After releasing strong Q4 2019 earnings results in early February, Zendesk (ZEN) promised investors some exciting product announcements at their annual customer event, Zendesk Relate, scheduled for the first week of March. Unfortunately, due to concerns with COVID-19, Zendesk cancelled the in-person event. However, they still made a number of product announcements and held a virtual analyst event on March 4. While the cancellation of Relate and the evolving COVID-19 situation will impact Zendesk’s business in 2020, their strong product development motion and new offerings will expand their leadership in customer service and support their foray into customer relationship management.

Product Announcements

Zendesk announced several additions to the core product offering and enhancements to their new CRM platform, Sunshine. Non-Sunshine product changes involve bundling of multiple offerings and extended integration with messaging. Previously, Zendesk offered two product bundles for customers interested in multiple products – Zendesk Suite and Duet. Zendesk Suite included Support, Guide, Chat and Talk, the primary products utilized by a customer support organization. Duet provided bundled access to Support and Sell, Zendesk’s salesforce automation tool.

The new announced changes provide two separate “Suite” bundles – Zendesk Support Suite for customer support organizations (with messaging added) and Zendesk Sales Suite for sales organizations. Bundles have the advantage for customers of providing access to multiple Zendesk products at a bulk rate, up to 35% less than the equivalent cost of licensing each product separately. Bundles work well for Zendesk, growing the number of customers licensing more than one product and driving incremental revenue.

In addition to the launch of the two separate Suite bundles, Zendesk announced full availability and pricing for the Sunshine platform. Sunshine represents Zendesk’s foray into providing a holistic, open platform for building next generation customer experience applications. The platform is hosted on AWS and provides connectors for data integration with most enterprise apps. Developers can build applications in the framework of their choosing and leverage common logic APIs and data storage for generic entities like user profiles, objects and events. This platform is positioned against what Zendesk views as “closed” competitive offerings, like those from Salesforce (CRM).

Zendesk Analyst Event, March 2020

Since 2018, Zendesk has been investing heavily in building out their product line to address more customer experience (CX) use cases and expand their target audience within the enterprise. From their foothold in customer support, Zendesk moved into salesforce automation with Sell and ultimately wants to address the full lifecycle of customer relationship management (CRM) with Sunshine. This evolution makes sense, as customer support personnel are increasingly being encouraged to sell upgrades and adjacent products to customers. This argument has credence as digital transformation efforts aim to provide customers with a single touchpoint within the enterprise, and not force them to distinguish between whether they have a “support” or “sales” issue.

Another characteristic of Zendesk’s customer experience offerings is the emphasis on enabling omni-channel communications. Practically, this means allowing customers to communicate with an enterprise over any channel – phone, email, text, social app or web site chat – and have those conversations all available to customer experience personnel within one interface. Zendesk’s recent focus has been on capturing messaging interactions like SMS, social apps and chat bots, as these are becoming preferred channels to phone and email, particularly with younger customers.

These moves are timely, as IDC predicts that worldwide spending on customer experience technologies will be $641B by 2022. According to IDC, customer experience has become a key point of competitive differentiation in the digital age, and enterprises are scrambling to keep up with their peers.

The CX use case that will see the most spending in 2019 and throughout the forecast is customer care and support followed by order fulfillment and interaction management. The use cases that will see the fastest spending growth over the five-year forecast period are AI-driven engagement, interaction management, and ubiquitous commerce.

IDC, Customer Experience Projection, August 2019

Enabling customer care, support and interaction management, coupled with AI-driven insights, are areas that fall right into Zendesk’s wheelhouse.

Enhanced Support Suite

The Support Suite builds upon the success of the original Zendesk Suite, which included Support, Guide, Chat and Talk, the primary products utilized by a customer support organization. The new Support Suite layers on extended messaging integration, providing agents with a single omni-channel view of all communications with customers. The agent workspace reflects all communication history, whether the customer calls, emails or messages the company, allowing agents to continue the conversation on the channel that makes the most sense. 

While messaging over web chat and SMS are common, younger customers are increasingly moving their conversations into emerging social messaging channels, like WhatsApp, Facebook Messenger, Twitter Direct Messages, WeChat, and LINE. By integrating with Sunshine Conversations, Zendesk’s recently launched conversational platform, Support Suite pulls communications from these disparate channels into a single agent view. The Conversations platform is powered by technology acquired from Smooch.io, which was brought into the Zendesk fold in May 2019. Smooch was a Montreal based start-up that focused on providing a messaging platform for enterprises to communicate with their customers across any messaging-based channel.

