Zendesk, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Welcome to the First Quarter 2015 Zendesk’s Earnings Call. During the call all participants will be in a listen-only mode. After the presentation we will conduct a question-and-answer session. [Operator Instruction] As a reminder, this conference is being recorded, and will be available for replay from the Investor Relations section of Zendesk’s website following this call. I will now turn the call over to Marc Cabi, Vice President of Investor Relations. Thank you, Mr. Cabi, you may begin now.

[Marc Cabi:]

Thank you, John. Good afternoon, this is Marc Cabi. I am pleased to welcome you to Zendesk’s first quarter 2015 earnings conference call and webcast to discuss our financial results. Joining me today are Mikkel Svane, Founder, CEO and Chair of the Board of Directors; and Alan Black, our Chief Financial Officer. After the market closed today, Zendesk announced financial results for its first quarter of calendar year 2015. The earnings press release and a live webcast of this session are available by visiting investor.zendesk.com, which is our Zendesk investor website. And a replay of this webcast will also be available for one year on our investor website. During the course of today’s call, we may make forward-looking statements such as statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers, and ability to compete effectively. Words such as may, should, will, believe, expect, anticipate, target and project and similar phrases that denote future expectation or intent regarding our financial results and operations and other matters are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in our earnings press release and the risk factors in our filings with the Securities and Exchange Commission, including our annual report on Form 10-Q for the year ended December 31, 2014. Further information on potential risks that could affect actual results will also be included in the subsequent periodic and current reports and other filings that we make with the Securities and Exchange Commission from time to time, including our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015. Please note that any forward-looking statements made today are based on assumptions that we believe to be reasonable as of today. Actual results may differ materially from those expressed or implied by any forward-looking statements that we make. 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. During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP measures should be considered in addition to, not as a substitute for, 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 regarding our first quarter of 2015 results, which is again available on our Investors website. With that let me turn the call over to Mikkel.

[Mikkel Asger Svane:]

