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Zendesk Inc (NYSE:ZEN)
Q1 2020 Earnings Call
Apr 30, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Zendesk Q1 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Marc Cabi. Thank you. Please go ahead, sir.

Marc Cabi -- Vice President, Investor Relations

Thank you, David. Welcome to our first quarter 2020 earnings call. We're doing it virtually from our homes today, and we're pleased to report our results. Joining me on the call today are Mikkel Svane, our Founder, CEO and Chair of the Board and Elena Gomez, our Chief Financial Officer.

During the course of today's call, we may make forward-looking statements such as statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers and ability to compete effectively. The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2019, and our upcoming quarterly report on Form 10-Q for the quarter ended March 31, 2020. 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 but not as a substitute or in isolation from our GAAP results. You can find additional disclosures regarding these non-GAAP financial measures, including the reconciliations with comparable GAAP financial measures in today's press release, in the shareholder letter and for certain non-GAAP financial measures for prior periods, in the earnings press releases of those such prior periods. All of those are available on our investor website.

With this intro, I'm going to turn the call over to Mikkel.

Mikkel Svane -- Chief Executive Officer, Founder

Okay. Thanks so much, Marc. I hope I come through here clear and loudly. I asked the team to -- if we could do this earnings call by Zoom, but apparently not. I thought that would have been very appropriate. This is how we spend most of our days now, in meetings over Zoom. So inviting our shareholders and inviting our investors into our home offices would have been great.

Anyway, I can't start what I say but, of course, the world has changed dramatically since we last talked. The pandemic has disrupted daily life, ours and everyone in the world, and created a lot of uncertainty for every single business out there.

We focused [Indecipherable] on immediately responding to the crisis and, of course, planning for the future in this new world. We initially responded by doubling our -- increase of calls, helping our customers and helping our communities through this disruption. We moved immediately to remote work globally within a few days. We assembled a customer response team to help customer manage big shifts in their customer service needs and in their business challenges. And we also launched a [Technical Issues]. So we ramped up non-profit access to each of our products and expertise aid in multiple kind of recovery efforts. We also have a number of partners to help us with these initiatives.

I think what's been most impressive is seeing our customers respond. It's more important now than ever that for companies to connect with their customers globally and across the channels that customers are expecting to use today. So we've seen a rise in customer service volumes from many of our customers, some dramatic rises for a large segment of our customers. We've also seen much more reliance on self-service, on automated detection and an increase in messaging and chat conversations. We have many examples, a lot of them are in the shareholder letter, but, like, one customer is trying WhatsApp chatbots through our Sunshine platform that help people self-diagnose COVID-19 symptoms. We have another customer that has deployed self-service for government track-and-trace applications. And our call center product, our voice product is helping multiple healthcare providers managing medical conversation to healthcare. So a lot of activities, and we've really been on the forefront of trying to help our customers coping with this new situation.

We're still in the early days, and I'm convinced we are not going to go back to business as usual anytime soon. We expect and we are preparing for a financial impact in the near and the medium term to ourselves, of course, but to the world around us. But we also believe that where the world is going through this tragic pandemic is also where Zendesk excels. Companies will see profit time-to-value in their investments. They're not going to draw out -- they're not going to deal with drawn out implementations, complicated products and, like, very slow time-to-value. This truly play to our strengths, and we could see that in the response in the market. We play to our strengths of being simple to do business with being easy to use and delivering very fast results. So we plan to double down on these strengths, to come out of the pandemic in an even stronger position, helping businesses all over the world respond to their customers in the most convenient and most easy way.

Before I'm going to turn it over to Elena, I want to thank all our customers. We have customers across more than 160,000 paid accounts. I want to thank every single one of them for trusting us. We're doing everything we can to help you because we know that you, our customers, you are the key to our success. I also want to say that, most importantly, we are, of course, super grateful for the healthcare professionals, the first responders, [Indecipherable] workers out there and especially, of course, the healthcare professionals, first responders, etc., in our own families, in our own neighborhoods, in our own communities. So thank you to all of you for keeping everything going and allowing Zendesk also to continue to operate and continue to excel. So thank you.

And with that, Elena, I want to turn it over to you.

Elena Gomez -- Chief Financial Officer

All right. Thanks, Mikkel. I'm going to discuss a few Q1 highlights and how we're managing Zendesk through the current economic crisis, setting us on a path to emerge as a stronger business.

