Zendesk's (ZEN) CEO Mikkel Svane on Q1 2017 Results - Earnings Call Transcript

| About: Zendesk, Inc. (ZEN)

Zendesk, Inc. (NYSE:ZEN)

Q1 2017 Earnings Conference Call

May 04, 2017 05:00 PM ET

Executives

Marc Cabi - Investor Relations

Mikkel Svane - Founder and Chief Executive Officer

Elena Gomez - Chief Financial Officer

Analysts

Bhavan Suri - William Blair

Jesse Hulsing - Goldman Sachs

Stan Zlotsky - Morgan Stanley

Brendan Barnicle - Pacific Crest

Samad Samani - Stevens

Derrick Wood - Cowen and Company

Phil Winslow - Wells Fargo

Tom Roderick - Stifel

Kash Rangan - Bank of America Merrill Lynch

Jonathan Kees - Summit Redstone

Jeff Van Rhee - Craig Hallum

Ian Strgar - UBS

Pat Walravens - JMP Securities

Nate Cunningham - Guggenheim

Operator

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2017 Zendesk Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Marc Cabi, you may begin your conference.

Marc Cabi

Thank you, Rob, and welcome to our first quarter 2017 earnings call. We are pleased to report our financial results for the 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, it 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 our 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 Factor section of our prior and subsequent filings with the Securities and Exchange Commission, including our most recent Annual 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 or in isolation from our GAAP financial information. You could find additional disclosures regarding these non-GAAP financial measures, including reconciliations with the comparable GAAP financial measures in today's earnings press release, shareholder letter and for certain non-GAAP financial measures for prior periods in the earnings press releases for such prior periods, all of which are available on our investor website.

With this brief introduction, I would like to turn the call over to Mikkel.

Mikkel Svane

Alright, prefect. Thank you, Marc, and good evening, good afternoon, everybody. Along with completing a first - solid first quarter of results, we also made major progress across our long term growth opportunities in new products, in industry integrations and in international expansion. You can read much more about that in our Shareholder letter.

We believe we are in a good position for 2017 to maintain the strength of our transactional business as we continue our enterprise class business. Here I would particularly like to highlight our recent progress in expanding our product family.

Just this week we launched Zendesk Guide. It's a new smart knowledge base solution and evolution of our current help center functionality that is part of our call center product but comes with new features, new functionality and new capabilities and of course opens additional monetization opportunities for us. Guide capitalizes on the desires of consumers of customer today to help themselves. And we do that by giving them a smart self-service support solution powered by machine learning.

Also today, we are announcing our acquisition of Outbound and welcoming the full team in the Zendesk family. Outbound believes that customers today experiences and expect communication to build around them not being built around the business or the business department. Outbound focuses on making those types of communication much more relevant at a time where customers are updated with messages from brands.

By using Outbound, businesses can automate and deliver relevant messages across web across e-mail and mobile channels and can measure of the effectiveness of those messages shifting the focus from the quality of messages delivered to the to the quality of customer attractions. So Outbound really complements our vision for Zendesk Connect, which we have about on earlier calls.

With Connects, we're working on making communication with customers much more proactive and predictive throughout the customer experience. We learned a lot from our own customers who are already using Outbound and we decided that working to combine Outbound and Connect into a single product would offer our customers the best experience and that is now quickly realize our regional vision for Connect. So we'll be working on an integrated product while we continue to offer Outbound to new customers and support its current customers.

It's been almost exactly one year to the day today since Elena, Bryan. Elena, our CFO; Bryan, our CRO, Chief Revenue Officer; and Tom, our CIO joined Zendesk and joined the management team.

Over the past four months, we have invested, we have laid the ground work for future success and we have today the team, the product portfolio, the customer base and the rapid pace of innovation in place for successful year and to keep us on cause to reach out $1 billion revenue target in 2020. Our financial outlook for full-year 2017 reflects our strong position and remains strong. We expect revenue to be in the range of $417 million to $425 million for the full year.

