Zendesk, Inc.ZENNYSE
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Jason Tsai: [Abrupt Start] …Investor Relations at Zendesk. Joining me on the call today are Mikkel Svane, our Founder and CEO and Chair of the Board; and Shelagh Glaser, our Chief Financial Officer. During the course of today's call, we may make forward-looking statements such as statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers and ability to compete effectively. The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our upcoming annual report on Form 10-K for the year ended December 31, 2021, and our upcoming quarterly report on Form 10-Q for the quarter ended March 31, 2022. We undertake no obligation to update these statements after today's presentation or to conform these statements to actual results or to the changes in our expectations, except as required by law. Please refer to today's earnings release for more information regarding forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, not as a substitute for or in 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 will turn the call over to Mikkel for opening comments.
Mikkel Svane: Thanks so much, Jason. 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 builder 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. And let me take this opportunity to welcome some of these great new brands to Zendesk, including the world's largest online leading technology company, Matt Group; also the largest clothing retailer in the UK, FTSE100 company, Next; and Itau, 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 court 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 extending the use of Zendesk within their organizations. That leads to stronger expansion, better retention, longer contract terms and lower churn 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 related 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. And 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. And we will have live in-person events in San Francisco and in London and in locations around the world following May 11. We are excited to finally bring people together and personally, it's back to business. And we have limited availability for these in-person events, but I'm pretty sure that your friendly investor relationship team here may be able to set you up with a ticket. As we look ahead to really 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 worst impact. The Zendesk Foundation has donated through the International Rescue Committee and the World Central Kitchen to support efforts in the region. We have suspended all sales activities in Russia and 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 headcount 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. And with that, now let me turn the call over to Shelagh to further discuss our financial results. Shelagh, please take it away.
Shelagh Glaser: 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. And 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 million 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 preferred Suite and a significant number of existing customers have already chosen to upgrade. We can see that once the customers on Suite, there remains ample opportunity for further growth through higher expansion rates at a higher dollar amount. As Mikkel mentioned, this will drive sustainable long-term growth for the company. We expect Suite expand -- Suite expansion to become the largest growth driver, and we expect the pace in which we transition existing non-suite customers on to 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 this 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 Suite 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 to $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 to $408 million. We expect non-GAAP operating income of $18 million to $24 million. For the full year 2022, we are increasing our revenue guidance to $1.685 billion to $1.710 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 to $137 million. We are increasing our full year free cash flow range to $175 million to $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?
A - Jason Tsai: 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.
Arjun Bhatia: Hello? Can you hear me?
Jason Tsai: You're very faint.
Arjun Bhatia: Is that better?
Jason Tsai: Yes.
Arjun Bhatia: Okay. I'm trying to start my video here. Okay, it's not letting me. But thanks. Thanks for taking the question and congrats on a good quarter. Mikkel, maybe starting with Suite, I want to 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? And then 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, meaning how much runway is there within that existing base?
Mikkel Svane: Yeah. Thank you. And you will also find additional material on this in our shareholder letter. Suite is the choice for almost all our new customers. And we are, of course, still expanding. We're 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. So as we said, now we have the first and first cohort that has reached a one-year anniversary. And we can see from that cohort that they are expanding at a much, much faster rate and seems to be the trend for cohort two. So 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. So we can also see that we have still a lot of -- we still have a big part of our customer base that we can still migrate to Suite. We will continue to see that as a double accelerating effort. As they upgrade to Suite, there's an up-sell 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. So 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?
Arjun Bhatia: Yes. Very -- very helpful.
Mikkel Svane: Thank you.
Arjun Bhatia: 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 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: Yeah. Certainly, so there's no doubt, and Mikkel mentioned at the beginning, we've got employees that are close -- you have family members that are impacted and then, we've got Poland employees. So we know, just even from our own company, how this is taking a hit. So 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 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 colleagues dealing with quite a bit. So we did, in fact, think about that when we left the range a bit larger than we might normally have done at this point.
Arjun Bhatia: Okay, understood, very helpful. Thank you.
Jason Tsai: Thank you, Arjun.
Mikkel Svane: Thanks Arjun.
