Zendesk - Q3 2021
October 26, 2021
Transcript
Jason Tsai (Head of Investor Relations)
Thank you everybody for joining us. Welcome to our Third Quarter 2021 Earnings Call, and thank you for joining us again today. I'm Jason Tsai, Head of Investor Relations at Zendesk. Joining me on the call today are Mikkel Svane, Founder and CEO and Chairman of the Board, Shelagh Glaser, our Chief Financial Officer, and Zander Lurie, CEO of Momentive. 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, as well as the anticipated benefits of our proposed acquisition of Momentive, which we announced earlier today.
The assumptions, risks, and factors that could affect our actual results are contained in our earnings press release in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31st, 2020, and our upcoming quarterly report on Form 10-Q for the quarter ended September 30th, 2021. We undertake no obligations to update these statements after today's presentation or to conform these statements to actual results or to changes in our expectations, except as required by law. Please refer to today's earnings release and the acquisition investor presentation available on our investor relations website for more information regarding forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures.
The non-GAAP financial measures should be considered in addition to, not as a substitute for or an isolation from, our GAAP financial information. You can find additional disclosures regarding these non-GAAP financial measures, including reconciliations with the comparable GAAP financial measures in today's earnings press release and shareholder letter, and for certain non-GAAP financial measures for prior periods in the earnings press release for such prior periods, all of which are available on our investor relations website. With this brief introduction, I'd like to turn the call over to Mikkel.
Mikkel Svane (Founder, CEO, and Chairman)
Well, yes, thank you, Jason, and welcome everyone to our call here today. We had an outstanding quarter. Our revenue growth accelerated for the third straight quarter as we further established ourselves as a key partner and we deepened our relationships with our customers. Revenue grew 32% year-over-year to $347 million, and that was driven by a combination of increased Zendesk Suite adoption and strong enterprise momentum as we signed customers to larger contracts with longer commitments. We had a 36% year-over-year increase in average deal size, and we crossed a significant milestone as we're now serving over 100 customers with more than $1 million in annual recurring revenue. Our results this quarter really reflects the strengths of our strategy.
Give customers a strong combined offering that is powerful yet simple to use, that offers fast time to value, and make it easy to create connections with their customers. This is of course also why I'm excited to talk to you about our agreement to acquire Momentive, the company behind SurveyMonkey. We have Momentive's CEO, Zander Lurie, with us today. He's lurking here somewhere, as well as our CFO, Shelagh Glaser, to share more about our joint vision and the transaction details. Both Zendesk and Momentive were founded to improve the customer experience and believe that software should be powerful while easy to use. Our cultures are very similar and our go-to-market strategies are complementary. Together, we have a significant opportunity to expand our markets and our collective growth over the long term, and most importantly, deliver more value to our customers.
The reality for businesses today, especially given the events of the last two years, is that building meaningful relationships with customers is hard, and everything is moving online and experiences happen in moments. There are no easy way to paint a rich picture of a customer, and we believe we can change that. Zendesk pioneered the best way to respond to what your customers say and do, and Momentive and the SurveyMonkey platform is the best way to capture how they think and feel. Combined, we create a richer combined picture of the customer, a deeper understanding, and the ability to better act and engage to build meaningful relationships. Together, we provide true customer intelligence.
Not only is this combination a fantastic opportunity for our current and our future customers, it sets us on a course to accelerate our revenue plan by reaching $3.5 billion in revenues by 2024 and $4.5 billion by 2025. We expect the acquisition to be growth accretive already in 2023, our first year as a unified company. With that, I would like to turn the call over to Zander to talk about Momentive and to talk about the success they have achieved. Hey, Zander.
Zander Lurie (CEO)
Hey, Mikkel. Thank you so much for having me. First, let me just say what a pleasure it is speaking with all of you today. I want to reiterate how excited I am about the opportunities ahead for Zendesk and Momentive. As Mikkel said, we share similar cultures, values, and millions of people believe in the mission that we are pursuing. It's the complementary nature of our product offering, and we believe we will deliver enhanced value for our business, customers, employees and shareholders. At Momentive, our fundamental strength is that we provide incredible insights into how customers think and what they want.
While you likely know our core business, SurveyMonkey, over the last few years, we've invested in product innovation and go-to-market resources to expand our product portfolio and move upmarket. Today, Momentive leads in five core areas, customer experience, employee experience, enterprise surveys, market insights, and brand insights. We provide 345,000 organizations worldwide, including IBM, Johnson & Johnson, LG, Toyota, and Verizon, just to name a few, with intuitive people-centric solutions that enable them to create valuable relationships with their customers. Through our expansive set of customers, we've generated 5.5 billion survey responses to date and 9 million daily AI predictions that help our customers make decisions quickly and confidently to achieve tangible results.
We've been pursuing a strategy to expand our enterprise customer base, and now with Zendesk, we believe we have an opportunity to accelerate this growth as we leverage our combined global footprint, our partners, and relationships with the world's leading companies and brands. By joining Zendesk, we believe the best days are ahead for us, and that together we are ideally positioned to deliver the customer intelligence company our customers want and deserve. It's great to be here.
Mikkel Svane (Founder, CEO, and Chairman)
Awesome, Zander. Thank you so much. With that, I'm of course super excited to welcome you and your team. For now I'm gonna turn it over to Shelagh, who will share more details about, of course, our strong quarter and this transaction. Here you go, Shelagh. You're muted.
