Zendesk, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Welcome to the Third Quarter 2015 Zendesk’s Earnings Conference 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 now begin.

[Marc Cabi:]

Thank you, Mellissa. I'm pleased to welcome you to Zendesk’s third 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 third quarter of 2015. The earnings press release and a live webcast of this session are available by visiting investor.zendesk.com, our Investors website. A replay of this webcast will also be available for one year on our 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, project and similar phrases that denote future expectation or intent regarding our financial results, 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 quarterly report on Form 10-Q for the quarter ended June 30, 2015. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that we may make with the Securities and Exchange Commission from time-to-time, including our quarterly report Form 10-Q for the quarter ended September 30, 2015. Please note that any forward-looking statements made today are based on assumptions that we believe to be reasonable today. Actual results may vary, differ materially from those expressed or implied by any forward-looking statements that we may 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 third quarter 2015 results. And for certain non-GAAP financial measures for prior periods in the earnings press releases for such prior periods, both of which are available on our investor website. Now, let me turn the call over to Mikkel.

[Mikkel Svane:]

Alright. Thanks so much Marc. And everybody thank you for joining us on our call today. I am of course proud to be able to share such an outstanding quarter of results and achievements, both major strive in our enterprise business and broadening our brand and our global reach. Before I jump into and expand on these accomplishments, I want to start by focusing on how we are executing on the substantial data opportunity ahead of us as a company. Data is becoming the currency for business today. Being able to not only generate and collect it but also understand it and act on it is what sets innovative companies apart from the rest. We believe that data of our customers is the most valuable currency and then organizations which harness that data can take a much more data driven approach to customer engagement and improve customers’ relationships. Customer data lists everywhere. It doesn’t come from a single software platform anymore in this hyper connected [data] of world. It comes from an ever growing number of devices, apps, websites, business software solutions and emerging channels of customer interactions. That’s the beauty behind our recent acquisition of the company behind BIME Analytics. This is something that we announced following the close of our quarter. BIME Analytics is a pioneer in modern data architecture. It allows organizations to build queries, to analyze and to visualize data wherever it lives without following the old approach of spending lots of time and money transporting all of that data into a single proprietary home as many of our competitors require. With this acquisition Zendesk will be able to more quickly innovate and expand the data analytics and visualizations that we offer in more placed throughout our portfolio of products and combined customer data from a broader range of sources. BIME Analytics overtime will become the underpinnings of our data platform. All of this gives organizations a deeper understanding of their customers. We also were attracted to BIME Analytics because the team’s philosophy around products fit ours transparent pricing. The ability to trial its cloud based analytics software before buying it and the marketing access to software for any size of company. We are excited to welcome the BIME Analytics team and another international home in Montpellier, Southern France to the Zendesk family. BIME Analytics will continue to sold and supported as a separate data analytics product. Deeper analytics and visualizations of a diverse set of customer data is one dimension of our data opportunity. Another is building more predictive capabilities based on machine learning, something that our data product team has been developing over the past year. Last month we launched a feature in data called Satisfaction Prediction. It acts as an early warning sign for organizations of potentially unhappy customers by anticipating the likelihood of a good or bad satisfaction rating. With the rise of communications across mobile, across cell phone and e-mail platforms, customer interactions have become much more complex. Customer service agents, managers don’t always have all of the cues necessary to pinpoint a misunderstanding, a confusion in a conversation. Satisfaction Prediction gives them almost a sixth sense to be able to identify potential problems before they occur. Each time a customer service request is created or updated the feature uses predicted analysis of 1,000s of customer signals to generate a score indicating the likelihood of good or poor satisfaction. This score is updated in real time during the conversation as a predicted analysis is personalized to each organization using Zendesk to account the differences in the business and customers. With this predictive information, organizations can make better decisions about how to interact with customers, how to prioritize requests, and how to escalate low score request to prevent unsatisfied customers. The predictive model analyses a number of signals including the amount of effort and involved in managing a request, the latency between user and agent responses and the language, the actual content used within a request. The launch -- the beta launch last month gathered wide attention including a story from Wall Street Journal that was published both in U.S. and Europe and in the Asia editions and more than 30 customers across industries such as retail, entertainment and education have joined the beta program and we expect to formally release satisfaction prediction and as a product in Q1. We have also continued our progress in building more advanced capabilities in core communication channels such as chat and voice with a goal of broadening the appeal to more organizations. Last quarter I discussed the early success of our premium chat offering and we continue to see its adoption by some of our best customers in Q3. We also rolled out a beta of our