None of the opportunities that we have ahead of us would be possible without our customers and without our employees. We ended the first quarter with more than 100,000 paid customer accounts, it's a great milestone for us and we also have more than 1,700 employees worldwide. I would like to thank all of them our customers, our employees, you guys for the continued support and for making contributions toward our growth.

And with that, back to Marc.

Marc Cabi

Rob, we will open it up right for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from line of Bhavan Suri from William Blair. Your line is open.

Bhavan Suri

Thank you. Hey, guys, do you hear me, okay.

Mikkel Svane

We can. Hi, Bhavan.

Bhavan Suri

Great, hi, and congratulation. Before I jump on the financial, I just have a quick question for Mikkel on Zendesk guide. As you look at that product, is there specific segments that you're targeting and how should we think about the ASP lift the product could have? It seems like an extension of your core help center offering, but inclusion of AI, so where do you see these are playing out alongside the core also we like get sort of how that's position not just as a product but also which customers you target [ph].

Mikkel Svane

So we will retain some very basic help center capabilities across support products, but we will focus all our investments and the continued kind of development of these capabilities in the guide product. That makes a lot of sense for many different reasons. It will also help us much better towards our customers kind of produce the value statements then makes it obvious for them while guide, actually and why self-service and why providing smart self-service options makes a lot of sense for that business.

So it really helps us focus our value statements, our value proposal around that product and of course add some monetization opportunity all to all across customer. The option of kind of these kind of self-service capabilities are very broad across our customer base, whether you work with technical support or whether you work with consumer support, you want to give this seamless customer experience where you almost predictive in your capabilities to kind of provide the wide answer to the customer. So it's a very broad opportunity and we look very much forwards testing it with new customers.

And move on from a revenue perspective obviously with all of our products we launch and let them evolve over time, but there will be some difference subscription models around guide and especially how AI and ML work within the guide product for self-service and delivering correct answers which will elaborate a little bit more on as we go forward. But there are lots of good subscription opportunities as the product evolves.

Bhavan Suri

Got it. That's really helpful. And then a quick follow-up for me, it's been a little bit of time now since you have changed subscription package pricing, can you speak to how that impacted sort of average seat count for customer, you know that gone up and sort of could you just remind where average seat counts are?Thank you.

Mikkel Svane

So we haven't really described average seat counts because of the large customer base with the long tail. What I would say is that in general, we are beginning to do more and more with larger companies and larger opportunities within either existing customer or new customers. So we would expect our average to move up over time based on that activity. But again averages are really difficult to kind of certain. In Q1 specifically we highlighted this in the letter, it's a very transactional more of an SMB small business kind of quarter, and so that kind of plays out in those results.

Bhavan Suri

Great. That's really helpful, guys. Thanks for my questions there and nice job.

Mikkel Svane

Thank you, Bhavan.

Operator

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

Jesse Hulsing

Yeah. Thank you. I wanted to touch a little bit on the enterprise or big or bigger customer part of your business. The mix was flat quarter-over-quarter at 34% and that's somewhat backwards looking. I'm curious, what are you seeing on the enterprise side and I know you guys went through some sales hashed and rehashed that multiple times about how do you feel about where the sales organization that as you as you finish up the first quarter and get into the second quarter.

Elena Gomez

Jesse, I can take that. So we feel very confident that the majority of the sales reorganize behind us and Brian done a nice job of retaining the top talent that we have. In terms of the new talent that is being onboard and obviously that takes some time to ramp, but we continue to feel that our pipeline is showing good signs of larger deals and we think of those as you know seasonally to show up more in the back half of the year.

Jesse Hulsing

Got it. And can you update us on your unicorn concentration I guess you want to call it that one of your software peers have some issues this week with Uber starting to end source part of their provided functionality. Are you seeing anything similar and do you see that as any sort of risk to your business? Thank you.

Mikkel Svane

So, we haven't really updated percentage of revenue that comes from so-called unicorn is only because we need a finite list to compare against to create that revenue number and the Wall Street Journal it has created a new list for us to compare against. With certain customers different companies including ourselves have to contend with the fact that once in a while they build in some futures that they might have taken from outside. But we feel very confident with our large customers in that category that we have really good working relationships with them and will participate in their future growth.