Thank you, Marc. And thank you everybody out there for joining us on our call today. We can be very proud of our results and our progress during our first quarter of 2015. In particular, I am thankful for the continued support of our customers which now numbered more than 57,000 paid customer accounts world-wide using our products. Just last week, [indiscernible] published its 2015 Magic Quadrant for CLM customer engagement centers. I was humbled to see that our customers gave us that highest overall satisfactions costs of any vendor for product implementation in that report. This was our third year in the Magic Quadrant report and I’m excited that our product vision and overall performance provided the momentum for us to be recognized as a visionary in our category. We stayed true to our routes of being beautifully simple while innovating our new features and proving our ability to scale to serve larger organizations. And we do all that while disrupting the typical enterprise sales process and giving our customers more agility at lower costs. Along with making deeper enterprise en routes, this was a quarter where we demonstrated the continued health and breath of our so called low charge online business. Our online business has been central through our success thus far, and remains incredibly important even as we’ve added other channels. We measured health using a variety of metrics, one is the percentage of online leads coming from organic sources and in the first quarter that measure remained healthy in the mid 60s range. Internally we also focus on factors like number of wins, conversion rates, ASP and future expansion opportunities. And this quarter those trends remained very strong and consistent. We not only win SMB customers from our online business but also departments within enterprises that represent potential for future expansion opportunities. With our recent addition of advanced chat offerings, we believe that we have very well positioned to continue robust growth in our low touch online business. Before I go into the details of our various growth drivers, I want to take a moment to provide additional detail around our business tactics and our view of our future market opportunity. We use similar strategies pursuing the SMB and the enterprise – sorry. Regardless of segment, we target building relationships with those of our customers that we view as having significant expansion opportunity, not only for new seats but also for additional services for upgrade subscription levels and for additional use cases. As you know, last year we invested in building the team to pursue opportunities with larger organizations. That team is currently working on identifying new customer opportunities as well as identifying existing relationships to cultivate as expected. Our expanding metric of monthly recurring revenue from customers with a 100 or more seats is a good indicator of our success pursuing these activities. It was 25% in the first quarter of 2015, up from 21% in the same period a year earlier. We are a leader in the SMB space, and it’s where we started and gained our earlier success. I am particularly pleased with our tremendous results in this segment in the first quarter because it demonstrates that we can expand to new areas while staying through to our routes. We’ve always had traditional small businesses on Zendesk, whether it’d be a Mom-and-pop shop or a regional manufacturer, they may or may not represent a great expansion opportunity but they want and they deserve access to a modern customer service platform. As we become more mainstream, we expect to keep expanding our base here and use our proven online model to keep growing among traditional SMBs across industries. Our Q1 customer wins in this segment demonstrate the diversity of being traditional SMBs choosing Zendesk. One of them carbon and steel manufacturer [indiscernible], Illinois is a great example. It describe itself as having technophobia when it was choosing our customer service platform. And like many companies we see in this segment, [indiscernible] was operating support by email before Zendesk. It chose Zendesk the cause it was easy to use and would serve both its business customers and its internal teams. Another example of traditional SMB is swale heating, this is a 40 year old heating company based in [indiscernible] in the UK. It offers expect guidance to help customers choose the best heating and boiler systems for their homes. It was looking to overhaul and modernize its customer service and chose Zendesk to centralize both its consumer and business interactions across multiple channels, including social media. So these are two great examples of very traditional SMBs choosing Zendesk and there are millions more companies like these in the market. We’ve also been very strong with fast growing tech start-ups and emerging digital businesses. We can grow with them as they scale their businesses at a record pace. Many of them like ooVoo and Groupon and Airpnp grow out of their SMB category over time as they grow rapidly and they often expanded to hundreds of seats on Zendesk. We continue to attract these high growth companies in Q1 with new comers including Bark & Co., the company behind the subscription, Bark dogs for dogs, whistle which makes a wearable activity tag of the dogs and Club W, a personalized online wine cloth, not for dogs though. Fast growing retailer Stitch Fix is an amazing company, fast growing and it’s example of an amazing customer that continue to expand its seats with us during this quarter. We’ve talked a lot about the enterprise opportunity for Zendesk on past calls, and I wanted to share more specifics on how we’re pursuing it. We land in enterprise organizations which we broadly define companies with more than 500 employees and then we grow our deployment with them to hundreds of seats overtime. Our focus on this high bought land and expand strategy has led us to attracting enterprise customers who have scale and internal complexity but about the agility and the user experience that are beautifully symbol software enables. They share our vision for building stronger customer relationships and have a mandate to innovate. They want to work with the new generation of Software Company. We see significant momentum in new customer additions in our enterprise segment. We added 30% more such winds in 2014 than we did in 2013 and the higher rate of acquisition in this segment continued in Q1 of 2015. And [indiscernible] the enterprise companies that joined us in the first quarter, I would like to mention four, Rockwell Collins, Peet’s Coffee & Tea, Cineplex Entertainment and Hotel Urbano. Rockwell Collins aviation and electronic systems are installed in the flight decks of nearly every transport aircraft in the world. Zendesk is bringing structure to its customer service operations including increasing customer self service and providing overall quicker service. Peet’s Coffee & Tea is a San Francisco Bay Area based specialty coffee roaster and retailer. Peet’s understand the importance of premium customer service and they just send us to help make its customer interactions easier and more efficiency. Cineplex Entertainment is Canada’s largest theatre chain known for its modern and fully digitized motion picture theatres. Cineplex wanted its customer service to be modern and it’s now using Zendesk to provide live chat online to assist its guests. Hotel Urbano was one of the largest online travel agencies in Brazil, they have more than 18 million relative users. It shows Zendesk to support all of it’s channels customers with questions relating to buying process, website navigation, post sale enquires and more. While we initially were brought into these enterprises organically, we build out our field sales and marketing team starting last year to specifically seek new customers in the enterprise segment. Customers in this segment typically starve with queue and a hundred seats. There could be an apartment all for a specific use case, but from their Zendesk gain support and buy their attention within these larger more traditional organizations. Then our team works with them to expand overtime into hundreds of seats and in some cases, thousands of seats. Examples of this type of expansion include Sino and [indiscernible]. Sino, as you all know is the leading home and real estate marketplace. They first started using Zendesk in June of 2014, with just a small number of customer service agents to manage certain types of request from home buyers, sellers and real estate agents. But they quickly crossed the 100 seat threshold through multiple expansions including one in this quarter. Now the customer of Zendesk since 2013, [indiscernible] also known as the fork in some