advanced voice offering through approximately 30 customers in Q3. The feedback from our beta customers has been very positive and with the help of their feedback we expect to move advanced voice into general availability sometime this quarter. We believe that voice will remain an important channel for customer interactions. And in addition to offering all of the voice entry call handling requirements of a typical call center, our advanced voice offering will provide a broad array of data and performance analytics integrated directly in Zendesk. The unique data we collect within our integrated solution will be one of our key advantages. Another advantage is of course our ability to work with other leading telephony solutions and we plan to deepen our partnerships with more than 30 telephony providers who already tightly integrate with Zendesk [but on] with our enterprise progress. We are executing on our direct enterprise strategy as our sales force matures and begins to close on new and existing opportunists. Our success this quarter was driven both by expanding on our existing relationships with Zendesk customers and landing new customer opportunities. Our land and expand sales strategy coupled with our organic lead generation and self service sales activities held out us overtime to mass a large number of customers with which we have significant opportunity for expansion. In the past year part of our sales and marketing expansion has been focused on ways to directly tap into this opportunity. Our annual dollar based net expansion rate in Q3 was 125% as of the end of the quarter, up 122% by the end of Q2 and 121% as of the end of Q3 of last year. In this quarter, we were also very pleased with the level of maturity that our sales force has reached. Improved management and processes for our sales is allowing us to compete to win across a significantly larger sales type opportunity. In the enterprise, we are winning more and bigger contracts. Let me share some stats. If we compare Q3 of this year to Q3 of last year we doubled the number of contracts won with an individual value of more than $50,000 annually as determined by annualizing the monthly recurring revenue for those contracts. At the same time, the average annual value of those individual contracts grew by 30% when compared to Q3 of last year. And now our customers with more than 100 seat deployments have continued to grow and represent 31% of our monthly recurring revenue as of the end of Q3 versus 27% as of the end of Q2, and 23% as of the end of Q3 of last year. Let me highlight some of these new enterprise customers. We are proud to welcome UK’s largest retailer Tesco to Zendesk. Tesco rolls Zendesk out in three months to over 3,000 support agents as they provide multichannel service to Tesco’s 500,000 employees and colleagues in over 7,000 stores globally. Zendesk was chosen due to its strong fit to Tesco’s rapidly changing requirements and the need to reduce cost of service across the enterprise. Some other new enterprise customers who joined us this quarter represented multiple industries and regions. Two of them were London based global fashion brand and retailers, French connection and Ben Sherman. Also, New Zealand based fast growing Xero. If you don’t know them, a leading cloud based accounting platform for small businesses with more than 1,200 employees and half in the subscribers, plus 20 offices worldwide. Continuing from last quarter, we are still seeing a shift to digital across industries, including public sector and education where we welcome the University of York and the University of North Carolina’s customers. We have seen significant interest from government organizations, including city and municipal government, state departments and federal agencies. Last quarter, we highlighted the success of the FCC in moving to the cloud for its consumer help center, and we continue to see federal agency momentum in the third quarter with the National Oceanic and Atmospheric Administration joining us. If you don’t know them already, their mission is to understand and predict changes in the earth’s environment and to conserve and manage coastal and marine resources, a great customer for Zendesk. We have also begun pursuing FedRAMP authorization, the so called Federal Risk and Authorization Management Program, or FedRAMP for short, is a government wide program for standardizing the process for security assessment for the recession and continuous monitoring for cloud products and services. We are committed to working through the process to gain FedRAMP authorization, which will help us to complete additional federal government business. Developing our brand is an important growth driver for us. And during this quarter, we began broadening, its appeal to an even wider audience with the introduction of a new Web site and a Zen series called Relate. We’ve entered a new era of customer relationships. I’ve talked before about how device of the subscription economy has changed the nature of customer relationships front, transactional to ongoing and how the promoter economy has turned customers into a business’ most powerful form of marketing. These are major shifts that are reshaping business models, reshaping operations, and reshaping the way business leaders think strategically about relationships. Relate is meant to help those leaders make the shifts with inspirational and thought provoking content and resources with real world advice and training and via online events. Truly, we expect to attract an engage a wide range of business and customer experience leaders, not around necessarily Zendesk products, but around the wider topic of relationships. Early in October, we both launched our first Relate live event in New York, and Relate online magazine or Web site. A sold out crowd attended the event in New York, which features both industry speakers from Warby Parker, from Shopify and Pinterest, as well as unconditional keynoters including journalist Jon Ronson, who is the author of newly released book, So You've Been Publicly Shamed, and Starlee Kine, host of Gimlet Media’s popular Mystery Show, podcast. I am really truly excited about this extension of our brand, about these events and we will be expanding it in 2016 with the Relate live series hitting to first Sao Paolo then San Francisco, and London, and of course more professional development resources coming online. We talked about this before, and you know that Zendesk is a very globally