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Zendesk Inc (NYSE:ZEN)
Q3 2020 Earnings Call
Oct 29, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Marc Cabi -- Vice President of Investor Relations

All right. Good afternoon, everybody. It's Marc Cabi and welcome to our Third Quarter 2020 Earnings Call. We are pleased to report our results. Joining me on our call today, Mikkel Svane, Founder, CEO and Chair of the Board, as well as 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 our ability to compete effectively.

The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the Risk 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 September 30, 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, not as a substitute or used in isolation from our GAAP financial information. You can find additional disclosures regarding these non-GAAP financial measures, including reconciliation with the comparable GAAP financial measures in today's earnings press release and shareholder letter, and for certain non-GAAP financial measures for prior period, in the earnings press releases for such prior periods. All of which are in -- on our website, Investor website.

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

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Thank you for this thrilling introduction. Thank you so much, Marc, and thanks everybody for joining us, I know it's a super busy earnings day, so we all appreciate you spending your precious time with us here in our living rooms.

So we entered our last quarter of the year with momentum on our side. In the third quarter, we turned the corner on the biggest impacts to our business in COVID-19. Our new business growth continued as churn returned to pre-pandemic levels. Our expansion business too returned to strong growth as our contraction trended closer to pre-pandemic levels too. All of these trends set us up well for the rest of the year. I'm particularly happy that we crossed the $1 billion annual revenue run rate during this third quarter and also that we are guiding to exceed our $1 billion revenue target for the full-year. This is of course a journey we've been on, since 2016, when we first that -- said that is inspiration.

While we are very pleased with our results, we also remain cautious. Our customers in challenged industries are still recovering and we know that a resurgence in cases and the return of restrictions can very well make the situation worse for many of them. Through all the challenges this year you will -- though, it has been very gratifying to see how our products, how our solutions are helping customers, helping businesses adapt and react so quickly to the -- very quickly changing conditions. We see so many examples of companies quickly adopting and working through this crisis using our tools too, with grit and perseverance. So a big thank you to all our customers for trusting us as their partners through this. We will continue to do everything that we can to keep you fast, keep you agile and keep you smart in your customer engagement.

And before I turn it over to Elena with all the numbers, I'm going to say a big thank you to all our employees, 4,000 of them, sitting at home. I know many of you are listening to this call. Just want to use this opportunity to say thank you for your sacrifice and for everything you do in your grit in this pandemic and as we are working away through this. So, thanks everyone.

And with that, over to you, Elena.

Elena Gomez -- Chief Financial Officer

Thanks, Mikkel. Thank you everyone for spending time with us, I am coming to you from my basement, best Internet reception. Anyway, in this dynamic pandemic environment, the momentum and resilience of our business is showing. We're on track to exceed our objective to be a $1 billion company and provide full-year guidance that reflects 25% year-over-year growth at the midpoint, which demonstrates the strength of our business model. Now more than ever, we are seeing companies want solutions with quick time-to-value, which we are well-positioned to deliver.

Third quarter revenue increased 24% year-over-year and exceeded our expectations. Revenue outperformance was driven by strong demand for our solutions and improved churn and contraction rate during the quarter. We see signs of the initial shock of the pandemic is behind us. Although, we continue to proceed with caution, given the continued uncertainty around the pandemic and economic climate.

Customer churn rate returned to normal levels in the third quarter. Contraction rate significantly improved, but remains elevated, compared to historical trends. We're encouraged that some of the customers that contracted with us in the second quarter expanded in the third quarter.

Our net expansion rate improved to 112% in Q3, up from a 111% in Q2 and continue to be in the healthy range of 110% to 120%. ARR from a 100 plus agency to remain flat at 43% in Q3, compared to prior quarter, given the very strong performance of our SMB business.

Total RPO increased 43% year-over-year. Short-term RPO increased 39% and long-term RPO increased 56% year-over-year. The increase in RPO demonstrates our customers' commitment to partner with us for the long-term. We saw an elevated number of multi-year contracts this quarter, compared to earlier this year.