Shelagh Glaser (CFO)
Sorry about that. I'm unmuted now. Thank you, Mikkel and Zander. I echo Mikkel's sentiment. We look forward to welcoming you and the Momentive team into the Zendesk family. As Mikkel shared, Zendesk had a truly exceptional quarter. We generated $347 million in revenue this quarter, our third consecutive quarter of revenue growth. Our strong momentum is driven by the success of enterprise strategy and increased Suite adoption. Suite now accounts for 25% of our ARR, up from 16% last quarter. Suite customers stay with us longer, have higher ARR, and upgrade at higher price points, driving stronger expansion long term. Enterprise customers this quarter accounted for 37% of our ARR, up from 35% last quarter and 30% a year ago.
As Enterprise and Suite customers account for more of our ARR, we expect the average length of our contracts to increase and churn and contraction to remain lower than what we have seen typically. Our net expansion rate for this quarter was 122%, up from 120% last quarter, above our long-term target of 110%-120%. Now let's turn to margins, operating income, and cash flow. Our GAAP margin this quarter was 79.8%. Our non-GAAP gross margin was 81.8%, an increase of more than 3 points as compared to last year, driven largely by revenue scale, increased optimization of our product support organization, and efficiencies from our hosting infrastructure. Our GAAP operating loss was $38.9 million, and GAAP operating margin was -11.2%.
Our non-GAAP operating income of $27 million grew 8% year-over-year, while non-GAAP operating margin declined by 1.7 points. The decline in margin was driven by higher sales, marketing, R&D expenses as we continue to invest in growth. Operating cash flow in the third quarter was $73.8 million, and free cash flow was $65.4 million. Now let's discuss guidance. We are increasing our full year 2021 guidance to $1.329 billion-$1.335 billion, growing 29% at the midpoint compared to last year, up from our previous guidance of $1.31 billion-$1.318 billion.
Given our strong results this quarter and continued business momentum, our fourth quarter revenue is expected to grow 30% year-over-year at the midpoint and be in the range of $366 million-$372 million. We expect our fourth quarter GAAP operating loss to be in the range of $43 million-$49 million, and non-GAAP operating income to be in the range of $22 million-$28 million. We expect full year free cash flow to be in the range of $140 million-$150 million, an increase from our prior estimate of $120 million-$130 million.
Our strong financial performance and outlook in second half with growth rate of 31%, coupled with our intent to acquire Momentive, means we are operating from a position of strength and the best is yet to come. Let me take you through some of the details of the transaction and our opportunity ahead. The terms of the transaction provide for Momentive stockholders to receive 0.225 shares of Zendesk for each share of Momentive, a ratio which represents a value of approximately $28 per outstanding share of Momentive stock based on the 15-day volume weighted average price of Zendesk common stock up to and including October 26, 2021. Upon closing this transaction, Momentive stockholders will own approximately 22% of the combined company.
We expect the transaction to close in the first half of 2022, subject to Zendesk and Momentive shareholders' approvals and other customary and regulatory approvals. Zendesk continues to lead in the customer service industry, and combined with Momentive's product offerings and surveys, feedback, and market research, we will create a powerful new customer intelligence company where our addressable market nearly doubles to $165 billion, providing a significant runway for sustained growth. Mikkel has touched on the growth potentials for this transaction, and I want to provide more context on why we believe it will be growth accretive in 2023, our first full year as a unified company.
We believe there are significant areas of revenue synergy that will be unlocked by this transaction as we are able to accelerate Momentive's enterprise motion, bring added capabilities, and a complete customer intelligence platform to existing and prospective customers. We intend to reinvest expense synergy savings back into the business to further accelerate growth. Taken together, this transaction accelerates our path to approximately $3.5 billion in revenue in 2024, a full year earlier and $500 million more than our previous target. We expect to reach approximately $4.5 billion in revenue by 2025, about 50% higher than we had previously targeted. Following the close of the transaction, we will work jointly with Zander and his strong leadership team on deeper integration of our teams, delivering on the shared vision of customer intelligence.
We'll cover more details on the transaction during our in-person Investor Day on November 18th in New York City. You can find details on our IR website. We look forward to seeing you there. With that, I'll turn it back over to Jason for Q&A.
Jason Tsai (Head of Investor Relations)
Great, thank you. As we've done in the last few quarters, we've put all the analysts through our randomizer. The first analyst to ask a question will be Arjun at William Blair. Please, go ahead.
Arjun Bhatia (Partner and Co-Group Head of Technology, Media, and Communications)
All right. Thanks Jason, and congrats on the announcement to the team. Mikkel, maybe to start off with, can you just walk us through the decision to build versus buy versus partner, right? What are you getting with Momentive from the acquisition that may not have been as beneficial if you were to partner with them instead?
Mikkel Svane (Founder, CEO, and Chairman)
Is somebody taking you away? No, like, you know, Momentive and its iconic SurveyMonkey platform is ubiquitous in the market today. It is the world's largest feedback platform. Like, you may be able to build some similar technology, you can never get the experience, you can never get the DNA, you can never get the je ne sais quoi that is in that platform, and first and foremost, of course, a fantastic brand, you know? There is a level of experience that we will never be able to match in such a product. Like, we've always been partners in many different ways, you know? We have, of course, a big overlap in customers.