Also included in social messaging capabilities is a live notifications view for agents to easily see updates to multiple customer conversations in real-time, as well as programmable auto-responders, so customers will receive an immediate response, even if an agent is not available.

Sales Suite

Sales Suite is a new bundle that supplements Zendesk’s stand-alone salesforce automation product, Sell. The Sales Suite is directed towards sales personnel, who are charged with prospecting for leads, communicating with customers and closing deals. With many first-time customer interactions starting from a company’s web site through a chat widget, the Sales Suite enables seamless communication with prospective customers from initial contact through concluding a sale, on whatever channel is most convenient. The conversation can move from chat to voice, text or email easily, with all interaction history displayed in the same interface.

The Sales Suite also provides prospecting and data enrichment tools, referred to as Reach. The salesperson has access to a database with 20 million companies and 395 million prospect records. A sales rep can select the type of company targeted and then drill down into detailed leads to contact. Reps can access all customer data and tasks from a single interface. They can generate customer emails quickly using personalized templates and then automatically ingest customer responses.

Sunshine Platform GA

As mentioned above, Sunshine is Zendesk’s new CRM platform, native to AWS. It provides a foundation of API’s and data storage upon which enterprises can aggregate all of their customer data and build better engagement experiences. It is designed to address limitations with “closed” packages of CRM software, by supporting flexible data models and open programming interfaces. After conducting a trial roll-out, Sunshine is now generally available for all customers, with reasonable per user pricing.

Sunshine started with Custom Objects, which allow customers to model any set of unique entities within a business, like a product catalog or content subscription levels. As part of the new Sunshine announcements, Zendesk is adding more capabilities to Sunshine to further model an enterprise. These include Custom Events, Unified Profiles and the AWS Events Connector. Custom Events allow enterprises to model any customer interaction, like a shopping cart addition, product delivery or a return. Unified Profiles can model all information about a customer, usually aggregated from multiple business management applications, like point of sales, loyalty, installation and training. Finally, the AWS Events Connector provides a universal data import/export tool to facilitate integration with other business management applications. With these capabilities, agents can:

  • View every interaction with their customers, regardless of the source system.
  • Tie all of these accounts into one comprehensive picture of their customer.
  • Harness the AWS ecosystem with a real-time streaming events connector.

These capabilities also facilitate integration with third-party e-commerce systems that process customer events, such as billing, allowing enterprises to provide real-time help to their customers. For example, an agent can see when a customer’s credit card is rejected and immediately reach out to help close the transaction.

Finally, Zendesk introduced new workflow automation tools with partners such as Workato, Qualtrics and Narvar that help enterprises automate common customer interactions. These allow agents to easily replace manual tasks, trigger actions based on new events or changes in customer status and create workflows that can be reused across business processes.

In their press release, Zendesk provided a reference customer testimonial from residential storage provider MakeSpace.

“Before Zendesk Sunshine, our customer support agents struggled with complicated CX systems,” said Sean Benedict, Customer Experience Operations Manager at full-service storage company MakeSpace. “Now our agents have a more holistic customer view in one place, seeing every customer event and the full history. Our team has everything they need to deliver a seamless and stress-free storage experience to our customers.”

Analyst and Investor Event

On March 4, Zendesk held a virtual event for analysts and investors. This was originally planned as an in-person meeting at their Relate conference in Miami. After cancelling Relate, the leadership team scrambled to reschedule and reformat the analyst event to be conducted virtually. As I watched it, I felt for the team, as I imagine they were all talking to a camera, versus the usual live audience. Regardless, they delivered a lot of useful information for investors. I have captured highlights below. Some of the event covered the product announcements, so I won’t rehash those.

