Zendesk, Inc.

I think we can go ahead and get started. It's 2.01. Great. Great. Well, thank you very much. Welcome to our fourth quarter 2021 earnings call, and thank you for joining us today. I'm Jason Tsai, head of investor relations at Zendesk. Joining me on the call today are Mikkel Svein, our founder, CEO, and chair of the board, and Sheila Glazer, 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. 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 compatible GAAP financial measures in today's earnings press release and shareholder letter, and for certain non-GAAP financial measures for prior periods and the earnings press release for such prior periods, all of which are available on our investor relations website. Lastly, this presentation may contain information regarding the business, operations, and financial results of Momentum and its subsidiaries. Such information has been prepared by Momentum and Zendesk does not represent or warrant the accuracy of such information. With this brief introduction, I would turn the call over to Mikkel for opening comments.

Thanks so much, Jason, and welcome everyone to our fourth quarter 2021 earnings call. First, as some of you may have seen in a separate press release that we issued this afternoon, our board of directors received an unsolicited non-binding proposal from a consortium of private equity firms to acquire Zendesk for between $127 and $132 per share. With the assistance of independent legal and financial advisors, our board thoroughly reviewed the proposal and concluded that the offer significantly undervalues the company and is not in the best interest of our shareholders. The board continues to believe strongly that the continued execution of a strategic plan, including the proposed acquisition of Momentum, will generate substantial additional long-term value for shareholders. The board unanimously recommends a vote for its proposal to approve the issuance of Senda stock in connection with the transaction at the shareholder meeting on February 25th. We will not be commenting further or taking any Q&A related to the unsolicited proposal. And instead, we're going to focus on a strong quarterly and full year results, which we're very excited about. 2021 was a great year for our business. We finished with a strong fourth quarter with revenue of $375 million a week. growing that 32% year over year. For the full year 21, revenue grew 30% to $1.34 billion, exceeding the outlook that we gave at the start of the year. Sheila is going to share much more details on our performance with you shortly. As a company, we were rewarded with strong growth throughout the year. after being focused on putting customers first during 2020, during the onset of the pandemic. The ongoing shift to a digital-first economy amplified this growth. Brands around the world are choosing Zendesk to evolve how they engage with their customers. This is evident by the fantastic adoption we've seen with the Zendesk suite and our continued success moving upmarket. In just 11 months since we launched Ascendant Suite, it has grown to 35% of our annual recurring revenue. That's a $500 million annual business from customers that stay longer and expand at higher rates. New and renewing customers are using Suite because it has powerful functionality that is easy to implement. 90% of our bookings are from new customers are on the suite product, and suite accounted for nearly 60% of our total bookings during the fourth quarter. In 21, we also scaled our success with enterprise customers. Driven by the adoption of the suite, combined with our maturing go-to-market motions, customer accounts that generate over $250,000 in annual recurring revenue now account for 38% of our total annual recurring revenue. Throughout the year, and especially in Q4, financial services became another great example of an industry where disruptors and established brands turn to centers for a time to value. Our ease of adoption helps them acquire new customers faster and cross-sell earlier in their relationships. Our financial services broker business grew more than 50% in 21, and annual recurring revenue from financial services is now more than $100 million. Overall, our ability to retain customers and expand our existing customers has never been stronger. And that alongside the compelling adoption of suite and our momentum in the enterprise means we have an extremely strong foundation for continued long-term growth. As a business, we are excited for what comes next and well-positioned for continued execution. In 2021, we saw record talent acquisition across all levels in a very competitive market, And our employee base grew by 41%. Across the board, 21 was a strong year, and we are keeping the momentum going into 22. I want to close out by saying that we look forward to the upcoming shareholder vote on our proposed acquisition of Momentum. In addition to the information that we provided at our investor day, we also published two presentations to provide further insight on the rationale and the merits of the transaction, which we encourage investors to review. We are committed to the acquisition and are excited about the outlook for the combined company. We've had a lot of conversations with our investor community over the last few weeks. They've been really good to have, even if they weren't always super comfortable. We appreciate everyone's willingness to dig in and to engage. Open discourse is how we really get clear about perspectives and expectations. It's how we correct any misconceptions out there. And most importantly, it's how we make sure everyone knows exactly why we are so committed to the vision and the plan we have outlined, presented us, and momentum. That vision is to build a leader in customer intelligence. Zendesk powers billions of customer interactions every day. With momentum, we can turn that into something much more powerful for our customers, real customer intelligence that will help redefine how to strategically run a business. And that is a future that we are ridiculously excited about. We feel strongly about this opportunity and the plan that we have in place to make it a reality. And we hope our investors do as well. We're going to build a business with a $5 billion run rate by 25 with improved margins and a stronger growth rate. And we believe that is in everybody's best interest. And with that, I'm gonna turn it over to Sheila to discuss our financial results for the quarter and for the year in more detail. Take it away, Sheila.