Operator: Thanks, Arjun. The next question comes from Jeff Van Rhee over at Craig-Hallum. Jeff, Switch on your camera.
Jeff Van Rhee: It says I can't start the video because the host is stopped it. So I'll just go with audio. Can you hear me?
Jason Tsai: Yeah.
Jeff Van Rhee: Okay. So a couple for me, first, I guess, very interested in the Suite, I didn't -- the percent of the base that we'll buy the Suite, is there a max? I know you've said some customers are clear won't buy it. Do you have any enhanced thoughts on that? And particularly within the Suite, it sounds like you just get great visibility on what's being used? Maybe just to expand on a second, what's being used within the suite that might be surprising you?
Mikkel Svane: Well, I wouldn't characterize it as a surprise. These are all part of our assumptions for building the Suite. We can see that customers are adopting more channels and 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. So, these are two assumptions we had around the product like the simplified pricing across the entire product and would encourage everybody to use a lot more of the product because they had full access to the product. So, that we feel very excited about. There will definitely be use cases or some use cases where maybe the Suite is less relevant. But if we look at our growth customer segment that represents 99% of our revenue, I think, ultimately, the Suite makes sense for everybody. Let's see it like the adoption as we -- as Shelagh has said many, many times now has been a lot faster than we originally predicted. So, let's see where this takes us.
Jeff Van Rhee: Yes. Shelagh, on the hiring, you mentioned on the operating side and the expenses, you got people indoor faster, specifically which departmental or which roles did you see the accelerated hiring ahead of plan?
Shelagh Glaser: Well, I was broad company based. And so 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. So, we've had a lot of success in our recruiting. And then our early recruiting through Q2 was also very successful, too. So, 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 the second half of last year.
Jeff Van Rhee: Okay. One very quick one for Mikkel. Mikkel on the vote and the magnitude of the Novo, just as you come out of that, how does it change how you think and operate as a business?
Mikkel Svane: Well, we had grand plans, grand visions for what we could do with the Momentum acquisition. That's not going to materialize. So, we are definitely focusing on our core operating plan that we had even before announcing the acquisition and executing on that. And that's really our focus.
Jeff Van Rhee: Thanks for taking my question guys.
Jason Tsai: Thanks Jeff. Next question comes from Ryan MacWilliams over Barclays. Hey Ryan can you unmute your line and connect.
Ryan MacWilliams: Thanks Jason. Hey guys. So, really strong growth in customers with greater than $1 million in ARR. Anything in particular to call out there beyond maybe Suite adoption, like is it more seats or they adding more products? Like what has contributed to the growth from that customer cohort?
Mikkel Svane: I would characterize that as a result of our Enterprise investments, both on the product side, Enterprise customers have much more kind of advanced needs for customization, integrations, extending. So, our platform investments and making these platform capabilities much easier accessible. We see that works with customers. We also see an overall trend with businesses today, where 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. So, we see that as a megatrend that business is definitely gravitating to those kind of attributes. And we see that as a long-term kind of accelerator of our business.
Ryan Macwilliams: Appreciate that. And I 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 -- there was a banker being hired by Zendesk, obviously not confirmed by you guys, but with an annual meeting kind of later than usual? Can you just talk about kind of the path forward here? And just in line with some of the things that we've been hearing around Zendesk?
Mikkel Svane: I think the Board has taken its time to kind of regroup after the Dell acquisition here. And so they are taking a little longer to kind of determine or to get ready for our annual meeting. They are now ready for it here in Q3, and they're going to announce the exact date when they are ready with that. But beyond that, we're very much focused on 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: Thanks, guys.
Mikkel Svane: Thank you.
Jason Tsai: Thanks, Ryan. Next question comes from Derrick Wood over at Cowen. Hey, Derrick.
Derrick Wood: Hey, guys. Thanks. So 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? And have you had any thought about reviving the focus on sale and the sales automation market?
Mikkel Svane: There's a ton of things that we're investing in. And we have a bunch of very interesting announcements coming up at it relate, including some new capabilities for our sales product. We are very much -- we had very much a strategy around focusing on our Enterprise execution and that we're very focused on that and seeing the returns on that strategy. And that -- it gives us a lot of runway over the next two or three years, focusing on our Enterprise investment. We are still very much focusing also on our customer intelligence strategy. It's not going to be with our friends from Momentive, but we're still going to focus on how can we help our customers gain more insights about their business, about their products and buy themselves from using customer service data combined with other data and we're still executing on that.
