Zendesk - Q1 2022
April 28, 2022
Transcript
Mikkel Svane (Founder, Chairman, and CEO)
Good afternoon, everybody, and welcome to our Q1 2022 earnings call. We had record first quarter revenue of $388 million, growing 30% year-over-year and adding over $90 million of revenue compared to last year, our largest ever one-year increase for the first quarter. This also marked the fourth consecutive quarter that we have grown our book of business by more than 30%. We also delivered another quarter of record low churn and contraction, which allowed us to deliver a net expansion rate of 121%. Our strong performance can be attributed to yet another great quarter of momentum with enterprise customers and continued growth of the suite. Our enterprise success is highlighted by our 140 customers with more than $1 million in annual recurring revenue.
Let me take this opportunity to welcome some of these great new brands to Zendesk, including the world's largest online dating technology company, Match Group, also the largest clothing retailer in the UK, FTSE 100 company, Next, and Itaú, the second largest financial institution in Latin America. Welcome. Turning to Suite now. Zendesk Suite has helped reduce the friction of selling to customers, and it provides a future-proof solution right out of the box. Our first cohort of Suite customers just passed their one-year anniversary, and the initial data confirms our assumptions and reinforces our confidence that Suite is the mainstream choice for businesses today. Suite customers are expanding at a much faster rate than our non-Suite customers. They are faster at adopting modern digital channels and expanding their use of Zendesk within their organizations.
That leads to stronger expansion, better retention, longer contract terms, and lower churn and contraction. We are confident that Suite is enhancing the sustainable long-term growth trajectory of the company. Now, let me talk to you about our upcoming Relate event. After almost four years, it's back, and we are so excited for everyone to hear directly from our customers about how they've been able to engage and service their customers better with Zendesk. We'll showcase some new products, new features, a lot of exciting stuff. I hope you'll all be able to tune in to the virtual event on May 11. We will have live in-person events in San Francisco and in London and in locations around the world following May 11. We're excited to finally bring people together in person. It's back to business.
We have limited availability for these in-person events, but I'm pretty sure that your friendly Investor Relations team here may be able to set you up with a ticket. As we look ahead to Relate and helping our customers get back to what they do best as we emerge from the pandemic, we are aware that this gradual return to normalcy is happening against the backdrop of the ongoing war in Ukraine. While we don't have any employees or offices in the region, our employees have family members and have friends there, and our team in Poland is acutely feeling the war's impact. The Zendesk Foundation has donated to the International Rescue Committee and the World Central Kitchen to support efforts in the region. We have suspended all sales activities in Russia and in Belarus, and we are providing relief to our customers in Ukraine.
Finally, let me take this opportunity to address the timing of our annual shareholder meeting. We expect to hold this meeting in Q3, and our board will determine and announce the specific date and time in due course. I'll close out by reiterating that this was another strong quarter. We grew our head count by 39% compared to the first quarter of last year, positioning us to deliver even stronger results for 2022 and beyond. Our team, our business, our customer relationships remain strong, and we are excited about the opportunities ahead. With that, now let me turn the call over to Shelagh to further discuss our financial results. Shelagh, please take it away.
Shelagh Glaser (CFO)
Great. Thank you, Mikkel, and thank you everyone for your time today. As Mikkel mentioned, we generated $388 million in revenue this quarter for 30% year-over-year growth, which was ahead of our expectations. We're pleased with the progress with upmarket customers, as well as the initial data we are seeing from Suite customers. We've had conversations with many of our investors recently, and one of the most requested items was more data around both these points, so I'll share some of that information with you today. Customers with more than $250,000 in ARR, our enterprise proxy, now account for 39% of our total ARR, up from 34% during the first quarter of 2021. The number of customer accounts in this category grew 41% year-over-year.
Over the past six months, we've increased the number of customers that are generating more than $1 million in ARR from 111 at the end of Q3 2021 to 140 at the end of the first quarter, up 26% in just two quarters and 65% year-over-year. It is our intention to continue to evolve the metrics we share to better reflect our long-term growth and business strategy. In addition to our enterprise ARR metric, we now intend to regularly disclose the number of customers that we have with greater than $1,000 in ARR, a segment we are referring to as growth customers. Since this segment accounts for approximately 99% of our total ARR and is directly correlated with future growth, we have consistently grown this cohort for the past five years.
During the first quarter, the number of customers in this segment increased by about 1,400 compared to the fourth quarter, and by 5,700 customers compared to the first quarter last year. We are confident that our land and expand strategy will continue to drive long-term growth for our business, and this new metric is better aligned with the strategic direction of our business. Turning to Suite and expanding on what Mikkel shared earlier, it now accounts for 40% of our total ARR, up from 35% in the fourth quarter. We continue to see the majority of bookings in the quarter, including our new customers on Suite. Based on the initial data from customers that adopted Suite in the first quarter of 2021, Suite customers have superior performance on all metrics.