I think that, like, really putting these things together and really executing on this vision of providing additional kind of a different depth and a richness on your customer pictures by overlapping kind of what they say and do with how they think and feel, you know? It's incredibly powerful, and we believe that it will create a whole new dimension on understanding and a whole new, richer picture of your customers. That is the vision we're very intrigued to execute on together.
Arjun Bhatia (Partner and Co-Group Head of Technology, Media, and Communications)
Very helpful. Zander, if you're available for a question, I would love to-
Zander Lurie (CEO)
Sure
Arjun Bhatia (Partner and Co-Group Head of Technology, Media, and Communications)
ask you one. For maybe those that are a little bit less familiar with the story, can you maybe just walk us through, I think, Mikkel and Shelagh touched on the move up market into the enterprise. Can you maybe just walk us through how you differentiate in the market versus some of your competitors that are playing in the mid-market enterprise space, and how the combination of Zendesk plus Momentive might help accelerate the competitive differentiation in that market?
Zander Lurie (CEO)
Yeah, sure, Arjun. It's a great question. You know, we started as a product-led growth company, and all of our customers, you know, 90% of our customers are on subscription contracts, annual contracts. What we have done with that large footprint where we have millions and millions of active users and 850,000 paying customers, is move up market to build enterprise products. I mapped out those five categories where we play with CX, employee experience, market brand, insights, et cetera. Today, a 1/3 of our business are enterprise contracts, and we have world-class product market fit. We have the most discerning, demanding customers in Finserv, CPG, auto, direct to consumer buying our products. With Zendesk, we are plugging into this much more mature go-to-market, and that really just accelerates our enterprise strategy.
As I think about their global footprint in LATAM and APAC and, you know, parts of Europe where we don't compete, we build these products that are gonna plug in that we can now sell up market to their 150,000 enterprise customers. The go-to-market synergies here are approximate and compelling and, frankly, just obvious. Mikkel and I have talked about it at length. To Mikkel's point around customer intelligence company, we bring products that just deliver a lot more value to customers. We have over 1,000 quarterly sales calls where Zendesk comes up. We've had hundreds of requests for integrations with our CX product for Zendesk. We're really excited to redouble our R&D efforts to build those integrations and just feel like there's a ton more value to offer our shared customers.
Jason Tsai (Head of Investor Relations)
Thanks, Arjun. Let's move to the next question. Next one will be Jeff Van Rhee with Craig-Hallum. Please turn on your camera and unmute your mic.
Jeff Van Rhee (Senior Research Analyst)
There we go. We should be good. Congrats guys, and just a couple from me. I guess, first, congrats on the, you know, the announcement today, and I'm curious maybe Mikkel, in your installed base, you know, when you look at the base, how many what percent of your base is your initial impression have customer feedback solutions? How much of it is greenfield and how much are you gonna have, you know, to go in and potentially displace with this solution?
Mikkel Svane (Founder, CEO, and Chairman)
Like, I think, like, a lot of our customers has something to some extent, and but I think, like, the level of integration we will be able to provide and the ease of use especially, like, just making these things incredibly simple for our customers, I think will have a big impact on how we can, together, can provide a bundle offering that makes a lot more sense for our current customers. Like more details on these kind of specifics with regard to our customer base and so on, of course, in our November analyst meeting.
Jeff Van Rhee (Senior Research Analyst)
Yep. Fair enough. Shelagh, just a question. Last quarter in the core business, I think enterprise was a front and center topic, and you called out a different linearity in the quarter than what you had seen previously, and I think you tried to reset the guide to get a little more cautious there as well as usage, but I think mostly there. Just talk about what you saw in linearity on the enterprise. Any more color around cycles and how that played out versus expectations?
Shelagh Glaser (CFO)
Thanks for the question. Good to hear from you, Jeff. Definitely as we, you know, have been moving up market for quite some time, we saw a pretty dramatic shift as we moved into Q2. In the forecast, you know, that's really how we're driving ourselves now. I continue to see very strong month threes. That's kind of typical, I think, in enterprise business that you see strong month threes. What we really saw throughout the quarter is just strength across all segments of the market. It was a very strong Q3 for us, and I do anticipate that enterprise continues to be month three heavy. That's really how we're kind of planning our workflow and planning our go-to-market function.
You know, across the board, just, you know, outstanding quarter, really in all segments of our business.
Jeff Van Rhee (Senior Research Analyst)
Sounds good. I'll leave it there. Thanks.
Jason Tsai (Head of Investor Relations)
Great. Thank you. The next question comes from Ryan MacWilliams at Barclays. Please, turn on your camera and unmute your mic.
Ryan MacWilliams (Analyst)
Thanks for taking the question. Interesting combination. Mikkel, is there an individual customer vertical or customer type where you're most excited about potential combined Momentive and Zendesk offer?
Shelagh Glaser (CFO)
Oh, Mikkel, you're on mute.
Mikkel Svane (Founder, CEO, and Chairman)
I know. Sorry about that. Well, I think, like, of course there's different things we can do for different segments and different industries and, like, that's something of course we can talk more about also later. I think, like, the ubiquitousness of, like, these products is what really, you know, is so attractive. You know, everybody in the world have been responding to a survey from SurveyMonkey at some point sooner or later. Like, just the amount of customers that have been using these products over the years is mind-blowing. I think there's so many different type of use cases, both internally and externally and tailored at different kind of sectors, the same way that we see in our customer base that the types of use cases are so broad.
We look forward to kind of serving the entire market over time.