Jesse Hulsing

Thank you, Mike.

Mikkel Svane

Thanks.

Operator

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

Stan Zlotsky

Hey, guys. Thank you so much for taking my question. So maybe just to start off, as you went through Q1 and the results came together, did anything surprise you either positive or negative is to how that the results came together in the quarter?

Elena Gomez

We had a really nice pickup at the end of the quarter as it relates to our low transactional business which was obviously great news, but other than that no major surprises for us.

Stan Zlotsky

Got it. Thank you. And maybe just small follow-up the 115% retention what was a pretty good result in line with what we saw in Q4. What is driving your up-sell now and in addition to that if you were to strip that up-sell, how has your gross retention rate been trending in recent quarters? That's it for me. Thank you.

Elena Gomez

Yes. So the majority of our expansion continues to come from existing installs adding more agents as well as moving up to a different plan. But we are starting to see with multiproduct more cross sell, our customers as our customers are adopting more of our products and we'll continue to see that move. In terms of our retention, I can tell you that our churning contraction combine has remained steady.

Stan Zlotsky

Perfect. Thank you very much.

Operator

Your next question comes from the line of Brendan Barnicle from Pacific Crest. Your line is open.

Brendan Barnicle

Thank you. I just wanted to follow-up on kind of the customer - kind of - type of customer you guys are seeing, if I look at the average kind of revenue per customer, the trend lines there are still growing, but at a slower pace than we've seen in the past. Should we look at that as new customers that you're on-boarding are smaller, walk us through what you're seeing relative of the type of customer that you're adding in the quarter and what type of trends you're seeing there I would assume with higher multi-product that has you could start to see that grow and maybe start accelerate, but walk or what you're seeing on the type of customers you're on boarding here and then uptake of multiple products?

Mikkel Svane

Thanks Brendan.I'll start would be answered here and then we'll get some additional comments. But when you look at our customer count, it really is something that we need to continue to grow but we're looking at the value of those customers more than just the count of customers, so it's quality versus quantity from a customer comp perspective. If you were to kind of look, we do have a seasonal pattern where in the first quarter we have a lot more customer count generated from the SMB space. And as we go through the year, the customer will tilt toward more enterprise type or larger organizations, so that definitely plays a role.

There is a big focus internally in 2017 to have our existing customers existing customers adopt additional products. We'll talk a little bit more about that specifically at our Analyst Day next week or I guess it's in week and half. And so but that is a large focus, Bryan's team this year is to make sure that we educate our customers on all of our products that are becoming available to them.

Brendan Barnicle

Helpful thanks.

Operator

Your next question comes from the line of Samad Samani from Stevens. Your line is open.

Samad Samani

Hi there, thanks for taking my questions. First maybe just one on guidance, if you think about for 2Q the implied midpoint is just below 35% year-over-year and for the year it's fairly close as well, and then when think about your 2020 target effectively requires you to stay around this growth level pretty consistently for the next few years. How should we get comfortable around that given the detail that we've seen? And then I have a follow-up.

Elena Gomez

Yeah, I think a couple things, we think about that a lot, and I think that the key is as we move up market or our business is starting to show more signs of seasonality that you see with enterprise like buyers, so that's one thing to think about within the context of the year. I also think that as we build out more products in our multiply product goal that will be a key lever to our growth to 2020, which we have not really had a history of so far.

Samad Samani

Gotcha. And then I guess maybe if I could ask what type of visibility do you have into guidance and that's my last question? Thank you.

Elena Gomez

The way we approach guidance is really looking at the transactional business as far as which is highly predictable and we place a high probability around that and in terms of sort of the larger installs given there's more tolls to cross to get those deals over the finish line, we place a lower probability overtime you know and we'll get more history with that and be more precise, but at the moment that's how we approach guidance.

Samad Samani

Great, appreciated taking my questions.

Operator

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

Derrick Wood

Great, thanks. So you guys are scaling customers very healthy clip, you guys support a lot of API calls into the platform that requires a lot of cloud infrastructure, and I know when Tom came a year ago one of the things he was going to work on was building up availability and security on the infrastructure, just wondering kind of where you guys stand today on that, and I think there were some kind of uptime challenges last year, and maybe ongoing, but are you feeling like that's mostly behind you just trying to get a sense for where you are on that effort?