oriented Company. Our revenue from the international markets has always been a large component of our revenues. In Q3, a strong 44% of our revenue came from outside of the United States, just that London to launch our new expanded office there. London has a special place in Zendesk history as our first international expansion office opened five years ago and London remains a vital hub for business throughout Europe. Back in 2012 we had just over 3,000 paid customer accounts for all of EMEA. As of the end of Q3 this year, we had more than 24,000 in EMEA and almost 6,000 in the UK alone. Our new location doubles the amount of space we have and give us room to continue to grow the team there. Now that sense out to be incredibly multinational and representing the entire region. When you visit the office, you hear Spanish, French, Italian, German even Danish being spoken alongside English. And if you hear, this office celebrates a birthday, you will hear a purely tradition of them saying happy birthday in all of those languages at the same time which is cool and also very messy. The multinational nature of the office was evidenced among the customers who joined us for the opening celebration. They included our new regional customer Booking.com which if you don’t know is a popular service for online accommodations based out of Amsterdam. We also have the pleasure of having Norwegian cable TV and broadband provider Get amongst our customers and amongst our UK customers we had the very cool Soho based Made.com that sells furniture directly to consumer, so I thank all of you guys for coming to our opening. We also used the opening to further our commitment to community and to our industry in the UK by joining techUK. techUK represents UK tech companies that have almost half of all UK tech jobs. Jacqueline de Rojas recently named Computer Weekly’s most influential woman in UK IT and a techUK board member joined us as a special guest and speaker. Our international investments continue throughout the world and in Q3 we went live with our previously announced collocation datacenter in Frankfurt Germany. It’s a second datacenter in Europe and allows us to better meet the needs of our customer in the region. Switching topic a little bit, talking about the SMB, small medium businesses amongst our customers. We continue to pursue customers through our high velocity try to buy model. It remains an important customer segment for us and we’ve had many of our large customers start more and grow with us overtime. Having a [business] model for these customers to start a trial and engage with our products is very important. One way in which we measure this is the number of customers using also our premium products including our Zendesk Starter plan, our Zopim Lite plan and our InBox product. On our year end call for 2014 I shared that our premium customer population was nearly 100,000 active customer accounts. I am happy to report that this premium population has expanded by more than 20% in nine months and as of the end of Q3 is approximately over 120,000 active customer accounts. Our customers in the SMB space continue to come from a variety of different industries and grow into more traditional organizations. In telecom we had numerous companies join us or expand with us in the last quarter including Hyperoptic which is an award winning broadband Internet service provider in the UK. Our presence in the retail sector continues to grow with new customers including Bluefly, an online multi-brand apparel retailer, Night Owl, a leading security camera and DVR company and BushWear UK a apparel supplier. And we continue to attract some of the world’s fastest growing start ups in Q3 from multiple regions. Out of Asia Pacific GO-JEK Indonesia chose us to support the explosive growth of its mobile service for instant transportation and delivery using a fleet of motorcycle drivers navigating the busy streets of Indonesia. Here in the Bay area, the widely popular payment service Stripe originally out of Ireland joined us to ramp up customer service and account management across its platform. Stripe’s offering makes it incredibly simple for organizations to integrate online payment into their systems. Stripe’s technology can store credit cards and process subscriptions and power marketplaces in over a 100 different currencies. In fact we Zendesk uses Stripe to power our own newly launched paid app marketplace. Our app marketplace has over 350 public apps today and we’ve recently begun allowing developers to charge for their apps at their own discretion. Paid apps provide developers with the potential for new revenue streams while broadening the appeal and the potential reach of the Zendesk platform to more developers and use cases. In our work with developers and in further advancing our platform opportunities Embeddables remain an important component of our long term strategy. We are proud to announce that we now have over 8,000 paid customer accounts employ Embeddables as the customer experience which has expanded from 5,800 in Q2. We have seen strong adoption across customers involved in sports, in retail, and in particular, in gaming and industry rules adoption has exceeded our expectations. In addition to our Web Widget, the availability of our mobile SDK allows organizations to natively embed a customer engagement widget directly in the iOS or in the Android app. Robinhood, a popular zero commission investing app implemented the mobile SDK in Q3 to support its mobile help center and allow customers to submit help to take it all without leaving the application. This kind of seamless user experience is an important feature from many of our mobile first customers. Our Embeddables division is an important part of our strategy to recruit developers for the Zendesk platform. We continue to expand our developer community and will invest to grow that further. As of the end of the Q3, we had over 7,300 developers, up from 5,300 as of the end of Q2. Before I now hand it over to Alan, who will take us through the financial numbers, I want to thank our more than 1,100 employees for continuing to push forward and to innovate. I would also very much like to extend a special welcome to the full employees joining the Zendesk from the team that built BIME Analytics. We are very excited to bring on for a similarly minded scene, which has been living and breathing data and analytics for the last six years [indiscernible]. Alan, over to you, thank you.