markets, it’s one of the leading reservation platforms in Europe with a network of more than 20,000 restaurants and more than 6 million users every single month. It has expanded its number of agents on Zendesk almost thoughtful over that time, most recent in Q1 as it consolidated both consumer and business customer communications on Zendesk. We’re also seeing our Zopim live chat at trade companies in our enterprise segment. Nexon America, a leader in free to play online games including MapleStory and the recently released Dirty Bomb which I’m sure you all know, first started using Zopim live chat at the end of 2014 to support its gamers. Then in the first quarter of 2015, it decided to standardize all of its customer service under full Zendesk platform. Our SMB and enterprise these are the two growth drivers for the company, and now there is a cross product innovation, it’s introducing new products, broadening up functionality. In the first quarter we took a big step into the future of communication by announcing a partnership for Facebook’s new businesses on Messenger product. Zendesk became the first customer service platform partner for Messenger and was highlighted during Facebook’s developer conference held here in San Francisco. Two of our very great retail customers Everlane and Zulily are also the first businesses to begin rolling out businesses on Messenger and will be using our integration of our live chat offering with Messenger to respond to customers and manage support on the messaging app. We’re still early in this integration but what excites us the most is being at the full front of a new way that customers are communicating with organizations. Messaging apps have gained mass popularity, especially among younger users, and we are only now starting to see how that will change the way organizations provide customer service and interact. Live business chat until now has largely been about real-time communication on websites, but now we’re seeing that it can also be used for one of the most popular messaging apps in the world with more than 600 million active users, we look very much forward to seeing this roll out further. Our fourth growth driver involves extending our reach through integrations and partnerships. To do that, a major focus with our developer community for 2015 is to increase adoptions of our Embeddables offering. In the short-term we expect Embeddables to have us grow reach and desk with the new audience of developers and product seems to fuel our future growth. Embeddables first launched last – late last year in December as a new set of development tools that allow organizations to easily embed call, send us functionality that’s the supporter grip, help sender, knowledge base, live chat into their respective native mobile application into the website, into the products, into their services. It addresses the proliferation of devices, apps and online services that people are using today and that all need customer service built in. We saw continued adoption of our initial set of Embeddables in Q1, last quarter we told you about the rapidly growing interest in Embeddables and this quarter we’re proud to report that more than 3,000 accounts have now deployed into actual production. Embeddables also gained industry attention. Forrester Research published a report in April signing embedded service as one of three customer service technologies to keep an eye on. Their report started, “customers have moved towards immersive experiences. When they are in their mobile apps or game environments, they don’t want to jump out of that environment to receive supporting.” Game developer [indiscernible] was cited for using our mobile as the gate to embed customer service chat function directly into its game play environment. Furthering our data driven approach is another growth driver for us. As we’ve pursue this, we plan to offer more predictive analytics that help our customers make smarter decisions about the customer service operations. In Q1, we launched a new proactive, a data driven recommendation engine that are now being delivered to all administrators of Zendesk accounts. A monthly report provide snapshot a key benchmarking data including the metrics like first apply time, resolution time and customer satisfaction. Not only does it that administrators know how they rank against peers in the industry, but it also offers actionable recommendations to improve the performance and direct them to send us resources to help improve those areas. These recommendations give a glimpse on how we can apply our unique benchmarking capability with more predictive and personalized recommendations for our customers. Continuing to expand our global footprint is a call growth driver for us. As emerged to the young company, we have a tremendous reach globally. At the end of Q1, 46% of our revenue came from outside of the United States, more than a third of our almost 900 employees are located outside the U.S. as well. Asia has become one of our fastest growing regions with a number of paid accounts growing 50% in the past 12 months to reach more than 4,000 at the end of Q1. In the first quarter, I visited Singapore to launch our new Asia Pacific headquarters along the Zopim co-founder Royston Tay and Mr. Teo Ser Luck, the Minister of State for Trade and Industry. It was amazing to see the local support and the very warm welcome, not to mention of course, with the same traditional Chinese New Year Lion Dance to celebrate the office opening. So, the new office sales growth as an expanded home for our live chat product development and the base for our regional marketing and sales. Singapore is a perfect gateway through the entire Asia Pacific region for Zendesk overall, and also in Singapore along we’re very proud to mention some of the region’s fastest growing online retailers as our customers including Lazada, Luxola and Zalora. Our presence though extends across the entire region. In Manila – the Philippines where we have a regional hub for support and sales. We attracted top telecom companies to use Zendesk for managing a number of their key communication channels, both the customers and with other businesses. For example, this includes Globe Telecom which runs one of the largest and most advanced mobile fixed line and broadband networks in the country. Globe started as a Zendesk customer in September last year and has since relatively expanded and also adopted our Embeddables product. In Indonesia, Traveloka Indonesia which provides flight and hotel bookings through its mobile apps and website, started with Zendesk in early 2014 and has increased its account multiple times in the spent including this quarter. One of our standout customers in India is Shaadi.com, it’s one of India’s best known match making services that has connected more than 30 million people since 1996. A customer of Zendesk since last year, it also continue to add seats with us in this quarter. Finally, brand, the ongoing development of our brand is an important growth for us. And particular in Q1 we were honored to gain national recognition from the White House for our involvement in the community. President Obama announced a new tech hire initiative in March across 21 cities including San Francisco. It highlighted Zendesk work with the paying area video collision which trains entry level workers on our customer service platform to better prepare than for customer service jobs. We are involved in our community because it not only helps our neighbors in these cities where we’re located but also because it makes us a stronger company. Employees gain diverse perspectives that they then bring to the work and believe it also help us attract and retain employees. We believe our community efforts make our brand stronger and extended to even more people around the world. We also grow with our brand through the events that we host throughout the year, ZenU is our global series of events to connect with and train our customers and prospects. We’ve been rapidly expanding those events to serve the growing interest in Zendesk and in customer service. In the first quarter alone, we have ZenUs in 42 cities world-wide with more than three quarters than outside of the U.S. We trained a total of 2,200 people in Q1, twice the number we trained in the same period in 2014. And then before I turn the call over to Alan, I just want to thank each of our investors for your support as we work through the liver on our near term commitments while driving towards our longer term vision. With the completion of our follow-on offering, we believe we are well capitalized to drive continued success. And so here to learn more about financial results and of course future outlook, I will turn the call over to you, Alan.

