Zendesk, Inc. (ZEN) CEO Mikkel Svane on Q2 2021 Results - Earnings Call Transcript

Jul. 29, 2021 10:50 PM ETZendesk, Inc. (ZEN)
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Zendesk, Inc. (NYSE:ZEN) Q2 2021 Earnings Conference Call July 29, 2021 5:00 PM ET

Company Participants

Jason Tsai - VP, IR

Mikkel Svane - Founder, Chairman & CEO

Shelagh Glaser - CFO & Principal Accounting Officer

Conference Call Participants

Bradley Sills - Bank of America Merrill Lynch

Allan Verkhovski - Wolfe Research

Stewart Materne - Evercore ISI

Ken Wong - Guggenheim Securities

Brent Bracelin - Piper Sandler & Co.

David Hynes - Canaccord Genuity

Taylor McGinnis - UBS

James Wood - Cowen and Company

Drew Foster - Citigroup

Patrick Walravens - JMP Securities

Arjun Bhatia - William Blair & Company

Stan Zlotsky - Morgan Stanley

Samad Samana - Jefferies

Jason Tsai

Okay. Why don't we go ahead and kick this off? Welcome, everybody, to our second quarter 2021 earnings call. I'm Jason Tsai, the new Head of IR here at Zendesk. We are pleased to report our results. Joining me on the call today are Mikkel Svane, Founder, CEO and Chairman of the Board; and Shelagh Glaser, our new 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 annual report on Form 10-K for the year ended December 31, 2020, and our upcoming quarterly report on Form 10-Q for the quarter ended June 30, 2021. 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 can find additional disclosures regarding our non-GAAP financial measures, including reconciliations with the comparable GAAP financial measures, in today's earnings press release and shareholder letter and for certain non-GAAP financial measures for prior periods in the earnings press releases for such prior periods, all of which are available on our Investor Relations website.

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

Mikkel Svane

Thank you, Jason, for this very brief instruction. And before I get started, I want to officially welcome you to the team. Welcome, Jason. And of course, welcome Shelagh, our new CFO. I'm very happy to be with you here on this call. I also want to say thanks to Marc, Marc Cabi, who I know is somewhere in the wings here of the call. Thanks to you for stepping in while we make this transition.

Turning to our business. We accelerated our revenue growth this quarter to 29% year-over-year compared to 26% last quarter. We saw both our bookings and our RPO grow by record dollar amounts, driven by strong increases in sales to Enterprise customers and the continued adoption of Zendesk Suite. The changing makeup of our customer base and the products they use are translating to longer customer engagements with higher retention.

While our record Q2 booking performance and key metrics reflects this fundamental strength of our business, we have updated our modeling and forecast to adjust for pacing and usage trends that resulted in quarterly revenue for this quarter that was at the lower end of our expected range. And Shelagh will have the absolute pleasure of providing you with greater details on that in a minute.

In what is now a digital-first economy, our customers have to deliver the real-time experiences that are expected in an online on-demand world. That means an increasing number of people are trying to reach customer service through new channels like social messaging chat. And that is also why - that is one of the reasons why over now 8,000 customers are using the Zendesk Suite. It's our messaging-centric, radically simple customer service solution. And what's more, Suite is a significant driver of our increase in average deal size, all while giving customers more relevant and more powerful capabilities.

Broadly speaking, Zendesk continues to win because we deliver best-in-class solutions without a long, complicated IT deployment. We've seen this hold true, particularly for leading gaming platforms that are experiencing unprecedented surges in users and support interactions. Our products enables the interactive immediate help that gamers expect and the gamers demand. This quarter, we added new logos, including the world's largest video game retailer, and we expanded our relationships with existing customers, such as our good friends from Roblox. So now we support more than - over 50 large online and mobile gaming platforms that serve nearly 3 billion gamers worldwide.

The foundation of our business has never been stronger, and I am excited about both our near- and long-term growth opportunities.

And with that, I will turn the call over to Shelagh to discuss the key points of the quarter. Take it away, Shelagh.