They have higher gross expansion, lower churn and contraction, and higher net expansion than non-Suite customers. Additionally, Suite customers' average contract terms are meaningfully longer than non-Suite customers, and on average, Suite customers are more engaged and use more products and features after upgrading compared to their pre-upgrade baseline. At 40%, Suite has far exceeded our expectations with respect to adoptions as new customers overwhelmingly prefer Suite and a significant number of existing customers have already chosen to upgrade. We can see that once a customer is on Suite, there remains ample opportunity for further growth through higher expansion rates at higher dollar amount. As Mikkel mentioned, this will drive sustainable long-term growth for the company.
We expect Suite expansion to become the largest growth driver, and we expect the pace in which we transition existing non-Suite customers onto Suite will be more moderate as we move into our second year. We expect Suite will continue to increase as a percentage of ARR, and that the rate of adoption will be similar to what we observed in this first quarter. Finally, we believe that the strong ongoing adoption of Suite helped to support our net expansion rate, which was at 121% for the quarter. The majority of our net expansion in the quarter came from seat expansion, while we also achieved another record low in churn and contraction. This supports our continued belief that our long-term net expansion rate will be between 110% to 120% range.
Turning to margins, our first quarter non-GAAP gross margin was 82.6%, up 80 basis points year-over-year. Gross margin has continued to improve over time, driven largely by revenue scale and efficiencies in our hosting infrastructure. For the quarter, we reported $20 million in non-GAAP operating income. This was within our guidance range, but at the low end due to continued investment in our people. During the first quarter, as a result of successful recruiting and improved employee retention from trends we experienced in the second half of 2021, we've absorbed a higher percentage of expected expense for incremental headcount than we had initially anticipated. We believe these Q1 efforts will support our long-term growth of our business, but they were approximately 135 basis points of headwind to operating income relative to our initial expectation.
Additionally, we had a one-time tax items that were another 25 basis points of headwind. Adjusting for these two items, we would have been at the high end of our operating income range. We continue to expect success in recruiting and our ability to retain employees that will result in a 235 basis point of additional expense in Q2, which is embedded in our Q2 operating income guidance. We are pleased with our ability to onboard and retain talent, which will drive our growth plan. As we fully onboard these new employees and scale our business, we remain confident, committed with a clear line of sight to 7.5% non-GAAP operating margin, which is the guidance that we had originally introduced in the November investor meeting.
Turning to free cash flow, I shared on our Q4 earnings call that we expected free cash flow to be slightly negative in Q1, primarily due to anticipated $14 million-$17 million of acquisition-related expenses. We outperformed this initial expectation and generated $1 million in positive free cash flow during the quarter, inclusive of $13 million in vendor payments related to the terminated acquisition. Finally, let me cover our guidance. For the second quarter of 2022, we expect revenue to be in the range of $402 million-$408 million. We expect non-GAAP operating income of $18 million-$24 million.
For the full year 2022, we are increasing our revenue guidance to $1.685 billion-$1.71 billion in light of our strong first quarter performance. We are maintaining our non-GAAP operating margin guidance of 7.5% with a range of $117 million-$137 million. We are increasing our full year free cash flow range to $175 million-$190 million. As Mikkel mentioned, we have suspended all of our activities in Russia and Belarus, and we are providing assistance to our customers in Ukraine by waiving charges for a six-month period. In total, we have approximately $7 million in annual recurring revenue exposure between Belarus, Ukraine, and Russia, all of which have been factored into our forward-looking guidance.
With that, let me turn it over to Jason for Q&A. Jason?
Jason Tsai (Head of Investor Relations)
Thank you, Shelagh. The first question will be coming from Arjun at William Blair. Arjun, please turn on your camera and unmute your line, please.
Speaker 14
Hello. Can you guys hear me?
Jason Tsai (Head of Investor Relations)
You're very faint.
Speaker 14
Is that better?
Jason Tsai (Head of Investor Relations)
Yes.
Speaker 14
Hello. Okay. I'm trying to start my video here. Okay, it's not letting me. Thanks for taking the question and congrats on a good quarter. Mikkel, maybe starting with Suite, I wanna get an understanding for perhaps how much of your Suite traction or perhaps how much Suite is an attractive element for new customers that are coming to Zendesk versus how much of it is existing customers that are migrating up. On that existing customer migration path, how much room do you get a sense for there being left in the existing customer base to still adopt Suite? I mean, how much runway is there within that existing base?
Mikkel Svane (Founder, Chairman, and CEO)
Yeah. Thank you. You will also find additional material on this in our shareholder letter. Suite is the choice for almost all our new customers. We are of course still expanding, moving a lot of existing customers from non-Suite to Suite during the quarter. An increasing amount of kind of the Suite growth as a percentage of our recurring revenue is coming from expansion of that cohort. As we said, now we have the first cohort that has reached their one-year anniversary, and we can see from that cohort that they are expanding at a much faster rate, and that seems to be the trend for other cohorts too.