Now turning to gross margin. GAAP gross margin for the third quarter was 76%, up 4.1 percentage points year-over-year. Non-GAAP gross margin was 78.7%, up 2.8 points year-over-year. Gross margin improvement was driven largely by revenue scale and increased optimization of our personnel costs in our product support organization and efficiency from our hosting infrastructure. GAAP operating margin expanded by 6 percentage points and non-GAAP operating margin expanded by 4.5 percentage points.

Margin improvement was driven largely by revenue outperformance, gross margin expansion, and prudent expense management. Margin also benefited from lower travel and event costs due to the pandemic. Free cash flow was $25 million in the third quarter.

Now let's move on to guidance for Q4. We expect revenues between $274 million and $279 million, representing 20% year-over-year growth at the midpoint. We expect non-GAAP operating income between $16 million and $20 million. For the full-year, we expect revenue between $1.02 billion and $1.025 billion. We expect non-GAAP operating income between $69 million and $73 million.

We expect free cash flow for the full-year 2020 to be approximately $15 million or higher. Free cash flow could be impacted by real estate changes we plan to make, to no longer occupy two of our leased office buildings in San Francisco. We have remaining contractual rent payments of approximately $12 million in additional operating costs related to these buildings, which we may accelerate before March 31, 2021. The impact from these changes has not been included in this guidance since the timing [Indecipherable] and the amount are unknown.

Over the last six months, we have spent a lot of time reimagining how we work. The big part of that conversation focuses on our physical spaces. Our employees have adapted well to remote work and we -- when we do return to the office, we intend for many of our employees to remain remote. We are determining how we can optimize our real estate globally.

Finally, as Mikkel said, I'll close with saying that our outperformance during this quarter could not be possible with the great teams across the organization. Our focus remains on strategically managing the company for the long-term, with decisions optimized for delivering greater customer value and long-term financial growth and profitability. With a strong balance sheet and a competitive position, we are well-positioned to invest for the long-term growth of this company.

Marc, back to you.

Questions and Answers:

Marc Cabi -- Vice President of Investor Relations

Thanks, Elena. And we're going to turn it over to Q&A now. As we did last quarter, we put all of our analyst names into randomizer and we'll be using that random -- randomly selected order for today's call. So -- and our first analyst up today is Jen Lowe from UBS. If you can mute yourself and if you'd like to turn on your video, we're happy to see you as well. Thank you, Jen.

Jen Lowe -- UBS -- Analyst

Great, and thanks to the randomizer for putting me in first. Maybe just to start on that last point, Elena, you mentioned rethinking exiting the two leases in San Francisco, rethinking of the footprint globally. I'm sure you're not the only ones at this point in time. As you think about what that might look like in terms of margins going forward, I know it's early, but is the aspiration being, is that you would be a bit more cost-efficient, as well around your headcount with that new real estate footprint or would that be reinvested? How should we think about what that ultimately means for the business?

Elena Gomez -- Chief Financial Officer

Yes. No, I think it's a fair question. We're going to continue to balance our investments focused on growth, and so to the extent that we have savings, if you will. I think that's the question from real estate, will we be investing that in the business? We will if it makes sense and will continue to position us for growth. But at the same time, we're constantly looking at ways to scale. So definitely would be some benefits in our operating income as a result.

Jen Lowe -- UBS -- Analyst

Maybe just one for Mikkel. Obviously the environment is incredibly dynamic. It seems like the trend was improving over the course of the third quarter. But now we're hearing, unfortunately, cases are starting to surge again, there's been rumblings of shutdowns in Europe, we're actually starting to see shutdowns in Europe. Has that -- or do you find that customers are a little bit more prepared for that now, given that we've been through it before and maybe not freezing up the same way we saw earlier? Is there any change in the tone of business or how they're responding to what might be another way to shutdowns?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

And that's, of course, the million dollar question, Jen. And we definitely see more preparedness in the market. Now, we all know what we're in, the same way that we know what we end like. I mean, everybody is prepared and we see more preparedness in the market for what can come, but many uncertain factors, how hard it's going to be, it can be a rough winter in Europe, I can imagine. But, definitely more preparedness in the market. I think a lot of businesses have been very prudent in how they have prepared their operations for the S&I. We don't see anybody overly optimistic in the market, which is probably a good thing.

Jen Lowe -- UBS -- Analyst

Thank you.