In the first quarter, our revenue increased 31% year-over-year. Revenue growth in every region exceeded 30% as we're making good progress on our international leadership initiatives. Also proud to say our new Head of EMEA Sales started in April. GAAP gross margin for the first quarter was 74.9%, up 560 basis points year-over-year. Non-GAAP gross margin was 78.3%, up 480 basis points year-over-year. Gross margin improvement was driven largely by customer success initiatives and plant optimization. GAAP operating margin for the quarter improved 680 basis points, and non-GAAP operating margin improved 360 basis points. This includes $6.5 million expense consisting of a one-time stipend for our employees as they transitioned to working from home. The additional costs arising from cancellation of our flagship conference, Relate, and increased bad debt expense driven by customer collection concerns due to COVID-19. Operating cash flow in the first quarter was negative $2.6 million.

Free cash flow in the first quarter was negative $15.6 million. Free cash flow was impacted by the amount and timing of bookings, our partnering with customers facing business challenges in light of COVID-19 and the implementation of our new procedure to invoice customers on their renewal date instead of 30 days prior. This new policy started on March 1, and the cash flow related to those invoices will impact Q1 and Q2. Free cash flow was also impacted by the timing of vendor payments.

And now quickly on our strategy moving forward and our view on our outlook. As you're well aware, COVID-19 has caused massive global disruption. We're carefully monitoring leading indicators and performing scenario planning to help inform our forecasts and plans, including demand generation, conversion, pace of booking, churn and contraction and product usage. We believe in the fundamental strength of our business model and the resiliency of our customer base. We have important and valued customers in industries that are facing significant pressure, including airlines, retail, ridesharing, and travel and hospitality. But overall, our book of business is highly diversified and includes many customers in industries that are doing well in this environment, including computer software and services, e-commerce and learning platforms and remote conferencing.

Our future financial performance will undoubtedly be impacted by the global economic crisis that has emerged. Starting at the end of Q1, we began to see higher trend of contraction among our smaller customers. That trend has continued early in Q2, and while we expect that to improve as economies begin to revive, we expect it to still outpace historical trends. We're also partnering with our larger customers who are undergoing business challenges to help them with modified invoicing and subscription terms. This will have a near and intermediate impact on our business, but we believe absolutely in the principle of protecting and partnering with our customer base, and this will be the foundation of our long-term growth.

As you would expect, we are carefully monitoring our operating expenses in light of the economic crisis. While our balance sheet is and will remain strong, we are committed to managing our expenses in line with revenue expectations. To that end, we have already implemented substantial expense saving measures, including a reduction in our hiring plan that we expect to yield savings over the course of 2020.

Given the macro uncertainty, we are withdrawing our full year 2020 financial guidance. We are, however, providing Q2 guidance to give you the best insight into the quarter ending June 30, 2020. At the midpoint, our Q2 revenue guidance reflects 23% year-over-year growth. Embedded in our operating income guidance is approximately $8 million of COVID-related expense, including continuing support of our employees working from home and bad debt expense.

We are in a good position to weather this crisis and emerge as a better, stronger Company. Our customer experience solutions are even more relevant in this new environment. We are confident in this. We have a strong balance sheet, diverse customer base, and a compelling subscription-based business model. We are in a position to invest, and we are continuing to invest in our product platform and go-to-market initiatives and infrastructure. These investments are focused to ensure we exit this crisis with strength.

Thank you to all of our customers and all of our employees. I'll turn it back over to Marc.

Marc Cabi -- Vice President, Investor Relations

Thanks, Elena. David, we're ready to begin the Q&A session.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Phil Winslow with Wells Fargo. Your line is open.

Philip Winslow -- Wells Fargo Securities -- Analyst

Hey, thanks guys for taking my question and glad to hear that you all are well and hope the same is true for your families. A question for Elena. Obviously, you flagged some factors here that will impact reported billings. Obviously, you already flagged the change in invoicing last quarter, but also just the change in invoice and subscription terms due to COVID. Wondering if you could help us unpack that because, obviously, if we take the change in short-term RPO, add that to revenue, it looked like the short-term RPO bookings number is up 34%. So wondering if you could kind of help us unpack as far as what the impact was in Q1 and how you think about those going forward? And then just one quick follow-up.

Elena Gomez -- Chief Financial Officer

Yeah, sure. Sure. So first of all, we're really encouraged by RPO overall. It just demonstrates the commitment of our customers, our enterprise and commercial customers to do business with us. But the other more important thing we're seeing is shorter invoice durations even from some of our larger customers. So that's really what's driving that sort of difference between RPO and billing. That was your question, right?

Philip Winslow -- Wells Fargo Securities -- Analyst

Yeah. Maybe help us kind of maybe think about the impact there, that delta. So what's coming from where? Yeah. So, how much is the 30-day later invoicing versus, call it, the COVID-related changes?

Elena Gomez -- Chief Financial Officer

We're not going to share the impact of the billings, but I can tell you that it's going to impact us over two quarters.