[Alan Black:]

Thank you, Mikkel and good afternoon everyone. In my prepared remarks this afternoon, I will review our quarterly financial results as well as provide you with an outlook for the fourth quarter, and also intent to briefly discuss the financial impact of the recent acquisition that we announced earlier in the quarter. Speaking to the third quarter results, which we released this afternoon, we marked another strong quarter for Zendesk, punctuated by strong revenue growth. Executing on our enterprise go to market plan has been an important priority we’ve discussed with you that we’ve emphasized this year. And it was great to see the productivity of our sales force kicking the gear this quarter. We landed several large enterprise deals across multiple use cases expanding industries and geographies, while also continuing to drive revenue growth through the expansion of existing customer relationships. As our sales force continues to mature, we observed that they are building a broad sales pipeline and closing on bigger transactions. It was also particularly satisfying that we won in competitive situations this quarter against some of our larger enterprise class competitors. So hat tip to our sales and marketing teams for collectively doing a great job to generate and convert our sales pipeline, and to everyone else across other departments that helped us to close business and deliver such strong Q3 results. And with that introduction, let’s now dive directly into the numbers for the third quarter. Year-over-year revenue accelerated in the third quarter, growing 64% to $55.7 million, up from $33.9 million in Q3 2014. Our top line revenue growth came as a result of strength in business closed with new customers, continued high customer retention and robust expansion growth driven by existing customers. On a quarter-to-quarter basis, revenue was up 15% from $48.2 million of revenue recorded in the second quarter. Our non-GAAP net loss was $4.2 million or $0.05 per share versus $7 million non-GAAP net loss reported in the second quarter. Non-GAAP gross margin was 72.6% in Q3 compared to 70.2% in the second quarter. Non-GAAP operating margin came in at negative 7.4% in Q3 compared to negative 13.4% in the second quarter of 2015, fueled by higher than expected revenue, better than expected gross margin and continuing control of our operating expenses. Our GAAP net loss was $18.9 million, which included; $13.7 million of share based compensation and related corporate payroll taxes; approximately $300,000 of share based compensation capitalized and internally used software and advertise to cost of revenue; approximately $400,000 of amortization of purchased intangibles; and approximately $300,000 of acquisition related expenses. GAAP net loss was $21.5 million in contrast in Q2. On a GAAP basis, third quarter gross margin was 69.4% compared to 66.5% in the second quarter, and operating margin was negative 33.8% versus negative 43.4% in Q2. GAAP net loss was $18.9 million or $0.22 per share versus $21.5 million loss or $0.25 per share loss in the second quarter. There were $87.8 million weighted average shares outstanding for the third quarter. Cash flow from operations was negative $200,000 in the quarter, influenced in part by the timing collections of accounts receivable. Accounts receivable increased 9.7 million quarter-over-quarter as a result of a strong growth driven by new and existing customers as previously discussed. Post quarter end collections in our aging of accounts receivable continue to be strong and in line with previous periods. Cash used in investing activities was $2.9 million in the third quarter comprised primarily of $6.8 million invested in property and equipment and $1.2 million in capitalized website and software development cost; those being offset by net $5.6 million proceeds from maturities and sale of marketable securities. Cash provided by financing activities was $2.8 million in the third quarter was all primarily from purchases of common stock by our employees through auction exercises and employee stock purchase plan activity. We ended the third quarter with $255.4 million of cash and equivalents as compared to $255.7 million at the end of the second quarter and we had an additional $25.2 million of short-term marketable securities. As was the case in the second quarter 56% of revenue was derived from customers in the Unites States. And as Mikkel said, 44% of revenue came from customers located internationally. Also land and expand strategy once again contributed to our growth in the quarter. We consider our dollar based net expansion rate as a good measure of our success executing on our land and expand strategy. And as of the end of the third quarter, again as Mikkel said, our dollar based net expansion rate was a strong 125% up from a 122% at the end of the second quarter. As we’ve stated in the past we review retention as the inverse of churn. And as of September 30, 2015 our annualized measure of monthly recurring revenue represented by churn customers was once again less than 10%. I would now like to turn your attention to discuss the financial impact of our acquisition of We Are Cloud, the developer of BIME Analytics which we completed last month. As summarized in the press release announcing the acquisition, the purchase price was $45 million paid in cash plus as estimated working capital adjustment of approximately $1.8 million. In addition restricted stock unit awards for approximately 480,000 shares of Zendesk common stock were awarded to the new team as part of long-term retention arrangements. On a non-GAAP basis we expect the acquisition to increase our operating loss in the fourth quarter and this estimated forward financial impact is reflected in the fourth quarter financial guidance we provide today. We also expect the acquisition to affect our fourth quarter GAAP operating results. We expect to incur an additional $800,000 of share based compensation arising from the acquisition and approximately $0.5 million of acquisition related expenses, plus yet to be determined amount of amortization of purchased intangibles that relate to the acquisition. We have not however finalized application to purchased price accounting for the acquisition and we will provide the impact of this charge when we release our results for the fourth quarter of 2015. In addition to our expectation that the acquisition will contribute to future revenue growth, we anticipate that we will realize cost savings as a result of the acquisition once our customers have been fully migrated on to the BIME Analytics platform. Customer migration on to the platform is expected to recur over the course of the next two years after which we expect to begin realizing cost savings and contribute to lower cost of sales. Before opening the call for your questions, allow me now to update you regarding our outlook for the fourth quarter. Please note that this outlook is inclusive of the effects of our recent acquisition as such are known to [have set] this time. We expect Q4 revenue to be in the range of approximately $59 million to $61 million and we expect our non-GAAP operating loss to range between $6 million to $7 million inclusive of the incremental operating expenses resulting from the acquisition. Our GAAP operating loss for the fourth quarter will include share based compensation related expenses of approximately $16 million additional translation -- additional transaction related expenses of approximately 0.5 million and amortization of purchased intangibles. Our estimate of amortization of purchased intangibles is subject to the completion and application of purchase price accounting to our recent acquisition and therefore an estimate for a GAAP operating results for the fourth quarter is not yet determinable. We estimate we will have approximately 89 million weighted average shares outstanding for the fourth quarter based only on current shares outstanding and anticipated activity associated with equity incentive plans. For the full year 2015 we expect revenue in the range of $205.1 million to $207.1 million and non-GAAP operating loss to range between $24.1 million and $25.1 million. Our GAAP operating loss for 2015 will include share based compensation and related expenses of approximately 54.9 million, acquisition related expenses of approximately $800,000 and amortization of purchased intangibles. Once again our estimate of amortization of purchased intangibles is subject to the completion and application of purchase price accounting to our recent acquisition and therefore an estimate for a GAAP operating for the year ending December 31, 2015 is not yet determinable. Finally, regarding cash, as we previously indicated we expect to be cash flow positive from operations for the year as a whole. And with that, I would like to thank you again. And I will turn the call back to Marc.