Some of our assumptions for the Suite has been verified by what we can see, the longer contract length, the increased adoption, the higher expansion rate, and the lower churn and contraction rate. We can also see that we still have a big part of our customer base that we can still migrate to Suite, and we will continue to see that as a double accelerating effort. As they upgrade to Suite, there's an upsell opportunity in that context. But also once they are Suite customers, they use much more of the product and expand much faster with the product. It's kind of a flywheel effect getting the customers on Suite as it will continue to provide expansion bookings to our business. Does that make sense?
Speaker 14
Yes. It's very, very helpful. Thank you.
Mikkel Svane (Founder, Chairman, and CEO)
Thank you.
Speaker 14
Shelagh, one if I can for you. I think fully appreciate the call-out on the exposure to Ukraine, Russia, Belarus. One thing we've heard from some other companies this earnings cycle is just maybe a slightly elevated hesitancy in the rest of Europe with the, you know, some companies calling out deal slippage. I'm curious if that's something that you're seeing at all at this point in time, and if you're adjusting for that in guidance maybe to be a little bit more conservative, but would just love any color you have on that front.
Shelagh Glaser (CFO)
Yeah, certainly. You know, there's no doubt, and Mikkel mentioned at the beginning, you know, we've got employees that are, you know, close. You have family members that are, you know, impacted, and then, you know, we've got Polish employees. We know just even from our own company how this is taking a hit. There's no doubt that there's probably some headwinds that are happening across Europe. We have left the range a little bit wider than we otherwise might have done, and then it's exactly for that point, Arjun. We know there's a lot of headwinds out there. We don't have a specific insight into those headwinds, but we just know there's a lot of uncertainty, specifically in EMEA with our EMEA, you know, colleagues dealing with quite a bit.
We did in fact think about that when we left the range a bit larger than we might normally have done at this point.
Speaker 14
Okay. Understood. Very helpful. Thank you.
Shelagh Glaser (CFO)
Thank you, Arjun.
Jason Tsai (Head of Investor Relations)
Thanks, Arjun. The next question comes from Jeff Van Rhee over at Craig-Hallum. Jeff, please turn on your camera.
Jeff Van Rhee (Senior Research Analyst)
It says I can't start the video because the host has stopped it, so I'll just go with audio. Can you hear me?
Jason Tsai (Head of Investor Relations)
Yep.
Jeff Van Rhee (Senior Research Analyst)
Okay. A couple from me. First, I guess very interested in the Suite. I didn't. The percent of the base that will buy the Suite, is there a max? I know you've said some customers are clear, you know, won't buy it. Do you have any enhanced thoughts on that? Particularly within the Suite, it sounds like you just get great visibility on what's being used. Just maybe just expand on it a second what's being used within the Suite that might be surprising you.
Mikkel Svane (Founder, Chairman, and CEO)
I wouldn't characterize it as surprises. These were part of our assumptions for building the Suite. We can see that customers are adopting more channels and are especially leaning in on the more kind of modern digital channels, like chat and the messaging channels. And they, in general, get much more wider adoption of the entire product in their organization. You know, these are two assumptions we had around the product, like the simplified pricing across the entire product. It would encourage everybody to use a lot more of the product because they had full access to the product. That we feel very excited about. You know, there will definitely be use cases or some use cases where maybe the Suite is less relevant.
Even if we look at our growth customer segment that represents, you know, 99% of our revenue, you know, I think ultimately the Suite makes sense for everybody. Let's see, like the adoption as we, as Shelagh has said many times now, has been a lot faster than we originally predicted. Let's see where this takes us.
Jeff Van Rhee (Senior Research Analyst)
Yep. Shelagh, on the hiring, you mentioned on the operating side and the expenses, you got people in the door faster. Specifically, which departmental roles did you see the accelerated hiring ahead of plan?
Shelagh Glaser (CFO)
Well, it was broad company based. I think the hiring environment has changed a bit. I'm sure many are seeing that between Q4 and Q1, and clearly Zendesk is, I think, a very attractive company for. We've had a lot of success in our recruiting, and then our early recruiting for Q2 was also very successful too. There's still spots. We're still recruiting. We're not done yet, but just have seen a demonstrable change in sort of our ability to successfully recruit versus what we saw in second half of last year.
Jeff Van Rhee (Senior Research Analyst)
Okay. One very quick one for Mikkel. Mikkel, on the vote and the magnitude of the no vote, just as you come out of that, how does it change how you think and operate as a business?
Mikkel Svane (Founder, Chairman, and CEO)
Well, we had grand plans, grand visions for what we could do with the Momentive acquisition. That's not gonna materialize. We are focusing on our core operating plan that we had even before announcing the acquisition and executing on that. That's really our focus.