Great. Mikkel, thank you, and thank you, everyone, for your time today. We generated $375 million in revenue this quarter, 32% year-over-year growth, which was ahead of our expectation. For the full year, revenue grew 30% to $1.34 billion, significantly better than the outlook we provided at the start of the year. As Mikko pointed out, our strength in the fourth quarter as well as for all of 2021 was driven by the success we've seen in growing our enterprise customer base and the introduction of the Zendesk suite. As more of our ARR comes from enterprise customers and customers on suite, we've seen meaningful improvements in the fundamentals of our business. In the fourth quarter, our average deal size, as well as our average length of contracts with our customers, both increased compared to last year and our ability to retain and expand these customers are at all time highs. New customers this quarter continue to generate 10X the ARR as compared to the ones that are turned off on our discontinued plans. All of this leads to a more predictable business that is well positioned for continuing strong growth over the long term. We introduced SWEED in early 2021 and it now accounts for over $500 million in ARR and 35% of our total ARR. While we are only a year into suite, we are encouraged by the initial data that we are seeing from suite customers. They have higher gross expansion rates, longer contract terms, and use more of our products. Our net expansion rate this quarter was 122%, similar to last quarter, and above our long-term target range of 110% to 120%. The majority of our NER continues to come from seed expansion. Over time, we believe NER will converge back to the target range, though it may remain above 120% in the near term. Our NER continues to benefit from more of our customers signing on with longer engagements and churn and contraction remaining at near all-time lows. Customer accounts with over 250K ARR, now generate 38% of our ARR, up from 37% last quarter and 32% a year ago. Turning to our margins, our fourth quarter non-GAAP gross margin was 81.6%, up 220 basis points year over year. Gross margin has continued to improve over time, largely driven by revenue scale, increased optimization of our product support personnel, and efficiencies in our hosting infrastructure. During this quarter, we had $27 million operating profit on a non-GAAP basis. Our non-GAAP operating income grew 47% year over year, while our non-GAAP operating margin improved 70 basis points year over year. We generated $28 million in free cash flow in the quarter. For the full year 2021, we generated $140 million free cash flow, up 430% year over year. Our fourth quarter free cash flow was impacted by a systems update issue that temporarily impacted our collections in the quarter. That has now been fully resolved. As well, we had expenses related to our proposed momentum acquisition. Finally, let me cover our guidance. We are confirming our full year 2022 revenue and operating income guidance that we shared at our November investor meeting. We expect revenue in the range of $1.675 billion to $1.705 billion, or approximately 26% year-over-year growth at the midpoint. We expect our operating margin for full year 2022 to be 7.5% on a non-GAAP basis, in line with our operating margin in 2021 and aligned to our November guidance as we continue to invest in our growth. Non-GAAP operating income is expected to be in the range of $117 million to $137 million for the year. We expect free cash flow for the full year to be in the range of $165 million to $195 million. For the first quarter of 2022, we expect to generate $381 million to $387 million in revenue for approximately 29% year-over-year growth at the midpoint. We expect non-GAAP operating income of $20 million to $26 million. I want to share a bit more detail on Q1 operating margin and free cash flow. For Q1, our GAAP and non-GAAP operating margins are seasonally lower due to the normal reset of payroll taxes and benefit costs. It is compounded this year due to increased investment and compensation for all employees, as we focus on growing, attracting, and retaining Zendesk talent. On free cash flow, consistent with our practice in previous periods, we continue to only provide free cash flow guidance for the year, as we believe it's best to assess cash flow performance over the longer term. However, I want to provide additional color since we expect our free cash flow in the quarter to be slightly negative. This is primarily due to the $14 to $17 million and pre-close expenses related to the proposed acquisition of momentum that we expect to incur. We expect free cash flow to rebound to normalized levels in the second quarter. Additionally, our full year guidance for free cash flow is to grow 28% at the midpoint. Based on the above factors, we expect our operating income and free cash flow to improve substantially over the course of the year particularly in the second half as investments that we are making today translate to both top and bottom line growth. In closing, as Mikkel said, Q4 and 2021 were outstanding results driven by our team's continued strong execution. Zendesk is well positioned with strong leadership foundation in the market and our 2021 strong performance builds our confidence in our 22 growth. With that, I will turn it over to Jason for Q&A. Jason?