Derrick Wood: Okay. Sheelagh, 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 million to $120 million in a different light? It seems like that could put upward pressure on that number. So how are you thinking about that potential for that being a stronger long-term target?
Shelagh Glaser: Well, I think obviously, it's still early days in Suite. As Mikkel said, we just anniversaried two months of customers so we're really encouraged by that. And we really look forward to next call. We'll have more fulsome data. The results of those customers are very strong. And that gives us a lot of -- gives us a lot of conviction, because we had those hypothesis. 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 million to the $120 million. But that's certainly something that we'd be looking at there, for sure.
Derrick Wood: Understood. Thanks.
Shelagh Glaser: Thanks.
Jason Tsai: Thanks, Derrick. Next question comes from Parker at Stifel.
Parker Lane: Hi. Thanks for taking the questions. Mikkel, I wonder if you could comment on the element 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 fully operational and driving new deals?
Mikkel Svane: We are partners alongside of a number of different dimensions. We have a lot of great technology partners, and we had really investing in doing -- doing more together with our technology partners. We have a lot of companies coming to us and want to work with us. And we see increasingly an opportunity to do more there. We are working also for regions we're working with retailer partners that also plays a part of our future growth. And then we, of course, have local system integrators and the global integrators to work with. And we're increasingly seeing benefits there and regions of the world, we almost have partners in all our deals. We also have -- we're working with some of big GSIs around some of the big BPOs around the world. So we're doing an increasing amount of business there. But 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.
Parker Lane: Yes. Understood. And then 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: Well, Shelagh, you can maybe add a little bit more color. But like, honestly, it -- a lot of these things also have to do with the renewal cycle. And when we have the right time to engage with them with 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 -- we help them kind understand the business case for using the Suite capabilities or they may be just like the right -- when it's the right moment in time for them to think about new channels, then they realize that this is a much better way of doing it. So I would say these are some of the occasions to that plays into when they move to the Suite. Shelagh, do you have other at...
Shelagh Glaser: Yes, I would agree. I think over time, we see -- and I mean that's what's been so exciting about it. We see customers of all sizes. The Suite is the preferred solution to them. So I think a lot of it does have to do with anniversary dates, which will 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 will continue to support them on whatever. If they just want to support product, we'd happily do that. But I do think the timing for renewal is probably the most likely interception point to move over to Suite.
Parker Lane: Yes, makes sense. All right. Appreciate it.
Jason Tsai: Thanks, Parker. Next question comes from Samad Samana of Jefferies.
Samad Samana: Hi, there. Good evening. Thanks for taking my questions. Maybe first one for you, Shelagh. I know that the company mostly prices in US 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 has thought about just as the dollars continue to get stronger?
Shelagh Glaser: So we haven't -- we don't have like 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, the pricing of our products. We think we've got -- I think Jeff always calls it, we price for value and the customers see great value in it. So we haven't seen the push on any change in pricing with some of the inflators going on. And then I would say just in terms of us managing our risk, we do hedge. So I feel like we don't have a lot of risk, FX risk and how we run the company.
Q – Samad Samana: Great. And then just as I think about the -- from the shareholder letter, the impact that Suite has obviously -- the initial impact is 20% plus, but then you talked 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 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: 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. And if you think about, our model has always been a land and expand. So that could be expanding in the part of the business we're in or expanding into another division or another use case inside the company. So I think that's all available. And obviously, moving from Suite -- non-Suite to Suite, there's the 28% upsell, and then that pricing persists for the seats. In terms of additional usage, we're seeing -- actually, it's been really interesting, much higher usage of features than the pre-upgrade. And we think actually that's really to be beneficial for turning contraction because it's -- the product is in higher usage, more valuable. If you will, to the customers that are using it, so they're going to want to be staying with Zendesk. And so we see that as being beneficial for that.