Jeff Van Rhee (Senior Research Analyst)
Okay. Thanks for taking my questions, guys.
Jason Tsai (Head of Investor Relations)
Thanks, Jeff. Next question comes from Ryan MacWilliams over at Barclays. Hey, Ryan, can you unmute your line? There you go.
Ryan MacWilliams (VP, Software Equity Research Analyst)
Thanks, Jason. Hey, guys. Really strong growth in customers with greater than $1 million in ARR. You know, anything in particular to call out there beyond maybe Suite adoption? Like, is it more seats or adding more products? Like, you know, what has contributed to the growth in that customer cohort?
Mikkel Svane (Founder, Chairman, and CEO)
Yeah. Well, I would characterize it as a result of our enterprise investments, both on the product side. Enterprise customers have much more kind of advanced, you know, needs for customization, integrations, extending, so our platform investments and making these platform capabilities much easier and accessible. We see that works with customers. We also see an overall trend with businesses today where they, you know, they appreciate kind of the fast time to results, the kind of no-hassle implementation, the kind of the ease of use and kind of the powerful capabilities of the platform that are available, even though they're very easy to implement. We see that as a mega trend, you know, that businesses are definitely gravitating to those kind of, you know, attributes.
We see that as a long-term kind of accelerator of our business.
Ryan MacWilliams (VP, Software Equity Research Analyst)
Appreciate that. You know, would just love if you could kind of clear up some of the things that we've been hearing on our side, right? Like, there was a press article that, you know, there was a banker being hired by Zendesk, not, obviously not confirmed by you guys, but with an annual meeting, you know, kind of later than usual. Can you just talk about kind of the path forward here and, you know, just in line with some of the things that we've been hearing, around Zendesk?
Mikkel Svane (Founder, Chairman, and CEO)
I think the board has taken its time to kind of regroup after the failed acquisition here and they have taken a little longer to kind of determine or to get ready for our annual meeting. They're now ready for it here in Q3, and they're gonna announce the exact date when they are ready with that. Beyond that, they're very much focused on, you know, as is the management team, on executing on our operating plan, and we're very excited about our ability and our success there.
Ryan MacWilliams (VP, Software Equity Research Analyst)
Appreciate the color. Thanks, guys.
Mikkel Svane (Founder, Chairman, and CEO)
Thank you.
Jason Tsai (Head of Investor Relations)
Thanks, Ryan. Next question comes from Derrick Wood over at Cowen. Hey, Derrick.
Shelagh Glaser (CFO)
Hey, guys. Thanks. Mikkel, given the change in strategy away from Momentive, are there new growth initiatives that you're looking to invest in over the course of the year, outside of the core business and customer service? Have you had any thought about reviving the focus on sell and the sales automation market?
Mikkel Svane (Founder, Chairman, and CEO)
That's a ton of things that we're investing in, and we have a bunch of very interesting announcements coming up at Relate, including some new capabilities for our sales product. We had very much a strategy around focusing on our enterprise execution, and we're very focused on that and seeing the returns on that strategy, and that gives us a lot of, you know, runway over the next two or three years focusing on our enterprise investment. We're still very much investing also on our customer intelligence strategy.
You know, it's not gonna be with our friends from Momentive, but we're gonna still focus on how can we help our customers gain more insights about their business, about their products, about themselves from using customer service data combined with other data, and we're still executing on that.
Derrick Wood (Analyst)
Okay. Shelagh, maybe one for you. I mean, it sounds like you're pretty encouraged about the net revenue retention rate out of the Suite customers even after they see that 20% uplift when they move. And if you're seeing more of the base have that kind of healthier net revenue retention rate, does that make you think about the long-term targets of the 110%-120% in a different light? It seems like that could put upward pressure on that number. How are you thinking about that potential for that being a stronger long-term target?
Shelagh Glaser (CFO)
Well, I think, you know, obviously, it's still early days on Suite. As Mikkel said, you know, we just anniversaried two months of customers, so we're really encouraged by that. We're really looking forward to next call. We'll have, you know, more fulsome data. The results of those customers are very strong, and that gives us a lot of conviction because we had those hypotheses, so it gives us a lot of conviction about the value and the sustained growth. I think it's too early to say whether that changes the entire range of the 110%-120%. That's certainly something that we'd be looking at there, for sure.
Derrick Wood (Analyst)
Understood. Thanks.
Shelagh Glaser (CFO)
Thanks.
Jason Tsai (Head of Investor Relations)
Thanks, Derrick Wood. Next question comes from Parker at Stifel.
Speaker 13
Yeah, hi. Thanks for taking the questions. Mikkel, wondering if you could comment on the development of the partner channel. I know you made some investments there a few years ago, and it's been something you've been emphasizing here. What role are they playing in some of the largest deals for Zendesk today, and how much work is there remaining to get that partner channel, you know, fully operational and driving new deals?