Zander Lurie (CEO)
I mean, one of the things, Ryan, that's been so compelling for me as we've gotten to spend more time with our respective organizations is, you know, our customer chart looks like the S&P 500 spliced up by vertical. It's every vertical. Then we have products from the annual subscription to team, all the way up to seven-figure contracts. As I think about Shelagh's 115,000 customer base, we have a product that every single one of those customers will use. Because if your company needs Zendesk, you need to collect feedback about how your customer feels. You want to understand how she's engaging with your platform, and that's what we do, to Mikkel's point, better than any company in the world.
Over 3 million active users on our platform every day sharing 25-30 million responses about how they feel about your product, your curriculum, your nonprofit, your pricing, your campaigns, et cetera. You know, it's our job to integrate. When Shelagh showed us the chart of just how big that suite component of that business has become, it's just obvious that their customers will benefit from that integration. We'll be excited to execute on that next year.
Ryan MacWilliams (Analyst)
That's great. I really appreciate the color. Yeah, definitely more actionable customer insights. Shelagh, as we think about the deal, you know, can you just talk about, you know, the decision between all stock versus cash? Then maybe how should we think about the timing for the shareholder votes between Zendesk and Momentive?
Shelagh Glaser (CFO)
Certainly. Thanks, Ryan. So as we thought about it, as Mikkel and Zander have laid out, we think there's enormous value to be created for our customers, our shareholders, our employees, and really that became you know the most straightforward mechanism to do that with was all stock. Because to that extent, we're all participating in that value creation. So that was really the straightforward. In terms of timing, we're anticipating first half of 2022. We would anticipate in the Q1 timeframe we would have the shareholder vote. Certainly we want to move as quickly as possible, so you know that'll be the focus across all teams.
Jason Tsai (Head of Investor Relations)
Thanks, Ryan. Moving on to the next question will be coming from Derrick Wood over at Cowen. Derek, please turn on your camera and unmute your mic, please.
Derrick Wood (Analyst)
Yep. Good. Thanks. Well, congrats on a strong quarter. I wanted to really touch on the enterprise business. I look at, you know, you guys did 40% billings growth last quarter, 30% this quarter on a much tougher comp. Seems like the enterprise business is doing quite well. So can we just get a little bit more color in terms of, you know, where you're seeing strength geographically, you know, how your large deal activity is, you know, sales productivity and hiring? Just get a sense for what's really, you know, what's really working and coming together there.
Mikkel Svane (Founder, CEO, and Chairman)
All the things like I think what we, you know, what we've really seen in like post-COVID, or gettin' on our way out of this pandemic is that like us doubling down on simplifying the packaging, making it very easy, bring a lot of powerful functionality in a very simple to use package works for our customers. It's easy, it's transparent, and they wanna execute on it. At the same time, everybody, you know, in the industry who deals with customers are experiencing how this whole behavior is changing. Like as I said in my opening script here, like everything is online today, and like all these experiences are little points in time that collectively are compounded creates like a user experience. Customers, they really need this.
We're seeing that for the small business, we're seeing that for the enterprise. Like, we are really benefiting from our continued investment in the enterprise, our continued investment in the product, and our worldwide presence. We're very excited about the progress we see everywhere in the world.
Derrick Wood (Analyst)
Okay. On the acquisition slide deck, I see a pitch that talks about customer intelligence vision and how the combination of you guys, you know, you can collect data from customer interactions, you can build context around it, and then you can take action on these insights. Could you just give us a little more sense on how all those pieces are gonna work? You know, what products do what, how you're gonna integrate everything, and really where you see the low-hanging fruit for cross-selling?
Mikkel Svane (Founder, CEO, and Chairman)
Is it just a little bit of details on how we're gonna integrate all the things? We're gonna talk a lot more about this on November eighteenth, New York, and I hope to see you there, Derek. There'll be a lot more details. It's obvious that even customers that are using both our products are not creating a richer picture of the customers. Like too many data still lives in different silos, and what we really want to do is to bring these things together and create a much richer picture. Like, we have the ability to do that, you know. It's within our reach, and we want to execute that on very quickly and help our customers with a much richer picture. That's the ambition.
Jason Tsai (Head of Investor Relations)
Great. Thank you, Derek. The next question will be coming from Parker Lane over at Stifel. Please turn on your camera and mute your mic, please.
J. Parker Lane (Managing Director of Equity Research)
Yeah, hi everyone. Thanks for taking my question. Can you hear me now?
Jason Tsai (Head of Investor Relations)
Yep. Go ahead.
J. Parker Lane (Managing Director of Equity Research)
Yeah. Perfect. Mikkel, I guess in the customer conversations you've had out there, over the last year or two years, obviously, everyone's taking this digital first approach to customer engagement. Can you talk a little bit more about how customers, you know, prior to this deal were, gathering feedback on their customer service interactions? I guess, you know, why was now the right time? Why was now the time that you needed to bring these two parties together and really accelerate, what both of you have done on an individual basis?
Mikkel Svane (Founder, CEO, and Chairman)
Yeah. Starting with your first question, that there's like, we of course provided basic functionality to our customers for years. We provided integrations with great products like the Momentive SurveyMonkey products and other products too. But I think this is a little bit more about just the operational stuff and kind of connecting the dots. This is really about helping our customers use the data much better, and that's the whole ambition here, creating a much richer and fuller picture of the customers.
