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Edited Transcript of ZEN earnings conference call or presentation 1-Nov-17 9:00pm GMT

Q3 2017 Zendesk Inc Earnings Call

San Francisco Nov 16, 2017 (Thomson StreetEvents) -- Edited Transcript of Zendesk Inc earnings conference call or presentation Wednesday, November 1, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elena Gomez

Zendesk, Inc. - CFO and Principal Financial & Accounting Officer

* Marc Cabi

* Mikkel Asger Svane

Zendesk, Inc. - Founder, Chairman and CEO

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Conference Call Participants

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* Aleksandr J. Zukin

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Alyssa Danielle Johnson

KeyBanc Capital Markets Inc., Research Division - Associate

* Bhavanmit Singh Suri

William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media, and Communications

* David E. Hynes

Canaccord Genuity Limited, Research Division - Analyst

* James Derrick Wood

Cowen and Company, LLC, Research Division - MD and Senior Software Analyst

* Jeffrey Parker Lane

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Jesse Wade Hulsing

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jonathan Kees

Summit Redstone Partners, L.L.C - MD & Senior Analyst

* Kasthuri Gopalan Rangan

BofA Merrill Lynch, Research Division - MD and Head of Software

* Philip Alan Winslow

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Robert Edward Simmons

RBC Capital Markets, LLC, Research Division - Senior Associate

* Samad Saleem Samana

Stephens Inc., Research Division - Research Analyst

* Stan Zlotsky

Morgan Stanley, Research Division - VP

* Stewart Kirk Materne

Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Kelly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2017 Zendesk Earnings Conference Call. (Operator Instructions) Mr. Marc Cabi, you may begin your conference.

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Marc Cabi, [2]

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Thank you, Kelly, and good afternoon, everyone. Welcome to our third quarter 2017 earnings call. We're pleased to report solid financial results for this quarter. Joining me on the call today are Mikkel Svane, Founder, CEO and Chair of the Board; and Elena Gomez, our Chief Financial Officer.

Before we get into the results, let me pass along a few reminders. Our Shareholder Letter is available at investor.zendesk.com, which details our full results and commentary.

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 most recent quarterly report on Form 10-Q and our upcoming quarterly report on Form 10-Q. We undertake no obligation to update these statements after today's presentation or to conform these statements to actual results or to changes in our expectations except as required by law. 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 results, in today's earnings press release and Shareholder Letter and for certain non-GAAP financial measures for prior periods in the earnings press releases of those prior periods, all of which are available on our investor website.

With this introduction, I would like to turn it over to Mikkel.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [3]

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Well, thank you so much, Marc, and welcome, everybody. We are very proud of the results we achieved during the third quarter. We reaccelerated our revenue growth rate to 40% versus a year ago. We made strong strides in our upmarket activities as our sales teams continue to improve productivity, continue to mature.

A key metrics that measure our enterprise-class business made advances. The percentage of our monthly recurring revenue from 100-plus seat Support customers rose to 37% from 35% at the end of the second quarter this year. We also signed many more and larger deals of at least $50,000 in annual contract value compared to a year ago. These improvements come as we see more (inaudible) in our pipeline and as our go-to-market organization is in a stronger position to land and expand business with larger organizations.

On the product front, we advanced our upmarket offerings with enterprise versions of our Talk and Chat products. Our Chat product now includes Zendesk Message to serve as a -- to serve a growing number of messaging channels used for customer conversations. Within our recently released product, Guide, we launched Answer Bot, which has received high marks from customers adopting self-service for their customers.

More recently in October, we reached an important internal milestone. We're now 2,000 employees worldwide. We're using this milestone as an opportunity to redouble our diversity and inclusion efforts as a company across our global offices.

Our progress so far this year and our outlook for the rest of the year make us confident in our plan to reach our $1 billion revenue objective for 2020 and to manage our business in order to deliver improving margins as we continue to grow.

As we near the end of 2017, we feel confident in our ability to continue to grow our business and advance our product portfolio, attract new customers while expanding with our existing ones. I look forward to share more success with you in the new year.