Q – Samad Samana: Great. Thank you so much
Shelagh Glaser: Thanks, Samad
A – Jason Tsai: Next question comes from Brent Bracelin of Piper Jaffray [ph]. Hey Brent can you turn the camera and unmute.
Q – Brent Bracelin: 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 a much stronger large enterprise momentum in that March quarter. ServiceNow, $1 million cohorts up 65% year-over-year. A little bit of a contrast to kind of what we were thinking going into the year from a standpoint. So can you talk about why or 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. So a little bit of a disconnect there. I'd like to hear what you're hearing from large customers.
Mikkel Svane: Well, I'm not sure I understand the disconnect. I can say is that we are, of course, heating with megatrends that are moving kind of that are rapidly increasing the amount of customer engagement that every business has to deal with. And businesses are looking for modern, agile solutions that can deal with these new channels and making capable of engagement with their customers. So they don't want to think about it as a 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. So our ability to sell into those segments is something that's been a long journey for us 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. So we are really, really pushing on all the kind of our Enterprise go-to-market emotions and also delivering a lot of the capabilities that our Enterprises want around the world around regulatory staff and data privacy issues and all these things that are top of mind for Enterprise today. We want to make those table stakes so they can just focus on executing on their customer strategy, and that is what we're doing.
Brent Bracelin: So it sounds like a lot of investments that you've been making for the last couple of 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: Yeah. I don't know if we've – certainly, it's -- 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 of -- there's sort of a universal headwind that the region is facing. But we tried to factor that into our forecast and gave that broader range just because we know that there's that uncertainty.
Brent Bracelin: Good color. Thank you.
Jason Tsai: Thanks, Brent. The next question comes from Adam over BofA. Adam, please go ahead.
Unidentified Analyst: Hey, thanks, guys. So how does COVID industries, traveler, rideshare, hospitality, we're seeing a lot of headlines about these categories coming rowing back. I know you guys had some exposure to them during the start of COVID. Is it fair to say that a lot of these kind of headwinds or the pause in spend from those categories have kind of come back?
Shelagh Glaser: Yes. I think we had even said at some point in late 2021 that sort of that contraction that we saw, we felt like we'd kind of worked through that. Hospitality was really hit, airlines were really hit sort of all those early hard hit industries, and they've come back or they had already kind of come back in 2021.
Unidentified Analyst: Got it. So then I guess next question. 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: I don't think we have – I don't think we have good data to provide you with that, Adam. Shelagh, I mean, I don't think – I don't have anything I can provide you.
Shelagh Glaser: Yeah. I don't -- yeah, I don't have the unique insight into. Obviously, we have different plans that appeal to different sized customers. So we try to have our plans right-sized by where the customer is.
Unidentified Analyst: Okay. So pretty consistent across the customer segments. Cool. Thank you.
Shelagh Glaser: Thank you.
Jason Tsai: Thanks, Adam. Next question comes from DJ Hynes. DJ?
David Hynes: 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 going to do organically? Any thoughts there?
Mikkel Svane: But we're not going to announce anything big and crazy right now. That's for sure. But like our investor in customer intelligence is really about leveraging the data sets that we have and hopefully apply more data that can act as ankles and like elevate the data and make it much more actionable. And 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. But we are definitely also working with partners with looking what technology there is out there that can help us on that path. So we keep open to like we have our own road map. We keep open to working with partners, looking at opportunities and working with our customers of executing on that mission.
David Hynes: Yeah. Okay. Make sense. Shelagh, 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 in the quarter.
Shelagh Glaser: Yeah. We provided, DJ, in the shareholder letter, we actually provided the history along with the logo. So we've actually provided that, so you can actually see where we've been. And our intention is to provide that over time. I think as a part of a lot of the investor outreach, this is an area that people want more visibility into. So we've tried to provide that.
David Hynes: Yeah. For sure.
Shelagh Glaser: Yeah.
David Hynes: Perfect. I’ll dig that data out. Thank you.
Shelagh Glaser: Great. Thanks DJ.
Jason Tsai: The next question comes from Taylor McGinnis over UBS. Taylor?
Taylor McGinnis: Yeah. Hi, everyone. Thanks for answering my question. So 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. So can you just talk a little bit about what's driving that? And what's giving you confidence with growth for the rest of the year? Just particularly in light of some of the comments, Shelagh, you made around customer uncertainty and the Europe exposure?