The timing is right because like, there's so many shifts in the market right now, and everybody understands that they can't fully execute on their business and like lead in a digital first, online first economy if they don't become much better at creating much better pictures of their customer based on the data they have. We are executing on this, and we look very much forward to creating like quick wins for our customers as we close this transaction.
J. Parker Lane (Managing Director of Equity Research)
Yeah. Very helpful. I think the support and service use case is pretty straightforward, but do you anticipate that ultimately this pulls you more into, you know, the sales use case where you have a product today and maybe even adjacent categories like marketing more fully?
Mikkel Svane (Founder, CEO, and Chairman)
Well, I think you shouldn't think about this as like customer service is not there just to be customer service. Customer service is there to provide feedback to the entire organization about the product, the sales cycles, the pricing, the packaging, the reactions, the experience, all of these things. What they communicate there overlaid with like the specific feedback they give to customers can create this much better picture that is not just serving one constituent, but serves the business. I lost my picture. Sorry about that. All right. I'm rebuilding my picture here. Jason, you wanna jump to the next question? Sorry about that.
Jason Tsai (Head of Investor Relations)
Yeah.
Zander Lurie (CEO)
Parker, I'll chime in, Mikkel, if you don't mind. I mean, just the way we use Zendesk at Momentive, our customer operations team feeds us so much intel and data about how our customers are engaging with our products, where they're getting insights, and that feeds our R&D efforts, it feeds our go-to-market efforts. You know, to Mikkel's point, like over the last 18 months, especially during COVID, as the whole world is kind of going through this digital transformation, it's, I think we've seen how much our businesses do talk to each other and how complementary our products are.
J. Parker Lane (Managing Director of Equity Research)
Yeah, makes sense. Congrats again.
Jason Tsai (Head of Investor Relations)
Great. Thank you. The next question comes from Samad Samana over at Jefferies. Please turn on your camera and unmute your mic.
Samad Samana (Managing Director)
Hi, good evening, and thanks for taking my questions. I wanna unpack maybe some of the numbers, the targets for $3.5 billion and then $4.5 billion. When you say growth accretive, if I think about the acquired company was growing high-teens%, do we expect growth to accelerate as a result of the consolidation? Or can you just help us understand what Zendesk should be growing to get to this $3.5 and $4.5 billion, and what the assumptions are around the acquisition, just so we understand what growth accretive means?
Shelagh Glaser (CFO)
Sure, Samad, and we'll lay it out in a lot more detail in our November investor meeting. Obviously, we're looking forward to seeing everybody there. You know, what the real goal is, the ambition that we just talked through, that I think that Mikkel and Zander just talked through, is the ability to very quickly start to cross-sell products. We've got a global footprint that can, you know, immediately offer revenue synergies into. We've got, you know, the move-up market, which we think we can immediately start to expand revenue synergies into. We think the first full year, which will be 2023, 'cause obviously 2022 will just be the close year and the initial integration.
We would think by 2023, you know, the combined company, you know, accelerated combined growth. That's what we're looking for. As you point out, we have slightly different growth rates to begin with, but as we start to combine ourselves, it's that combined growth rate.
Samad Samana (Managing Director)
Okay, just to make sure, for the sake of clarity, you're what? You're assuming that the companies will grow faster individually, even as a combined company. It'll accelerate the growth of both companies. Is that a fair conclusion based on what you just said?
Shelagh Glaser (CFO)
No. It's the growth rate of the new combined company. It's growth accretive to what our long-term growth plan. As you recall, our target had been to get to $3 billion by 2025. That's the target that we had put out there. As we look at this new opportunity, as we bring Momentive into the Zendesk family, we're now looking at $3.5 billion a year earlier. An absolute bigger growth target and pulling it in 12 months.
Samad Samana (Managing Director)
Okay, great. Maybe just a follow-up on the two businesses. How should we think, and maybe Zander you can chime in here, and Mikkel as well, but just, are we going to be expanding who Zendesk is selling into? Is it this expanding the wallet share that you potentially press up against beyond just, call it customer service departments to more marketing-oriented use cases? Just help us think about what you, how you see some of the maybe synergies that develop here.
Mikkel Svane (Founder, CEO, and Chairman)
Yeah, no doubt. I think there is a big push in kind of getting these different parts of the organization to work much more seamlessly together, so you're not, like, operating in silos, and you don't have this very kind of broken up, decoupled customer experience. We already, of course, serve different constituents, and we continue that. We definitely expect that to be accelerated with this acquisition.
Jason Tsai (Head of Investor Relations)
Thanks, Samad. Moving on to the next question. Kenneth Wong with Guggenheim, please turn on your camera and unmute your mic.
Kenneth Wong (Analyst)
Hey, great. You know, actually, in building off of Samad's question just now, so really appreciate the update on the 3-5 and 4-5. I believe kind of when you guys introduced those numbers, the expectations were for the CAGR over that time frame to be mid-20s. Should we think about this kind of accretive commentary to mean that mid-20s is kind of marginally higher? Or what's the right way to think about it?
Shelagh Glaser (CFO)
Yeah, I think that's the right way to think about it. Again, we'll lay out a lot more details, as we, you know, get together with everybody in a few weeks in New York.
Kenneth Wong (Analyst)
Okay. Second, just as far as Momentive, is the idea to run it more standalone? 'Cause it does seem like a fairly distinct product from what Zendesk is currently selling. Or do we envision a scenario down the line where this is part of the suite bundle? What's the right way to think about that?