Thank you, Sheila. As we've done in past quarters, everybody was put through a randomizer. And the first question is coming from Stan Zlotsky at Morgan Stanley. Stan, please turn on your camera and unmute your line.

Perfect. Thank you. Good afternoon, everybody. Thanks, guys. So a couple of questions from my end. Maybe just for Sheila first. As we think about the very strong results that you guys put up in Q4, why not bump up the guidance for 2022?

So, Stan, nice to see you. Thanks for the question. So I think as we've done in the past, what we really want to do is build our confidence through the year, because obviously there's a lot more year left. And so what we want to do is, you know, we get together with you every 90 days. So each 90 days, build our confidence as we move through the year. And so we're, you know, obviously giving you very strong guidance for Q1. We feel really good about that. And then throughout the course of the year, just as we did in prior years, just build confidence each quarter.

Understood. And then just as a follow-up on net revenue retention, once again, you know, very strong, 122%. NRR and Q4, with so much of the selling happening from suites, right, and those are coming at much bigger chunks, how much did suite adoption help net revenue retention this year? And with so many customers already on suites, what can happen to net revenue retention as we move into 2022 and beyond?

Yeah, it's a good question. We obviously haven't yet fully anniversary suite. We'll do that in the Q1 timeframe, Q1 22 timeframe. But as you point out, because we're really getting a lot of stickiness with suite and a lot of the suite customers then still do have seed expansion. It may change those dynamics over time. I just don't think we fully played through because we've not yet anniversary read. many customers on Suite. But I think to your point, we're seeing a lot of stickiness with Suite.

Got it. Thank you so much.

Thanks, Dan. The next question is coming from Arjun Bhatia at William Blair. Arjun, please turn on your camera and unmute your line. Thank you.

Hello. Hey, Michael. Nice to meet you. Congrats on the quarter. One thing that stuck out is the enterprise adoption process. I'm curious, you know, if you can just maybe just elaborate on the success that you're having upmarket. Are those larger customers that are driving that strength? Are you seeing existing customers just buy more, upsell, move to higher price and tiers? We'd just love to hear a little bit more detail on that upmarket traction.

Well, I can talk to a few points that may give you a little bit additional color. Like we mentioned this example of the financial services. It's also in our shareholder letter. And I think there's like we see a bunch of industries where like you see the established enterprises are trying to keep up with the change of the disruptors. That is very visible here in a digital first economy. And that definitely boosts interest incentives. We also see because like in many industries, we kind of considered kind of the disruptors choice. I think what we're also seeing is that like there is a trend which we spent most of 2020 and beginning of 21 on. It's just like simplifying the usage of our suite so that it's not only, you know, it's not only you not only have everything together, but it's also like, elegantly integrated so you can roll it out elegantly without a lot of overhead and very, very quickly. And we believe that's a major IT trend that we see in the enterprise today. So these are two points I would emphasize here. Make sense?

Yes, very helpful. And then a quick follow-up for Sheila. I know we're seeing FX headwinds play into guidance for a lot of companies. Can you just Remind us of your FX exposure and billing practices and what impact is any of that having on the guidance?

So certainly we have FX exposure. So that's a part of how we're thinking about things. We have we have only, you know, kind of EU type currency. So Europe. And then we are introducing the reality. That's early days, so we don't have a lot of business on that. So it's not a material part of our revenue, I would say. But certainly we're watching that and, you know, putting hedging in and making sure that we're well protected. But it's something we think about in our forecast, but it's not a major headwind for us.

Okay. Understood. Thank you very much.

Thanks, Arjun. Thanks, Arjun. The next question comes from Samad Samana over at Jefferies. Please. There you go.

Great. Thank you for taking my questions. Maybe first one for Mikkel. Hiring is in focus for a lot of the companies that we cover right now. It's obviously a tight labor market. I'm just curious if you could give us any kind of color on where Zen is in terms of recruiting and retaining sales headcount and whether you ended at plan, ahead of plan in the fourth quarter, just trying to triangulate as we think about 2022. Sure.

There's no doubt the employee market is very, very fluid right now. We see that. I think all our peers are seeing that. Despite that, we had a very strong recruiting year. We grew the team with 41% year over year. So our recruiting machine is really humming. But it is a very fluid market. And we appreciate that and are doing everything we can to engage with our employees and kind of set them up for success. And how we get back to reality and start meeting each other and getting together again and building that company culture where this is such a big element is, of course, something that we spend a lot of time on.