Shelagh Glaser

Great. Thank you, Mikkel, and thank you, everyone, for your time today. Our strong momentum continues. In this quarter, we delivered $318.2 million, growing 29% year-over-year, an acceleration from last quarter's growth of 26%. Both net bookings and total RPO achieved record levels driven by strong Enterprise penetration and Suite adoption.

As Mikkel mentioned, changes to our booking pacing impacted this quarter's revenue. A greater percentage of our bookings was closed later in the quarter than last year and our historical trends. We expect this to become persistent as we continue our push into the Enterprise, which, as of Q2, has grown to 35% of our total ARR. We also adjusted our model for certain nonrecurring usage revenue for products like Talk, for which volatility was at the high end at the onset of the pandemic in 2020. Our forecasts for the remainder of the year reflect our updated understanding of these trends.

The performance of our Suite has been outstanding. It continues to surpass our expectations and now makes up more than 16% of our total ARR, up from 7% last quarter. In connection with the launch of our Suite this year, we made the strategic decision to eliminate our lower-end, lower-ARR product plans. As expected, this decision is causing a leveling off in our total logos. We expect this trend to continue for several quarters as the customer base rotates out of these lower-value plans towards Suite.

Suite adoption drives better retention, predictability and longer-term growth and positively impacts our net expansion rate. This quarter, our NER was 120%, at the upper end of our healthy range of 110% to 120% and up from 114% last quarter. We may see NER increase in the near term as we graduate from the spike in churn and contraction we experienced during the onset of the pandemic, but we do expect to stay in this range long term.

Turning to margins. GAAP gross margin for the second quarter was 79.0%, up nearly 4 percentage points year-on-year. Non-GAAP gross margin was 81.3%, up more than 3 points year-over-year. Gross margin improvement was largely driven by revenue scale, increased optimization of our product support personnel cost and efficiencies from our hosting infrastructure.

GAAP operating margin declined by 0.5 percentage point year-over-year to minus 13.3%. Non-GAAP operating margin declined by 0.7 percentage points, largely driven by higher personnel costs as we continue to invest in our growing business.

Free cash flow was $20.9 million in the second quarter. Now moving on to guidance. Given our strong Q2 '21 results and continued momentum with our customers, we are reaffirming our raise from last quarter and raising the lower end of our full year 2021 revenue guidance. We now expect full year 2021 revenue to be in the range of $1.310 billion to $1.318 billion, which represents approximately 28% growth year-over-year at the midpoint. We continue to expect our non-GAAP operating income to be in the range of $96 million to $101 million.

We expect full year free cash flow for 2021 to increase and be in the range of $120 million to $130 million. Our higher free cash flow estimate for the year represents operational improvements that are resulting in stronger collections performance.

To close, I would like to thank Marc Cabi, our Deputy CFO, for all of his support as I've transitioned to Zendesk. My first 2 months here have reinforced why I joined Zendesk. We have exceptional talent with a true passion for customer success and tremendous growth opportunity ahead of us.

I look forward to growing and scaling our business, building on our strong foundation. You will hear more on this front at our Investor Meeting in November. Expect invitations shortly.

And with that, I will turn it back over to Jason for Q&A.

Question-and-Answer Session

A - Jason Tsai

Thank you, Shelagh. And as we've done for the last few quarters, we've put everybody in a randomizer. First up is Brad Sills of Bank of America Merrill Lynch.

Bradley Sills

Excellent. Well, I just wanted to ask a question, Shelagh, just around the move to consumption that you mentioned and the impact this quarter. If you could just double-click a little bit on that. What drove - you mentioned some volatility in the prior year assumption. But was there any delta this quarter on your expectations on the consumption side for the - for Talk?

Shelagh Glaser

So as we looked at it, the kind of the usage-based business, we saw quite a bit of volatility last year with the onset of COVID, and we saw a really rapid growth in the usage rates of Talk. As we started to come a bit out of it in the most recent quarter, we saw some of those growth trends attenuate. So we're really adjusting based on sort of the new environment we're in. And as we said, we've got a lot of customers that have moved up to Suite, and they're using some of the other messaging platforms. So to some extent, it's a pretty unusual environment, COVID last year and then coming out of it a bit. And so we're adjusting our models for that.