Mikkel Svane (Founder, CEO, and Chairman)
There's definitely opportunities for kind of bundling and packaging these products and just integrating them much more tightly at the core. They are also separate businesses, and we can talk a lot more about that in November.
Brad Sills (Managing Director)
Great. Thank you, Ken. The next question comes from Natalie Howe and Brad Sills over at Bank of America.
Oh, great. Hey, guys. Thanks for taking my question here.
Jason Tsai (Head of Investor Relations)
Please turn on your camera.
Brad Sills (Managing Director)
Could you.
Jason Tsai (Head of Investor Relations)
Oh.
Brad Sills (Managing Director)
Yeah, sorry, I think I'm having.
Jason Tsai (Head of Investor Relations)
Okay
Brad Sills (Managing Director)
video issues here. Anyway, good to see you guys. Yeah, I wanted to ask about you know, when you think about SurveyMonkey, they have obviously a big freemium motion, you know, mining that free base and getting customers onto paid. Could this signify an opportunity for Zendesk to potentially start down there more, kind of move down market more and then, embark on kind of a similar strategy over time, kind of moving down market? 'Cause the company's been moving up market. Could this also kind of bring in that end of the market more so for just the core business?
Mikkel Svane (Founder, CEO, and Chairman)
Well, you know, this has been a, you know, a question that we've been asked before, like freemium models and like we're gonna do what works best for the business. Like I think that for the Momentive SurveyMonkey brand, like there is something to kind of putting it in the hands of people that has been incredibly powerful. Especially also because there's a lot of. There's a big constituency out there of like individual users that can see a tremendous benefit of this, and where there is kind of a huge value to a kind of and brand awareness that plays in. Can we translate that to the Zendesk business? Like I don't think I can comment on that right now.
Brad Sills (Managing Director)
Got it. Okay. Thanks for that. Then just, you know, the other aspect of SurveyMonkey is that it's not just customer, you know, experience, it's also employee experience. Do you see potential for, you know, Zendesk to kind of move into that end of the market as well more aggressively?
Mikkel Svane (Founder, CEO, and Chairman)
I lost my camera again. Sorry about that. We already have a big footprint in the kind of employee use cases. Like this is definitely something, especially within HR and shared service centers and so on. This is definitely an area where we will see uptake of this joint offering too. No doubt about it.
Brad Sills (Managing Director)
Great. Thanks, Mikkel.
Jason Tsai (Head of Investor Relations)
Great. Thank you. The next question comes from David Hynes over at Canaccord. Please turn on your camera.
David Hynes (Analyst)
Hey, guys. Congrats on the transaction and nice standalone results. Mikkel, you alluded to customer overlap at one point. Is there any way to put a finer point on just how much customer overlap there is in the two customer bases today?
Mikkel Svane (Founder, CEO, and Chairman)
Not at this point, but this is something we can talk a lot more about it in November in New York.
David Hynes (Analyst)
Okay. And a last one for Shelagh as well, which is probably gonna be deferred to November as well. The new targets that are out there, right? I think it implies like 28%-29% growth for 2025, right? That $3.5 billion-$4.5 billion. When you ran that math, like how are you thinking about combined net revenue retention, right? I mean, the profile of the two businesses is very different today. I mean, you guys are north of 120%, they're at 100%. Do you think you can keep that combined net revenue retention kind of in the historic ranges you've been talking about? Like what was the thinking there?
Shelagh Glaser (CFO)
Yeah. You're right, I'm gonna answer your question, DJ, and say we'll provide a lot more detail in November. Certainly as we look at both companies, we both have really strong offerings that customers frankly love. We operate on a slightly different basis. It's, you know, the kind of the motions are slightly different. We've tried to really contemplate, you know, how the products are purchased, and therefore how they're used by customers in our estimates. Certainly over time, as the prior question, thinking about new products that we may offer and combining things, that's something we haven't actually yet been able to map out, and that'd be opportunity on top of what we're already talking about.
David Hynes (Analyst)
Got it. Thank you.
Jason Tsai (Head of Investor Relations)
Great. Thank you. The next question comes from Kirk Materne over at Evercore. Please turn on your camera.
Mikkel Svane (Founder, CEO, and Chairman)
All right.
Kirk Materne (Senior Managing Director)
Hopefully you can see me. Thanks. I guess first, Mikkel, for you, could you just talk about, you know, this is your first really big deal. Can you just talk about how to make sure that the momentum you're seeing, you know, this quarter doesn't get sort of slowed down in any way as you bring on, you know, another, you know, as you bring on momentum into the business over the next year. You know, how do you make sure that that, you know, this doesn't become a distraction to the business as it can, you know, as it's been accelerating the last couple quarters?
Mikkel Svane (Founder, CEO, and Chairman)
This quarter, first and foremost, is of course already off to the races. Like we have big trust in our continued execution throughout this quarter. As we look into next year, I think we're much more focused on the opportunities and the excitement that this creates. This is a conversation that is very natural to us, to our prospects, to our customers. I'm pretty sure we have a sales force that are all pumped up to go out and have this conversation.
Like there's so many things we can do in our joint kind of online activities where we can really help our customers with bringing like this basic concept of just like overlaying data and get a much more richer customer picture that is so basic but so important, and like we can really make that easy for our customers, and we're very excited about that.
Kirk Materne (Senior Managing Director)
Zander, can you just remind us that aren't as familiar just about your international sort of exposure, maybe relative to Zendesk, that would seem to be one area maybe of some easy uplift between the two companies.