Great. And maybe just a quick follow-up for Sheila. When I look at the RPO, both short-term and total, the seasonal uplift from 3Q to 4Q was just around 10%. that's a little bit more muted than the last several years from 3Q to 4Q. Just anything that we need to be aware of that would have impacted kind of the normal seasonality for RPO from 3Q to 4Q?

Well, I guess it's a little bit, um, you know, 2020 was such a strange year. Um, so it's, uh, it probably, uh, is always a hard compare, but no, there wasn't anything that we saw. We actually feel really good about both our short-term and long-term RPO. We feel like, um, Again, we're signing customers with, you know, longer and longer contracts, and we feel really good about that. So there isn't anything specific to note there.

Great. Thanks for taking my questions.

Thanks so much. Thank you so much. The next question comes from Hannah Rudolph over at Piper Jaffrey.

Hi, all. Thanks for taking my questions today. Just first one kind of to follow up on the last question. I guess, Sheila, did you guys see any impacts from Omicron in the fourth quarter?

So certainly I think everybody was, you know, towards the end of the year, everybody was starting to either be impacted by it or somebody in their family member. I know that happened on my team. That probably happened on everybody's team. So we saw, you know, a bit of that. But I think, you know, we've got a pretty, you know, rapid motion for customer wins. So it really didn't impact the results for us. But certainly we saw, you know, some team members be impacted by it and then also some some things on the customer. But I wouldn't say it was any significant impact for our business.

OK, that's helpful. And then it's nice to see that you guys are gaining strong traction with Zendesk Suite. I guess what kind of expectations are you guys having for suite this year? And then what does the path kind of look like to get suite to more of 40 percent or 50 percent of ARR look like?

I'll take that one. So we expect continued strong growth on Suite. We are anticipating that, you know, we're going to anniversary, so we're going to learn a lot about those customers. So we're excited about that. As I mentioned, you know, early indications of those customers are that they, you know, have more expansion and they stay with us. So we're interested to see that. But we expect, you know, strong growth throughout the year. continued growth on suite. And we expect that that continues into 2023. Great. Thank you.

Thanks, Hannah. Thanks. The next question comes from Max Osnowitz from Stiefel.

Hi, thanks, Jason. Just staying on suite for a second. 90% of new customer bookings is obviously great. 60% of total bookings. What is it? Is there like a common trend that you're seeing for the customers that aren't adopting suite right now that are maybe, you know, hesitant and is there a path to get them on the suite eventually?

I would say it's all natural behavior. You know, we have customers that know and are very specific about what they want and don't have suite in their plans right now. We also, of course, working with a lot of the customers, sorry about that, about the proper timing of moving to the suite because there's a little bit of a slight bit of change management of their organization. But there's no other kind of – there's no other big issues that are preventing customers from moving to suite.

Got it. And then just thinking about kind of the impact of COVID, I know some are thinking that there's been a demand pull forward across different industries. Have you noticed anything like that in the customer service and support industry? And can you maybe talk about how customer conversations have shifted over the last four to six months?

I wouldn't describe us as a company that saw a big like pull in during the pandemic. We had a, as we kind of was very, you know, transparent about, we had a lot of customers in the sharing economy and the transportation industry and the, you know, entertainment industry and travel and so on that was highly impacted by COVID. And what we did during that transition was to focus on our customers and kind of helping them as much as we can for the long-term relationship. We also, of course, saw a lot of customers that saw a tremendous amount of demand, you know, suddenly from one day to the other, suddenly serving all of the U.S. with their solutions. And so, like, some of our customers within, like, a couple of quarters suddenly had, you know, 50 million more customers to serve. So it's like we saw some – we definitely saw a lot with our customers. But I do believe we think much more about kind of the long-term implications to demand in the market. And that goes both for kind of like digital engagement going forward, but especially around kind of how the enterprise are buying IT going forward, which is much more focused on agility, fast time to results, and keeping up with customer expectations. And we believe these are not like short-term COVID blips. These are true long-term megatrends.

Got it. Thanks. That's it for me.

The next question comes from Strucker back from Wolf. Go ahead, please.

Hi. So, Sheila, you noted in your prepared remarks that your net expansion rate has been primarily driven by seats. So can you give us any color into insights or figures around, you know, how much room you still have left and what kind of opportunity that represents? Thanks. And then beyond just seats, what levers are you meeting with right now that will help drive this metric higher in 2022?