[Marc Cabi:]

Thanks Alan. Before we take your questions today I wanted to highlight two future dates for your calendars. First, we plan to announce our annual 2015 results on February 16, 2016. Second, we’re very pleased to announce that we will conduct our first Analyst Day, which will be held in San Francisco on Tuesday, May 10, 2016. More information regarding the details associated with both of these dates will be forthcoming. With that, I will now turn the call over to our operator Melissa, who will poll for questions.

[Operator:]

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

[Kash Rangan:]

Thank you for taking my question. Nice top line growth and billings growth as well. Alan if I could, I wanted to go into the accounts receivable, it looks like the pick-up in accounts receivable was more than what you would have expected, notwithstanding the fact that deferred revenues are up nicely. Perhaps if you could illuminate us on where this was driven by couple of large transactions, or how much of it is spill over from Q2 receivables, just following through into Q3? And question for Mikkel, with respect to the customer account. I was actually personally surprised that 24,000 in EMEA, paid accounts would leave you with roughly eight point seven thousands, or little bit less than that, in the U.S. Could you contrast for us how your expansion efforts in the U.S. are coming along, and maybe talk about how the billings in the U.S. maybe not on actual number, or separating away from your rest of the world billings growth rate. Thank you very much. That’s it from me.

[Alan Black:]

So I propose because I first respond to Kash’s question regarding receivables, and I’ll turn it over to you as far the question about customers on a geographic basis. So Kash I think just to be clear, the growth in accounts receivable resulted from business closed predominantly in the third quarter, so very little impact at all in terms of spill over from the prior period. We have a history as a business of having very high collection rate, and I think that carried over into the third quarter. We had a combination I think of a number of large wins that we talked about in terms of success going out market that contributed to the increase. And at the same time, we had the, what I would describe, as the more regular flow of business from historicals perspective that also occurred. So I think that our expectation is that we will see collection of those happen, I think that’s what I was alluding to in my prepared remarks, in terms of the post quarter end behavior, where we expect to collect. So none of it really is pivotal back to the second quarter per se, really a function of strong growth from the third quarter.

[Kash Rangan:]

And you expect the capital rebound in Q4, I would assume, right?

[Alan Black:]

Yes, I think, actually [multiple speakers].

[Kash Rangan:]

Okay, thanks a lot.

[Alan Black:]

And then Mikkel to speak to question about geographic breakdown of customers.

