Zendesk, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Good afternoon. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Zendesk Fourth Quarter and Year-End 2016 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. I’d now like to turn the call over to Marc Cabi. You may begin your conference.

[Marc Cabi:]

Thank you, Mariama. Good afternoon and welcome to our fourth quarter and full fiscal year 2016 earnings call. We are pleased to report our financial results for the quarter and the year. Joining me on the call today are Mikkel Svane, Founder, CEO and Chair of the Board; and Elena Gomez, Chief Financial Officer. Before we get into the results, let me pass along a few reminders. Our shareholder letter is available at our website, 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, ability to attract and retain customers and ability to compete effectively. The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the risk factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q and our upcoming Form 10-K. 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 or in isolation from our GAAP financial information. 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 and our shareholder letter where 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. So with this brief introduction, I would like to turn the call over to Mikkel.

[Mikkel Svane:]

Thank you, Marc, and I will keep it as brief, but more interesting. We are entering 2017 in a strong position after a year of what I would call significant change. In 2016, we expanded beyond our heritage and customer service to address customer relationships more broadly. We started our journey to become a multi-product company and we launched our new branding and our new family of products that open new market opportunities for us both with new and existing customers. As an organization, we also built out our management team and we improved our sales and marketing operations to reflect our broader focus. So we ended 2016 on a high note with $312 million in full-year revenues, nearly 50% year-over-year growth. But in 2016 we really let the ground work to reach our full potential here in 2017. We have the team, the product portfolio, the customer base and the rapid pace of technology innovation in place for a successful year and to put us on a cost to reach our $1 billion revenue growth target in 2020. We've also begun really to see the benefits of the operational changes we made at the Company last year. We previously discussed how our sales and marketing realignment caused some organizational disruption that impacted our ability to close business in Q3 of 2016. We moved beyond that disruption in Q4 and close more deals in Q4 than we expected. And we believe our sales and marketing realignment puts our sales team in a strong position to execute in 2017. So our financial outlook for full-year of 2017 reflects our strong position. We expect revenue to be in the range of $415 million to $425 million and GAAP and non-GAAP operating margin improvements between 200 and 300 basis points. None of the opportunities we have ahead of us would be possible without, of course, our customers and our employees. We ended 2016 with more than 94,000 paid customer accounts and more than 1,600 employees worldwide. I would like to thank all of them customers and employees for the continued support and for making 2016 such a great year for us. And with that, Marc back to you, so you can open the floor for questions.

[Marc Cabi:]

Thank you, Mikkel. As you know, all the detailed information is in our shareholder letter, so I refer you to that. At this time, I'll turn the call back to Mariama who will begin our Q&A period.

[Operator:]

[Operator Instructions] Your first question comes from Kash Rangan with BofA Merrill Lynch. Your line is open.

[Kash Rangan:]

Hey guys, congratulations on finishing up the year on a strong note. I'm curious, Mikkel, to the extent that you can elaborate, what were the kinds of changes that you made in regards to the feel alignment and why you feel that this new structure, modified structure, is going to serve you on your way to $1 billion? Thank you so much.

[Mikkel Svane:]

Yes, well you know we talked about those changes after we did them already in Q2 with a focus that held our account executives focused more on their accounts and their territories. So it's just a strong alignment of our sales organization and the marketing effort to support that. It had some disruptions in Q3; we didn't, as we said at that point, we did not live up to the potential, to our full potential. But in Q4, I feel that like these things fell into place, the organization responds with focus, clarity and really good execution. So very excited about that and thanks for asking, Kash.

[Kash Rangan:]

Sure, Mikkel. Can you also talk about some of the landmark deals that you were able to close towards the end of the fiscal year that can give us confidence that the enterprise strategy is continuing to work for Zendesk? That's it for me. Thank you.

[Mikkel Svane:]

Well, I think we are really excited about our transactional velocity business. It's a beautiful kid, it has many names. But like we also definitely saw some great results of our land and expand business, some really exciting new customer use cases that we hope we can talk some more about at a later point in time.

[Kash Rangan:]

Wonderful, thanks so much.

[Mikkel Svane:]

Thank you, Kash.