Thanks. So I would quote Norm. Norm would say we're not sold out in any customer. So I think as we continue to do kind of our land and expand motion with customers, I don't think we're tapped out at any specific customer that we have. And certainly as they add agents, you know, they're going to want to get those agents onboarded to the tools. So as Mikkel said, you know, there were some impacted kind of organizations that are kind of coming back with, you know, a bit of the waning COVID. So that's an opportunity for us as they bring agents back in. And then certainly, you know, moving customers to suite is always an opportunity. Not all customers are on suite. So that movement to suite, we've talked about it in Prior quarters, and we saw that this time, this quarter, too, that that's on average about 20% increase as people move to the suite product. So, you know, can kind of get some pricing improvement with that. And then there's obviously different tiers of suite. So we still do think long term that the range is 110 to 120%, but we're not in any way capping that opportunity. Thank you.

Thanks, Stricker. Thanks. And the next question comes from Kirk Matern over at Everport. Kirk?

Okay, there we go. Thanks. Thanks for taking the question. You know, Sheila, can you talk just a little bit about the investments for next year? I know you went over this a little bit at the analyst day, but you know, given the high net retention rate right now, you know, it seems like you get a little bit more operating leverage just off the growth you're seeing. And can you just talk maybe a little bit more specifically, like where you're making investments and sort of how you're thinking about the payback on some of those?

Certainly. So I think one of the biggest things we're investing is that enterprise motion that Norm talked a lot about at the investor day. We think the, you know, the opportunity there is tremendous. And if you look at the the kind of the progress we've already made, we think we can accelerate that progress. So we're making the investments. And as Norm talked about in Investor Day, it's not just the feet on the street. It's all the supporting cast to make sure that there's, you know, you win an enterprise deal every day. So you need to make sure that you're fully supporting that customer once they onboard our capabilities. So we're making, you know, investments in that. That's a big investment area. And, again, we think the time is ripe for us making the investment. That acceleration we're already seeing, we really want to capitalize on that. We're obviously investing, you know, and continuing to improve our products for the enterprise because they have, you know, they have a lot of specifics that they need. So we're putting investments in place that will – will adhere to sort of the standards that enterprises want to have. We're making large investments in our reliability. That's across the board for every customer, but obviously even more important for enterprises as, you know, we're helping serve our consequential workflow for them. And then we're obviously doing investment. I mentioned even, you know, putting some investment into compensation because, as some of the earlier questions, it's a competitive market. We want to make sure that we're properly investing in our talent.

That's helpful. And then, Michael, just one quick one for you. Obviously, a lot of discussion on your end about shareholder value and things like that. Regardless of what happens in a few weeks on the vote, have you and the board talked about buybacks and leveraging your balance sheet and things like that in a little bit different way? I realize you have a lot of balls in the air right now, so maybe that's at the bottom of the list of discussion points, but You know, it is, you know, it is, you know, you are generating cash. There's other things you could potentially do on that front. So I was just curious if that's come up or if you want to punt that question, I'll give you that option too.

Totally want to punt that. We are very, very focused on the upcoming transaction here and getting the vote and And that's definitely how we believe we can create the most shareholder value, building a $5 billion run rate company by 2025, prove margins, higher growth rate. We think that's going to be great for everyone. Fair enough. Thanks.

Thanks, Kirk. Thanks, Kirk. The next question comes from Ken Wong over at Guggenheim.

Great. Thanks for taking my question. Sheila, you mentioned bringing agents back as a source of growth, and it does seem like a lot of these customers are still aiming to ramp back up. How much of that rebound is possibly being held back by either their own business dynamics or is it more labor bottlenecks, shortages? How should we think about kind of what gets, you know, what helps move service reps kind of back into your customer's

Well, I think both those things are at play. I don't know that I know the, you know, balancing act between them, but certainly we know that everybody who was impacted in COVID hasn't been able to fully come back. We, you know, we see that in our daily lives that, you know, some things are still not all the way back. So certainly that ability to come back and bring people back as part of it. But to your point, you know, the labor market is pretty tight. So there's, you know, lots of competition for talent. So I would say it's probably a combination of that. I don't know where which side of the balance any one particular company is on.

Got it. And then maybe just touching on customer logos. I know you guys have already messaged that that should kind of continue to go down. Can you remind us when we should see that dynamic stabilize and then possibly improve?

Yeah, so I think I mentioned also in my prepared remarks that, you know, new customers we're adding are 10x more ARR than some of those low-end kind of discontinued marketed plans. So we expect that's, you know, going to continue through this year. Our expectation was that we may get through that in 2022. But, you know, obviously that's something we'll monitor every quarter. And so, as we've said before, this is really a strategy to make sure that we were focusing on those, you know, high impact, high return customers.