Mikkel Svane (Founder, Chairman, and CEO)
We have partners alongside a number of different dimensions. We have a lot of great technology partners, and we are really investing in doing more together with our technology partners. We have a lot of companies coming to us and wanna work with us, and we see increasingly an opportunity to do more there. We are working also in regions, we're working with reseller partners that also plays a part of our future growth. We, of course, have local system integrators and the global integrators to work with, and we're increasingly seeing benefits there. In regions of the world, we almost have partners on all our deals.
We also have, we're working with some of the big GSIs around some of the big BPOs around the world, so we're doing an increasing amount of business there. It still is like we can do a lot more, and we can make it much more predictable for our business, and that's a big focus area for the business, and we still have a lot of work to do there.
Speaker 13
Yeah. Understood. On the Suite side of the equation here, lapping the one-year mark. In the case of customers that have not chosen to migrate to the Suite yet, what are the most common reasons they're citing to your sales team? Is it a pricing situation? Are they not finding a use case for some of the functionality? What's going to move them across the goal line here as you go past the year mark?
Mikkel Svane (Founder, Chairman, and CEO)
Well, Shelagh, you can maybe add a little bit more color. Like, honestly, a lot of these things also have to do with their renewal cycle, and when we have the right time to engage with them or the right kind of reason to engage with them and kind of help them through the process and understand the process, et cetera, et cetera, and help them kind of help us. You know, we help them kind of understand the business case for using the Suite capabilities. Or there may be just, like, when it's the right moment in time for them to think about new channels, and then they realize that this is a much better way of doing it. I would say these are some of the occasions that plays into when they move to the Suite.
Shelagh, do you have other data?
Shelagh Glaser (CFO)
Yeah, I would agree. I think, over time we see. I mean, that's what's been so exciting about it. We see customers of all sizes, the Suite is the, you know, preferred solution to them. I think a lot of it does have to do with anniversary dates, which will, you know, be coming up on more anniversary dates as we go through the year. There may be some customers that have some particular use case that it's not suited for, and certainly we'll, you know, continue to support them on, you know, whatever. If they just want the support product, we'd, you know, happily do that. I do think the timing for renewal is probably the most likely inflection point to move over to Suite.
Speaker 13
Yeah, makes sense. All right. Appreciate it.
Jason Tsai (Head of Investor Relations)
Thanks, Parker. Next question comes from Samad Samana over at Jefferies.
Derrick Wood (Analyst)
Hi there. Good evening. Thanks for taking my questions. Maybe first one, for you, Shelagh. I know that the company mostly prices in U.S. dollars, so FX isn't an issue, but I'm curious just with the strength of the dollar, how do you guys think about pricing strategy for your international customers, just given the high mix? Or is that something that the company's thought about just as the dollars continue to get stronger?
Shelagh Glaser (CFO)
We don't have a CPI or an inflator that moves up and down. That's not written into our contracts. We haven't found it to be an issue. You know, the pricing of our products. I think Jeff always calls it we price for value, and the customers see great value in it. We haven't seen the push on any change in pricing with some of the inflators going on. Then I would say just in terms of us managing our risk, we do hedge. I feel like we don't have a lot of risk, FX risk in how we run the company.
Derrick Wood (Analyst)
Great. Just as I think about the from the shareholder letter, the impact that Suite has, obviously the initial impact is, you know, 20% plus, but then you talk about the additional uplift. I'm curious, when you think about the ongoing tailwind, is that more a function of new users being added to those customers? Is it more about-
Samad Samana (Managing Director)
Them adding even additional products within the suite or upgrading to a higher tier, just how should we think about what that additional tailwind you guys talked about beyond that first 20% bump?
Shelagh Glaser (CFO)
Sure. I mean, I think the main growth, as I kind of mentioned in my prepared remarks, that we're seeing is really that continued seat expansion. If you think about our model has always been to land and expand, so that could be expanding in the, you know, in the part of the business we're in, or expanding into another division or another use case inside the company. I think that's all available. Obviously, you know, moving from suite, non-suite to suite, there's the 20% upsell, and then, you know, that pricing persists for the seats. In terms of, you know, additional usage, we're seeing, actually it's been really interesting, much higher usage of features than the pre-upgrade.
We think actually that's really gonna be beneficial for churn and contraction, because it's the product is, you know, in higher usage, more valuable, if you will, to the customers that are using it, so they're gonna wanna be staying with Zendesk, and so we see that as being beneficial for that.
Samad Samana (Managing Director)
Great. Thank you so much.
Shelagh Glaser (CFO)
Thanks, Samad Samana.
Jason Tsai (Head of Investor Relations)
Thanks. Next one, next question comes from Brent Bracelin over at Piper Sandler. Hey, Brent. Can you turn on your camera and unmute? There you go. Thanks.