  • Prior to cancellation, the Relate conference had 2,300 registered attendees and 110 speakers, including Netflix, Box, Peloton and Logitech. This is indicative of solid customer engagement and interest in building next-gen customer relationship experiences.
  • The leadership team emphasized the opportunity for Sunshine Conversations, their messaging product. Zendesk’s State of Messaging report showed that 87% of smartphone owners utilize messaging. The leadership team said that Conversations represents their fastest growing product. This is encouraging as it is a relatively new offering.
  • For 2020, Zendesk will reach its interim goal of generating $1B in revenue. Going forward, the leadership is now talking about a new multi-billion dollar annual target (reminds me of similar comments by Alteryx). They see three primary factors driving this growth:
    • Expanding TAM – Customer expectations are increasing and Zendesk is extending its reach into CRM and CX.
    • Product Innovation – New product development and acquisitions are allowing Zendesk to address adjacent use cases in CX.
    • Enterprise and SMB Motion – The move upmarket into larger companies will drive bigger deals with multiple products.
  • Expanded Answer Bot capabilities, allowing it to access data from other systems, like order tracking, and to set up guided workflows for responding to customer inquiries. Added 10 new languages to Answer Bot, including Chinese, Japanese and Korean.
  • Zendesk Sunshine already has 2,500 trial customers, across all industries. This comment generated significant interest among analysts as it reflects positive initial traction with the new offering.
  • Referenced four marque customers who were scheduled to discuss their experiences with Sunshine at the Relate conference: Netflix, Logitech, Bestseller and Four Seasons.
  • Zendesk Conversations has generated over 1B messages in 2018 – 2019, with 7x year/year growth. The pace of growth is accelerating.
Zendesk Analyst Event, March 2020
  • Teased future enhancements to Sunshine, including Sunshine Workflows, which allows for automation of common CX processes.
  • Sales leadership talked at length about the experience of two major customers with Sunshine – Logitech and Peloton. Logitech was able to load all of their product sku’s into Sunshine to better align customer service inquiries with the actual products in inventory. Peloton uses Sunshine to create custom workflows for tracking its white glove installation service.
  • RPO growth is indicative of traction with enterprises, as they commit to larger deals with longer timeframes. At the end of 2019, Zendesk saw a 57% year/year increase in total RPO. Also, 43% of total ARR is now from companies with 100+ Support agent seats, another indicator of enterprise progress.
  • Sunshine has opened the door for more meaningful engagement with the global system integrators (GSI’s), as they can help enterprises with the custom application development and system integration enabled by Sunshine. This provides an important new sales channel, which wasn’t available previously.
  • CFO estimates Zendesk TAM at >$25B. This is based on share of markets for customer service applications, contact center, sales and marketing applications. Note that she didn’t just add up the total size of all markets, reflecting a more measured view of the opportunity.
Zendesk Analyst Event, Mar 2020
  • The percent of companies licensing more than one Zendesk product has grown from 9% in Q4 2016 to 29% in Q4 2019.
  • If a customer adopted all new Zendesk products, their spend would increase by 3.5x over just Support. This is an important take-away for investors, as it reflects the expansion opportunity associated with Zendesk’s new products.
  • Further illustrating the expansion point, the CFO modeled an actual customer’s expansion over 4 years. The customer started with Support in 2016. Then, added Chat, Guide and Talk in 2018. Finally, began using Sunshine in 2019 (without monetization). When monetized, this would represent a 15-40% increase in revenue.

Adjustments to 2020 Guidance

At the Morgan Stanley analyst event on March 2nd, the Zendesk CFO announced some updates to their 2020 guidance, in anticipation of impact from COVID-19 and the cancellation of their Relate conference. Since Relate was cancelled at the last minute, Zendesk lost all sponsorship revenue, and would likely not recoup all costs for holding the event. Also, Relate provides a captive audience of Zendesk’s existing customers and an opportunity to get face time with prospective customers. At the same time, Zendesk is trying to mitigate the forward sales impact, by holding a virtual Relater event for customers in late March.

Given these inputs, the CFO revisited prior FY 2020 guidance issued in the Q4 Earnings results. She is maintaining Q1 2020 revenue guidance, but anticipates $2-4M of additional expense due to the Relate event cancellation. She is not quantifying risk for the 2020 revenue outlook at this point, but expects some impact. She will provide specifics on the Q1 2020 earnings call in April.

At the time of this announcement in early March, COVID-19 was entrenched in Asia, with cases growing in Europe. The U.S. hadn’t seen much impact at that point. Zendesk was early in making a call on business impact from COVID-19, which initially hurt the stock price as investors thought Zendesk was unique, due to heavy penetration in Europe. Since then, it has become clear that all software companies will be impacted in some regard. Ironically, because 50% of Zendesk’s business is outside of the U.S. (Asia, LATAM, EMEA), this diversity may now be a benefit.

Take-Aways for Investors

Overall, I was happy with the new product announcements and progress reported on the analyst event. Zendesk is still on a strong trajectory going forward and I am optimistic about my investment thesis. Passing the $1B revenue milestone was significant, but more encouraging is the new multi-billion dollar target. This higher target will be achievable as a result of ZEN’s rapid product expansion, particularly the upsell opportunity approaching 3.5x of current customer spend. After growing significantly as a public company from 2014 – 2018 with the single Support product, Zendesk has pursued several new market vectors in the last 2 years. This has culminated with Sunshine, which provides the foundation for evolving customer experience applications and attracting new enterprise customers with strong developer-led mindsets and aggressive digital transformation roadmaps.