[Alan Black:]

Well, thank you Mikkel and good afternoon everyone and welcome to the call. Mikkel has already briefed you extensively, so if I may allow me to direct your attention to the numbers. Beginning with the review of our results for the quarter, Q1 marked another strong quarter for Zendesk in terms of our revenue growth, financial results and operating metrics. Revenue for the quarter totaled $42.2 million, up 68% from $25.1 million in first quarter of 2014 and up 10% from the fourth quarter of 2014 in which we reported $38.5 million of revenue. Our GAAP net loss was $19.2 million, which included $10.7 million of share-based compensation and related corporate payroll taxes, $203,000 of share-based compensation capitalized in internal use software and amortized to cost of revenue and $435,000 of amortization of purchased intangibles. GAAP net loss attributable to common shareholders was $0.25 per share, excluding the charges that I just detailed, non-GAAP net loss was $7.8 million, or $0.10 per share. There were 76.3 million weighted average shares outstanding for the quarter. Non-GAAP gross margin was 69.8% in Q1, compared to 67.9% in the fourth quarter, five full percentage points better than our results in Q1 one year ago. We’re thus making steady progress towards reaching the gross margin target contained in our long-term model. Non-GAAP operating margin came in at negative 17.7% compared to negative 20.1% in the fourth quarter of 2014. On a GAAP basis, gross margin was 66.2% compared to 64.6% in the fourth quarter and operating margin was negative 44.6%. As expected, we shifted from generating positive cash from operations in the fourth quarter 2014 consuming $5.2 million of cash from operating activities in the first quarter. This was largely driven by two factors, the first being settlement of accrued vacation liabilities upon introduction of our new vacation policy applicable to U.S. based employees. And then second was retention payouts to Zopim employees upon the one year anniversary of the opposition of the company. Cash used in investing activities was $6.4 million in the first quarter, comprised primarily of $3.4 million invested in property and equipment, another $1.3 million in capitalized website and software development costs and net $1.1 million invested in marketable securities. Cash derived from financing activities was $195.4 million in the first quarter, driven largely from completion of our follow-on offering in March, in which we raised net $190.8 million equity capital and further $5.4 million stemming from purchases of common stock by our employees through option exercises or under our employee stock purchase plan. We ended the first quarter with $264.2 million of cash and equivalents and had an additional $44.9 million of short-term marketable securities. 54% of our revenue was derived from customers in the U.S. as Mikkel described was 46% revenue came from customers located internationally. This mix reflects the broad geographic diversification of our business and the global opportunity we are addressing. Once again in the first quarter, our land and expand strategy drove our growth, with over 65% of our growth in recurring revenue derived from expansion of our relationships with existing customers and the balance of our growth coming from the addition of new customers during the quarter. A dollar based net expansion rate was a 120% for the first quarter, showing consistent with what we’ve experienced throughout 2014. We view retention as the inverse of churn and as of March 31, 2015, our annualized measure of monthly recurring revenue which was represented by churned customers remained less than 10%. We view our dollar based net expansion rate as a good measure for you of our success executing our land and expand strategy. Also as communicated by Mikkel, the percentage of recurring revenue that is generated by customers with a hundred or more seats grew to 25% of monthly recurring revenue as of the end of the first quarter. Before I conclude and turn the call back to Marc, I would like to update our guidance for the second quarter and remainder of 2015. First, our outlook for the second quarter is as follows