Brent Bracelin (Managing Director, Senior Research Analyst)
Oh, great. Good afternoon. Great to see the team here. I wanted to go back maybe for you, Mikkel, and talk a little bit about some of the investor concerns going into the year more broadly were tied to these changing global risk factors. But what we saw in Q1 from Microsoft, they actually had much stronger large enterprise momentum in that March quarter. ServiceNow, your million-dollar cohort's up 65% year-over-year. A little bit of a contrast to kind of what we were thinking going into the year from a risk standpoint. Can you talk about what's resonating with these large enterprise customers? Is it just older systems that they feel they have to upgrade and modernize?
Is it just a mix shift to direct to consumer that's driving some of these large enterprise wins for you? Just trying to figure out and understand the risks have changed, but it looks like large enterprise deals continue to be strong. Little bit of a disconnect there. I'd love to hear what you're hearing from large customers.
Mikkel Svane (Founder, Chairman, and CEO)
Well, I'm not sure I understand the disconnect. What I can say is that we are, of course, dealing with mega trends that are rapidly increasing the amount of customer engagement that every business has to deal with. Businesses are looking for modern agile solutions that can deal with these new channels and make them capable of engaging with their customers. You know, so they don't wanna think about it as big, massive IT projects. They want the agility to be customer focused and meet their customers where their customers are, and that is what we do for them. Our ability to sell into those segments, it's something that's been a long journey for us and becoming increasingly better at it. We're working more and more with partners.
As you heard before, there was a question about partners, like, our partner revenue has grown like 100% over since last year. We are really pushing on all the kind of our enterprise go-to-market motions and, you know, also delivering a lot of the capabilities that our enterprises want around the world, around regulatory stuff and data privacy issues and all these things that are, you know, top of mind for enterprise today. We wanna make those table stakes so they can just focus on executing on their customer strategy, and that is what we're doing.
Brent Bracelin (Managing Director, Senior Research Analyst)
Got it. It sounds like a lot of investments that you've been making for the last, you know, couple years are kind of paying off here. I guess, Shelagh, for you, just a quick follow-up on Europe. It is 29% of the business. As you look at that pipeline, maybe split it between transactional and enterprise, are you seeing any one of those areas maybe a little more weaker? I appreciate the wider range of guidance in the quarter, but just as you think about pipeline, specifically in Europe, can you comment a little bit on what you're seeing, either enterprise or transactional trends so far?
Shelagh Glaser (CFO)
Yeah. I don't know if we have. You know, certainly, there's a lot of uncertainty for customers. I think we've witnessed things taking a bit longer and some hesitancy on customers. I mean, I think that's very natural. I don't know if I would say it was more in one segment than the other. I think, you know, kind of, there's sort of a universal headwind that the region is facing. We tried to factor that into our forecast and gave that broader range, just because we know that there's that uncertainty.
Brent Bracelin (Managing Director, Senior Research Analyst)
Helpful color. Thank you.
Jason Tsai (Head of Investor Relations)
Thanks, Brent. The next question comes from Adam over at BofA. Adam, please go ahead.
Samad Samana (Managing Director)
Hey, thanks, guys. Hard-hit COVID industries, travel, rideshare, hospitality, you know, we're seeing a lot of headlines about these categories coming roaring back. I know you guys had some exposure to them, you know, during the start of COVID. Is it fair to say that a lot of these kinda headwinds or this, the pause in spend from those categories have kinda come back?
Shelagh Glaser (CFO)
Yeah. I think we had even said at some point in late 2021 that sorta that contraction that we saw. We felt like we'd kind of worked through that. You know.
Samad Samana (Managing Director)
Got it.
Shelagh Glaser (CFO)
Hospitality was really hit, airlines were really hit, sort of all those really hard-hit industries, and they've come back. You know, or they had already kind of come back in 2021.
Samad Samana (Managing Director)
Got it. I guess next question. You know, to the extent that you guys have visibility into this, can you compare and contrast kind of what you're seeing between the up-market enterprise customers versus the small business customers, just in terms of appetite and willingness to spend on software?
Mikkel Svane (Founder, Chairman, and CEO)
I don't think we have good data to provide you with that, Adam.
Samad Samana (Managing Director)
Okay.
Mikkel Svane (Founder, Chairman, and CEO)
We'd love to have it. Sheila, do you have any? I don't have anything I can provide here.
Shelagh Glaser (CFO)
Yeah, I don't have a unique insight into, you know.
Samad Samana (Managing Director)
Okay
Shelagh Glaser (CFO)
Obviously we have different plans that appeal to different size customers. We try to have our plans right sized by where the customer is.
Samad Samana (Managing Director)
Okay, pretty consistent across.
Shelagh Glaser (CFO)
Mm-hmm
Samad Samana (Managing Director)
You know, across the customer segments.