Before we take your questions, I want to welcome our newest board member, Hilarie Koplow-McAdams, and acknowledge the service of our longtime director, Peter Fenton, who is now leaving the board. Hilarie, first and foremost, brings us extensive enterprise software sales expertise from her past executive leadership positions at New Relic, with Salesforce, with Intuit and with Oracle. So we're very happy to have Hilarie on the board. Thank you so much for joining us, Hilarie, and you already made a big difference.

Peter joined us as Benchmark and led our CSB back in 2009. He's been an incredible resource to the company and to me since the earliest days of the company. Peter helped me make some of my very best and some of my very worst decisions, and he helped me, more importantly, learn from both, the good and the bad ones, and always helped me keep pushing the company forward. So thanks for everything, Peter. Thanks for your tenure here on the board, and we look forward to keeping in touch with you. We really appreciate your continued support and your continued friendship. And even though you're leaving the board, we know where you live. So thank you so much, Peter.

With that -- on that note, Marc, back to you.

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Marc Cabi, [4]

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Thanks, Mikkel. Kelly, we'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Bhavan Suri from William Blair.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media, and Communications [2]

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I just wanted to touch sort of on the use cases that you're seeing. So you've seen sort of really solid enterprise traction. And at the user conference, we heard of some interesting use cases outside of the traditional customer support, and you guys have sort of talked down in the past sort of internal help-desk-type use cases. Just wondering, are you starting to see more users of Zendesk internally? Is that a piece of what's driving the growth? And then, as you think about broad sort of customer support, nontypical use cases, are you seeing more in marketing and sales and other areas? Or is it still very predominantly focused in sort of the Outbound customer support view?

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [3]

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Well -- so I'm -- this is Mikkel, sorry. I think that we've always had our fair share of internal use cases for our product, and we appreciate those, like there are some really interesting use cases. But like we -- what we really focus on are the internal use cases, where it's really about providing almost a customer-service-like experience. If it becomes more about like managing your IT assets and managing your IT infrastructure and all these other things that sometimes are associated with internal use cases, we try to shy away from them. These are not our expertise at all. But when you have large organizations that try to provide an almost customer-service-like experience to their internal employees or to their staff, we can do -- we can help them and we can do some really interesting things for them. And then there are some really interesting use cases where they -- we can help them transform their employee engagement and their employee relations. As for external use cases, yes, it's a changing world, and like how we think traditionally about customer service is definitely changing. And like more and more, we see more and more forward-looking organization, thinking how sales, marketing, customer service work together. And that is definitely affecting the use cases so that some of our products is also being used tremendously in much more traditional kind of sales roles, anything from account management to success management to proactive sales engagement on websites.

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Bhavanmit Singh Suri, William Blair & Company L.L.C., Research Division - Partner & Co-Group Head of Technology, Media, and Communications [4]

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That's helpful, Mikkel. And I guess just a quick follow-up from me. So given the move in sort of sales account management, Answer Bot is a great product, but that's sort of a customer support, self-support-type product. Any color on sort of how you guys are thinking about using AI and bots sort of drive -- we've talked about sort of some of the intelligence you've built into which tickets should be answered, which customer should be responded to. But as you think of the account management sort of appropriate touching -- touch points for the customer, how frequently, things like that, just some sense of how you guys are thinking about using AI or some of the technology bots to expand in that area, would be helpful.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [5]

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Well, I think the same -- like the same principle goes for anything that is customer related that we're trying to do with customer service; basically helping the customer get to the right information on their own as easy as possible using the collective information to guide them there. So we're doing that with Answer Bot, and you'll see more of that stuff in our products. We're also very -- we're very bullish about what we can do with our Connect product, also powered by a recent Outbound acquisition and like really using the collective information there to be much more proactive and preemptive in our -- in your outreach to customers. And a lot of that stuff, over time, will also be powered by more and more like machine learning models. So we believe that all these investments will be used -- can be used to provide much better customer experiences across the board.

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Operator [6]

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Your next question comes from the line of Ross MacMillan of RBC.