[Operator:]

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

[Philip Winslow:]

Hey, thanks, guys and congrats on a great end of the year. I just have a question in terms of the upsell potential, Chat analytics in addition to what Kash was just mentioning about the movement upstream with those 100-plus seat deals. When you look forward in terms of your guidance for the full-year 2017. How are you balancing verticals are just – in that our net new customer expansion, upsell to Chat analytics, et cetera, but also the move up-market? How are you balancing that or thinking about that in terms of the guidance?

[Elena Gomez:]

Yes, sure. This is Elena. So as we think about our guidance, we really look at it and we have a philosophy of looking at our businesses in two parts. It's a very predictable business, which we place high probability around. And then we have, as we move up- market, a more lumpy business, if you will. And a lot of that is we put a lower probability on that. So our very predictable business and expansion, we feel really good about, and Brian has brought a lot of focus around that. But in terms of the more lumpy business, we put lower probability on that and that's what dictates our guidance.

[Marc Cabi:]

And Phil, I will add that in Q4 we did see the beginning of increased momentum around additional products being sold into our existing customer base. As Elena mentioned, Brian has been very focused on that. And so we saw the beginnings of a really strong cross-sell campaign that we expect will continue into 2017 and we will report more on it and build metrics to let you measure it over time.

[Philip Winslow:]

Okay. And then just one quick follow-up just on the cross-sell there, I mean obviously you have a broadening base of functionality to cross-sell. When you look at 2017, Mikkel, in particular sort of what are you most excited about? What do you think is actually potentially starting to hit that inflection point?

[Mikkel Svane:]

Well, like all these new products, Phil, it tremendous potential like – we said this before, like Chat has really taken off. It will be a big year for really graduating our call center product, [Tall] and we have a tremendous interest in the products we have out in early access programs. So we are really focused on getting all of these things out there in the market, getting our customers to use them and really like open new potential and new opportunities with these customers. So we’re really looking forward, placing these new products into the hands of our customers so they can really realize the potential of this new family of products, so great excitement across the Company about getting these things out to our customers.

[Philip Winslow:]

Great, thanks, guys.

[Mikkel Svane:]

Thanks.

[Operator:]

Your next question comes from Jesse Hulsing with Goldman Sachs. Your line is open.

[Jesse Hulsing:]

Yes, thank you for taking my question. I wanted to follow-up on Phil's question and dig into the guidance a little bit for 2017. The mix this year shifted about 200 basis points towards your enterprise business and I'm wondering are you expecting a similar type of mix shift, a couple 100 basis points in 2017? Are you expecting more – expecting less, I'm trying to get a sense of your growth expectations for enterprise versus the velocity business?

[Elena Gomez:]

Yes, so we use 100-plus seats as a proxy for that business. And so as we think about the future, we think we would expect to see one or two points a year roughly of that growth and we are targeting roughly by 2020 to be in mid 40s. So the other thing – the other dynamics to think about is because we look at the businesses in two parts, to the extent the business, which is less than 100, grows. It may not reflect the growth in our 100% kind of the weighted average of those two. So we always have to think about that because we continue to see strong growth in our transactional business.

[Jesse Hulsing:]

Got it. And I'm curious, when you look at your cross-sell business, how much of your early cross-selling is selling into that velocity or transactional base versus selling into your 100 plus seat base? And over the next year, how do you expect that to shift? Do you expect more cross-selling in the enterprise versus the transactional segment or do you expect the opposite to occur? Thank you.

[Marc Cabi:]

Jesse, that really depends on the product. As our products mature, like Chat, Chat is now being sold into many of our very large accounts. And so we’ve seen the evolution of our Chat program over the last two years from kind of an SMB start to a very enterprise set of customers that are working very well with our product, hundreds and sometimes 1,000 agents or more. So that's been really successful for us. Each of our products will go through these phases kind of nurturing and then will become mainstream, and as they go mainstream, we see that our larger customers are very attracted. A couple of our new products coming out that are more data oriented are very interesting to our larger customers. They allow our customers to see their customer from a different lens. We allow them to really be able to engage with their customers in ways that they haven't been able to using Zendesk in the past. And so we will see a good mix of SMB and enterprise customers adopting some of our data intensive products.

[Jesse Hulsing:]

Thanks, Marc. Helpful.

[Operator:]

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

[Stan Zlotsky:]

Hey, guys, good afternoon and thank you so much for taking my question. As far as stabilization of your enterprise business, certainly a nice from a growth perspective, we’re seeing the stabilization, but behind the scenes within the actual organization. Do you feel like all the right pieces are now in place for the business to execute through 2017? Or is there more work that you feel that needs to be done to just shore up the organization?