Mikkel Svane

When I think uptime unable abilities never behind you, like we are in a transition moving to cloud infrastructure from our own data centers, and we have definitely accelerated some of these projects to really take benefit and take advantage of the some of the advantages that we can find in the cloud infrastructure, because we are incredibly mature today. So definitely matured and definitely accelerated that part of the process and we believe that's one of the things we really owe to our customers is to provide them with an excellent environment, that they can depend on and then some of the challenges that we've had is basically over some of last year like it's - like it's not good enough. And we didn't live up to our own promise to our customers and we have accelerated some investments and some of our products to make sure that we will do what's best for our customers and provide them with best of class infrastructure and reliability.

Elena Gomez

I would just add that in the shareholder letter we talked a little bit about gross margin and the fact that this investment in the year where we have both a Colos strategy and moving to and AWS that that will put some tax on our gross margin, but as Mikkel said it's the right thing to do in particular as we move up market, so just stay tuned for that.

Mikkel Svane

Yeah, so the bottom line on gross margin is, we don't normally guide to gross margin, but in 2017 gross margin will continue to have a slight penalty as a result of the hybrid investment that's occurring, and once we're through that transition we'll see gross margin improve.

Derrick Wood

Great. And with the acquisition of outbound and combined that with Connect. Are you going to go after a different type of user more of a marketing person or is the idea to turn a customer service agent more into a marketer?

Mikkel Svane

Well, I think what is already happening is that we're talking to more and more different buyers in our customer base, because I really supporting the customer experience is not just the responsibility of this department of that department, it's really a responsibility across the organization. So we already in the process of talking to more buyers and then the Connect product with outbound is definitely also outside of the kind of a call traditional customer service buyer so that will continue to push us in that direction.

But I think more interesting is that what we see with kind of a new generation of businesses and also new kind of innovative groups within some of the larger enterprises, but if think very differently about this and they think of how to nurture the customer experience, and really nurturing the customer lifetime happen through a different momentum and a different way of doing business than think about your traditional sales marketing and customer service, operating mode. So these are really the new type of customers we are gathering for and we see a tremendous amount of growth in that market.

Derrick Wood

Great, thank you.

Operator

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

Phil Winslow

Hi, guys, thanks guys for taking my questions, just a couple questions. First one back on the velocity business, earlier you mentioned an uptick that saw towards the end of the quarter, that's something I know that you'd see seasonally and then we think about just had transactional business over the course of the quarter versus the trends that you'd seen over the past few, any changes there than just one quick follow-up for Mikkel.

Elena Gomez

I think I'm to be honest, I think that has a lot to do with some of the focus that Bryan has brought in on the operational side of the business, he is just making it easier for our sales reps to focus on time with the customer and selling. So I think that's starting to pay off, so that's good news because we expect to see that to continue.

Phil Winslow

Got it. And then Mikkel as far as the new products obviously you've commented on Connect plus outbound, but we look at it to explore for example, et cetera, how should we expect these to roll out and then sort of how do you think about just your expectations for uptick of some of these new services within the base?

Mikkel Svane

Well we haven't we announced - we haven't announced a general availability date for the new Connect products yet, but we will doing this year and you will hear more about explorer later this year. We are excited to get these products out. We are excited it changes our conversation with customers, it helps us having some more broader conversation and we can already see how you know that how people are think about this and brand goes beyond just talking about customer, traditional customer support. So it's exciting like from a bookings revenue perspective this year we have it's a lot about the additional products is Chad and talk for us to really sell this year, Chad is doing really well, target still in its early innings, but like with tremendous amount of momentum really becoming the preferred solution for our own customers. So bookings wise revenue impact wise these are really the product for this year that we're focusing on.

Phil Winslow

Got it, make us.

Operator

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

Tom Roderick

Hi guys, thanks for taking my question. I want to talk a little bit about your support and interacting here with the AWS Connect product and you've got - you've certainly got some experience now under your belt with that, can you guys really talk a little bit about just how what integration has gone, how feedback it's coming from my customers, anything you can say about that that certainly an interesting partnership there? Thanks.