[Marc Cabi:]

Thanks, Alan. Thanks Mikkel. We’re now ready to take questions from the conference. I will turn the call back to the operator, John, who will poll for questions.

[Operator:]

Certainly. [Operator Instructions] And our first question comes from the line of Greg Dunham from Goldman Sachs.

[Greg Dunham:]

Hi, yes, thanks for taking my question. I want to start off this quarter has been a big FX quarter for a lot of companies in [indiscernible], I know you guys pricing dollars and clearly you only decelerated three points in the quarter. So it doesn’t look like it’s generally enough but is there any way to measure the impact of the massive currency in those in terms of lower international revenue, so are you seeing more discounting – anyway to gauge how much of that is impacting business oversees? Thanks.

[Alan Black:]

Sure. Hi Greg, it’s Alan, I’ll take your question. So, yeah just first let me – for everybody on the call, we introduced Pounds drilling based pricing first in the quarter then later on in the quarter Euro based pricing. So as a result, not much of the new business that we exposed in the quarter really was based in the local currencies, clearly there were some but not significant amount. I think if anything there was more tailwinds as it relates to the benefit of favorable exchange rate movements with the dollar strengthen against foreign currencies and the cost that we had, with employees spread in different parts of the world, and clearly in Europe and Asia. So, not significant amount of impact in the quarter as it relates to top line and tailwinds that helping us as far as the cost were concerned.

[Greg Dunham:]

Okay, thanks. And then maybe one more from Mikkel, you finished the second year you have $309 million roughly in cash on hand. What are some of the areas you think from a product perspective would be opportunities for you from an M&A perspective?

[Mikkel Asger Svane:]

Well, I think it’s across the band. We believe very much that the whole notion of CRM is changing rapidly and we believe that it’s in rapid evolution. We believe that we see a world of customer service and customer engagement in general that would be driven much more by data driven decisions. And of course, we are both investing in technologies and we’re investing in research projects that we believe are very interesting. And of course, we also keep an open eye on like what are companies doing up interesting things and those perspectives out there, in those areas out there, but like we have a very broad approach as we have a very broad aspiration and as we have a very broad vision for the entire CRM market.

[Greg Dunham:]

Okay, thanks guys.

[Operator:]

Our next question comes from the line of Kash Rangan from Merrill Lynch.

[Kash Rangan:]

Hi, thank you very much for taking my questions. I was curious to see if you can give us some steps on the add-on activity within enterprises and also any perspective you might tap on cohort analysis of having done deals with enterprises say two to three years back, and how is the seats count improving? And also perhaps some perspective on how your initial engagement with a new enterprise customer is landing you perhaps bigger seat count than relative to say a year back or so, just wanted to understand the trajectory and I have one follow-up on the credentials. Thank you.

[Marc Cabi:]

So, Kash let me just talk a little bit about our mix of revenues coming from expansion – this is Marc by the way, coming from expansion versus new customers. We typically have slightly over 60% come from expansion somewhere around 40% from existing customers in each year’s period in terms of incremental growth. Those patterns have been consistent and we’re again consistent this quarter. So, I wanted to just touch on that question first, and then we’ll – Alan is going to take the other two questions.

[Alan Black:]

Yeah, so you asked about add-on activities, Marc just addressed that in terms of cohort analysis, and this is something I think we’ve looked at internally where back in time without necessarily playing into a lot of detail about it, I think pretty comfortably what we’ve seen over the years as if you pick a quarter or a month we’ve seen in the follow-on period for those that there has been growth for that cohort of customers added, and that’s been consistent aversely from the beginning of the company. You see that maybe most on a macro level manifest in the dollar rate and expansion rate where all of last year over a 120% that’s net of all churn and then we layer on top of that the expansion we have across the base for the cohort that’s being measured, and that’s been the case again in the first quarter with a 120%. So, I think that we’d see across the different cohorts in time that we’re getting more today than we did when we first added the customers in that measurement period. All right, and as you…

[Marc Cabi:]

Well, there is some follow-up question is related to the financials?