[Mikkel Svane:]

Stan, really I personally see our enterprise play as a journey that we have started on and it will continue to be lumpy. We still have a lot to learn and like we are still in the early stages of the full enterprise potential. Like we still have so much more opportunity we can go after. So we will continue – as Elena said, we will continue to see some more lumpiness and a little bit more unpredictability in that business. But at the same time, we're still in the early innings. We're still in the early phase of truly like getting into the full enterprise potential. So I think that as we get our kind of getting our ducks in a row around executing on our enterprise opportunity, we will also see more and more opportunity in kind of that big enterprise, Stan that we go after. So it's a journey. We feel good about where we are today. It's still very much a land and expand motion like coming in, there's more implementations and really growing from there and we see some really, really good results of that also, especially in the last quarter. And we will continue to execute on that. Did that help, Stan?

[Stan Zlotsky:]

It does. Well, maybe to ask a similar question, but slightly differently, incrementally do you feel like you have greater confidence in pursuing your $1 billion revenue opportunity now versus 60, 90 days ago?

[Mikkel Svane:]

No, I think nothing substantially has changed like that that gives us substantially different confidence right now. But like we still feel very confident about it and we feel like as we – for every quarter moved towards that goal, we – like that confidence is solidified, if you will.

[Marc Cabi:]

Yes, Stan, I will just add one other thing, from kind of internal perspective, we are not dependent on only enterprise to get to that goal. From our perspective, having a balanced approach and making sure we foster that transactional business, which has these really good customer acquisition costs measures associated with it, and mix that in with some of the enterprise activity we have with very different sets of customers has been really powerful to us and allows us to kind of manage in a good way toward that goal.

[Stan Zlotsky:]

Wonderful. Thank you, that's very helpful. And maybe just a tactical question. As we look at 2017, should we still be thinking about a 110% to 120% range for expansion rate? And that's it for me. Thank you.

[Marc Cabi:]

Yes, it's in the letter. So we would expect for the next few quarters that our dollar-based net expansion rate will range between 110% and 120%.

[Stan Zlotsky:]

Perfect. Thank you.

[Operator:]

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

[Jeff Van Rhee:]

There we go, can you hear me now? There we go, good. I guess along the lines of the enterprise question, let's see if I can phrase this correctly. The 100-plus seat deals, are you more focused after Brian Cox's adjustments to the sales organization on the enterprise, more focused on landing deals in excess of 100 seats out of the gate now than you were previously? Or has the focus on landing 100-plus seats out of the gate versus expanding into that range not changed? I'm curious if there's been any tilt in terms of the sales org and how you are ultimately trying to attack the enterprise?

[Mikkel Svane:]

First and foremost, thanks for another enterprise question. No, I think that like we have really liked our motion of landing and expanding is still our primary products and it has not changed. That's what fits best with the product, with our motions. But there is tremendous amount of things we can do to kind of improve and make that a much more repeatable motion and that's what we're focusing on. Are we also landing plus 100-seat customers that are brand-new? Yes, we do.

[Jeff Van Rhee:]

Okay. And then with respect to the initial sales, I know you are working to have the enterprise – the entire sales team ready to sell the suite. Is there any way to quantify any of the early impacts and sell in terms of multi-module sales out of the gate to new customers?

[Elena Gomez:]

We are not ready to do that yet. For the most part in 2016, we had two products, so we're going to spend this year obviously very focused on what percentage of our customer base has multiple products. But really want this year to evaluate that, but we will be prepared to come back to you guys once we learn more about what we are seeing early on.

[Jeff Van Rhee:]

Okay. Just maybe one more try here then. With respect to the competition, would you talk to the top three non-homegrown competitors? And most interestingly, I'm just curious how that has or has not morphed in terms what you saw maybe a year ago?

[Marc Cabi:]

I don't think that the competitive picture has changed significantly over the past year or two. It's a highly fragmented market. There are companies that do things differently than we do for different parts of the marketplace. We kind of know the customers that we resonate with. We are a very valuable product for that SMB mid-market company where try to buy as highly valued because they get the full experience of Zendesk. As we move up market, we are working with customers that really want to make a change about how they work with their customers and the customer experience they deliver to their end customers. So it's about those customers are really view customer engagement, customer experience, as a revenue opportunity rather than a cost center. And so those are the areas that we have always pursued. And we feel we are very competitive in those positions and very happy with our win rates there.