Zander Lurie (CEO)
Yeah, sure. You know, about 36% of our business is generated outside the United States, you know, that includes Canada. Our primary sales operations are here in the U.S. with a nice size footprint in half dozen countries in Europe, and then we have a very small team in Australia. We intend to benefit from the footprint that Mikkel and team have in LATAM and APAC and other countries in Europe. I think this is a big opportunity. You know, some of you are old enough to remember where kind of everything happened in the U.S. and it took a decade or 15 years for the rest of the world to catch up. Those days are over. A lot of the rest of the world is there.
There are millions of organizations that need our software, and Zendesk already has 115,000 of them and growing faster. This is just a huge opportunity to accelerate our channel building. Our product strategy is ahead of our demand generation, and that is gonna be a big accelerant, once this deal closes in the first half of 2022.
Kirk Materne (Senior Managing Director)
Great. Thank you.
Jason Tsai (Head of Investor Relations)
Great. Thanks, Kirk. The next question comes from Taylor McGinnis over at UBS. Please turn on your camera. Okay. We'll move to the next one. Next caller, Brian Schwartz over at Oppenheimer. Please turn on your camera. Brian?
Mikkel Svane (Founder, CEO, and Chairman)
I think we just answered all the questions.
Jason Tsai (Head of Investor Relations)
All right. Next one is Stan Zlotsky over at Morgan Stanley. Are you here with us? Okay. Alex Zukin over at Wolfe. Are you there?
Speaker 17
Hi, this is Strecker on for Alex. Can you hear me? Can you see me?
Jason Tsai (Head of Investor Relations)
Yep. Yep.
Speaker 17
Great. So first question's for Zander. We touched on it a little bit earlier with Arjun's question, but can you dig in a little deeper into, you know, some of your products beyond surveys that some of us may not be as familiar with, that you think will fit in really well with Zendesk?
Zander Lurie (CEO)
Yeah. I mean, we have a handful of solutions that attack these big markets. Customer experience, obviously folks are familiar with, CX leaders. These are purpose-built software solutions for a buyer, whether it's a chief product officer or chief experience officer, somebody who is really tasked with understanding the sentiment of their key customers and then what actions to take. A lot of those folks are looking for a solution that integrates with Zendesk. We're looking for a solution that integrates with Salesforce or Microsoft Dynamics. Those are. We call our product GetFeedback. We've seen a ton of success here. This is a business that's in hyper-growth. ACV is demonstrably higher than our core service product.
The market research product that that Brad asked about a moment ago is really, you know, this is a $50 billion TAM where increasingly people are using software to understand the needs of a certain cohort of customers. If you're looking to reach a cohort of customers about a product launch or a campaign you're gonna launch, you really wanna understand, and that takes a panel. We have the largest, most liquid panel in the United States. It takes software. We've built 50 solutions, and then some professional services. This is a really high ACV market for us, growing quickly. Then as I mentioned, of course, there's employee experience, that is a big market, brand metrics, tracking the health of your brand, et cetera.
It's a handful of solutions that frankly every industry, every size company in every geo. That's the market we're going after, and Zendesk is really gonna help us accelerate that.
Speaker 17
Thank you.
Jason Tsai (Head of Investor Relations)
Great. The next question comes from Patrick Walravens at JMP. Patrick? Are you there? Patrick?
Mikkel Svane (Founder, CEO, and Chairman)
The name again, I'm sorry, Jason?
Jason Tsai (Head of Investor Relations)
Patrick Walravens.
Mikkel Svane (Founder, CEO, and Chairman)
Yeah, one second.
Jason Tsai (Head of Investor Relations)
There you go. Patrick, can you unmute and turn on your camera, please?
Mikkel Svane (Founder, CEO, and Chairman)
Hold on one second. I gotta promote him. He should be able to now. Patrick, can you talk?
Patrick Walravens (Director of Technology Research and Senior Analyst)
All right. Sorry. Can you hear me now?
Jason Tsai (Head of Investor Relations)
There we go. Thanks.
Patrick Walravens (Director of Technology Research and Senior Analyst)
Yeah. What's going on by the way is that it takes a minute for us to get promoted as panelists, so that's why there's the delay.
Zander Lurie (CEO)
Congrats on your promotion.
Patrick Walravens (Director of Technology Research and Senior Analyst)
Yeah. Thank you. All right. You know, Mikkel, I love the idea, Zander, of you being part of Zendesk and helping move this forward, and I think we're seeing in a lot of other parts of software that you know the demand for getting this kind of feedback into other solutions. I think the concern a lot of investors are gonna have on this call is that we all just lived through Zoom Five9, right? Which was an all-stock deal with a modest premium, and Zoom's stock went down, ISS recommended against it, Five9 didn't get enough shareholders, the deal fell apart and you know six or seven months were lost. I
If you look at what Zendesk stock is doing in the aftermarket now, it's, you know, it's below $100 and Momentive is, you know, very accurately tracking at, like, $22.30 now. The question is why. Zander, how are you gonna be able to convince, why should your shareholders vote in favor of this deal at this price? That's number one. Mikkel, how committed is Zendesk to doing this, right? You know, in the end, obviously Zoom wasn't that committed to it 'cause they weren't willing to, they weren't willing to pay more. I think, you know, it's a very direct question, but
Zander Lurie (CEO)
Yeah
Patrick Walravens (Director of Technology Research and Senior Analyst)
I think that's the big question.