Bradley Sills

Got it. Got it. Great. And then the net revenue retention acceleration, pretty meaningful this quarter. Congratulations on that result. Obviously, the Suite has a lot to do with that. Is there anything else you'd call out there from the product side that you're seeing that's driving that acceleration? In particular, in some of those hard-hit industries that you've talked about in the past, are they starting to come back with more expansion deals now? Or any other color you can provide on that nice acceleration you saw in that revenue retention?

Shelagh Glaser

So Suite has played a major role in the net expansion rate, certainly, and we've had tremendous success with the Suite nearly doubling since when it was introduced in the Q1 time frame. We also are seeing some of the industries that were hard hit coming back. We've seen about 50% of that come back. And then there is a bit of a - as we bleed off some of the contraction, we experienced during the COVID, there's some effect of that, too.

Jason Tsai

The next question comes from Allan at Wolfe. Allan?

Allan Verkhovski

Can you give us a sense for what you saw in terms of the demand environment, both in the first half versus expectations for the second half? Would love to hear also how like the selling environment is. Are certain geos having a bigger bounce-back? How is strength in the Enterprise versus small business? And then I have a follow-up.

Mikkel Svane

Shelagh, do you want to give a little color? Or do you want me to ramble away a little bit here?

Shelagh Glaser

You ramble, and then I'll jump on the back of your ramble.

Mikkel Svane

Now I'm really, really positive about the demand that we've seen this quarter. And it has been broad-based, but like our Enterprise business has been doing really, really well. And you can see that throughout our metrics. So we are very excited about that. And we see, in general, just everything coming back. Like people are really gearing up for solidifying their plans. It's less hectic. It's more - it seems more balanced. It seems more prescriptive. It seems more intentional, the plans now. Like last year was a lot of hectic activities, I would say. So we feel really good about - we feel like a lot of confidence after Q1, increasing confidence after Q2, and we see that continuing. Globally, like all regions overperformed, very happy about that.

Allan Verkhovski

Got it. And just as a follow-up, you now have the Suite for about 2 quarters under your belt. It represents 16% of your ARR. Can you talk about the main drivers or like limitations behind how big it can get as a percent of ARR exiting the year? Ultimately, like what does success look like related to the Suite for the year and going forward?

Mikkel Svane

Like we have different success parameters. I think the adoption is beyond what we expected. The adoption is going really, really well. We want to see the usage of the new capabilities follow alongside that, and that's going really well, too. But like we see that trend continue for a while and don't - we don't have any constraints neither in kind of how customers are using it or how they expect to use it that is setting any kind of limits through the adoption of what kind of adoption we can get off the Suite.

Shelagh Glaser

Yes. I would say we - the estimate is that at least 60% of our customers would basically be aligned to Suite. And as Mikkel said, it's going really beyond our expectations. So we may find over time that there's even more applicability.

Jason Tsai

Thanks, Allan. And the next question comes from Kirk Materne from Evercore.

Stewart Materne

I tried to turn my camera, it wouldn't let me. So I will - I'll just have to go with the voice over this. But yes, Shelagh, not to - I'm sure you get a lot of questions on this, but can you just talk about - sorry, okay, Jason has asked me to start my video, so there we go.

So anyway, can you just talk about what you're sort of embedding in the guidance from some of the consumption revenue? Because I think when you look at the quarter, the bookings were solid. RPO growth was really good. All the forward-looking metrics look really strong. NRR is obviously up. Yet the guidance is sort of just coming up at the very bottom end of the range, not sort of moving up in aggregate. So after this quarter, I assume you're being a little bit more conservative around the consumption part of the business. Can you just - sorry, can you just give us some color on that because I think that would be probably helpful?

Shelagh Glaser

Yes. So certainly, as we saw in Q2, some of the consumption revenue, the usage revenue attenuate, we're baking that into the forecast to ensure that we've kind of captured that key insight.