[Kash Rangan:]

Yeah, I actually change my mind to midstream but maybe more on the sales department models, could you talk about how you plan to expand your sales capacity by the end of this year and where are you at the end of Q1 on the appliance? And also any color on what is the average caliber tenure of sales people that you’re able to attract in the company relative to two years back? Thank you, that’s it from me.

[Marc Cabi:]

Well Kash, it’s Marc again. If you recall, last year was a year of investment where we built a sales in field marketing capability, to really be able to go after larger opportunities and larger companies. And that exercise we completed in 2014, from this point forward we will be growing the sales force commencer with the business opportunity. Viewing last year it’s kind of a year of expansion of investment, and from here kind of growing overtime. And as Mikkel stated in his text earlier, when he was talked about how we approach both SMB and enterprise, we really have very similar strategies on looking at land and expand as our opportunities with these larger organizations. In many cases we’ve disrupt the normal RFP process by identifying departments or change needs within large enterprise organizations to kind of land in those opportunities and then create a viral approach to expanding.

[Kash Rangan:]

Okay, keep up the good, good going guys. Don’t let down, congrats. Bye.

[Marc Cabi:]

I make [indiscernible].

[Mikkel Asger Svane:]

Thanks, Kash.

[Operator:]

Our next question comes from the line of Jennifer Lowe from Morgan Stanley.

[Jennifer Lowe:]

Great, thank you. Maybe just a kind of amalgamate the prior two questions, Alan you’ve mentioned that that FX had a beneficial impact on operating expenses and just looking at average trajectory there it seems like the growth in OpEx was noticeably slower than it’s been in the past. So I’m curious how much of that is tied to FX versus any short fall in hiring plans or any change in hiring plans for this year versus the hiring trajectory we saw this year, and to the extent that that you have a high count number that would be helpful too?

[Alan Black:]

Yeah, so I think latter we were close to 900 as of the end of the quarter in terms of world-wide headcount. In terms of the impact of FX on operating expenses for the quarter we had in OpEx close to a $1 million of impact favorable and then below the line offsetting that from translation think of it in the less than $0.5 million range in terms of translation loss. So net effect $600,000, $700,000 range, and so not dramatic but announced that it had an impact probably equal interest to you in terms of your question around hiring, I think it was a good quarter for us in terms of the hiring. We managed that and I think once again recruiting and the hiring managers across the company they did a tremendous job in delivering. It is definitely a competitive environment, I think we benefit by being distributed geographically, not only from a sales and go to market perspective but with development centers in five cities around the world including here in San Francisco but also four internationally. So, I think solid quarter for us, but definitely competitive as it relates to the recruiting environment.

[Jennifer Lowe:]

Okay. And then to shifting gears slightly, so what are the things that really jumped out to me is that the international business continues to grow incredibly well growing faster than the average for the business overall. And I was so curious at some of the drivers there, and you mentioned Asia in particular at the strength but is what you’re seeing there that there is more people finding Zendesk organically i.e., brand building more awareness or is there a more conservative push effort there, I know as far as the enterprise push is being a little bit more U.S. centric but just trying to reconcile that with the good growth internationally, is that more of a organic pull or are you seeing some push there too?

[Mikkel Asger Svane:]

Well Jennifer, hi, this is Mikkel. I think it’s not one fact, it’s a combination of many factors and it’s generally just execution. As you know like we described the model before, the different regions, the different countries they go through different maturity levels. And when they reach their maturity level so we change our investment strategy in those areas by putting more people on the ground, adding, fueling and marketing and so on, and this is just like – I think a lot of Asia has still been very – we only scratched the surface of some of these markets and we’re really starting to see the benefit of the investments we’re doing. And the same thing for Latin America where we have like tremendous progress that we also mentioned in the last quarter. So it’s not just one thing, it’s really a combination of more things. And then I think it is tremendously helpful to us, that we have a lot of international DNA in the company. We really try to be native in the areas that we know, we try to be very easy to do business with in those areas. And I think that differentiates us a lot from other vendors in the regions.

[Jennifer Lowe:]

Okay, thank you.

[Mikkel Asger Svane:]

Thank you.

[Marc Cabi:]

Thanks, Jen.

[Mikkel Asger Svane:]

Next question please?