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Robert Edward Simmons, RBC Capital Markets, LLC, Research Division - Senior Associate [7]

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This is Robert Simmons on for Ross. So you said in your guide, there's a pretty significant step down in growth. I was wondering if there was anything you wanted to call out on that. Maybe there were some one-offs in Q3 that helped?

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [8]

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Our full year guidance, as to your question, Ross -- or Rob?

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Robert Edward Simmons, RBC Capital Markets, LLC, Research Division - Senior Associate [9]

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No, for 4Q.

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [10]

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For 4Q? Yes. So we actually raised our guide for the full year. We still have confidence in Q4. There's definitely some seasonal aspects to our business, but we still have complete confidence in the sales productivity continuing to improve and position us well to close out Q4 strong.

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Marc Cabi, [11]

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Yes. And Robert, I would just kind of remind everyone that as we set guidance, we assign a high probability to our transactional business, which is very linear and comes in throughout the quarter; whereas our move upmarket to larger business transactions have less predictability around when we close those, and that's represented in how we set guidance each quarter.

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Operator [12]

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Your next question comes from the line of Stan Zlotsky from Morgan Stanley.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [13]

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So just listening to Mikkel and opening the call and reading the shareholder newsletter, it certainly sounds -- you certainly sound very excited about going into the Q4 in the big enterprise pipeline. What specifically are you seeing out of your sales force productivity year-on-year as well as just the pipeline that's giving you this confidence going into this big, important fourth quarter?

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [14]

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So we don't obviously talk about specific numbers around productivity, but we have seen -- we talked about this a little bit last quarter, Stan, if you remember, that we did some hiring in the back half of last year and the early part of Q1. Our expectation was that we would begin to see that sales force begin to have some productivity in Q3, and some of it will continue to play out in Q4, which we're really proud of, given that we had a leadership change in the middle of the quarter. We were able to continue our focus and execute pretty consistently throughout the quarter. In terms of pipeline, I've been at the company a little over 1.5 years, and we're starting to see more household names in our pipeline on a more consistent basis. Obviously, as Marc alluded to, the predictability of when those close is a little bit more challenging for us to pinpoint exactly, which is why we put that kind of lower probability in that business, but we're thrilled to see, on a more consistent basis, that pipeline is showing household names.

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Stan Zlotsky, Morgan Stanley, Research Division - VP [15]

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Okay, great. And maybe to dig into something that you guys mentioned in the shareholder newsletter. So you have products that address all the major communication channels that a customer service representative would touch on a daily basis. And in the letter, you mentioned that there could be opportunities for you in the future to start to bundle these products into unified omnichannel offerings. Can you unpack that a little bit for us? What kind of omnichannel offerings could you be offering in the future? Or are you going to make us hold our collective breaths until the big reveal?

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [16]

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Stan, this is definitely something we want to talk much more about next year. But like the ease of use we are providing and we've kind of built into these products, we're really excited about extending that to how seamlessly these products work together both from internally and seen from the customer perspective. And we believe there's a tremendous amount of like -- there's just -- you can just do a lot with the customer experience by providing a very seamless omnichannel experience. So that's something we're going to talk more about. And it also gives us some new opportunities for some different type of conversation with customers and to see attach rates for the products go up and provide a much better experience for everybody. So I think, we've been doing that for a lot of companies. I think, we're looking at streamlining and mainstreaming that much more going forward.

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Operator [17]

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Your next question comes from the line of Derrick Wood of Cowen and Company.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD and Senior Software Analyst [18]

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It sounds like you guys are starting to see the fruits of the investments on the territory-based sales teams. Can you just give us a sense for how much progress you've made in laying that foundation and then maybe a little color as to what to expect as you build out this strategy over the next year or so?

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [19]

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Sure. So you're right. We made a change probably a year -- a little over a year ago to have a territory-based sales organization as we move upmarket. And what we're finding is as our sales leaders are taking a longer view with customers, we're seeing those relationships build out, which allows us to have a deeper conversation about helping them solve their needs and how they engage with their customers. So that's definitely playing out and that's -- where we see that is translating in the productivity improvements we've seen. We're going to continue with that model for the foreseeable future, especially as we move upmarket. It's really important that we have consistency in those territories not only with our enterprise customers, but just as we're transitioning years, oftentimes sales organizations change territories. And we're very committed to trying to keep a consistent territory based for the foreseeable future. So we're not changing out executives to customer relationships very often. We're trying to hold that steady.