[Jeff Van Rhee:]

Okay. Fair enough. Congrats on the quarter.

[Marc Cabi:]

Thanks.

[Operator:]

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

[Ross MacMillan:]

Thanks so much and congrats on a strong finish. I actually had a question relating to some language in your letter talking about first half guidance and some impacts from revenue recognition. It seems like there's two elements to that. Maybe well, first of all, could you maybe just give some color around those two elements? And then I had a follow-up. Thanks.

[Marc Cabi:]

Ross, you need to clarify that question. I just need to…

[Ross MacMillan:]

Yes, so in your language you say in the first half of the year, there's two things happening. You've got contracts with flexibility and scalability you provide to products and customers. And the impact of seasonality in 2016 will have an impact in 2017. And then you say you've got a small growing number of customers that have flexible arrangements where maybe you can scale up on agents in the Q4 period and then back down. So maybe you could talk to those two pieces, and I guess I understand the second one, I don't really understand the first one and then I guess the real question on the second one, well let's do that first. Let's talk about the first piece.

[Elena Gomez:]

So Ross I can take that. So we’re starting to see some seasonality that we’ve seen before. It's a pattern for us that during Q4 we tend to see customers use flexible agents more. That's not uncommon for us. And what happens is they ramp-up in Q4 and then the ramp back down. So that is when we talk about flexible agent, it’s a SKU that we use and that's a specific product. The other piece is we have a small but growing number of agents among deals, if you will. So as customers use our product more to the extent they hit a certain threshold, we are able to basically bill for that extra usage and we're constantly monitoring that. That is not always as predictable, as you can imagine, but that's what's driving that.

[Ross MacMillan:]

So one is just flexible seasonal agents, and then the other piece sounds like it's more, almost like a ramped type usage deal that could scale up and scale down, is that right?

[Elena Gomez:]

Yes, customers will use our product and initially believe they’re going to use X amount of agents and realize as they get into it that they are having more usage than anticipated.

[Ross MacMillan:]

And the second question, Elena on the flexible agents. Anyway to size that in Q4, like what percentage of the revenue you think related to the flexible agents seasonally – the seasonal agents?

[Marc Cabi:]

I don't think we want to size that, Ross. But as you know, we work with the lot of e-commerce and retail customers. So they intend to be the typical users. Remember though, that we are pretty diversified across 10 industry groups. But in e-commerce company that's selling during the holiday season, or a retailer during the holiday season will pickup significant amount of agents in the fourth quarter and then flex back down. And that’s the beauty of Zendesk is we offer that flexibility a lot of competitors do not and that’s why we’re so attractive.

[Ross MacMillan:]

Great, thank you.

[Operator:]

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

[Parker Lane:]

Hi, it's actually Parker Lane in for Tom. I was curious if you could comment on the move to bring your infrastructure and technology operations under the leadership of your CIO last quarter and whether some of the issues that plagued the Company in 2016 are largely in the rearview mirror? Thanks.

[Mikkel Svane:]

Well, we definitely beginning to see that the benefits of moving the technology operations on to Tom. And it's given some – it's open and freed up some resources, it's given a new level of focus. So it's helped us definitely with plans and with planning and capacity planning. I still believe that we have a lot more work to do. And this is not like – we're not stainless with any of this, but the shift has already provided its value in our predictability around technology operations. But definitely still a lot of work to do and it’s also very much related to how we think about future usage of our own Colos versus AWS and similar services.

[Parker Lane:]

And to that point, how should we think about the pace of those investments going forward in particular 2017?

[Elena Gomez:]

Yes, I think it’s a good point. I think that’s going to – those investments which we feel are obviously very critical as we grow. We will put some pressure on gross margin for sure in 2017. But I think if you think about our 2020 goals, we still expect to have improving gross margins, targeting kind of high 70% range. So I think shorter-term you will see more pressure, but that should get freed up over time.

[Mikkel Svane:]

Yes, Parker let me just specifically say just that we would expect gross margins to be slightly lower in Q1 and maybe the first half of the year than Q4 based on sort of these investments we’re making because we’re not operating at the most efficient when we’re using both a Colo and an AWS. But that is kind of near-term and we're also building that infrastructure, so that we can move to a more robust platform based on AWS and others within the cloud infrastructure.