[Operator:]

Our next question comes from the line of Philip Winslow from Credit Suisse.

[Sitikantha Panigrahi:]

Hi, this is Siti Panigrahi for Phil. Congrats on the good quarter, and also it’s good to see that you’re moving up market and good to see that 25% coming from more than hundred seats. Just a follow-up to Kash’s questions on sales capacity, you talked about 25% or so of your codec carrying rates focus on the enterprise. I was just wondering like where do you stand today and have you planned to expand the enterprise focus sales reps? And then as you move up market, just wondering how does the competitive landscape change do you see different vendors and also in terms of features do you see demand from customer to add more features as you move up enterprise? Thank you.

[Marc Cabi:]

So, this is Marc, let me just take the first question around the sales organization. Again, like we stated in 2014 we were fairly transparent with the investment community about the infrastructure we were building to not only be able to support our core growth but also to move up market. And we feel very good about the theme that we built to be able to do that. Going forward, really the way you should look at the growth of our sales organization is commencer of what the opportunities that arrive, rather than making that major investment again that we made in 2014. So we feel like we have a very good geographic presence both in Asia, Europe and Latin America and North America with our sales and field marketing teams. And from here on now that will kind of evolve as we grow our business. And then I may turn over the - well, there is a [indiscernible] question about what we see as different related to going up market.

[Alan Black:]

Yeah, I would describe as being much more disruptive as we entered the enterprise, we’ll let Mikkel take that.

[Mikkel Asger Svane:]

Well, there is no bounce back that our land and expand rate is incredibly disruptive for lot of the players in the market, but I think more relevantly I think like our investment in a great services and success organization has really prepared this organization for being like – being really good at dealing with these different requirements and helping organizations, anchor Zendesk in the organization is much better. So they both were – have been sales and have a great partner team now, service and partner service team around the world. And it just makes us a great partner for these larger enterprise customers.

[Alan Black:]

Yeah, [indiscernible] given the features that are important to customers up market that are not often as important to smaller businesses, I think is usual list of security, disaster recovery, particularly important I think for our European customers that we have ability to both store and back up data in region which is something that we’re able to do, and that type of thing. Those were the things that come immediately to mind that we are doing today and continuing to invest in.

[Sitikantha Panigrahi:]

Thanks guys, congrats again.

[Alan Black:]

Thank you.

[Mikkel Asger Svane:]

Thank you. Next question please?

[Operator:]

The next question comes from the line of Richard Davis from Canaccord Genuity.

[Richard Davis:]

Thanks. So I was trying to take notes quickly but I think you guys said, it sounded like the customer add number was very strong and I think you get that down, and did you say the ending customer account? And I just have one quick question.

[Mikkel Asger Svane:]

We had more than 57,000…

[Alan Black:]

Paying customer.

[Mikkel Asger Svane:]

Paying customer accounts.

[Richard Davis:]

That’s what I thought, okay. And then Alan, was there any change in the mix of the invoice timing because it differs a little bit different than what we had, and I didn’t know if there was any mix shift or anything on that if I know?

[Alan Black:]

Yeah, I think there is no single thing that really jumps out I think in the first quarter. We did have more bias towards month-to-month which we’re delighted to have. We don’t really try to pressure customers to choose one versus the other. So I think there was a couple point shift there that resulted in more of the growth coming from customers on month-to-month, so that can fluctuate. So in the first quarter that’s what transpired, other things that I think may have played a role including in the first quarter just a calendar to shorter quarter, but no I think primarily the question you’re asking really was a little bit more shifted to month-to-month than we’ve seen in the past.

[Richard Davis:]

Got it, that makes sense. And real quickly, when you guys do – when you got shift from landing in a [indiscernible] to kind of giving a many more seats, is the vast proponents of that move before rip and replace of a legacy system or are you overlaying on top of a lot of systems to just help the rest just be more efficient and better?

[Mikkel Asger Svane:]

So, we typically start up in a used case on a specific project where we can exist alongside other systems. But what then typically happens is that we slowly pushes out other systems that we then get consolidated on Zendesk.

[Richard Davis:]

Got it, perfect. Thank you.

[Mikkel Asger Svane:]

Thank you.

[Alan Black:]

Thanks, Richard.

[Mikkel Asger Svane:]

Next question please?

[Operator:]

Your next question comes from the line of Brendan Barnicle from Pacific Crest Securities.