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James Derrick Wood, Cowen and Company, LLC, Research Division - MD and Senior Software Analyst [20]

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Great. And then as you guys shift more towards a solution-selling model, going after more multichannel environments, I mean, do you -- are you expecting sales cycles to change much? And I guess, maybe too early to tell, but this is a land-and-expand sales model. So is there -- can you give us a sense for what the cadence looks like between an initial deal and how long it takes customers to come back into expansion deals?

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [21]

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We -- so we don't anticipate the -- part of -- the beauty of the territory model is if you have a consistent engagement with your customer, you can have that conversation about expanding to our new products. We do expect that we will begin to sell -- we'll have solution selling earlier in the customer engagement, you're right. But we're going to try to invest a lot in sales enablement and making sure that's a big priority for us next year so that we manage and not extend our sales cycles that much. But as you know, as you move upmarket, those sales cycles are less predictable, so we have to factor that in as we guide. But we're not expecting a wholesale change in our sales cycles. In fact, what we're hoping is that the additional products we add are really just natural adjacencies to our flagship support products.

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Operator [22]

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Your next question comes from the line of Jesse Hulsing from Goldman Sachs.

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Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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Elena, you mentioned that there's more household names in the enterprise pipeline. And I guess, if I take a look at this quarter and, to an extent, in the second quarter as well, it seems like the floodgates kind of opened up a little bit in the enterprise segment. And I'm wondering what's changed there. Is this just a function of having the sales force kind of totally realigned and less attrition and that sort of thing? Or is there something that's changing in the market as far as the types of technologies customers are looking to adopt and so they're bringing in Zendesk rather than other vendors? Or your win rate is going up? I'm just trying to unpack the nice inflection that we're seeing in the enterprise business.

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [24]

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Yes, I think a couple of things. I think one thing we have, if you recall, last year, we had a little bit of a disruption. So that -- at that point, we made a change to the territory-based model, and that has definitely helped and translated. I think we've also had strong consistency in our regional VPs. They have not really turned over, and I think that that's translating into strong leadership all around the globe, which I think is helping us. As customers evolve their use cases, I think our product is evolving. And we're adding more product to support our enterprise install, and that's starting to -- we're starting to see early success of that. And we'll continue to see that as we get into next year as well, but I think it's a little bit of both. Our product is improving as well as our sales orders have been stable now for a good almost year.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [25]

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Yes. And Jesse, I just want to add to that. Without like diminishing any of that, like we have talked about increased kind of seasonality of our business throughout the year and then -- so we -- that is kind of expected, some of these. There's like more of the enterprise deals than we used to have. We're seeing them by the end of the year.

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Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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Yes, yes, that makes sense. And it looks like, if I just look at your other products outside of Support and Chat, I know it's a small base, but you've increased each quarter or the last couple of quarters the number of net new ads within that line. Where are you seeing the most traction? Is there a product that stands out there? Or is it pretty broad-based?

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Marc Cabi, [27]

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So, Jesse, as you know, Guide is a product that we now monetize as part of our selling efforts with customers. It's an upgraded version of our Help Center. And the professional version of Guide has seen some very good adoption. It has a lot of features customers are looking for to support kind of their efforts around self-service. So that is seeing some really good uptake. But our cross-sell on Chat and Talk are also very strong right now. And so the adoption rates of second and third products by our existing customers is going nicely as well.

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Operator [28]

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Your next question comes from the line of Alex Zukin from Piper Jaffray.

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Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [29]

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Just a couple from me. I wanted to ask first about the competitive environment and specifically if you're seeing any boost to your pipelines on either the mid-market side or the enterprise side from the sunsetting or discontinuation of certain products from your competitors?