Mikkel Svane

So we spent time with the team at AWS Connect prior to its launch, they will be one of you know the 35 plus CTI vendors we integrate with. What's interesting is AWS Connect comes at a time when we've also seen you know some of the traditional on prim players having more financial difficulties. So it is very probable from my perspective that you know it could allow for some more acceptance of SAS in the traditional call center world that's normally been on prim oriented, too early to tell you know how quickly that kind of trend plays out, but I would think that AWS Connect is a good product that could propelled some of that momentum forward. We view all of those products as extremely important as part of our partner programming within the top category, but we will also continue do have our own talk solution, some customers want to have that one vendor approach.

Tom Roderick

Got it, good. Helpful. And last question from me, just thinking about the international revenue still sticking right around 46% of revenues, as you look at some of the or more recent offices you've opened up whether it's APAC or France or investment you've been making over in international regions. Any particular international territories you'd point out having some extra momentum of places that you're - that you'd like to put additional resources to accelerate things.

Mikkel Svane

Well, we generally open up new countries within geographies, and so last year within Asia-Pac we spent time opening up and investing a little bit more in India and Japan and seeing some very good early returns off a small base in both of those countries. We've done really well in Brazil, while Brazil's been having a tough economy over the last two three years, that team is now expanding into the Spanish speaking countries within Latin and so Mexico is kind of on their target list in their seeing good reception there.

And then in Europe you know we have a very strong presence in northern Europe less so in southern Europe, and there's a huge opportunity for that vendors team to be more visible in France and other southern European countries, so that's kind of the effort you'll see from us in 2017 in Europe.

Tom Roderick

That's great color Thank you Mikkel.

Mikkel Svane

Sure.

Operator

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

Kash Rangan

Hey guys thanks for taking my question, I just had a question on the long term financial goals for 2020 billion dollars in revenue that would imply that from fiscal 2017 updated guidance of the company, it's a grow lot of 32%, 33% type CAGR it's more or less in line with what we experienced in Q1, as the numbers get larger, how comfortable do you feel that you can hold these growth rates. And also secondly curious how you're thinking about field sales capacity growth rate for this year? That's it from me. Thank you.

Elena Gomez

So, I would comment you know Kash, we definitely look at the long term growth and understand the CAGR and really the key is, we're early in our multiproduct strategy, and we believe we had - have a set of solutions for our customers will serve them in their transformation, so we think that as we look at multiproduct adoption and continue to focus our land and expand strategy. We're setting ourselves up for sustaining back room, so that's how we think about. You had a second question.

Mikkel Svane

About the sales, I mean cover that…

Elena Gomez

All the fields, yeah, go ahead.

Mikkel Svane

So Bryan has really been working to as you know restructure, which is pretty much behind us, but part of that restructure activity was to put strategic sales reps, account reps in market, and so for the first time we have account executives who will be closer to our customers and potential customers, and we're already seeing a benefit to that activity, so first time more that gives been out in especially North America in region with the representation, and so that's up to an early start and he's ramping up those individuals right now.

Operator

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

Jonathan Kees

Great. Thanks for taking my question guys, and I just had a couple of questions here, as you get more into the larger customers and also even with unit requirements, are you seeing a lot of dual sourcing taking place. Especially with the larger customers, I would think that there would invite multiple people in for the RFPs. That's the first question.

Mikkel Svane

Well so, generally customer will kind of rely on a few vendors for different types of application that they're trying to serve we oftentimes through as our land and expand model try to short circuit the normal traditional RFP process, but we do also compete often in the RFP process. When we compete in the RFP process our winning power is around total cost of ownership time the first ticket, the flexibility of our product, the future Jodi out of our products, so you know those are the things that we put forward to gain you know standing in those RFP proposals, and those are the fee type sales actions.

Jonathan Kees

Okay, so in those RFP situations in and I guess you would encounter I would assume more the bigger players who also offer solution as one part of their packages of software offerings, are you seeing more pressure from the big guys are you also seeing pressure from the smaller guys at the bottom end with more the transactional business, just curious in terms of competitive picture?