[Brendan Barnicle:]

Thanks so much guys. I wanted to go back to that 57,000 number because that’s a big sequential improvement and much more than what we’ve been expecting, especially given increase in large enterprise. So anything in particular that drove that big new customer add number?

[Alan Black:]

Well Brendan, if you look at some of the commentary we made, we did have a very good quarter in terms of our online business unit which really results in good base of SMB customers. Our international expansion has been good, so we have a lot of customer additions through there. So those are kind of factors that can influence that number from quarter-to-quarter.

[Brendan Barnicle:]

All right. Then Mikkel, you talked about not having partner services and not helping at enterprise, now that you’ve built out sort of enterprise sales force, how do you think about the channel in terms of a felling on for you?

[Mikkel Asger Svane:]

Well, I think that we have some initial really good experiences there, especially around BPOs which has turned out be an interesting channel for us internationally also. And we are very – let’s say we’re very channel furious by talking to a bunch of different partners, and we see some opportunities to do some interesting stuff. We’ll though have to say that that’s [indiscernible] channels they’re traditionally is a not to crack, but like we do see some interesting opportunities down the road.

[Brendan Barnicle:]

And then lastly if you look at, you’ve got the enterprise sales force in place, now you’ve gone through a big change with that a lot of sort of sales disruption. How do you think about managing that going forward to make sure that you don’t have disruption between the different channels to back on?

[Mikkel Asger Svane:]

Well, what can I say cleverly about that? It’s – I think we built a culture where we are all in it for the disruption of the traditional enterprise sales processes. We’re all in it for the democratization of business software. And so I think we’re all behind that mission that helps us respect and take care of each other, and of course, operationally we have to support that with good agreement about what you do with deals and so on. But it’s never – these things are never super easy but I think we’re doing really well at it primarily because the team underground has a great end toward it.

[Brendan Barnicle:]

Great, thanks a lot guys.

[Mikkel Asger Svane:]

Next question please? Thank you.

[Operator:]

And our next question comes from the line of Pat Walravens from JMP Group.

[Patrick Walravens:]

Hello, great thanks, and let me add my congratulations.

[Mikkel Asger Svane:]

Thanks, Pat.

[Patrick Walravens:]

Sure. So, let me see, I would love to hear your thoughts on how you think the CRM market is likely to change over the next couple of years, particularly as we’re seeing all these reports of the guidance and the leader in the space till last decade, sales force potentially getting bids from Microsoft or then maybe Google. So I’d love to see what you’re seeing that might be driving and kind of thinking from the giants?

[Mikkel Asger Svane:]

Well, so I think we’ve talked about this before and then of course, it’s something we like to talk about. But like the whole world of CRM like, I think today a lot of people when they think about Tier and they think about sales automation and we say that there is a big shift in the lines from a transaction oriented economy to a life time value oriented economy, and where it’s all about improving your relationships with the individual customer to not only kind of preserve the life time or the long-term value of the customer but also to think about how you select customer into a promoter and there by an extension of your marketing vehicle. And I think that changes everything in terms of sales and marketing and customer service is leading that change. And even like, because if you think about another CRM disciplined to the marketing automation it’s a lot about sending out emails but that notion is also changing with the promoter economy and with customers being – an organic growth being a primary mean of expanding the market. And we see that from our own business where we can see that word of mouth is so strong and it continue to drive growth in our business. So we’re very bullish, we’re very optimistic about the changes in market because not only believe – do we believe that that is a huge opportunity for us but I think more importantly we believe that ultimately it’s a better thing and it gives – it provides everybody with a much better experience and it’s ultimately a big win for the consumers.

[Patrick Walravens:]

I want to follow-up a little bit on that Mikkel, do you see synergies between search and CRM?

[Mikkel Asger Svane:]

Between search and CRM?

[Patrick Walravens:]

Yeah, so if your Google does it help to some reason to earn something like sales force?

[Mikkel Asger Svane:]

I would just but I can’t impossibly take away on that. And what I can say is that we haven’t made a business for us.

[Patrick Walravens:]

Okay, thank you.

[Marc Cabi:]

Operator, are there any other questions?

[Operator:]

We have no additional audio questions at this time.

[Marc Cabi:]

Well, so no other questions, this is Marc. I’d like to thank all of you for listening into our conference call today. We again thank you for your continued support of Zendesk. Thank you.

[Alan Black:]

And we’ll listen to you, well we wish you guys next quarter again.

[Operator:]

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