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Marc Cabi, [30]

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We've always had a really strong offering for the midmarket, and so our product does fit very well for the replacement of our competitors' products that might not be receiving the investment that their customers are looking for. We provide a really nice ability for customers to transition onto Zendesk in a really quick way. We can have those customers up and running in a period of days and weeks. So the transition is also a nice transition for them, and they feel secure that we're going to continue to grow with them. We have a lot of use cases where customers started with 5 or 10 agents and are now multiple hundreds or thousands of agents. So we have a demonstrated ability to scale for a lot of customers in the midmarket and small enterprise.

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Aleksandr J. Zukin, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [31]

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Got it, great. And then, maybe just one for Elena. In the Shareholder Letter, you guys mentioned some increased investments for 4Q. Can you maybe be a little bit more specific about what areas those investments are going to? And kind of maybe -- is that -- some of the products you referenced earlier that...

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Marc Cabi, [32]

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I think, what it's referencing is that as we continue to see success, we're going to continue to invest in those categories where we have success. So as you know, we've placed a lot more emphasis on our move upmarket. As we built the territory model, that is being reinvested in as things are starting to work well for us there. We've added investments around solutions consultants as we move towards solution selling, and that's what we're referring to in the Shareholder Letter.

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Operator [33]

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Your next question comes from the line of Kash Rangan of Bank of America Merrill Lynch.

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Marc Cabi, [34]

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Kash, are you on mute? I know there are a couple of other callers. Operator, let's put him back in the queue. We'll repoll him.

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Operator [35]

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Certainly. Your next question comes from the line of David Hynes from Canaccord Genuity.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [36]

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So some interesting color on Answer Bot in the prepared remarks. I guess, Dollar Shave Club has seen some nice results. It got me thinking about what's needed to really ramp that product. So a couple of related questions there. How populated does the knowledge base in Guide need to be to really leverage a bot? How long does that take? And then, is that burden on the customer? Or is some of that automated? Can you help them kind of populate that knowledge base? And any color would be helpful in thinking about how bots could scale.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [37]

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Yes. So it does -- like there has to be well-structured information that can be navigated by our bot. So it's -- none of this knowledge is order created. We build; we have tools with Guide, and we have different tools that helps the agents be much more productive at producing these knowledge articles. That is part of our new offering from our -- for our Guide products. So the kind of -- the distance between creating articles and actually having them published is very, very small. So we try to make all of these publishing efforts minimum -- minimal and just make it super easy to put structured content out there and build tools that helps it kind of structure in an easy way with ratings and what's most popular and what's been used most, et cetera, et cetera. So we are trying to make all parts of kind of knowledge creation and knowledge consumption as easy as possible, which will make the Answer Bot's job much easier, too. But like, Answer Bot cannot work without some level of structure content and some level of volume. It needs some kind of -- even though it comes with a base model that is based on the collective kind of customer data we have, we need some kind of knowledge about how customers of our customers typically act and how they ask questions, et cetera, et cetera, for Answer Bot to be most efficient. But that also means that you can put Answer Bot to work. You can set the threshold for when you feel like that it should step in. And like, over time, it will get more and more confident, and it will learn more and more about your customers and your content and will be more and more confident in how it can provide answers. And that's the beauty of these machine learning algorithms. And I think that's why it's a relatively low effort for most of our customers to put it into production and easily, over time, help it learn more and be more and more efficient and also be more and more kind of relevant for the customers.

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David E. Hynes, Canaccord Genuity Limited, Research Division - Analyst [38]

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Yes, that's helpful. Maybe one more if I can sneak it in. International, you guys talked a lot about newish efforts in, I think, Brazil, Japan, Australia last quarter. Open-ended question, you could take any direction you want. Any color on kind of what you're seeing internationally?

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Marc Cabi, [39]

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So we make incremental investments internationally all the time. As you know, we have customers in over 100 countries, and we invest in a smaller subset of those as they warrant a larger investment. So Brazil, a couple of years ago; Japan, this past year has -- we've grown our investment; India. And what we see is that we can demonstrate success in each of those markets. We have a model that works. We're seeing really good output from our new team in Japan. And so those are exciting for us because we create relationships in in-market, which is critical as you move upmarket.

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Operator [40]

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Your next question comes from the line of Jonathan Kees from Summit Redstone.