Got it. Great. Thank you very much.

Thanks, Ken. Next question comes from Ryan McWilliams over at Barclays. Ryan, please turn your camera. Thanks. Hey, guys.

Thanks for taking the question. Michael, in your remarks, you mentioned conversations with investors, you know, the last few months on the pending momentum deal. So what's feedback been like so far? What's some pain points or some positives that people have focused on?

I just want to repeat what I said in my prepared remarks here, that we, like, a lot of these, like, we really appreciate our investors digging in and engaging in these conversations. And, like, that's going to continue over the next couple of weeks. we realized that we surprised some of our investors with this acquisition. So giving them time to dig in and understand it better and really engaging with us in these conversations has been very rewarding, and we believe it's very productive, and we believe that's going to continue over the next couple of weeks.

Perfect. I liked hearing about Sundance Opportunity and the customer intelligence strategy over the last few presentations. But just one more on the deal. I know you're fully committed to getting this acquisition passed over the next two weeks, but, you know, in the event it doesn't go through, have you thought about potential next steps and, you know, what comes next for Zendesk?

We have a strong operating plan for 22, and we've got to continue to execute on that. That's for certain. And if for one reason or the other the deal doesn't go through, we're going to continue to execute on our vision about building customer intelligence, but the path is going to be different. And, you know, we'll have to kind of revisit some of our strategies there. But, like, we're very, very committed to our vision. We believe we can build strong, strong shareholder value with that. And we believe that momentum acquisition fits very, very neatly into that.

Thank you. Thanks, Ryan. The next question comes from Michael Funk over at Bank of America. Please turn on your camera.

michael yeah hi can you hear me now yeah yeah apologies my camera is not functioning so i apologize for that um just know your earlier comments about the unsolicited offer understand you're not going to comment on the offer specifically but you did say that you view your ability to generate excess value in addition to where the offer came in. So maybe you can just go back and quantify for us the benefits of the momentum transaction and some of the metrics that may actually benefit from that deal.

I want to keep it high level here. We have produced a lot of material that lays out our path over the next couple of years towards building a company with a five, almost $5 billion run rate by 25 with a higher growth rate than we as an independent company ever better margins to. We believe that there's a tremendous amount of shareholder value, shareholder creation, shareholder value creation from building that. And we believe it it's going to be responded to very, very well by our customers and, and, can become a new category and send us a category leader there. So we're very, we believe that we have laid out that in our various presentations that are available for us. And we're very focused on that.

Sure. No, I appreciate it. Are there near-term metrics we can look to and then say 12 months after the close, for example, the cross-sell opportunity, which you've highlighted in your presentations and your prior remarks, you know, obviously the combination of the products, Metrics we can look to post-close that should improve and prove that point you made earlier about excess value creation.

Yep. And like we have committed to our shareholders in our conversations that we will be very, very transparent about the synergies that we're creating and help them understand quarter by quarter our improvements on those metrics. And we're very appreciative for our shareholders' interest in monitoring that and working with us on that journey.

Great. Thank you so much for the time. I apologize again for the camera.

No worries. Thank you so much.

Thanks. And the next question comes from Derek Wood over at Kellan. Derek, please turn on your camera.

Oh, great. Thanks, guys. First question on the, you know, we've talked a lot about the enterprise business. Wanted to ask about the velocity business. And just kind of how that growth curve has been tracking, you know, small business certainly got hit harder during COVID that had a nice bounce back. And now we've kind of moved more into a normalized environment. So how would you characterize the trend line on velocity and maybe how that growth compares to the enterprise?

Do you want to start out here, Sheila? Yeah.

Yeah, so we saw exactly what you just said, Derek, that sort of journey that you laid out. Obviously, as we're, you know, coming into more normal times, we still see good growth there. And we think it's back to somewhat more normal growth trends than maybe that more, you know, kind of other side of that COVID decline. But we see kind of a normal growth plan happening there.

We are very excited about our continued relevance and winning strategy in both the SMB, mid-market, and enterprise markets. And we're very excited that we can continue to execute on all free markets at the same time. It gives a lot of stability and strength to our business. And that is the strategy that we've been pursuing over six, seven, eight years now. that we can move up into the enterprise without sacrificing our growth in the other segments.

Got it. And maybe just kind of double clicking on the enterprise, go to market side. And it sounds like you'll continue to focus on the sweet sales. Any other changes to be aware of that you're thinking about going into 2022? Maybe, you know, thinking about how to bring sunshine more into the fold or or anything, any other new playbooks to highlight?

