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Suite provides the sweet spot for Zendesk as revenues grow 30% year-on-year

Stuart Lauchlan Profile picture for user slauchlan April 29, 2022
Summary:
Zendesk Suite is delivering results for the firm as customer adoption ramps up.

customer
(Pixabay)

Zendesk has had a few bumps in the road in recent months, with activist investors on manoeuvres and the collapse of plans acquire Momentive, parent company of Survey Monkey. So yesterday’s positive quarterly numbers and a corresponding bump up in the share price will have been welcome development, no doubt.

The firm reported a Q1 2022 net loss of $66,946 million, against a comparable $48,965 million last year, but revenues soared 30% to $388 million, beating Wall Street expectations.

Other stats of note from the quarterly report:

  • Customers with more than $250,000 Annual Recurring Revenue (ARR) now make up 39% of the total, up from 34% last year.
  • The number of customers with more than $1 million ARR is up 65% year-on-year to 140.
  • And in a new metric, the number of customers with more than $1k ARR increased 5,700 year-on-year to hit 62,000.
  • Zendesk Suite now accounts for 40% of ARR, up from just seven percent a year ago.
  • Crucially, customers who upgrade to Suite are expanding spend by about 20%, while contract lengths increase by 19 months.

It was Suite’s performance to date that CEO Mikkel Svane pointed:

Zendesk Suite has helped reduce the friction of selling to customers and it provides a future-proof solution right out of the box. Our first cohort of Suite customers just passed their one-year anniversary, and the initial data confirms our assumptions and reinforces our confidence that Suite is the mainstream choice for businesses today. Suite customers are expanding at a much faster rate than our non-suite customers. They are faster at adopting modern digital channels and extending the use of Zendesk within their organizations. That leads to stronger expansion, better retention, longer contract terms and lower churn contraction. We are confident that Suite is enhancing the sustainable long-term growth trajectory of the company.

He added:

Suite is the choice for almost all our new customers and we are, of course, still expanding. We're moving a lot of existing customers from non-Suite to Suite during the quarter. An increasing amount of the Suite growth as a percentage of our recurring revenue is coming from expansion of that cohort.

Now we have the first cohort [of customers] that has reached a one-year anniversary, we can see from that cohort that they are expanding at a much, much faster rate and seems to be the trend for cohort two. So some of our assumptions for the Suite has been verified by what we can see - the longer contract length, the increased adoption, the higher expansion rate and the lower churn and contraction rate.

But of course there’s a journey still to travel, he added:

We can also see that we still have a big part of our customer base that we can still migrate to Suite. We will continue to see that as a double accelerating effort. As they upgrade to Suite, there's an up-sell opportunity in that context. But also once they are Suite customers, they use much more of the product and expand much faster with the product. So it's kind of a flywheel effect getting the customers on Suite, as it will continue to provide expansion bookings to our business.

Plan B

Of the rise in enterprise users - over $1 million ARR - Svane argued this is a result of investment on Zendesk’s part:

Enterprise customers have much more kind of advanced needs for customization, integrations, extending. So, our platform investments and making these platform capabilities much easier accessible, we see that works with customers. We also see an overall trend with businesses today, where they appreciate kind of the fast time to results, the kind of no hassle implementation, the kind of the ease of use and kind of the powerful capabilities of the platform that are available even though they're very easy to implement. So, we see that as a mega-trend that business is definitely gravitating to those kind of attributes. And we see that as a long-term kind of accelerator of our business.

As for the Momentive takeover that was rejected by shareholders, Svane wanted to keep an eye to what comes next:

We had grand plans, grand visions, for what we could do with the Momentum acquisition. That's not going to materialize. So, we are definitely focusing on our core operating plan that we had even before announcing the acquisition and executing on that. And that's really our focus.

My take

Zendesk got a good reception from Wall Street yesterday on numbers that show a positive direction of travel for the product strategy and customer adoption. As ‘Plan B’ continues, such growth will be an important validation for Svane and his management team that the firm is on the right strategic course.

Next up is the firm’s AGM which will take place some time in Q3. There have been reports via Bloomberg that Zendesk has appointed an advisory firm, Qatalyst Partners, to evaluate possible sale options. This has not been confirmed by Zendesk or Qatalyst. Svane said the Board has taken time to regroup and as such it’s taken longer to get the AGM timing locked down, adding:

They are now ready for it here in Q3, and they're going to announce the exact date when they are ready with that. But beyond that, we're very much focused on as is the management team on executing on our operating plan, and we're very excited about our ability and our success there.

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