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Jonathan Kees, Summit Redstone Partners, L.L.C - MD & Senior Analyst [41]

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Just, I guess, my first question is, if I can get an update in terms of gross margins. They ticked up incrementally sequentially. Still in the -- still under development in terms of your dual deployment, your work with AWS there? Or is that still under consideration in terms of what your plan is? And how should we think about gross margins into 2018? Or I guess that's going to be hinting a lot in terms of what you're going to be doing with AWS as well as with your own network.

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Marc Cabi, [42]

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So as we stated earlier in the year, we continue to have both a colo and a cloud infrastructure dual path at this point. As you'll see in the Shareholder Letter, we will be making a commitment to cloud infrastructure in Q4, and we'll work through the timing of how we transition our customers in a proper way with a good outcome. And we'll be able to tell you more about that in February when we meet next, but we do -- we are moving quickly to cloud infrastructure.

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Jonathan Kees, Summit Redstone Partners, L.L.C - MD & Senior Analyst [43]

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Okay, great. That was helpful. And my last question is, as you roll out your new products and you have overlap with some of your partners that you currently work with now, are you getting any push back from them in terms of what you're rolling out in terms of even like referrals? Or is this still too early to tell?

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [44]

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No, it's natural that we are going to evolve our offerings, and like it's natural that we will bump into kind of partner offerings. But we really believe in, like -- we really believe in that our partners can take things in the direction that we are not going to take it. And, like, we also really believe and continue to support our partners even though we have our own offerings. So that, for example, with our Talk product, we also maintain a partner edition so that we make it -- so we provide the same, seamless experience if you're using a different product than our Talk product and the same thing with our Chat product. Like you can use our Chat product. If you use a partner product instead, we also try to make the experience as seamless as possible. We do, of course -- like we want to have amazing products, and we want to give our customers good reasons for choosing our products, but it is also -- we also want to make sure that partners that invest in our platform and build on our platform can be successful. So we are always going to choose a dual strategy where we try to be as open, as inclusive as possible with our partners at the same time as we try to build really amazing products ourselves.

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Marc Cabi, [45]

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Jonathan, I just want to go back to my -- part of my answer there. When I say quickly, it's as quickly as possible as our -- in terms of our move to cloud infrastructure. Again, we want to make sure that, that transition experience is great for our customers.

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Operator [46]

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Your next question comes from the line of Brent Bracelin of KeyBanc Capital Markets.

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Alyssa Danielle Johnson, KeyBanc Capital Markets Inc., Research Division - Associate [47]

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This is Alyssa on for Brent. My question was around -- if I did some math on the -- your kind of new subscription side, it looks like you really had strength in your new subscriber revenue. Is that something where you attribute it all to kind of what we were talking about around large deals? Or is there something else kind of going on that really caused inflection in your new customers?

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Marc Cabi, [48]

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I'm not looking at the same math you are, but we always have a mix of new and expansion each quarter. We had fairly good customer additions in this quarter, especially on our Support product as -- and our Guide product. So that's probably how you're making that determination. But we have a fairly balanced new and expansion model that's within the bounds of what we feel comfortable with.

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Operator [49]

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And your next question comes from the line of Kirk Materne from Evercore.

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Stewart Kirk Materne, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [50]

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I guess, when I look forward and as you all continue the transition to more of a service solution selling company and have a broader portfolio of products to offer your customers, I was curious just how sort of broader partnerships with system integrators sort of factors into that evolution. As some of your, I guess, bigger competitors evolve, there was more need -- or there wasn't more need, but there was obviously more interest in the bigger system integrators partnering with them to help their own customers go through more of a digital transformation journey. So I'm just kind of curious if your dialogue with bigger SIs has picked up as your products portfolios broadened. I guess, just any color around that would be great.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [51]

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Well, yes. What can I say? That as we have moved upmarket over the last couple of years, it becomes an increasingly bigger part of the picture and increasingly bigger part of our engagement model with our customers to make them successful. So as we continue to move upmarket, it's going to continue to become an increasingly important part of our offering. I do want to say that we take great pride in being really, really easy to implement and roll out quickly. So it is a different set of needs, and it's definitely much smaller projects that we come into these large organizations with, but nevertheless, it is important that we can kind of provide a joint offering and that we can provide a joint kind of engagement towards the customer with some of these partners as the project becomes very big.