Elena Gomez

Our competitive picture hasn't really changed, frankly in and leases I have been here, we continue to see obviously service cloud on the high end and we continue to have a fragmented market on the low end. So we're not - we're not really seeing anything emerge as giving us cause for concern to change our strategy.

Jonathan Kees

Okay, great, that's helpful. Thanks a lot guys, good.

Mikkel Svane

Thank you.

Operator

Your next question comes from the line of Jeff Van Rhee from Craig Hallum. Your line is open.

Jeff Van Rhee

Great, thanks. A couple from me maybe first understanding the limitations of our billings number, maybe you could comment if you met your own bookings expectation. And then second on outbound can you give us some sense of size revenue headcount they have live customers a little better sense of how mature the product was in the company itself?

Mikkel Svane

We do not comment on bookings, but from a calculated billings perspective, two things I'll remind everyone, only about approximately 50% of our revenues are invoiced annually, the rest is invoiced quarterly and monthly and Q1is the transactional quarter, so there's a lot of debt activity in Q1.

As far as out bound they have customer base, we had some overlapping customers, that's where we kind of discovered that we were taking some parallel pass and we could take up - take what they've done and what we've done from our connect program and create something that is bigger better, but also one we thought we can monetize sooner than just pursuing Connect on its own, so we're really pleased to have that Connect team or the out bound team join our Connect team to make this a very nice solution for the customer experience.

Jeff Van Rhee

And any semblance of their size that you can share?

Mikkel Svane

Yeah generally there were small company, that was generating revenues and developed a really nice product, and we will upscale that for Zendesk to go after our larger customers with it. But that's all I want to say.

Jeff Van Rhee

Okay, thanks.

Mikkel Svane

It is not a material transaction for us.

Operator

Your next question comes from the line of Ian Strgar from UBS. Your line is open.

Ian Strgar

Hey guys, thanks for taking my question. We noticed that during the quarter there were some outages that were posted to your site, I'm wondering if you guys could just give us a little more color on one whether that impacted your ability to meet SLA agreements. And to just kind of how your whole infrastructure strategy it is looking going into the rest of 2017?

Mikkel Svane

Yes, I just want to start a high level, and what I said previously like we've had some outages and we didn't live up to our own expectations. Specifically we've had some capacity issues that we have remedied, a fixed and we have accelerated, as we said on move to cloud infrastructure, so we can have a more elastic environment which that benefits our growth rates, which is one of the issues on our infrastructure. So definitely we we've seen some outages that got that going to amplified by some of our capacity issues, we have accelerated our move to kind of structure because that projects involved in that, and setting ourselves a better op for the rest of the year and to live up to the full promise of our customers. As far as bridges, Elena?

Elena Gomez

No we haven't add anything outside any financial impact and don't expect that this time.

Ian Strgar

Okay, great. And Mikkel, it's been about a year now since you brought on Brian Cox to lead enterprise sales initiative. I'm wondering if you can just comment on now that you have 12 months in your rearview mirror, can you just kind of comment on how he has performs and the progress he has made relative to your initial expectation.

Mikkel Svane

So, it's been almost exactly of a year since both Elena, Tom and Brian joined us and it's been a fantastic years. It's been great. It's been - no, but it's like any new few new executive to your management team is traditionally complicated but likely we've been incredibly successful with both the dynamic and the result that we are creating as a team. So I'm very excited about that with Brian specifically like Brian comes with a ton of professional jobs and operational jobs and has really helped us scale and set the organization up for future success.

And I am really excited about that. This is his job as a Chief Revenue Officer, is really to ensure both of current execution and said while sending ourselves out for the future and it's a lot of work, which he will also tell you if you come to Analyst Day. But like it, it's going really well and I'm - I couldn't be more excited about adding such great talent in both Elena, Tom and Brian to my team here.

Ian Strgar

Okay. Great. And if I could squeeze one more in, the connect product, could you just give us any more color on that particular the connect product and how the early customer reception has been and if there's just been any kind of interesting conversations or used cases with that particular product that kind of spans outside of core customer service?