And then in terms of thinking about the guidance, this is literally my first full quarter in the chair. So I got lots of opportunity to learn more deeply about the business and the contracts of the business. And so the way I really thought about guidance was enlightened by the Q2, enlightened, as you say, with the strength - incredible strength we're seeing in subscription, but making sure we put kind of a practical range in place as we navigate through this transition, even me personally, navigating through transition for the first full quarter in the chair.

Stewart Materne

Well, Mikkel wanted to throw you into the deep end to start, so...

Shelagh Glaser

And I have not been bored, so I enjoyed every minute of it.

Stewart Materne

And then just maybe 1 follow-up. I don't know if this is for you or Mikkel, but the customers that contracted last year, they drew down? Are you seeing them come back? Are they adding seats back to the mix? And kind of how does that shape up for the rest of the year?

Shelagh Glaser

Yes. Let me take that one. So yes, as you said, last year, we saw significant impact to many industries that we support. And as of now, we see about 50% of that coming back, approximately 50%. That's about the same that we saw in Q1. We're seeing that. So we would assume, over the next several quarters, we'll continue to see that come back.

Jason Tsai

Thanks, Kirk. Next question comes from Ken Wong at Guggenheim. Hey, Ken, we can't hear you.

Ken Wong

Hello? Can you guys hear me now?

Jason Tsai

Yes.

Ken Wong

Okay. I had a sort of a double mute going. So sorry about that. So for you, Shelagh, as we think about the higher Enterprise run rate that you guys are talking about, so we do see it in some of the KPIs, and obviously, billings look pretty attractive. I guess how should we think about maybe the second half kind of billings, revenue dynamic there? Is there a scenario where perhaps billings will outpace revenue? And I know that's not really a metric you guys necessarily guide to, but any color on that side would be particularly helpful with kind of this interesting dynamic in Q2.

Shelagh Glaser

So we're continuing to see strength in Enterprise. It was - certainly, in Q2, as we said, we saw a large acceleration, 50 deals over $250,000 ARR. So we're continuing to see that. But we're just seeing that those larger deals take longer to close. So we saw that effect in Q2, and we're assuming that same effect for the balance of the year that those more larger, more complex deals just take a bit longer to close. And so we would expect that, that trend continues, and we would expect that we'll continue to make lots of progress in the Enterprise space.

Ken Wong

Got it. And then, I guess, as we think about that longer sales cycle, I guess, do you feel that, that was partly - maybe you guys weren't quite ready for that kind of a sales kind of negotiation process and something that you guys could potentially alleviate in the back half? Or do you think it's just very much just the nature of as these deal sizes get larger and larger, we should just come to expect that, that extended sales cycle is what's going to be on tap?

Shelagh Glaser

And Mikkel has a lot of insight, I'm sure here, but my own personal experience is typically Enterprise is a longer sales cycle. Almost any product, any industry, it's just - there's more approval levels and things like that, that need to occur versus in a smaller business. So I don't anticipate that the nature of those businesses changes. And so we're really just provisioning that into the forecast. SMB and commercial, obviously, have much more rapid pace just due to the nature.

But Mikkel, I don't know if there's anything you'd want to add.

Mikkel Svane

No, that's right, Shelagh. And Ken, a lot of our revenue recognition is based on the pacing of the bookings, as you know, in the quarter. And this model is being based on - is based on historical data. So that's also heavily influenced by what we saw last year. And last year was, as I would say, last - less intentional of our purchase. There was a lot of activity was less intentional. We have more intentional purchases right now and definitely more kind of Enterprise deal. So we see the market balance starting to gravitate more towards the end of the quarter, the last month of the quarter. And that is the shift we've been seeing, and that we've - that Shelagh has built into our models going forward. Makes sense?

Ken Wong

Yes. Yes, it does.

Jason Tsai

Thanks, Ken. And the next question comes from Brent Bracelin over at Piper Jaffray.