Philip Winslow -- Wells Fargo Securities -- Analyst

Got it. And then just a follow-up for Mikkel. Obviously, you talked about working with your customers. One of the things that Zendesk has been known for has been an extremely high renewal rate. What do you have in place to maybe reach out to customers early that are potentially an impact to verticals, kind of work with them and sort of on a sort of front-footed versus waiting for the renewal?

Mikkel Svane -- Chief Executive Officer, Founder

I mean that's a really good question. We are being really proactive with our customers and try to help them through this situation. And so that they also -- so we can help them come out on the other side stronger, too. And like I could just say that we are still very proud about our renewal rate, but we are helping customers in any other aspect that we can, of course. Does that make sense?

Philip Winslow -- Wells Fargo Securities -- Analyst

Got it. Thank and stay safe.

Operator

Your next question comes from the line of Ken Wong with Guggenheim Securities. Your line is open.

Ken Wong -- Guggenheim Securities -- Analyst

Great. I wanted to touch a little bit on what Phil was asking earlier. Perhaps just on the larger customers you mentioned, I think we understand the adjusting invoicing, but in terms of subscription terms, what does that look like? Is that a temporary price reduction? Is that dialing back on maybe multiyear commitments? Help us understand kind of what you guys are doing there to bridge the gap.

Elena Gomez -- Chief Financial Officer

Yeah. So it's really we're -- it's unique to different customers. Some of them want extended payment terms, some of them want perhaps a one-time discount. It's all different flavors. The important thing is we're trying to retain and do everything we can to be -- show empathy and make sure that we keep these customers for the long haul.

Ken Wong -- Guggenheim Securities -- Analyst

Got it. And then maybe one follow-up. In the prepared remarks, you guys touched on kind of going through a variety of scenarios. Any color on how you guys are bookending those scenarios in terms of potential best and worst-case outcome for kind of magnitude and duration of the -- this impact?

Elena Gomez -- Chief Financial Officer

Yeah. No, we're running various scenarios. We even started with a quick recovery, which we all appreciate that has not happened. But without being an economist, I think we're basically evaluating a couple of scenarios. One, which is a longer recovery into 2020; and another one, which is a longer recovery into 2021. That's sort of the time frame we're thinking about. But I just want to make sure to clarify, it's a super fluid situation and continues to evolve.

Ken Wong -- Guggenheim Securities -- Analyst

Great. Thanks a lot.

Operator

Your next question comes from the line of Kirk Materne with Evercore ISI. Your line is open.

Kirk Materne -- Evercore ISI -- Analyst

Yes. Thanks very much. I was wondering, Mikkel, if you could just talk about sort of the need to sort of thread the needle these days with managing expenses but not want to sort of shift the car into neutral per se. Meaning, obviously, the beauty of a SaaS model is that you don't feel it sort of as much on the upfront, but a year from now when things are clearing up, if you don't make investments in, say, sales and R&D today, it takes you a little bit longer to sort of get back into motion. So how are you thinking about that in terms of just balancing that? And I don't know -- I'm sure Elena has some thoughts on that. But I'd be just kind of curious about how you think about hiring and those kind of things in this kind of environment. Thanks.

Mikkel Svane -- Chief Executive Officer, Founder

If I'm starting, what we -- one of the principles we started out with in our response to this is that we need to make the organization very, very agile. Like -- and that means that, like, really focus on things with true impact and kind of there are some other things where we can kind of -- where we don't need to give things the same progress. It's exactly to give the organization agility so we can quickly scale up and down given kind of the conditions in the market. I think that's very important because, as you say, as you know, it's a very fluid situation. It's a very volatile market, and we have to constantly adapt to kind of what we see and the signals we're getting from everywhere in the world.

So we are really focusing on giving the organization as much agility as possible, so we can be very fluid in our motions and accelerate investments where we think it makes sense, but also be ready to move those investments over to other areas. Does that make sense?

Kirk Materne -- Evercore ISI -- Analyst

Yes, it does. Thanks very much.

Mikkel Svane -- Chief Executive Officer, Founder

All right. Elena, do you want to add anything?

Elena Gomez -- Chief Financial Officer

Yes. No, I think you covered it, Mikkel. I think the key is obviously, we are benefiting from some of the natural savings we have. No one in our employee base is traveling, so we get some of that natural tailwind. And then we're -- as we're looking at hiring, we're making sure we're putting those hires into areas that will drive -- will position us for strength as we come out of this. And then the last thing I would say is we were really good at hiring sales in Q1, so I'm not super worried about what I have in terms of quota on the street. So we feel good about that.

Kirk Materne -- Evercore ISI -- Analyst

That's very helpful. Thanks a lot.

Operator

Your next question comes from the line of Samad Samana with Jefferies. Your line is open.