Shelagh Glaser: Yeah. So Taylor, I think it's kind of two parts. So if you think back, we had a really strong Q4, if you remember back. So we finished the year really strong at a 32% growth. I think 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. So I think as I shared when we reiterated the November investor guidance in the Q4, meaning we're really looking to Q1 to help build our confidence for the year. So that's really -- 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: Perfect. Thanks.
Shelagh Glaser: Thanks Taylor.
Jason Tsai: Next question comes from Elizabeth Porter over Morgan Stanley. Elizabeth?
Elizabeth Porter: Hi. Thank you so much for the question. Truly encouraging to see the NRR 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. So what were the drivers of that downtick and any impact we should be thinking about an anniversarying this suite launch and how that impacts the go-forward NRR?
Shelagh Glaser: Elizabeth, hi. Thanks for the question. A lot of -- some of these effects are just the other side of COVID. So I think that's the slight downtick. I would say we're kind of lapping some of those downturns from COVID, so that's part of what's happening. And then in terms of our strength that we're seeing in the Suite and sort of those early trends. I mean that will be something that we'll be looking at. Does the move to suite actually give us a different sense of what that normal range would be over time?
Elizabeth Porter: Got it. And then on the customer -- the growth customer logos saw the 1,400 added this quarter and then last year, it was about 1,800. So should we just think about last year as being one of those more COVID impacted quarters? And is the run rate of customers, we think kind of going forward in this 1,400 range, or could we get back to that first half of calendar 2021 rate?
Shelagh Glaser: Well, there are sort of two components as we think about these customers. Some is new customers coming to us. And then the other component is some of the customers in the lower-price bands actually moving up. And we saw some additional activity. You're right, that was COVID related and then we saw some additional activity in Suite. We think that 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. And some of that isn't just us. That's their own business creation that they have more agents and they want to move to a bigger plan with us.
Elizabeth Porter: Got it. Thank you so much.
Shelagh Glaser: Thanks.
Jason Tsai: Next question comes from Ryan Krieger of Wolfe. Ryan?
Ryan Krieger : Hey, guys. Thanks for taking the questions. Shelagh, 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, but we're six months removed from that. So, any changes there? And then 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 is embedded in the full year guide?
Shelagh Glaser : Yes, I'll answer the second question first, and then we'll go to the first one. Correct. That's a correct assumption that you have on the second question. On the first one, as we laid out in November, and 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 requirements. Mikkel talked about compliance requirements, things like that, and they just have higher requirements. So we're rolling 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. So we're still early days, even though we doubled with our partners year-over-year, we're still early days in that. And we have a lot of enthusiasm and excitement from the partners, but we have to really build that practice. So 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 related about that, share some of that conversational CRM. We think that's one of the important modalities that is going to be important in customer service. So we've been building that out. So I'd say those are kind of our top investment areas.
Ryan Krieger : Awesome. Thanks so much.
Shelagh Glaser : Thanks for the question, Ryan.
Jason Tsai: Thanks, Ryan. And our last question comes from Pat Walravens over JMP. Hey, Pat, go ahead please.
Pat Walravens : Great. Thank you. So Mikkel, even without momentum, I'm still -- I'm sure you're still serving your customers' employees a lot. When you serve your employees, what did they say that we want Zendesk to do better?
Mikkel Svane: So, top three employee requests Ping-Pong tables, fresh food, and a bigger beard inventory. That's kind of -- that's the three requests right now. Everybody is super focused on getting back to the office, getting back to the team -- back with teams again. We have a ton of upsides and meetings now. We 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. So, 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, and they're very excited about getting back together. And there's a lot of energy coming from there that we're very excited now.
Pat Walravens: Okay. I was just looking at the Glassdoor reviews, so I never know how accurate that is. But I mean is compensation something that is coming up on. And as the company is 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. So I was just kind of wondering on those two topics what you would say?
Mikkel Svane: We are an excellent reflection of the United States of America in that regard.
Pat Walravens: Thank you.
Mikkel Svane: Thank you.
Jason Tsai: 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: Thank you.