Brent Bracelin

I guess for me, listen, the Suite penetration doubling is fantastic. Enterprise adoption, really strong. The flip side to strong net expansion is it'd be the contribution from new customers is not ramping maybe as fast as we think. So what are the puts and takes relative to new customer lands that appear to be kind of recovering at a more subdued pace here? And what can you do specifically to drive maybe a reacceleration on new customer contribution here? Again, a lot of positive in the quarter. That was the one that kind of stood out as a question mark where you could do more. And it might be tied to kind of the deemphasis of those lower-end customers, but just that metric look a little weak. And any color there you could provide would be helpful.

Shelagh Glaser

So the one thing I would - when I kind of laid out the 3 drivers of the net expansion rate, the one thing that I would also lay out is we do have - we are coming off sort of a period the year prior that had a lot of contraction in it due to kind of the COVID situation. So our intent and our focus is certainly the land and expand but continuing to grow new customers.

So to some effect, the higher end of the range that we're seeing right now is a bit of the kind of that comparison quarters that were impacted by COVID. So that's why we see it really as a short-term effect, not a long-term change in the business model.

Mikkel Svane

I think, Brent, your question is also about new customers. We actually had record new customer contribution this quarter, up remarkably compared to our second-best quarter. And if the indication you have, I don't know why you have that data, what you're pointing to, but the amount of logos, you're going to see a stabilization of that as we have terminated a lot of these kind of the low-end plans. And we see more and more customers choosing the Suite and migrating to the Suite. So that's why you're going to see like a stabilization over the next quarters as that number of logos is stabilizing. Does that make sense?

Brent Bracelin

Yes. So it sounds like there's some noise here as you abandon some of those lower-end kind of stand-alone kind of products.

Mikkel Svane

We have to wash through that. And it's kind of higher churn, lower-end customers and the number of logos you're going to see kind of a flattening for a while as we kind of wash that out.

Brent Bracelin

Got it. But the new customer logo land sounds like it's been pretty strong. It was very strong this quarter.

Mikkel Svane

Very strong. Yes.

Jason Tsai

Thanks. And the next question comes from DJ Hynes over at Canaccord.

David Hynes

Shelagh, two quick ones for you, maybe just to help put the revenue results in context this quarter. Can you talk about how much transactional revenue you get in a quarter? And then second would just be, how much revenue in a quarter comes from deals that are signed in that quarter?

Shelagh Glaser

So in terms of usage-based revenue, I think it's the first question that you have. We've talked about it in the past: it's low single digits. But obviously, since it's usage-based revenue, it's still booked and recognized inside the quarter. So that's where some of the effects of the volatile Talk usage came into play.

And then in terms of kind of our pacing, as Mikkel talked about, obviously, earlier in the quarter, we're able to recognize the majority of the revenue. And then the later in the quarter it is, most of the revenue recognition is going to be for subsequent quarters. So as we start to move to a model where month 3 is the bigger month, as we move higher into Enterprise, a lot of those effects will be for the subsequent quarter versus the current quarter.

David Hynes

Yes, yes. Okay. And then, Mikkel, maybe one for you. So if we look at the customers that are onboarding over that $250,000 threshold and we did pattern recognition on them, like are there common characteristics? Like what would we pick up? What's the profile of the customer that's landing at that threshold for Zendesk?

Mikkel Svane

Well, I think it's - so like our Enterprise wins are very broad. This is - a lot of them are very traditional industries other than very digital-first industries, like we talk about the gaming industry, no doubt like that's like we really like that the world of gaming is definitely exploding. And like a lot of we are working with, a lot of these customers are about their - with their customer service. But it's also like we're working with breweries and electrical companies, and everybody has to kind of - everybody has to embrace these newer channels that we now take for given when we engage with businesses. So it's very - I would say it's very broad, our appetite, and it's very broad the kind of demand we see in the market, also in the Enterprise.

Jason Tsai

Great. Thanks, DJ. The next question comes from Taylor McGinnis over at UBS.

Taylor McGinnis

Can you hear me now?

Jason Tsai

Yes.