Samad Samana -- Jefferies -- Analyst

Hi, good evening and thanks for taking my questions. I hope everybody is staying safe and doing as well as you can in this environment. First, maybe one for you, Mikkel. On Sunshine, that was obviously a big release and Relate was moved to virtual. I'm just curious if you've seen any unique use cases during COVID? And if customers are still adopting Sunshine or how we should think about maybe the ramp cycle for Sunshine? And then I have a follow-up.

Mikkel Svane -- Chief Executive Officer, Founder

Yeah, we definitely continue to see demand for the Sunshine platform. We are also trying to really help our customers making it much faster for them to use Sunshine, and we have some really good capabilities and features there and some really good interesting things in our road map. Because that's definitely what our customers need right now, quick solutions, they need time to value very, very quickly. And so some of the -- I would say, some of the things we've seen outside of the U.S., we really see that in the U.S. now like this really time -- the focus on time-to-value and having very agile platforms, and we are helping customers see that potential and see that value and such.

The conversation platform that is part of Sunshine has really seen very, very strong demand. Like this is definitely a point in time where everybody sees the potential in better using these messaging channels over traditional, much more convenient for us as consumers in platform rather than having to sit on the phone waiting for a long time or these very asynchronous conversations over email. Like this kind of very intimate relation, this very intimate conversation that works on your terms has turned out to be very, very convenient for the environment right now. And we're seeing uptake of that, and really believe that this is a uptime for the business relevancy of the messaging platforms.

Samad Samana -- Jefferies -- Analyst

That's helpful. And then, Elena, maybe as I think about the framework for 2Q guidance, it's -- 24% is impressive, all things considered, what's going on. I guess, I'm curious, when you think about the slight slowdown, how much of that is as a result of gross retention declining versus less new bookings activity? Can you maybe parse out those two factors?

Elena Gomez -- Chief Financial Officer

Yeah. I would definitely. I think the -- I would say it's more oriented to the contraction we're seeing in our business, which continues to be very fluid. But that's definitely a key part of what's included in that guidance. And so I would orient it more to that.

Samad Samana -- Jefferies -- Analyst

Okay. I...

Elena Gomez -- Chief Financial Officer

Go ahead.

Samad Samana -- Jefferies -- Analyst

Great. Sorry, I was going to say I apologize, I'm going to squeeze a third one in and then just as a follow-up. So when you think about new bookings activity, is that more with your -- with larger customers or with smaller customers? Just trying to think about where new business activity is still happening. Thanks again for taking my questions.

Elena Gomez -- Chief Financial Officer

I think you're seeing -- we're seeing new business across different segments, really. We're seeing some larger customers that want something up and running very quickly, and we're seeing still the usual self-service. I wouldn't say that it's not been impacted by COVID. Definitely, some of our really large customers may say, I need a little bit more time, I need to double-click before I commit. But the new business is coming in from different segments as well as, as always, the expansion of our existing customers is a big driver of bookings for us.

Operator

Your next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia -- William Blair & Company -- Analyst

Hello guys, thanks for taking my questions. First, on the go-to market, I was wondering if you could maybe just walk through how that strategy has shifted to kind of adapt to this environment. What are you doing from a multigen perspective? Are you leading with perhaps different products where customers see maybe a faster time-to-value where they more need? And then to pack on to that, do you think this kind of coming out of this environment, it will accelerate your new upmarket as SMBs become a little bit more cash-strapped? I know you've been going in that direction a while, but some color there would be great.

Mikkel Svane -- Chief Executive Officer, Founder

Yeah. So let me give a short answer to that. So I would say that like we definitely, like, we definitely double down on our unique strengths. And that is that we can -- we think there's large complex organizations up and running very, very quickly, and we can give them, like, we can decrease their time-to-value and really help them get results out of the gates. And that is incredibly relevant right now, like some of our largest deals -- larger deals, these days have very short cycles and customers basically almost up and running before we have negotiated the deal.

So, like, we definitely kind of -- we're definitely responding to the environment. And, like, we definitely focus on the qualities that are -- that have always been part of our vocabulary that is really, really relevant right now. And we believe that these things are going to -- these things are going to define the business, the future business coming through. We're not going to have time for all these big complicated anchors in our IT infrastructure. We need to be more agile as a -- not just in our IT systems, but as a population to come probably through this and to make sure we can get the economy up and running again and to make sure that we can come out of this stronger, not just as companies but as a population, as a world. And, like, Zendesk is 100% behind this. So we believe that, that's where we need to bring the world. So we don't hold each other back, and so we can act quickly, so we can be agile, so we can keep up and live up to the expectations of the world around us and our customers have to us. Makes sense?