[Parker Lane:]

Got it, very helpful. Thank you.

[Operator:]

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

[Sharon Rhodes:]

Hi, this is Sharon for Bhavan. In terms of your enterprise pipeline, can you provide any color about where some of those deals that may have slipped in Q3, where they are at now in your overall? And what your overall enterprise pipeline looks like?

[Marc Cabi:]

That pipeline is always evolving. In Q4, we closed a lot of deals that were in the pipe from earlier in the year. Some deals can take 12, 15 months to really move from trial to conclusion and we are always finding new customers that are going through those phases. So we feel very good about the customers that we are speaking to, especially those that are looking to make changes to the way they work with their customers. And within that group, the companies we can't name specifically, but they are traditional telecom players, they are airlines and there are other kind of companies where they are recognized for having lackluster customer service and we're doing things to help them work around and improve some of their customer relationships, maybe with their VIP or with a special segment of their customer base.

[Sharon Rhodes:]

Okay, thank you.

[Operator:]

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

[Jonathan Kees:]

Great, thanks for taking my question and congrats to a big finish to the year. I wanted to ask, I guess my questions will be more follow-up. One, the gross margins for 2017, I would think that with new products coming out, they would also be a lesser gross margin than the corporate average. But you mentioned and basically the Colo and AWS are the new products already being pretty efficient or is that part of the data centers stuff that you were talking about?

[Marc Cabi:]

From an order of magnitude the data center that using both Colos and AWS are more meaningful part. But yes, obviously from a very small base those products are not yet a full scale. So they also put pressure and we want to make sure that they are fostered through to maturity. So yes, that's accretive, but I was trying to provide it to you in order of magnitude.

[Jonathan Kees:]

Okay, great. And then the second I guess my follow-up question would be, you talked about this is a year for Chat, so is this the year that it's going to become a material part of revenues, is that what you mean?

[Marc Cabi:]

So material would be when a product category hits more than 10% and I don't want to give that forecast. What I would say is that our Chat product is being adopted by several of our largest customers in very interesting use cases and we're going to continue to foster that. And later in the year, our roadmap would be to make that product, elevate that product to have more enterprise capabilities than it does today and so the product will continue to evolve and improve.

[Jonathan Kees:]

Okay, great. Good luck guys.

[Operator:]

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

[Ian Strgar:]

Hey guys, good afternoon. So I don't mean to beat a dead drum here on the sales reorg and the enterprise business, but we got a lot of questions heading into the quarter. So I just want to confirm, what it sounds like is that all of those changes are done and we should not be looking out for any more disruptive sales changes. And there should be improvements in productivity throughout 2017. Is that fair?

[Elena Gomez:]

So I would never say never to org changes, but we do believe the material changes are behind us, but I think it's fair to say Brian will always continue to tweak and refine and make things better. So that's where I would leave that. I think in terms of – you had a secondary question, you had two questions?

[Ian Strgar:]

No, no, that sums it up. It sounds like all of the big parts of it up behind you guys. So kind of an adjacent question to that is if enterprise isn't contributing as you guys expected, what kind of inning are we in now with the SMB in terms of penetration? I mean do you guys still have enough of the opportunity where you can keep putting up strong growth rates without a lot of contribution from enterprise?

[Mikkel Svane:]

No doubt. There's a tremendous amount of small business out there. There's a tremendous amount of mid-market businesses. There's a tremendous amount of departments within large organization and enterprise we can sell into and as we get more products to sell and advance our family of products like there's tremendous amount of opportunity. We think it's very interesting to be in the enterprise space, we learned tremendously from it and it hardens our product in a way that is interesting for all of our customers. So that’s kind of our philosophy around these things. And you put a little bit of words into our mouths there about like we didn’t feel that our enterprise business will execute right. I think we are executing very much on plan and feel very good about that.

[Ian Strgar:]

Yes, okay. And my last question, if I could just squeeze one more in, is just the contribution from the two new products that you guys launched late 2016, Explorer and Engage. I'm wondering if you can just comment on some of the early reception from the beta customers and the contribution that you are expecting from those in 2017.