Taylor McGinnis

Okay. Great. So sorry if I missed it earlier, but can you talk about the level of up-sell that you're seeing with Suite relative to the 20% you gave last quarter? And I guess, how much traction are you getting with single-product customers in migrating to Suite versus multi-product customers? And then maybe a third part of that is just on like new logo activity, I'd be curious if you're seeing any interesting trends with Suite there.

Mikkel Svane

What were the numbers?

Shelagh Glaser

So I think - yes. So in terms of - we're seeing about the same that we saw in Q1, approximately the 20% up-sell. I think we said in Q1 that the range was between 10% and 30%, and we saw 20% in Q1, and we're seeing 20% in Q2. So we're continuing to see that as a positive trend, the average customer value of Suite versus non-Suite. In terms of the number of products that customers had and they're moving to Suite, I don't think I've got that at hand. But I would just say the substantial majority of the customers, the new customers coming in are moving on to Suite.

Mikkel Svane

Yes. I think the metric is around 75% of new business is Suite.

Jason Tsai

Great. And the next question comes from Derrick Wood over Cowen.

James Wood

Yes. Great. Can you hear me?

Jason Tsai

Yes.

James Wood

So I hear the message that the Enterprise business, you're working on bigger deals and it's maybe a little bit more back end-loaded in the quarter. But I want to ask a question on kind of how to think about the shape of the second half. Like do you see like more direct Enterprise business have seasonal uptick in Q2 and then kind of softer seasonality in Q3 and then a bigger uptick in Q4? Or do you see kind of first half being slower, second half, including Q3, Q4, being stronger? Just trying to get a sense for the shape of the Enterprise business and how to think about it in the model.

Shelagh Glaser

So our expectation is continued strength in Enterprise through the year. Since we're really still growing in that phase, we don't necessarily, I think, have the quite seasonality pattern that you're talking about. So we're expecting to continue to be strong in Enterprise in both Q3 and Q4.

James Wood

Okay. And maybe one for Mikkel. I wanted to hear about how you're thinking about Sunshine. And I think that there was going to be a bigger focus on Sunshine entering 2020, COVID hit. I think you kind of backed off on it. It's more of a kind of evangelical sale and it involves maybe embracing developers and deeper integrations and beyond just kind of the application scope. So when do you think you want to bring that back more - especially as you're moving upmarket more where it's going to be more critical to have kind of development platform? Would love to hear how you're thinking about that.

Mikkel Svane

Yes. So our investments in development tools has not decreased. We do - we have kind of pivoted some of our investments on the platform kind of aspects of it to make these platform capabilities easily available for our Enterprise customers. And that is also part of why we see kind of the increasing demand from the Enterprise that we are making these so also, they can extend, they can integrate and they can customize Zendesk much, much better using our developer and platform capability. So that is our kind of - that is the current priority. It works really well in terms of making these things easily accessible for our larger Enterprise customers.

Jason Tsai

Thanks, Derrick. The next question comes from Drew Foster over at Citi.

Drew Foster

Can you guys hear me okay? Can you hear me?

Jason Tsai

Yes. Go ahead.

Drew Foster

Okay. So I know you're using $250,000 as a benchmark for Enterprise. But what percent of your installed base do you think you have an opportunity to grow your footprint at or above that $250,000 mark within those accounts? I mean assuming those customers don't really grow the size of their own businesses today.

Shelagh Glaser

So I know we don't break it out. So we haven't been breaking it out. We're continuing to see continued growth in the $500,000 and above. So the expectation is that over time, we'll be able to move some amount of those customers up and win new customers that are coming in at a higher rate. We don't have the exact numbers on that, but our ambition is to keep moving upmarket.

Drew Foster

Cool. And then as you progress more into those Enterprise accounts, I mean, Mikkel, what are some of the other changes you think you need to make, either within your feature set or on the distribution side, investments that you still have to make to increase your presence there?

Mikkel Svane

Well, the enterprise journey is long and interesting and never ending. Like we definitely like - we feel like we're still in the early innings of our Enterprise business here. Like we still have more people to invest in, more teams to build out. Our partner business is thriving. But like we need to take - we can still do a lot more with partners, both in terms of introduce them early into the relationships with our customers and so on.