Arjun Bhatia -- William Blair & Company -- Analyst

Yeah. That's very helpful. And, Elena, a quick follow-up for you. I remember reading the shareholder letter that interactions are increasing and volumes are increasing and people are maybe scaling up their service operations. One of the things I want to ask on that, and I know a portion of your business is usage-based, and it might be small, but answer that in conversations will turn that category on. I'm wondering, are you seeing a revenue impact from that? Or is that not where the core usage increase is coming in?

Elena Gomez -- Chief Financial Officer

Actually, what's interesting is we're seeing some customers increase their usage during this time, to be honest. So we're seeing both, but we're really seeing -- encouraged by seeing some customers who actually are needing Zendesk more and increasing their usage. So it's not -- I'm not seeing a dampening as much there. I would say in our Proserve revenue, to the extent they're attached to very large enterprise deals, that's definitely a place we're paying attention to because that has slowed a little bit. But in terms of our usage, I would say it's quite the contrary, we're actually seeing more uptake.

Arjun Bhatia -- William Blair & Company -- Analyst

Got it. Thank you for taking my questions.

Operator

Your next question comes from the line of Alex Zukin with RBC Capital Markets. Your line is open.

Alex Zukin -- RBC Capital Markets -- Analyst

Hey guys. Thanks for taking my questions and I'm glad to hear you're staying safe. Maybe just a couple. Elena, maybe can you talk on what -- go through maybe the exposure that you guys see to have to troubled sectors versus healthier sectors of the economy? If you can give us a sizing. Is it 20% of the business? Is it 50% of the business? And then I got a quick follow-up.

Elena Gomez -- Chief Financial Officer

Yeah. When we look at our numbers, if you include all of the typical ones people talk about, whether it's travel, rideshare, I'm forgetting some, Marc, keep me on -- some what they are, but it's in that 20% range for us. And it's across all of our -- it's across all of our segments, too. It's not just in the SMB or in our price. It's really across -- when I say that, it's across our entire book of business.

Alex Zukin -- RBC Capital Markets -- Analyst

Understood. And I guess, so if you could help us understand where you're seeing most of the degradation in the -- not maybe the dollar renewal rate or is it in the SMB part? Is it in the enterprise? And if you can help us understand where those rates are trending because on the one hand, it sounds like current RPO bookings or billings is a better grade of kind of some of that new ACV behavior versus billings, but yet you're pulling the guidance. So I just want to understand, is it the retention or the churn spike that's driving that or -- so if you could help us understand that.

Elena Gomez -- Chief Financial Officer

Yeah. I mean, it's a fair question, Alex. As you know, the market conditions are super volatile and fluid. I think the key for me, as I was setting guidance, was really thinking about the contraction we're seeing in our customer base and just being thoughtful about that. But the impact we're seeing in terms of the highly impacted industries across both SMB and enterprise, it's not only SMB customers. But the contraction we're seeing, like I said, is mostly oriented to these highly impacted industries.

Marc Cabi -- Vice President, Investor Relations

Yeah. Alex, let me -- yes, I just want to clarify that most of that is contraction oriented. You think about many travel-related companies, they have -- their business is down 80% or more sometimes. And so we've been working with those customers to make sure that we can keep them in a place where they come back to us when travel conditions and hospitality industry conditions come back.

Alex Zukin -- RBC Capital Markets -- Analyst

Understood. And maybe just I could sneak one more in. Can you talk about -- I mean, contractually, are these customers with multiyear contracts that you're proactively going in and changing their contracts? Or how is that working exactly? Is that on renewal?

Marc Cabi -- Vice President, Investor Relations

Alex, on the shareholder letter, you'll see that we made a statement. There are times where we will work with companies on their subscription terms to help them manage through this period, especially if they're in one of those heavily impacted industries.

Alex Zukin -- RBC Capital Markets -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Chris Merwin with Goldman Sachs. Your line is open.

Christopher Merwin -- Goldman Sachs -- Analyst

Thanks so much for taking my question. I just wanted to ask about the product portfolio. And particularly, I guess, in these conditions, where are you seeing more resilient demand? Is it in core support, just given the importance of companies engaging with customers sometimes through online channels for the very first time, or maybe with analytics as customers try to think through some new challenges they're facing. Just curious in general, where you've been positively surprised with the resilience of certain products and perhaps other areas where it's been more of a temporary challenge.

Mikkel Svane -- Chief Executive Officer, Founder

I think it's a little bit across the board. And I would say that, like, if you look at a quarter like this, like, there's too many different signals for us to point anything out. I do want to say that, like, one of the overall trends that we've seen and that it's truly being accelerated right now is the adoption of kind of the newer messaging-oriented channels. That has turned out to be very convenient for a lot of customers. It's very convenient for a lot of, like, end users/consumers. So this is definitely where we see this -- we definitely see a trend there. But like overall, like there's interest for our products across the board.