I would re-emphasize here that the biggest trend we are seeing is enterprises being attracted more to easier yet powerful solutions that they can roll out really, really quickly, that they can scale with really, really quickly, that are very, very agile, that doesn't take years to change, that is very responsive. to their needs and to their customer needs that provides this transparency and empowerment of everybody involved. So it's almost at a point where they don't have to think about it as an IT solution, but truly live up to kind of the promise of SaaS. And we're very excited about it. I think this is one of the mega trends coming out of the pandemic, and that's a major driver of our business right now.

Yeah, and if I might add, The only other, I'm sorry, I got a frog in my throat. Just when I was talking. Pardon me. The only other thing I would mention is one other thing that we're putting further investment in, in 2022 is our partner, building out our partner relationships. That's been, that's been a, you know, growth area for us. And we think there's more opportunity. So in addition to everything Michael said, I just add, you know, kind of further building out that partner. All right.

Thanks, guys.

Thanks, Derek. Next question comes from Jeff Henry over at Craig Allen.

There we go. Hey, guys. So a couple questions for me. I'd like to maybe zoom way out. I remember late 18, early 19, you had given a target model that discussed, hey, look, if we're a 30% grower or sub, we'll give you 500 basis points of margin per year. And I think since then, the actual give's been about a quarter of that. And then to your point, Sheila, I think we're guiding roughly flat-ish minimal operating margin. Here's the question is, since that view back then as to what it would take to drive a 30% growth business versus now what it takes to drive 30%, you know, can you put your finger on exactly what's changed? You touched on the move to enterprise. Maybe that's a little more expensive. Labor's certainly gotten a little more expensive, particularly recently. But maybe just zoom out in any perspective you can give there.

Yeah. So I think as we move forward and I kind of laid out our our standalone Zendesk model at Investor Day and then our long term ambition is to get to the 20 percent operating operating margin. Investing in enterprise really requires a lot of upfront capability because obviously we need to build out our products such that enterprises feel confident adopting it. We need to build out the sales motion and then all the supporting cast. And it's always been the company's philosophy to balance growth and profit, making sure that we have an eye on both. and making sure that we're putting the right investment in so that we're growing the top so that we then have the scale to grow the bottom line. So we kind of laid out, you know, the long-term ambition is the 20%. And, you know, as we drove into this year, what we were really struck by was the progress we made in 21 in enterprise, which was, I think quite, quite remarkable. And we felt like the opportunity is really there as Michael pointed out for the customers that we've won, what they really appreciate about us is the time to value rapid ability for them to, you know, bring their agents on and, and TCO. And we think that's a big opportunity. So we want to make sure to take full advantage of that opportunity.

Okay. On the suite, one question on suite. So if you look at the, you know, obviously great adoption. What have you learned about the adoption of incremental? Obviously you get more seats, you get all kinds of things, but what have you seen? Can you quantify the adoption of incremental features and the pace at which people do that on suite versus previously?

Yeah. Yeah. Definitely. And all the signs that we're looking at and all the things that you're asking about here, the things that we've also said, like it all looks positive. We do want to have like a full year and like preferably a little bit more before we say these things with the highest degree of confidence, but both like the adoption of capabilities, the expansion within an organization, and the adoption of more agents on the solution, like all these things points positive, as we can see the data right now.

Last one, and I'll let somebody else jump here or get to the order. Sheila, on the seasonality, I remember the messaging last quarter around RPOs. was that because of the move to enterprise, you're seeing particularly back-end loaded Q4-centric business. If I look at the sequential growth of RPOs Q3 to Q4, it's kind of in line, maybe a little less than what you've seen historically. So I guess there's two questions embedded in there. Was the seasonality what you expected or asked differently? Were the bookings what you expected in the quarter? Did you hit your bookings number in the quarter?

Yeah, we were largely in line with our expectations. It is a big quarter, as you mentioned. It's a big renewal quarter for us. So, yeah, we – We didn't see any significant change from what our expectation was.

Thanks for taking my questions, guys.

Thanks, Jeff. Thanks, Jeff. Next question comes from Pat Walravens from J&P. Go ahead, Pat.

Great. Thank you, and congratulations on the quarter. So, Mikkel, you know, there's sort of multiple balls in the air here for you. Momentum, these third parties who are approaching you, the core business. I'm just curious, and I think shareholders might find it helpful too. What are your, you know, as CEO, what are your top one or two priorities right now? What do you think are the most important things for you to be focusing on and getting done?