So it's - I think we all feel that it's very exciting to work on because there's just so tremendous opportunity there, and we're getting more and more comfortable in our suits, even though they're only bottom-up - or sorry, a top-up. But it's - so we still feel that we - it's been a long journey for us, going Enterprise, and it's going to continue for a while as we invest in all of these things. But we believe it's super interesting, and we learn a lot from it. There's a lot of investments we're bringing back to the product and make available for everyone and democratize and make it simple for everyone to use these capabilities, and we're excited about that.

Jason Tsai

Great. Thanks. The next call - the next question comes from Pat Walravens at JMP.

Patrick Walravens

Can we talk a little bit more about the usage in Talk and how you feel about that product in general? And there was the comment about moving to some of that usage to other messaging platforms that I didn't really understand.

Mikkel Svane

Well, I can give a little color, and Shelagh, you can support me here. Well, so again, it's a little bit outpacing. Our model is influenced by historical data and especially historical data from 2020 where like our usage tenant, they were much more volatile kind of how we saw usage kind of go up and down throughout the quarter, a lot of kind of sporadic usage. So that had influenced our model, and kind of it's stabilizing now. But like that model just was - just didn't materialize the way kind of we had - because of these historical data. So we had to adjust that. And it's still right. We still have high growth in usage, but like it wasn't influenced by that kind of - it wasn't impacted by the, say, kind of volatility we saw last year.

There is definitely like - we are definitely making a lot of channels available for our customers with the Suite. And we are having a big push to getting them to use these messaging channels that are getting increasingly important, democratizing these things, making it super easy for customers to engage with the customer over a WhatsApp and chat and Facebook Messenger and all these other different channels. And our customers are realizing how convenient that is, both for their organization but also the end customers, the consumers are realizing how convenient that is. So we do see a lot of customers thinking messaging first versus voice first, if you will.

Does that make sense, Pat? I can't see you. I hope you...

Patrick Walravens

Yes. No, I'm sorry about that. I'm not driving, but I am in the car. Yes, it does make sense, but I just - there's so much change going on in this space right now, if you look at like Zoom buying Five9. And I was just wondering if there's something broader that might be impacting Talk.

Mikkel Svane

No. We're still very happy about kind of the growth in the usage of this. But like these models were based too much on some of the volatility from last year. So we had to kind of just adjust that.

Jason Tsai

Thanks, Pat. The next question comes from Arjun at William Blair.

Arjun Bhatia

Shelagh, maybe you don't have to belabor this point, but it seems like what I'm understanding is there was a - some assumption baked in about usage-based products before this quarter, and there's a new assumption today. Is there any way that you can quantify just how much the consumption is driving down your - or I should say posing a headwind to your full year guidance? Because the rest of the business seems strong, right? I think we're just trying to bifurcate those 2 aspects in the guidance.

Shelagh Glaser

Yes. So I won't go into detail about it, which probably won't surprise you. And as we've noted, the subscription business indicators are all extremely strong. So we're seeing really across the board strength in highest RPO, both short term and long term, a significant number of customers over $250,000. So that business is extremely strong. So we're continuing our growth in the subscription business.

And you know the usage business has been low single digits, remains low single digits. So there's not a significant change really in their forecast on that. But as Mikkel said, understanding the usage rates when you're trying to come off with COVID, pretty unprecedented situation has really had us adjust those for the second half of the year. But the total usage remains in the low single digits.

Arjun Bhatia

Okay. Got it. And I wanted to ask on Enterprise, maybe Mikkel, this one might be for you. But is the partner channel at a point of maturity yet where you're seeing them bring in big enterprise deals? Or is that something that your Enterprise - your direct Enterprise sales team is still handling?