[Mikkel Svane:]

Yes, so with most of our products when they are in the EAP, the revenue contribution is diminimus. What I would say is that both Explore and Connect programs, the EAP program similar to a beta are very active with some of our existing customers as well as potentially new customers. And what we do as we collect the lot of information through those EAPs to refine the product and there will be both generally available during 2017 probably some time in mid-year and we learn a lot from those EAPs, we have a very active EAP program.

[Ian Strgar:]

Thanks guys.

[Mikkel Svane:]

Thank you.

[Operator:]

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

[Derrick Wood:]

Great, thanks. Last quarter you talked about attrition being a bit higher. Could you just talk about how that trended in Q4 and maybe give us a sense about how aggressive you have been in sales hiring in the quarter and into 2017?

[Elena Gomez:]

Yes, I can comment on that. So we did comments that there were some description last quarter particularly in the Americas. We’ve definitely seen that stabilize and obviously we are investing in the early part of the year of course, but it’s consistent with our historical investment patterns is nothing unusual about our investment in sales this year.

[Derrick Wood:]

Okay. And then just on the $1 billion revenue target 2020. I was hoping you could share some assumptions on how you get there, perhaps how to maybe thinking about growth and average revenue per customer or kind of the average number of products expected to be deployed out of the installed base by 2020 versus today. Or any other color around assumptions would be helpful.

[Elena Gomez:]

Yes, I mean I think the way to think about it is we know that the revenue CAGR between here and there’s in the mid-30s and we are going to work hard to continue at that growth clip. I think the other thing to think about is as we plan and forecast, we think the products we have today we be what we need to get to that number. I don’t want to get into because its too early to say what is the contribution of each of the products. But at sometime as we gather more information this year we’ll be in a position probably by next year to give you more color on that.

[Derrick Wood:]

Okay. All right, thank you.

[Operator:]

Your next question comes from Richard Davis with Canaccord. Your line is open.

[Richard Davis:]

Thanks. To what extent do you see kind of customer demand, because there’s been all sorts of news items about it, but machine intelligent bots as a back-end to kind of that reporter responder support systems. And then meld that into kind of what work is needed on your part to get to where you want to be? Thanks.

[Mikkel Svane:]

Thanks, Richard, nice to talk product for a little.

[Richard Davis:]

There you go exactly, thought I'd shift it up.

[Mikkel Svane:]

Well, I think like for us we think very much about machine learning, bots and these kind of things is kind of next generation self-service made this smarter, you can make the systems to help customers truly help themselves like with the beta customer experience you can have. So we’ve been investing in machine learning teams for a long time. We've had a couple of first conversations, but you're going to see a lot more from us around these things, because we believe that there is a whole new set of abilities that you can provide our customers to provide a much smoother experience about navigating information through kind of the more conversational channels that more and more consumers are using today, so very excited about that and we look forward to talk much more about that in the coming year.

[Richard Davis:]

Great, thank you so much.

[Mikkel Svane:]

Thank you.

[Operator:]

Your next question comes from Scott Wilson with Piper Jaffray. Your line is open.

[Scott Wilson:]

Yes, hey guys. Thanks for taking my question. I'm on for Alex Zukin, apologies about earlier technical difficulties.

[Marc Cabi:]

No problem.

[Scott Wilson:]

I want to repurpose someone's question from a little bit earlier, maybe ask it slightly different. Given that Chat's coming into focus in 2017, just curious if you think about your bookings targets for the year ahead, how much does Chat play a role in hitting those targets? And then how might that compare to what it did in 2016? And relatedly just in terms of trends here, are Chat buyers net new customers or are they predominantly sales back to the installed base?

[Mikkel Svane:]

I would like to start just with the sales part of his question because I think that's a really interesting thing about Chat and something that helps us truly expand how we have conversation with our customers, but because what we see is that a lot of use cases are on Chat as a prime example of how organizations start to think differently about the customers experience to customer engagement, where it's not necessarily only anchored in customer service, only anchored in sales, but truly becomes like this new way of thinking about customer experience first and then naturally kind of anchored around the organizations where kind of we need to support the customer experience. So it's a really good first indicator of how we really see the future of our software and how people think about the customer experience first. And so it opens up a whole new set of conversations, there are whole new set of opportunities for us. And as for the first part, how we quantify that I’m not sure we had…

[Elena Gomez:]

We don’t disclose bookings number, but we can tell you that obviously we’ve seen great success in Chat in Q4 and have built that into our forecast for 2017.