So we had two puppies yesterday. Oh, yeah. And a bunch of kids losing their minds. So that's a big priority in the house.

Oh, yeah, that's huge.

No, I think, like, you know, our investors want to see us execute. And, like, I'm very happy about having built a team that can just ensure that we can continue to execute that strong operational discipline, strong execution discipline. You know, that is the foundation of whatever we want to do. So I think that's one thing. And then, of course, we need to get to the boat and get the acquisition done with. And I think that's the key top things for everybody to think about right now.

Okay, great. And then if I can add just a follow-up that's only somewhat related. But, you know, you're closing these really big deals – in big companies that supposedly are standardized on, like, Salesforce's software. And I'm just curious, how does that work? How do you get in and do such big deals in companies that are supposedly standardized on another customer engagement solution?

And I think this standardized on a specific vendor is, like, that's a term from the 90s. Like, nobody does that anymore. Like, nobody... nobody wants to put on those handcuffs voluntarily. So like, no, I think that like, and that's the promise of SaaS software. And I see we like actually the early promises of SaaS software. We see that some of that realization right now, and we're good at playing with others. We've always been very good at playing with others. And like, I think businesses today are much more focused on what they can get out of the solutions that all are kind of that, you know, like usually kind of focus on the technical integration and the, whatever back end choice they had because us, the public cloud and so on has taken care of a lot of those things. So they're not really top of mind for businesses anymore.

All right, great. Thank you.

Great. And our last question comes from Taylor McGinnis over at UBS. Taylor. Taylor.

Yeah, hi. Thanks so much for taking my question. I just wanted to focus on suites. So the sequential growth and uptake that you guys have experienced has been really solid. But I guess with suite ARR now at over 500 million, that means the non-suite part of the business, of course, has been declining year over year. So can you maybe just provide color on where we stand in terms of migrating the existing install base to suite? and the runway left there, just in the context of when we start to lap that, how we should think about that next year. And then maybe as like a second part to that question, you know, you've talked a lot about the new logo adoption and that being strong with Sweet. So maybe you can talk about the opportunity still there.

Sure. So we still feel like we're early days in Sweet. We've got a lot of runway and we expect, you know, continued growth on Sweet in I know we've said that we think, you know, there's a certain set of our customers who might not adopt suite. I think, as Michael said, we're not even one year anniversary done suite. So I don't know if we feel as as declarative about that. We think a lot of customers are finding suite suite fits their needs. Right. And solves a lot of problems for them. So we're very open for every customer adopting suite over time. But, you know, 2022 is still another really strong year of growth in suite, and we think 2023 is. And to your point, over time, as suite grows, obviously it becomes our largest line of business, if you will, which I think we're very happy to have happen because we think that gives customers solutions that bring them great value, and we always want to be providing a lot of value to our customers.

Got it. And then my second question is just when looking at the guide for 2022 for the full year at 27, so it's only a modest decel. So when thinking about SWEET and some of these other variables that contribute to that growth, any color that you can provide on some of the assumptions embedded there? And I know you talked about earlier, hey, you have to lap SWEET, right, in order to see some of, like, the impact or what that could look like. So is there any risk to the guide from that perspective?

So, I mean, you know, we feel really comfortable with the guide that we're providing. And obviously, execution is very important to us always. So we feel like we've got a good, strong line of sight for the guide. To your question on suite, suite is certainly, continued suite adoption is certainly one of the key assumptions. in the guide and then also this continued move in enterprise, along with our traditional strength in SMB and the mid-market. There isn't any one business that doesn't have, you know, opportunity to continue to grow in the guide that we have. And, yeah, we feel a good, strong line of sight. And like I said, I think it was the first question that I got asked, You know, our expectation is we get to be with you every 90 days. And then we use, you know, the performance of the last 90 days to help build the confidence going forward, similar to what we did in 2021. Awesome.

Congrats on the quarter. Thanks.

Thank you, Taylor.

Great. Thank you, everybody. I'll turn the call back over to Mikkel.

I don't have so much more to say. Again, we appreciate everybody leaning in and engaging with us on both our quarter here, but also the strong metrics going forward. And of course, the upcoming transaction here, the acquisition of Memento that we look very much forward to complete. So thanks everybody for joining us today. Very proud about our quarter. Congratulations, Team Zendesk. This was a fantastic Q4 and You know, a tough Q4 in many parts of the world where we were all affected by Omicron and had families and friends and, you know, children sick. And, you know, so thanks so much, team. You did a great job. Thank you.