[Mikkel Svane:]

Kash just want to be certain that I understand your question correctly. We have -- I think we announced in the press release that we, as of the end of Q3, have a little bit over 64,000 paid customer accounts. Of those 64,000 paid customer accounts, approximately 24,000 are in the EMEA region. Is that the same numbers you asked?

[Kash Rangan:]

Yes, I believe that excluding -- I was wondering on the 24,000 was excluding the LiveChat or including the LiveChat? And I am trying to get to the excluding LiveChat U.S. customer count and how that is progressing on a year-over-year basis relative to the overall customer count. Just to understand how your U.S. opportunity is expanding.

[Mikkel Svane:]

So, what I can -- where we can do that at least is how our revenue growth has been growing from this quarter -- from previous quarter to this quarter. And I think rate of our revenue is coming from international business is the same previous quarter, this quarter as well previous quarter. So between these two quarters, we’ve seen the same amount of revenue growth internationally as well as domestically. I don’t have like I don’t think we published, we don’t have the numbers for individual customer account and the individual regions. But these two things should represent each other pretty well.

[Marc Cabi:]

Kash let me just add real quickly in terms of customer counts, again if you were to look at the revenue contribution coming from some of our larger contracts, they were fairly globally distributed. And that’s really what we focused on is that revenue distribution from some of the enterprise efforts we’re currently doing. And that did come and was disbursed across our regions.

[Operator:]

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

[Stan Zlotsky:]

Good afternoon and thank you for taking my question. Just wanted to start off with the inflection that we saw in the customers greater than 100 seats and it was about 400 basis points inflection quarter-on-quarter. Going back historically, the last time we saw something like that was potentially two years ago when that part of the business was in instant seats. And as far as you were able to provide any more details and what exactly drove such a strong inflection in that part of the business?

[Mikkel Svane:]

Well, I think high level picture is that we had really-really good quarter in terms of both winning new customers and expanding the customer base. And because a lot of the new brands a lot of them were maybe bigger than we’ve seen historically, both has now contributed to spiking up that number in this quarter.

[Stan Zlotsky:]

Okay. And one more question. So you guys generated a lot of leverage in the model this particular quarter and certainly negative 7% operating margin were significantly better than our consensus expectations. How are you thinking about your long-term profitability profile and as far as your target of reaching breakeven free cash flow in the second half of next year in light of the results that you’ve been putting out? And that’s it from me. Thank you.

[Alan Black:]

Hey Stan, it’s Alan, maybe I will respond to those questions. I think first of all we from the very beginning as a public company had communicated that we’re committed towards as we grow and scale the business that we would deliver ever improving operating performance and then we do that in a steady and measured way. I think we have delivered on that now six consecutive quarters. Our guidance for the fourth quarter I think has us inclusive of the acquisition taking a modest step backwards to that but I think that the view we have is that as the business scales it’s appropriate for us to continue to focus on improving operating performance towards getting to the long-term model that we’ve discussed with investors. And we remain committed to doing so. As it relates to the outlook for 2016 and what we’ve discussed I think I’d say two things. One, reiterate what I said in prepared remarks in terms of operating cash for this quarter we expect to be positive for the year and to do so we need to be positive in Q4. I think what I would ask is that everybody just wait until we update 2016 on the February call as far as a broader discussion about growth for next year and cash flows for next year. But the big takeaway would have -- all of you have is that we remain committed as we grow to these operating disciplined and fashioned as we can while continuing to drive as we did this quarter very high rate of growth.

[Stan Zlotsky:]

Okay, thank you.

[Operator:]

Your next question comes from Philip Winslow with Credit Suisse. Your line is open.

[Philip Winslow:]

Hi thanks guys and congrats on a great quarter. Just wanted to dig into the enterprise business which was obviously very strong this quarter. You talked about some big wins, starting to see leverage out of the sales force. As you kind of look forward to the next quarter and even the next year, how do you think about sort of feeding the sales force and then to continue to grow that business and then B, as far as the pipeline goes how are you feeling about going into Q4 and would you think about going up against in that pipeline, what are the competitors that you are seeing there?

[Marc Cabi:]

Phil as you know our guidance kind of is stated in terms of our revenue opportunity going forward. So I am going to leave the pipeline question open on that other than our sales force is maturing very nicely and we are seeing both larger opportunities and also winning more of those larger opportunities. And then as far as …

[Philip Winslow:]

Competitors.

[Marc Cabi:]

… competitors we have been competing against the known quantity of competitors fairly effectively again with the sales processes and management that are in place now. We are able to go through and compete pretty effectively.

[Mikkel Svane:]

The only other point I would add to Marc’s remarks Phil is in terms of the enterprise wins that we had all of them came against the usual competitors that we come up against and we won large significant enterprise transactions in every geography from Asia to Latin America, to Europe to here in the U.S.