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Stewart Kirk Materne, Evercore ISI, Research Division - Senior MD and Fundamental Research Analyst [52]

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Okay. And just Elena, on your commentary around productivity improving, is there any way to sort of think about that in terms of just the amount of at bats you're getting versus the hit rate on those at bats? I assume everything's moving sort of in the right direction. I was just wondering if there's any sort of 1 or 2 things that were sort of standing out on that front in terms of people being in the seats longer -- they're just much more efficient, and how fast they can take a deal from the front end of the pipeline to getting it through. I don't know. Any extra color you could add on that would be great.

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [53]

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Yes, it's -- we haven't -- we don't disclose, obviously, close rates or anything like that. We haven't seen any major shift there. I think what we're seeing more is qualifying customers better, but also just the tenure of our -- and more ramped productive sales force has really proven to be powerful for us in all regions. I think the other thing, too, is we do have a balance of new and expansion, but as you can tell from our net expansion rate, we really did kind of go back to our land-and-expand motions pretty heavily in Q3. And I think that's really played out very well, and I think that's a testament to the territory model working for us.

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Operator [54]

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Your next question comes from the line of Phil Winslow of Wells Fargo.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [55]

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One of the things you called out in the Shareholder Letter was just the repackaging you saw of Chat and Talk and, obviously the release of the enterprise edition. I wondered if you could provide just more color and just sort of what the thought process was behind this, what benefits do you see and kind of how you think about this going forward?

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Marc Cabi, [56]

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So all of our products -- we've talked about this over the past year. All of our products are intended to close feature gaps to be able to address a broader segment of our customers, especially our larger customers. And so a lot of R&D -- a lot of our R&D effort goes into making sure that over time, our products can sit side by side with each other and work well together and have all the features that are required for an enterprise or enterprise-like use case. And Talk and Chat were 2 products that started off from a small base, serving a small base of customers, to a point now where they can serve larger sets of customers with a larger base of agents. And so we're very excited, and we're going to continue to close feature gaps. And as Mikkel said earlier, there are times where we're going to partner with someone else for these capabilities. So we want to be able to serve the end customer the way they want to be served.

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Philip Alan Winslow, Wells Fargo Securities, LLC, Research Division - Senior Analyst [57]

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Got it. And then also, just if you can provide some color on just the international versus domestic, just the trends that you saw this quarter and how you're thinking about Q4.

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Marc Cabi, [58]

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There weren't too many changes; pretty even across the board.

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [59]

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I mean, there's nothing notable. I mean, we continue to have success in Latin America, but that's -- it's still a small part of our business today.

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Marc Cabi, [60]

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You'll see that we did highlight in the Shareholder Letter that we had some large customers that either expanded or joined us recently in the European market. So the territory model is working for them there, but yes, we're very happy that all the regions are growing nicely.

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [61]

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Yes. And I just came back from a number of visits in Brazil and like -- it's like seeing our performance in LatAm is really inspiring. And we continue to do more there and continue to be growing really quickly. We've seen some great things coming out of APAC last quarter; Europe, too, for that matter. But also North America is still continuing to grow really, really nicely for us. So we are international in our approach, and we love to see all our children grow.

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Operator [62]

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Your next question comes from the line of Tom Roderick of Stifel.

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Jeffrey Parker Lane, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [63]

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It's actually Parker Lane in for Tom. You guys pointed to strength in Guide pro and the upsell of Chat and Talk. I was wondering if you can talk a little more about Explore, how that's resonating with your largest customers and what sort of opportunities either longer term with the Velocity business customers.

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Marc Cabi, [64]

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So we've taken our BIME acquisition to create Explore and that is still going through a process of getting out to the market in a broader way. We'll have more to talk about as we enter the new year on how that will do. We have high demand for that product. A lot of our customers want to use products like Explore to really understand the customers both within what sits in Zendesk and outside. Today, we do that through our own Insights products that are very, very heavily used by our customers, and Explore will take that to the next step. But Explore is not yet GA as the new version from -- that we acquired from BIME. We'll have more to talk about on that in February.