Zander Lurie (CEO)
Yeah. I'm gonna try and make the lawyers as nervous as possible here. Ready?
Patrick Walravens (Director of Technology Research and Senior Analyst)
Okay.
Zander Lurie (CEO)
Here's what I can say. We ran a thorough process, and the board enthusiastically supports this transaction for many reasons because of what we have just been discussing. We see a compelling combination. I don't think it takes a lot of squinting to understand the power of our combined product offering. I don't care what happens in the short-term movements, this team, and me in particular, is super committed to executing this transaction, closing this transaction, and then serving the hundreds of thousands of customers we're excited to bring a better product offering to. Mikkel's vision for a customer intelligence company, I believe, is super compelling. It enhances the value for our shareholders. Our employees are gonna have incredible opportunities, and we're gonna serve customers. I can't speak to the Zoom Five9 transaction. I think a lot of different attributes here.
I've got a lot of confidence we're gonna be able to, not only close this transaction, but make it a success for shareholders on both sides.
Mikkel Svane (Founder, CEO, and Chairman)
I can't add much more to that. Like, we're very committed to doing this, no doubt about it. I don't wanna comment on, like, short-term kind of market reactions. I think this
Everybody who takes a look at this, and of course we need our investors, of course, to take a look at this, will see the synergies. It's very straightforward. These are the two companies that can work really well together and provide a lot of value to customers, and in many ways we've already proven that we can do that, with how we operate over the last couple of years. I feel very confident about this, and we're very committed to see it through.
Patrick Walravens (Director of Technology Research and Senior Analyst)
All right. Great. Thank you for that perspective.
Jason Tsai (Head of Investor Relations)
Thanks, Patrick. I think we're gonna circle back to the couple of folks that we didn't get to yet. Taylor McGinnis, are you on now? Can you turn on your camera?
Taylor McGinnis (Equity Research Analyst)
Yeah. I'm on. Can you hear me?
Jason Tsai (Head of Investor Relations)
Yep, we can hear you.
Taylor McGinnis (Equity Research Analyst)
Okay. Perfect. Awesome. Yeah, a little bit of technical difficulty to my end. Just when looking at the 4Q guide of 31% at the high end, Shelagh, can you maybe talk about the assumptions embedded in the guide? I know you mentioned earlier 3Q being strong, and so just in the context of last quarter being back-end loaded, were there any deals that were pushed that ended up, like, closing this quarter, and how we should think about, you know, seasonality between 3Q and 4Q in the context of some of what's happened the last couple of quarters?
Shelagh Glaser (CFO)
Yeah. Thanks, Taylor, for the question. I anticipate that this is our new reality as we've moved up market, that month three is the big month. Clearly, Q4 is a huge quarter for us, in that there's quite a bit of renewals and then there's quite a bit of, you know, new customer momentum that we would have. I do anticipate that it, again, will have a heavy month three, and obviously that's always, you know, a kinda heavy race to the year end, sort of December. I would anticipate that. You know, it's all hands on deck. I think the teams are, you know, excited. We had such a strong Q3, so we're coming into Q4 with a lot of momentum.
Taylor McGinnis (Equity Research Analyst)
Got it. Awesome. Thank you.
Jason Tsai (Head of Investor Relations)
Great. Our last question will come from Stan Zlotsky over at Morgan Stanley. Stan?
Stan Zlotsky (Executive Director of Software Equity Research)
Hey, guys. All right. Good. I think we're all set. A little bit of technical issues there as well. Actually just wanted to ask specifically on CRPO. I mean, obviously, you know, from a year-on-year perspective, very strong 40% year-on-year growth. If we kinda look at it, you know, change in CRPO sequentially plus revenue and, you know, if we use that as a proxy, right, there it's about, you know, 20% year-on-year growth in that ACV or ACV bookings metric or ACV billings metric. Is there anything that we need to be mindful of as far as, like, the growth of CRPO in the quarter? Was there anything one-off or one-time that we need to be mindful of?
Shelagh Glaser (CFO)
I think there's some Q3 seasonality. You know, it's hard to compare anything to 2020, just because there were so many different factors going on. Over time we've seen a Q3 seasonality and certainly I think as we continue to move up market, we're gonna see more seasonality in Q3.
Stan Zlotsky (Executive Director of Software Equity Research)
Got it. What about? You know, obviously in Q2 we heard some issues with the Talk product and you know that impacted the results there. How did that track in Q3, and how are you thinking about that, Shelagh, for you know for Q4 now?
Shelagh Glaser (CFO)
Q3 I think I had mentioned in Q2 that I had you know really looked to de-risk that. We saw good results in Q3 in line with expectations, and I'm continuing to sort of you know manage that pretty closely to make sure that we've got a good line of sight for the numbers there. I think it's responding well to sort of the new motion we've put in place.
Stan Zlotsky (Executive Director of Software Equity Research)
Okay. Perfect. Thank you, guys.
Jason Tsai (Head of Investor Relations)
Great. Well, that's all the questions we have for today. As Mikkel and Shelagh both talked about, feel free to sign up for our November 18th Investor Day. It'll be a limited in-person event in New York, and you'll get to be able to speak with Mikkel and Shelagh as well as Zander, as well as the broader Zendesk management team. We look forward to seeing you there and speaking to you again then. Thank you.
Shelagh Glaser (CFO)
Thank you.