[Philip Winslow:]

Got it. Thanks guys.

[Alan Black:]

Thank you.

[Operator:]

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

[Richard Davis:]

Hey thanks. So with regard to the acquisition of BIME kind of funny but your comments are exactly what I have been working on exact report. So at least I have to -- you got expert for beating me to the punch on that acquisition. So professional for jealousy there. But anyways more directly can you talk about how long you’ve known this firm, how they historically and prospectively will price the software and to what degree you kind of touched on it but this will be a standalone product versus an integrated product and those kinds of things. So that would be helpful? Thanks.

[Mikkel Svane:]

Well so I think first and foremost we’ve definitely been mapping out the landscape for quite a while. It’s been important for us to understand like especially like what are the companies that are investing time and resource into some of the most interesting technologies out there and that’s really where BIME stands out compared to so many of its competitors out there. It’s incredibly new and modern in the approach to building beautiful data analytics with very little overhead kind of the backend administration of data. So it’s a beautiful system and we believe it will be a huge [democratize] in understanding your business data across platforms, across services much better. So we have been following the landscape for quite a while mapping it out pretty well. BIME will continue as a standalone product but it will also be integrated really well into our whole portfolio of products and into the platform overall. So it will both part of the preconfigured custom analytics platform and scattered around the product or sprinkle around the product for understanding your customer relationships better but at the same time there will also be extended loan product that companies can acquire to better understand the businesses across the multitude of channels.

[Operator:]

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

[Bhavan Suri:]

Just a couple, and congrats a nice job there. When you look at the BPO opportunity, you discussed just a little bit in the past. But any color on how that’s progressing. So how you’re attacking it and as those guys go through the transition of tying voice to text broader customer integration. How you’re seeing the traditional guys or the customer applications they develop compete?

[Alan Black:]

So Marc I can take that. Just quickly what I would say this was another quarter which we had wins that came through the BPO partnerships that we have. I think we had a lot of ground and lot of material to cover the scores, so we didn’t spend much time on it. But pleased with the continued success we had with our partners. As it relates to the telephony partners that we have, maybe Marc I’ll ask you respond to that part of question.

[Marc Cabi:]

So Bhavan, we continue to work really closely with our telephony partners CTI integrations have been a good part of the story for a very long time. And we have approximately 30 partners that we worked actively with and we continue to work with them. In addition to that though, we do want to be able to provide an integrated solution to our advanced voice product, which we said will come live sometime this quarter which is in beta today. So, from that perspective, voice is an important element of channels for customer service and we want to make sure that customers are already have good voice solution, can work and put Zendesk on top of that. And when they need a voice solution, we are able to offer that to them as they package or as an add-on.

[Bhavan Suri:]

And then if I ask one more on the enterprise base, as you think about the enterprise customer base and you’ve got some of these beach ads in these large enterprises, and you’ve got 300,000-400,000, 2,000 seats but they’ve obviously got tens of thousands of people who are doing customer support service. How do you size that market? Have you looked at what the potential size of the customers you have today or you’re somewhat penetrated in the enterprise space looks like? And how do you think of approaching that opportunity, either in partnership with guys like Accenture Deloitte, is it just growing the base? How should we think about that from a growth perspective?

[Alan Black:]

The market sizing we provided in the past had really been from industry analysts like IDC and others that size the market anywhere between $8 billion to $10 billion in annual opportunity, and we play into segment of that. And over time we’re playing to a bigger opportunity there as we’re able to track down more enterprises. That said, we don’t appear as often in questions you might ask professional service providers, because we do have a much faster time to market, time to first ticket. We don’t require as large an investment in professional services as some of the competing solutions that might be considered. And so that might help you put that into context.

[Operator:]

Your next question comes from Brendan Barnicle with Pacific Crest Securities. Your line is open.

[Brendan Barnicle:]

Alan I know you guys don’t guide the billings. But as I just run through my model, I guess I would leave unchanged I’d have actually billings that’d be flat to slightly down in the fourth quarter. Is there any reason that we should assume that type of trend in the fourth quarter this year?

[Alan Black:]

We don’t guide. I think the reason just to reiterate why we do not is because of the mix of our customer base. We have over 40% of our customers pay us month-to-month and then others who pay us on annual or have long multiyear contract arrangements. And so it just is for us a metric which we think is less indicative and less predictive in terms of our future results. That said, I think obviously it was strong quarter for us as you see in the balance sheet in terms of the growth of deferred, don’t think that there should be a significant change in terms of fourth quarter trajectory. But it’s not something that we’ve provided guidance on for the reason that I described.

[Brendan Barnicle:]

And then on the international side, obviously international remains a big part of your business, and globally, even in Europe there’ve been some pockets of weakness, doesn’t appear that you guys saw any of that. Any reason why you haven’t seen it, or if there were some areas that you saw weakness in geographies that you operate and even if it didn’t manifest in your business?