Mikkel Svane

We've learned tremendously from the connect product and from the early access program that we've had. And I think running into outbound with a bunch of our customers has also informed us about the right direction for that product. So excited to have the outbound team join us and it's been really interesting to see what some of our customers are doing. We have one of them coming to Analyst Days who can talk a little bit more about there, some of their experiences so if you can join us for that you can get some firsthand information there.

Ian Strgar

I will be there. Thanks a lot guys.

Mikkel Svane

Perfect.

Operator

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Unidentified Analyst

Hi. This is Mass Spencer [ph] on for Pat. Thank you for taking my question. If you wouldn't mind, could you just tell me what kind of trends you're seeing with in app support and maybe talk a little bit about the work you're doing with fabric and Zendesk kit? Thank you.

Mikkel Svane

Yes. So like with so many of the things we're doing, mobile is growing rapidly. I think we mentioned at the last earnings call that just the amount of chat traffic we see going from web to mobile over the last, over June 2016 that was quite dramatic a shift and we continue to see that in kind of throughout powering the customer experience that more, more things are happening, not just on mobile web but in apps also. So by supporting the fabric framework, the Google fabric framework, we are really making these things incredibly easy for developers. And like with a few clicks you can get the full kind of support, customer service experience in to your app and really provided as a seamless interaction in our app.

So very excited about working with Google fabric framework, very exciting to work with many, many developments who are building these capabilities into their apps and that's no doubt that it's a different paradigm providing these things on mobile but like we have a big team working on it and I'm really excited about what we're seeing there.

Unidentified Analyst

That's great. Thank you very much.

Mikkel Svane

Thank you.

Operator

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

Unidentified Analyst

Yeah. Hey, guys. This is Scott on for Alex. Just a couple quick ones for me. You call that kind of 1Q as the volume base quarter, enterprise more since really back half weighted. I'm curious if there are any kind of strategic programs or initiatives that they've launched to help feed those sale cycles to this up sale cycle. We've hear anecdotally you might be testing out then kind of strategy consulting teams in a limited number of geographies, curious if that's true and if we could get any more color on that?

Mikkel Svane

I think what you're referring to is our motions around solutions consulting and success and those kind of activities in professional services. And as we move and evolve up market those kind of activities tend to be more valued. And so that's probably what you're observing is that marketplace is that some of our customers are getting into more complex use cases, they're getting into a broader implementations Zendesk and they look to our teams to help them. That is part of our future strategy is to not only build our own teams to support that but over time to kind of describe to our customers the availability of a broader external set of development systems integrators that can help out. You hear more about that next week at our Investor Day but that is part of our kind of evolving strategy addressing these larger opportunities.

Unidentified Analyst

Got it. Understood. I look forward to hear more about that. And then unrelated we're hearing kind of on again off again plans to pursue federal apps certification, curious that if it's back on and that's true, what you're seeing in the federal vertical right now?

Mikkel Svane

So there are a lot of things happening in Fed ramp and there are some alternatives in the Fed ramp-up process and we're evaluating those alternative avenues for Fed ramp. Fed ramp is endower is somewhat long and cumbersome and so there are other ways that we can do business with the Fed. As you know we're already doing business at the FCC and other places within pockets of those different government entities. But it is an area that we will focus on over time.

Unidentified Analyst

Got it. Thanks, guys.

Operator

[Operator Instructions] Your next question comes from the line of Nate Cunningham from Guggenheim. Your line is open.

Nate Cunningham

Hi, guys. Thanks for taking my question. I was wondering if you could give us a sense where the enterprise renewal rates have been trending relative to those in the velocity business?

Elena Gomez

We don't really disclose segment details. But I think I said earlier, our turning contraction has remained steady since our IPO days.

Nate Cunningham

Okay. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to the presenters.

Mikkel Svane

Thanks, Rob. We appreciate you turning into our earnings call today. I want to remind everybody that our Analyst Day is a week from Monday in our headquarters here in San Francisco and again there will be a webcast as well as an opportunity to come in live and we're looking forward to seeing some of you there. Have a great day.

Operator

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

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