Christopher Merwin -- Goldman Sachs -- Analyst

Great. Thank you. And just one quick follow-up on RPO. Obviously, sort of been asked about the RPO growth -- or current RPO growth, which is really strong. Long-term RPO growth decelerated a little bit, still a very strong growth rate and was up a little bit sequentially. I mean, anything you can say just about the divergence in trend for those current and long-term RPO?

Elena Gomez -- Chief Financial Officer

So we're -- I mean, we're really encouraged by our RPO and really proud of it, especially in this time. I mean I think the fact that customers are still continuing to commit to us is something we're encouraged by for multiyear contracts, and we're seeing that even during this sort of stressful COVID time. So I think it's important to be proud of that for us, and I think that it's a testament to what the sales organization has done in terms of making sure they share the full value of Zendesk. So I'm pretty proud of that, I think, in terms of how it relates to billing and so on. I think it really goes back to during the time we're also working with customers to make sure that if they need different payment terms, etc., we're really helping them through that. And this is coming from even larger customers.

Christopher Merwin -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

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

Stan Zlotsky -- Morgan Stanley -- Analyst

Hey guys, thank you so much for taking my questions. And I hope everybody is staying safe and healthy obviously. Maybe just help us characterize what you're seeing through the first, let's call it, four weeks of the current quarter and what you're seeing through April. Because obviously, I'm sure March -- end of March was pretty terrible. But what are you seeing quarter-to-date? And then I have a quick follow-up.

Elena Gomez -- Chief Financial Officer

Yeah. So we're -- like I said on the script, we're still seeing contraction, mostly, especially with our SMB customers. I'm encouraged that we're not seeing as much churn but more contraction, and I think that's really an important sign for us because we believe as the economy comes back, we'll start to see some of these customers come back. And I think we talked about it earlier, but also a lot of that is coming from customers in these industries that are -- that have -- that are highly distressed at the moment. And so we're really trying to work with them. We'll see -- I mean, we're looking at these signals daily, weekly. And if that changes, obviously, that would be a positive. But right now, we're seeing still the same kind of tone we saw the late part of March into early April.

Stan Zlotsky -- Morgan Stanley -- Analyst

Okay. Perfect. And then maybe just to change the tone a little bit because there's so much negativity overall. Looking at the positives, right? So you guys are giving away this remote working bundle and you're also giving away the product to start-ups working on COVID-19. Could there be -- when we are all coming out in the other end of this, an increased uptake of things like the Explore product or maybe just a greater adoption of Zendesk within some of these newer start-ups popping up that we could start to see the benefits as we get into maybe the second half of the year and into 2021.

Mikkel Svane -- Chief Executive Officer, Founder

Well, maybe let me answer or try to answer here. I don't want to -- I want to be very realistic about the situation we are in, the uncertainty in the market and uncertainty about the global market. But we -- and we have kind of been very humble to what's going on with our customers and the situation they're in right now, because it's, of course, everyone that are impacted. But I do want to say that we believe that we, as a Company, we have a responsibility to kind of help customers through this and come out strong on the other side. And that also -- we're doing that because we want to invest in our relationship and our trust with these companies. And we have, as a business, we've always been the kind of Company that got up every morning and tried to earn the trust of all of our customers. And this is a defining moment for us in the churn that we can really do that. And that will, without speculating in the future here, that will lead to -- from -- our belief is that will lead to better customer relationships and more trust in us and in our products and understanding of the value that our products bring to their businesses. So high level, yes, you're right, even though that we are not trying to take advantage of a bad situation there. Does that make sense, Stan?

Stan Zlotsky -- Morgan Stanley -- Analyst

Yes, of course. It makes a lot of sense. All right. Thank you so much.

Mikkel Svane -- Chief Executive Officer, Founder

Thank you.

Operator

Your next question comes from the line of Brad Sills with BofA Securities. Your line is open.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Hey guys. Thanks for taking my question. I wanted to ask about net revenue retention held in that kind of 115 million [Phonetic] level this quarter. And I'm hearing that there's some increased activity at customers, which could lead to more seats, I would imagine. But on the other hand, you're seeing obviously contraction in other areas of the business. So I guess what's your expectation or what have you seen even in the first month here or the quarter with regard to net revenue retention, kind of on the gross side and then the upsell? And where do you think that could trend over the year?