Shelagh Glaser (CFO)
Yeah.
Samad Samana (Managing Director)
Cool. Thank you.
Shelagh Glaser (CFO)
Thank you.
Mikkel Svane (Founder, Chairman, and CEO)
Thanks, Adam. Next question comes from David Hynes. DJ?
David Hynes (Analyst)
Hey guys, good to see everyone. Mikkel, how are you thinking about M&A now as you pursue that kind of evolution towards customer intelligence platform? Like, are you out there actively looking for assets that would improve that data strategy going forward? Is this stuff you're gonna do organically? Any thoughts there?
Mikkel Svane (Founder, Chairman, and CEO)
Well, we're not gonna announce anything big and crazy right now, that's for sure. Like, you know, our investment in customer intelligence is really about leveraging the data sets that we have and hopefully applying more data that could act as anchors and like, you know, elevate the data and make it much more actionable. You know, we can work with our customers about getting that data in together with the customer service data, and that, for a lot of our customers, is a long way makes a big start to that journey. We are definitely also working with partners with, you know, looking what technology there is that are out there that can help us on that path. We keep open to, like, we have our own roadmap.
We keep open to working with partners, looking at opportunities, and working with our customers of executing on that vision.
David Hynes (Analyst)
Yeah. Okay. Makes sense. Sheila, the follow-up for you, just any operating history on that growth customer count metric you're now sharing? I think you said 1,400 was the net adds-
Shelagh Glaser (CFO)
Yeah, I think it's.
David Hynes (Analyst)
in the quarter.
Shelagh Glaser (CFO)
Yeah. We provided, DJ, in the shareholder letter, we actually provided the history along with the logos.
David Hynes (Analyst)
Okay.
Shelagh Glaser (CFO)
So, uh-
David Hynes (Analyst)
All right. Thank you.
Shelagh Glaser (CFO)
... we've actually provided that, so you can actually see where we've been. Our intention is to provide that over time. I think, you know, as a part of a lot of the investor outreach, this is an area that people wanted more visibility into, so we've tried to provide that.
David Hynes (Analyst)
Yeah, for sure.
Shelagh Glaser (CFO)
Yeah.
David Hynes (Analyst)
Perfect. I'll dig that data out. Thank you.
Mikkel Svane (Founder, Chairman, and CEO)
Thanks, DJ.
Shelagh Glaser (CFO)
Great. Thanks, DJ.
Mikkel Svane (Founder, Chairman, and CEO)
The next question comes from Taylor McGinnis over at UBS. Taylor?
Taylor McGinnis (Analyst)
Yeah. Hi, everyone. Thanks for asking, answering my question. If I look at the beat on the high end of the rev guide in 1Q, it's roughly $1 million, but you raised the full year guide by $5 million. Can you just talk a little bit about what's driving that and what's giving you confidence, you know, with growth, for the rest of the year, just particularly in light of, you know, some of the comments, Shelagh, you made around customer uncertainty and the Europe exposure?
Shelagh Glaser (CFO)
Taylor, I think it's kind of two parts. If you think back, we had a really strong Q4, if you remember back. We finished the year really strong at a 32% growth. I think, you know, as all of us entered, 2022, there's uncertainty. It's always important for us to start the year strong, that gives us a lot of confidence about the year. I think as I shared when we, you know, reiterated the, November investor guidance in the Q4 meeting, we're really looking to Q1 to help build our confidence for the year. That's what you're just seeing us move through. We feel we had a very strong Q4. We built confidence in Q1, and that's giving us the confidence for the full year.
Taylor McGinnis (Analyst)
Perfect. Thanks.
Shelagh Glaser (CFO)
Thanks, Taylor.
Mikkel Svane (Founder, Chairman, and CEO)
Thanks. Next question comes from Elizabeth Porter over at Morgan Stanley. Elizabeth, please turn on your camera. There you go. Thank you.
Elizabeth Porter (Executive Director, Equity Research)
Awesome. Hi. Thank you so much for the question. It's really encouraging to see the NRR kind of above that target range, but I just wanted to ask on the modest downtick from the prior two quarters, just given the new low levels of churn. What were the drivers of that downtick and any impact we should be thinking about in anniversary-ing this suite launch and how that impacts the go forward NRR?
Shelagh Glaser (CFO)
Elizabeth, hi, thanks for the question. A lot of, you know, some of these effects are just the other side of COVID. I think that's, you know, the slight downtick, I would say. You know, we're kind of lapping some of those, downturns from COVID, so that's part of what's happening. Then in terms of, you know, our strength that we're seeing on the Suite and sort of those early trends, I mean, that will be something that we'll be looking at. You know, does the move to Suite actually give us a different sense of what that normal range would be over time?