[Alan Black:]

So I would think, so we didn’t see it just to be direct about it, in any of the geographic regions we operate, which is spread everywhere. I think it was a strong quarter. One of the reasons I think why we perhaps are not as effective is we very much are a Company that delivers value in terms of the democratization of access to our software. So from a price perspective, you’re looking at our business relative to competitors. Marc just spoke about it a moment ago. You don’t have a significant investment that you’re making in professional services just to get the software deployed. And so I think that that may have played a part but the specific question you asked, we didn’t see weakness in different parts of the world where maybe perhaps others have. So it’s for us a strong quarter.

[Operator:]

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

[Jeff Van Rhee:]

Number of questions here, first, I guess just as we look at the analytics and the voice offerings in particular. Can you go into those a bit deeper and just talk about the potential for ARPU uplift, both from an ARPU uplift standpoint as well as how you view the market potential and opportunity in each of those two as you look out two-three years in the sense of relative sizing?

[Alan Black:]

Jeff I would ask since we’ve not announced some of our pricing around advanced voice and some other feature sets that I would ask that you look at what we did with our premium chat in earlier this year where we’re cross selling our premium chat product into our existing Zendesk platform at about $44 a seat. Again it’s a subset of seats that take chat as a percentage of the total, but it is a nice uplift. And we’re continuing to become a multiproduct, multi-SKU Company, and some of these efforts around voice, some of the data analytics will represent those moves going forward.

[Jeff Van Rhee:]

Would you be able to comment on the relative sizing which of those you see as being a bigger contributor to revenues a couple of years down the road?

[Alan Black:]

We think that data is actually one of the most important, and that’s why Mikkel highlighted that as far as being able to, for companies, our companies our customers to be able to use data to their advantage. But voice is a large component. It’s a very large channel that is used, so we view voice as an important channel for us to pursue.

[Jeff Van Rhee:]

And with respect to BIME, certainly you’d seen as though you’ve got a lot of conviction and the capabilities of the product set. Can you just give us a sense of some of their larger implementations? Where have they been battle tested? Or how did you get to comfort that the product would play as you move up into the enterprise in particular?

[Mikkel Svane:]

BIME is not traditional enterprise company. This is a company that’s built on lot of the same principles that we built Zendesk. But that also means that it’s a product that’s very-very easy to scale. They have some very large customers among their customers but they truly believe in democratizing access to this field that also means that they solved some very hard problems. Does that mean that they are the preferred enterprise product from one day to the other, no, it doesn’t but they will get there the same way that Zendesk got there, and we’re very confident in that vision.

[Jeff Van Rhee:]

And then last one from me, just gross margins I think 72.6%. Is that level sustainable certainly impressive margins and progress there. Just how to think about gross margins? Thanks.

[Alan Black:]

Jeff, so very fair question, I think that our guidance for the last quarter would suggest that it’s not going to be as sustainable. We had partial quarter cost of depreciating the new data center in Germany. In Q4, we’ll have a full quarter. So, we’ve seen similar impact in previous quarters when we launched in the middle of one quarter in Virginia, new data center, and then next quarter we had a full quarter of depreciation. So I think that if you build that into your respective models. That said, we remain I think in the spirit of what I described previously in terms of continuing to drive ever improving results, we continue to drive towards delivering towards the target model of our gross margin target model, which is higher than where we ended up this period. But it’s going to be, always be a one directional move, and I think that this quarter with the added depreciation it may tick down a little bit.

[Operator:]

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

[Pat Walravens:]

I would love to focus a little more on the Tesco example that you gave early in the call. Maybe just how does that win come about? What were those agents using before they’re using Zendesk? And why did that particular set of agents decided to move now?

[Mikkel Svane:]

The Tesco use case is a special use case, because of the size of the organization and because it basically an internal customer support case. They basically handle their internal customers. There’re 3,000 agents managing requests from all the employees, which is like 0.5 million or more employees. That also means that they have approached -- they have adopted an approach and a tactic that resembles much more like traditional customer service that support the number of different channels to communicate with the central service department and rather than like the most traditional IT support, HR support kind of system you would see elsewhere. So they use, I can’t even remember what platform they came from but they use I think multiple platforms and this was part of the consolidation that really streamlined the operation that improved satisfaction and really gave them the ability to take them through a lot of the changes that going through as an organization and as they modernize their tools.

[Pat Walravens:]

Great, thank you Mikkel.

[Marc Cabi:]

I think operator that’s the last question. We will close the call here. Thank you everyone for joining us for our Q3 2015 earnings call. We will talk to you next quarter.

[Mikkel Svane:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.