Elena Gomez -- Chief Financial Officer

So I won't comment on the full year because obviously, because the situation is so fluid. But consistent with what I've just talked about, we're definitely seeing contraction across these industries where we have -- we're seeing distress. The pace of our bookings is a -- in start of the quarter is pacing OK, but I think we obviously look at everything holistically. And so we have to look at those together, and right now, we're seeing contraction. That said, this could change very quickly. As quickly as it came, it could change. And so I don't want to predict what this will be but we factored what the trend will be for the full quarter, but we took all of that into consideration in our guidance.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Got it. Thanks very much. And then just one on the global SI channel. I know that was a big -- that was increasing focus here in developing some of these global SI partnerships. How does the situation impact that? I know that you mentioned that some of the bigger expand deals, you've seen a little bit of a pause there. I assume that's focused a lot in the global SI channel. Just any update on how that's progressing in the midst of all this. Thank you.

Mikkel Svane -- Chief Executive Officer, Founder

We -- sorry, [Indecipherable] there. Like partners -- partners' improvement to be a really, really important part of our ecosystem. And they're going to continue to be an increasingly important part of the ecosystem. What kind of partners, like -- it's not like the big global SIs that are the most agile right now. But, like, I think they will also accommodate to the new world order and be better at that. But, like, our partners is a big part of our ecosystem. And, Marc, you maybe want to add some color on global SI?

Marc Cabi -- Vice President, Investor Relations

Yeah. I think, Brad, our partners will be an important part of our ecosystem. In this most recent quarter, we actually saw some partners bring in these quick-win deals where companies were looking to make adaptations to what they were doing, and we were able to serve that. And so I think in the near term, that's what you should expect from our partner activity. And then as market conditions improve, we have a product, I think, that people will want to work with over time.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Thanks guys.

Operator

Your next question comes from the line of Steve Koenig with Wedbush Securities. Your line is open.

Steve Koenig -- Wedbush Securities -- Analyst

Hey. Thanks for taking my question. You talked a little bit about the impact to your financials. You're expecting it to be over the short and medium term. You're obviously appropriately uncertain because the environment is uncertain. I'd like to try to understand a little better, though, how the contraction plays out with respect to the mechanics of your billings terms and your total contract duration. So if I have it right, I know that you've got a mix of shorter than annual and even some multiyear contracts in your billings terms have been moving more toward annual, I think, with the goal of getting 70% annual. Does the contraction happen only when a customer renews? Or is it happening? Are they asking for concessions when a bill hits them, and you can't collect? And then does this -- is this going to extend into multiyear contracts as well? So kind of help me understand how that plays out with respect to these contracts getting renewed and the billings period as well.

Elena Gomez -- Chief Financial Officer

Yeah. So if I understand -- that's a complex question, but I think if I understand you correctly, you're asking when do these contractions happen? Do they happen with renewal? Or do they happen off-cycle? And so it's important to understand we have both annual and monthly customers, obviously. And so a monthly customer theoretically could every month renew. But some of it is happening off cycle. But typically, you're seeing it -- and it depends on the size of the customer. The customers that have annual contracts, if they're in a distressed industry, there may be a handful of those that are coming before their renewal to look for different payment terms. In other cases, it's at renewal. So it's a little bit of both. It's not one or the other.

Steve Koenig -- Wedbush Securities -- Analyst

And just a quick follow-up, Elena. When you do have some multiyear contracts, I believe, and would you expect that the concessions you're granting them then stabilize when you get to another year of the contract? Or could -- is medium term, could it be longer than a year? Or does it just totally depend on the environment?

Elena Gomez -- Chief Financial Officer

It depends on the environment, it depends on the customer and what their needs are. They -- with larger customers, everyone's needs are a little different in terms of their cash position and whatnot. But we're trying to think about what does this customer look like over the long haul, over a multiyear contract. We're trying to avoid, obviously, changing contract terms. That's something we prefer not to do, but rather really think about how can we help them in the short and intermediate term so that when they come out of it as they grow, then we're back in a good position with them.

Steve Koenig -- Wedbush Securities -- Analyst

Got it. Okay, great. Thank you very much.

Elena Gomez -- Chief Financial Officer

Sure.

Operator

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

Andrew Sherman -- Cowen and Company -- Analyst

Great. Thanks. It's Andrew on for Derrick. Hope you're all well. You locked down business travel pretty early in the COVID cycle. Any color on how this has affected close rates and rep behavior and how are reps adjusting to selling virtually?

Elena Gomez -- Chief Financial Officer

I've actually been really encouraged and impressed with our sales team and actually with all of our employees to pivot almost overnight to working from home. And Zendesk time-to-value and all the things that we talk about, I think, will do well in this environment. I don't see that necessarily being challenged. Unless it's a really huge deal, of course, some of that is potentially slipping, but not in a material way. I think we can still do business and continue to close deals, and we've proven that in Q1 and continuing to prove that through Q2 in a virtual environment.

Andrew Sherman -- Cowen and Company -- Analyst

Great. And then, Elena, maybe what percentage of your revenue or billings come from new versus existing customers? And what are you assuming around growth in each cohort for the year?