Elizabeth Porter (Executive Director, Equity Research)
Got it. On the customer, the growth customer logos, saw the 1,400 added, this quarter, and then last year it was about 1,800. Should we just think about last year as being one of those more COVID impacted quarters? Is the run rate of customers we think kind of going forward in this, you know, 1,400 range, or could we get back to that first half of calendar 2021 rate?
Shelagh Glaser (CFO)
Well, there's sort of two components as we think about these customers. Some is, you know, new customers coming to us, and then the other component is some of the customers in the lower price bands actually moving up. We saw some additional activity, you're right, that was COVID related, and then we saw some additional activity in suite. We think that, you know, this is a, this is a very strong trend that we have, and there may be just some perturbations as we might have some uplift, some of the customers below 1,000 moving up. Some of that isn't just us, that's, you know, their own business creation that they have more agents and they wanna move to a bigger plan with us.
Ryan Krieger (Analyst)
Got it. Thank you so much.
Shelagh Glaser (CFO)
Thanks.
Jason Tsai (Head of Investor Relations)
Great. Next question comes from Ryan Krieger over at Wolfe. Ryan?
Ryan Krieger (Analyst)
Hey, guys. Thanks for taking the questions. Sheila, just two quick ones for you. Can you talk a little bit about the investment priorities for the remainder of the year? I know you laid them out at the Analyst Day-
Shelagh Glaser (CFO)
Sure
Ryan Krieger (Analyst)
We're six months removed from that, so any changes there? Just going back to the FX point, given the hedging, is it fair to say that there was no FX impact in 1Q and then no FX embedded in the full year guide?
Shelagh Glaser (CFO)
Yeah, I'll answer the second question first and then we'll go to the first one. Correct. That's correct.
Ryan Krieger (Analyst)
Okay
Shelagh Glaser (CFO)
assumption that you have on the second question. On the first one, as we laid out in November, and, you know, we're as Mikkel said, we're really focused on this, it's really building out that enterprise capability. I would say that's our foundational investment area, and there's many different facets to that. That's certainly building out our sales capability and then, the support of the sales capability, but it's certainly building out product features that enterprises are looking for as they have, you know, requirements. Mikkel talked about compliance requirements, things like that, and they just have higher requirements. We're building out our product capability to be able to serve those customers, and then we're also building out, as Mikkel talked about, the partner network. We're still early days.
Even though we doubled with our partners year over year, we're still early days in that. We have a lot of enthusiasm and excitement from the partners, but we have to really build that practice. That's the other part of it. We've been continuing to build out our messaging. That's been a big investment area for us. I think we'll talk a lot at Relate about that, share some of that conversational CRM. We think that's, you know, one of the important modalities that is gonna be important in customer service, so we've been building that out. I'd say those are kind of our top investment areas.
Ryan Krieger (Analyst)
Awesome. Thank you so much.
Shelagh Glaser (CFO)
Thanks for the question.
Jason Tsai (Head of Investor Relations)
Thanks, Ryan. Our last question comes from Pat Walravens over at JMP. Hey, Pat, go ahead please.
Pat Walravens (Managing Director, Director of Technology Research)
Oh, great. Thank you. Mikkel, even without Momentive, I'm sure you're still serving your customers' employees a lot. When you survey your employees, what do they say that they want Zendesk to do better?
Mikkel Svane (Founder, Chairman, and CEO)
Top three employee requests are ping pong tables, fresh fruit, and a bigger beer inventory. That's kind of the top three requests right now. Everybody's super focused on getting back to the offices, getting back to the team.
Pat Walravens (Managing Director, Director of Technology Research)
Right
Mikkel Svane (Founder, Chairman, and CEO)
Back with teams again. We have a ton of offsites and meetings now. We're like starting to have like we hosted our first live Q&A yesterday in London and with some of our team that are in the region. Like a lot of people are focused on getting back together. We have a lot of people in this company that never met a colleague, you know, and they're very excited about getting back together, and there's a lot of energy coming from that that we're very excited about.
Pat Walravens (Managing Director, Director of Technology Research)
Okay. I was just looking at the Glassdoor reviews. I never know how accurate that is, but, I mean, is compensation something that is coming up a lot? As the company's growing, it seems like there's mixed results about some people say there's too much structure and other people say it's too bureaucratic. I was just kind of wondering on those two topics what you would say.
Mikkel Svane (Founder, Chairman, and CEO)
We are an excellent reflection of the United States of America in that regard.
Pat Walravens (Managing Director, Director of Technology Research)
Yeah. Yeah. All right, thank you.
Mikkel Svane (Founder, Chairman, and CEO)
Thank you.
Jason Tsai (Head of Investor Relations)
Great. I think that's all our questions for today. Thank you everybody for joining our call, and we look forward to seeing you at the various conferences that we'll be at this quarter.
Shelagh Glaser (CFO)
Thank you.
David Hynes (Analyst)
The recording has stopped.