Mikkel Svane

We are seeing pockets of it, but it's not like something where we execute well on it everywhere. But we are like - we have pockets where it's working really, really well for us. And as I said before, this is definitely one of the areas where, for so many reasons, for the customer experience, for the success of the projects and all these things, we want to get like - we want to get that motion much more engaged. And like the partnerships we have been building and are working like that, they're working like really, really well. Customers are really appreciating the kind of the quick time to value they're getting out of it and having a partner right on hand and how quickly they can move on these things. So like it's definitely something we want to see a lot more of.

Jason Tsai

Thanks, Arjun. Next up is Stan Zlotsky from Morgan Stanley.

Stan Zlotsky

So a couple of questions from my end. I realized you're reticent to kind of quantify the impact of the consumption changes for the full year. But is there a way to possibly quantify the impact on the - that you saw in the quarter?

Shelagh Glaser

I probably won't go into that much detail. I think as we've said, the - kind of the couple of headwinds that we faced in Q2 that we've adjusted for, for the full year is just really, as we move upmarket, that timing on subscription, it's just going to be heavier towards the end of the quarter. And then the usage piece, we had expected kind of some continued growth, both based on what we saw in COVID, we just muted that growth for the balance of the year.

Stan Zlotsky

Got it. So would it be fair to say that outside of that consumption component changes, did everything else come in essentially above your plan?

Shelagh Glaser

So inside the quarter, the two effects were those two effects. And so the underlying indicators of the business, the long-term underlying indicators of the business, all are trending really positively, right? We talked about the Suite coming in more positively then than we thought it would come kind of the record improvement we had in bookings. So the key long-term foundational underlying aspects of the business are all trending very well. But obviously, you've got your in-quarter revenue recognition that really all comes down to when the timing of deal closure is, and then usage is obviously real-time revenue recognition.

Stan Zlotsky

Got it. So last question. I know - I realize, Shelagh, you said that you're a little bit newer to the company. There's obviously still a lot to learn. Is it fair that - to say that you may be slightly tweaked the way you approach guidance setting now versus how the company has done it in prior quarters?

Shelagh Glaser

Well, I think it's objectively true that I'm brand new. So it'd be my first 90 days inside this great company, and so there's a lot of stuff for me to learn, a very - a strong business that's continuing to gain momentum. So certainly, as I thought about guidance, I wanted to make sure that it was informed by kind of the learnings that we had inside the Q2 time frame and make sure I put guidance out that aligned with that. So I would call it balanced.

Jason Tsai

Thanks, Stan. And our last question comes from Samad over at Jefferies.

Samad Samana

So just maybe a couple of questions on the large customer side. I saw the data point around 50 customer accounts contributing $250,000. Can you help us understand how many of those were new to Zendesk for the first time in the quarter versus customers that, let's call it, crossed the threshold that were already existing Zendesk customers?

Shelagh Glaser

So it's a combination of both. I don't think we're prepared to break it down, but we saw both new customers come in, as Mikkel had talked about earlier, quite a few large accounts that we were able to close in the quarter. And then, as you know, our history has been accounts graduate. We get in companies who were in their early days, and they graduate from SMB to commercial into Enterprise space. So we also saw some graduations into that space, too.

Samad Samana

Okay. Great. And then just as I think about the 8,000 customers adopting the Suite, can you help us understand, I know there were a couple of other Suite SKUs that existed previously, where we are in terms of either migrating or up-selling those customers from the existing Suites to the one that was rolled out in February? And how should we think about that opportunity?

Shelagh Glaser

So the way we've thought about it is that we think at least 60% of our customer base Suite would - will end up being the offering for them. And again, we're early days, and we've been really pleasantly surprised at how quickly the Suite has been adopted through the customer base. So our current expectation is we've got a lot of room to go in the Suite adoption.

Samad Samana

Great. I'll leave it there, and congrats, Shelagh, on the new job, and look forward to asking you questions for several more quarters.

Shelagh Glaser

Absolutely.

Jason Tsai

Great. That was the last question. Mikkel, do you want to - any closing comments?

Mikkel Svane

No. Thanks, everyone, for joining today. And congrats, Shelagh, on your first earnings call here. Thanks, everyone.

Shelagh Glaser

Thank you.

Jason Tsai

Thank you.

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