Elena Gomez -- Chief Financial Officer

So we don't really give distinct -- we don't break out our bookings or billings between new and expansion. But obviously, the expansion motion is a big part of our growth. And then you guys know that is looking at our net expansion rate but we are continuing to deliver on both new and expansion bookings, but we don't break those out.

Andrew Sherman -- Cowen and Company -- Analyst

Great. Thanks. Take care.

Operator

[Operator Instructions] Your next question comes from the line of Jeff Van Rhee with Craig-Hallum. Your line is open.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Great. Thanks. Just a couple for me. I think from a geographic standpoint, can you just talk to, I guess, two aspects. Churn variance by geography, if you've noticed any. And then also within the selling motion, the ability to get cycles over the finish line, if you will. Maybe just talk to things sort of through the geographic lens, if you can call out any notable differences.

Elena Gomez -- Chief Financial Officer

We haven't. So in terms of contraction, I haven't noticed any particular churn that's such an outlier that, that's something we would mention here. But of course, every region is experiencing this differently, so we may see pockets of countries come back sooner than others. We're paying attention to that, but I wouldn't say that there's a stark complete difference between, say, America or EMEA or APAC at this point.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Okay. And then on the cycles, I think Mikkel called out some -- you've seen some urgency, some cycles have been fairly large and come in with great urgency. When you look at the deals that have come in with urgency, what's the makeup of the deals in terms of what feature function capabilities they were most focused on? What were the drivers there?

Mikkel Svane -- Chief Executive Officer, Founder

I think there was a similar question on that before. It's really across the board here. Like it's really about ensuring that the business can engage or respond to the customers, to their communities, to their stakeholders. And as I said earlier, we definitely see a drive toward, like, more like the messaging and chat channels over the traditional channels. But really the demand is across the board and even across some higher sales products, the demand is across the board.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Yeah. Good enough. Okay, great. Thank you.

Operator

Your next question comes from the line of Jennifer Lowe with UBS. Your line is open.

Jennifer Swanson Lowe -- UBS -- Analyst

Great. Thank you. I wanted to, Elena, just to circle back quickly to hit on some of the things that have kind of gotten discussed earlier. As we're talking about some of the adjustments and the concessions that are being made to customers to help them through challenging times, is it fair to think that, that will be a billings impact, but shouldn't be something that affects RPO or CRPO? Or could it be CRPO, but not an RPO impact? Can you just help us understand sort of what's cash versus contract?

Elena Gomez -- Chief Financial Officer

Yeah. I mean, I think most of the orientation has been on payment terms so far, but it's early to tell. We're still going through and talking to customers actively but I can definitely say that payment terms has been a big topic with customers. I'm not going to say that we won't change contract terms, but definitely, the orientation has been payment term. And in some cases, as customers are needing fewer agents in this time, we're seeing that come through. But the flip side is we expect that to come back as the economy starts to revive.

Jennifer Swanson Lowe -- UBS -- Analyst

Great. And then just looking at the puts and takes on billings in the quarter. And again, you mentioned there was the invoicing change, there's the payment concessions. I think you said that you expect this to last for two quarters. But just thinking of sort of the magnitude there because it seems like the invoicing component would be -- the invoicing change would be relatively contained in Q1 as kind of a onetime event. Would you expect a similar degree of headwinds in Q2 billings? Just any kind of qualification there would be helpful as we try to think about what...

Elena Gomez -- Chief Financial Officer

Sure. Look, I think the one thing to just think about is even though we bill, we don't always -- so the billing impact is we effectively had two months of billings instead of three. So that's sort of the impact there. What I mean is we should expect cash flow for Q2 to have that same impact as well, simply because, obviously, we're collecting some of that billing in Q2. That makes sense?

Jennifer Swanson Lowe -- UBS -- Analyst

Yeah, that makes sense. Great. Thank you.

Operator

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

Marc Cabi -- Vice President, Investor Relations

Well, we'd like to thank you for joining us on our virtual call. And we will look forward to speaking to you next quarter. Have a great day and stay safe.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Marc Cabi -- Vice President, Investor Relations

Mikkel Svane -- Chief Executive Officer, Founder

Elena Gomez -- Chief Financial Officer

Philip Winslow -- Wells Fargo Securities -- Analyst

Ken Wong -- Guggenheim Securities -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Samad Samana -- Jefferies -- Analyst

Arjun Bhatia -- William Blair & Company -- Analyst

Alex Zukin -- RBC Capital Markets -- Analyst

Christopher Merwin -- Goldman Sachs -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

Andrew Sherman -- Cowen and Company -- Analyst

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Jennifer Swanson Lowe -- UBS -- Analyst

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