[Scott Wilson:]

Great, it makes total sense. And maybe if I could just sneak one more in here, if I think about the Company specific backdrop, strategic imperatives in my mind are kind of two-fold right now between obviously selling to the large enterprise, which we've talked a lot about, and then the cross and upsell opportunity of the expanding product set? At the same time, you've historically run a pretty services light business model. I think 2% of revenue or so, if I'm not mistaken? And I can see both of these imperatives benefiting from more robust services and support organization. Obviously enterprise deals typically being larger more complex sales, cross-sell opportunities being helped by a closer customer relationship and knowing their pain points. So my question would be this, do you see services becoming a more substantial part of your business? And are there any structural changes or incentive changes kind of ahead for that organization?

[Elena Gomez:]

I’ll take a crack at that. From my history, I know what you mean because Pro-Serv can be upwards to 10% to 15% of Company’s revenue stream. But our product isn't structured in a way where you need a huge implementation. So even as we go up market, yes would you expect Pro-Serv to increase a tad. Yes, but expected to be 10% to 15% of our revenue stream at some point not likely, and so I hope that gives you some contacts.

[Scott Wilson:]

Great. Thanks, guys.

[Operator:]

Your next question comes from Kash Rangan with BofA Merrill Lynch. Your line is open.

[Kash Rangan:]

Hey guys, can you hear me okay. Thanks for taking the follow-up. Can you give us a little bit more color on quarter carrying sales capacity growth rate? Do you think that percentage growth rate steps up a little as you go into 2017 versus 2016 or is this going to stay at roughly the rate at which you have been adding sales headcount? And also if you could give a little color on product breakdown, I know that some of the new products are not yet at the materiality point, 10% of revenue, such as Chat, Voice, Analytics, but since you've been spending a lot of time rolling out these products, can you give us some early indications how many customers do you have for each of these products? How is it contributing to your bookings or billings, any rough percentage that would be useful? And also, finally for you, Elena, you pointed out that free cash flow would be positive in the first half and negative in the second half of 2017, some more color or clarification? Thank you so much.

[Marc Cabi:]

I think the commentary on the cash flow should be we may be free cash flow negative during the first half of 2017, but for the full-year will be positive, so.

[Elena Gomez:]

Yes. I think that’s what you said. Yes, that’s right. It will be full-year positive and its seasonality wise. Q1 is typically not a high free cash flow quarter for us. And then your other question about products?

[Marc Cabi:]

Yes. So for products, Kash we do have a breakout of new products in our customer count in our shareholder letter. That's an aggregate number of products outside of Chat and support that you can track. Within that talk and some of the other programs will each contribute to that number over time. And again as we begin to kind of measure these cross-sell activities of our sales organization, we’re committed to kind of providing better metrics around how we're doing there. What I can tell you is that as we entered the second half of the year, the cross-sell into our existing customer base of these was pretty good.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is open.

[Jeff Van Rhee:]

Great. Just two quick clean-ups for me. Any changes in contract duration? I know you have multiple ways customers can buy. Curious if you saw any contract relationships. And then at this point what are the splits internal versus external use cases?

[Marc Cabi:]

So from a contract duration perspective, we did see a pickup in annual invoicing. So remember that our contract durations are different than our invoice durations. And so from an invoice duration perspective, in Q4 we did see a pickup of a couple points in annual invoice duration, maybe Elena is influence is working there a bit, and that will probably slowly evolve over time and then, I forget your other question now.

[Jeff Van Rhee:]

The splits of internal versus external use cases?

[Marc Cabi:]

Yes. In the past, we’ve said that a majority of our use cases are external use cases, a very large majority and that split has not changed.

[Jeff Van Rhee:]

Okay, thank you. End of Q&A

[Operator:]

There are no further questions in queue. I’ll now turn the call back over to the presenters.

[Marc Cabi:]

Okay. Thank you very much, Mariama. I'd like to thank everyone that joined us today. We’re very pleased with our Q4 results. Before we end the call, I want to announce two upcoming dates. First, our first quarter earnings call will be on Thursday, May 4 after the market close. And then secondly, our Annual Analyst and Investor Day will be on Monday, May 15 here in San Francisco. So if you have any questions about either of those, you can reach us at [e-mail]. And again, we thank you for joining us today.

[Operator:]

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