and really, really quickly prove some dramatic results for you. And that’s what we’re seeing with some of our customers that where we take part of that business and apply our technology and quickly we can take out 20%, 30% of their requests and provide a much better customer experience. So in machine learning kind of our current instances are being works, really, really well in the instances where there is. There is a lot of data to work with and there is a lot of customer interactions. And also with the customer has an interest in kind of structuring the data and have the maturity to structure the data in the definition they work with. So the sweet spot of these implementations currently is with high-volume, high-traffic, high customer count and an ability to at least a willingness to structure your content and information for you. Does that help you?

[Jeff Van Rhee:]

It does, it does. And then just lastly, I know you talked to the dollar-based expansion. But with respect to actual customer count churn, I know it’s not a metric you provide but maybe just qualitatively, could you talk to just trends? Is that stable? Have you seen any particular areas improve or particular areas you have seen challenges with the customer count retention?

[Elena Gomez:]

No, we’ve had fairly consistent – no wild swings, to be honest, in any other contractor with our customers. It’s been pretty steady since, I think, the IPO days.

[Jeff Van Rhee:]

Okay, great. Thank you.

[Operator:]

I will now turn the call back over to the presenters for final remarks.

[Marc Cabi:]

Thank you, Leandra. I’d like to thank everybody for joining us on our quarterly call and your interest in Zendesk. And we look forward to speaking with you next quarter. Have a great night.

[Operator:]

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