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Jeffrey Parker Lane, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [65]

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Got it. And then, you had some really nice strength in the MRR from Support customers with 100 agents or more. Should we expect that figure to continue going in the trend that you think you said 100 basis points per quarter? Or would we expect to see it come back maybe for a quarter or 2 given that strength?

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Marc Cabi, [66]

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So our comments have always been we should see -- a sustainable growth rate for that would be about 100 to 200 basis points a year. Generally, Q3 and Q4 are more enterprise-oriented. So you may see more of the movement in those quarters going forward. And that's -- and I don't think we have any reason to change that commentary. And if we are performing a little bit ahead of what's sustainable, that's great for us.

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Operator [67]

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And your next question comes from the line of Samad Samana of Stephens.

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Samad Saleem Samana, Stephens Inc., Research Division - Research Analyst [68]

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At Relate Live, I think Adrian mentioned that you guys are approaching 1 million customer support seats. I was curious if you could help us understand what that growth in those seats looks like year-over-year, and of those 1 million customer support seats, what the attach rate for the additional products looks like.

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Marc Cabi, [69]

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So we haven't publicly disclosed the average attach rates. It is a potential metric for next year. Right now, we have some really good cross-sell activity happening, but it's something that we're working on for next year into how we allow you guys to see more about our cross-sell opportunity and how that looks in terms of metrics. In terms of agent growth, we are -- as we move upmarket, we are growing our ASP slightly. Enterprise customers are worth a little more per agent than a starter account is. And so the seat growth is probably slower than our revenue growth, but we haven't disclosed the full amount for you on that.

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Samad Saleem Samana, Stephens Inc., Research Division - Research Analyst [70]

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And then, maybe just as a follow-up to that. I think the company has a pretty big market opportunity. Could you maybe help us frame what the market size is based on seats just to help us understand that for our models?

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Marc Cabi, [71]

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I have not seen a reliable -- and I would never use our numbers, but I have not seen an industry analyst put out a seat number that I would put a high amount of reliance on. We do know that the market spends about $12 billion annually on our sector and it's growing at high single digits and that there's a large conversion opportunity from legacy on-premise to cloud, which is kind of what we're benefiting from today.

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Operator [72]

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And we have another question from the line of Kash Rangan of Bank of America Merrill Lynch.

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Kasthuri Gopalan Rangan, BofA Merrill Lynch, Research Division - MD and Head of Software [73]

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I'm curious to get your thoughts on go-to-market strategy for 2018. Any update you have on the sales leadership front? And as you more broadly attack the $1 billion revenue goal in 2020, how do you see your business mix change? And how do you see changes in go-to-market? Because every company, as they become larger, they go through a series of steps learning, and evolution is always a work in process. How do you see all these things playing out? And what are the changes -- mix changes you're going to be making to gear you better to get that $1 billion goal?

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Mikkel Asger Svane, Zendesk, Inc. - Founder, Chairman and CEO [74]

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We're all fighting for the worm, as you say.

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Elena Gomez, Zendesk, Inc. - CFO and Principal Financial & Accounting Officer [75]

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I mean, I think -- so Kash, that's a good point. I think everyone's always reevaluating sales organizations as you grow. And so for us, right now, we're seeing success in the territory model. We're going to continue with that. We are looking for a head of sales, obviously, to replace Bryan. And hopefully, we'll have more news on that soon. But in the meantime, at least for the foreseeable future, we're going to stick with the model we have. It doesn't mean it won't change because as you suggest, as we move upmarket, we may find that we may need to evolve that. We probably will, but I think we're in a position right now where we're going to stick to our knitting and continue to focus on improved productivity and getting larger deals.

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Operator [76]

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And there seems to be no further questions at this time.

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Marc Cabi, [77]

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All right. Well, again, we thank you for your interest in Zendesk, and we will talk to you next quarter. Have a great evening.

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Operator [78]

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