Marc Cabi -- Vice President of Investor Relations

Thanks, Jen. Next up is Brad Sills from Bank of America. If you want to unmute and use your video, you're welcome too.

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

Oh, I tried to start the video, but unable to looks like anyway. Thanks, guys for taking my question. I wanted to ask about the comments you made earlier on the expansion in some of the industries where you've seen contraction. I know in the past, you've talked about how the -- there's a decent amount of goodwill that's been building there, where you've been providing those concessions, customers, we will remember this and come back. Are there -- is there any color you can provide as to how that's gone within some of those hard it industries, kind of, where are we with some of that business, kind of, coming back and even thinking about expansion?

Elena Gomez -- Chief Financial Officer

Yes. I mean, I'll start and Marc or Mikkel feel free to chime in. But we're definitely not back to pre-COVID levels in these hard hit industries. But we are seeing some of that expansion come back. But I would definitely say we're not. We are not close to pre-COVID levels. But overall, I mean, the good news is, is our businesses pretty broad and diverse. And so there isn't any one particular industry or segment that is really drowning out the overall financial picture for us.

Marc Cabi -- Vice President of Investor Relations

I'd just add that, if you look at car share, airlines and just travel related industries, those are probably the hardest hit of our customers. But if you look outside of those impacted industries, there was definitely a return to more normal patterns that completely normal, but a return to much more normal patterns in Q3 over Q2.

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

Got it. Great, thank you. And then any color you guys can provide on kind of progress with some of these bigger expansion deals in the -- in larger organizations, great result this quarter on the billings and backlog. So any kind of color on kind of the bigger expansion deals, maybe even Sunshine, are you seeing some of these bigger -- larger firms, committing more to the platform and going wider with Zendesk Support?

Elena Gomez -- Chief Financial Officer

Reflected in our RPO, Brad, you saw and I mentioned it on the script, you saw an elevated set of customers in terms of committing longer to us, so we're really encouraged by that. I wouldn't call out any single product, if you will, but just commitment to the Zendesk family of products. And Mikkel, would you chime in there too?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Brad, I think in general and you can look at like, as we also put in the shareholder letter and then as we repeat this year like our expansion business is returning to strong growth that we are very optimistic about.

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

Great. Thanks guys.

Marc Cabi -- Vice President of Investor Relations

Thanks, Brad. So next up we have Drew Foster from Citi. Drew, can you hear...

Drew Foster -- Citi -- Analyst

Hey, can you guys hear me?

Marc Cabi -- Vice President of Investor Relations

Yes.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Yes, go ahead, Drew.

Drew Foster -- Citi -- Analyst

Okay. Great, great, thanks a lot. Elena, I just wanted to double-click on some of the latter comments that you made there around RPO, so both current and total RPO growth in the quarter was really strong, looks to have sort of reaccelerated from Q2. And I know that you just mentioned there, you had some multiyear deals in the quarter, but are there any other benefits that metrics saw in the quarter in terms of maybe some of your larger deals lending and whether there were any big renewals in the quarter as well?

Elena Gomez -- Chief Financial Officer

We don't comment on specific customers, Drew. But I can tell you in looking back at our RPO and the contract comments over the last few quarters within this year, we definitely saw really good momentum in Q3. And it's broad-based, I can't point any one segment, but it's broad-based, so there is nothing more to say other than more commitment from these customers and actually encouraging to see this level of commitment in the backdrop that we're in.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Maybe I'd just like to add there, we do thousands of transactions per quarter, because we have 170,000 customers.

Drew Foster -- Citi -- Analyst

Sure.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

So we're not dependent on any one customer to swing that results in any direction.

Drew Foster -- Citi -- Analyst

Understood. Helpful. Thanks a lot. And then just another follow-up, Elena on the Q4 guide sort of implies a little bit lower of a growth rate than we're seeing here in Q3. So just wondering if there is any areas of the business where you're sort of taking an outsized level of conservatism there and maybe Q4 where there's more large deals than normal?

Elena Gomez -- Chief Financial Officer

It's a fair question. I -- we approach guidance with the same -- generally the same approach, but we are in a different -- we are in a totally different environment. So I think, for me, it was really prudent to just put out a guidance when we've got an election year, we've got a pandemic, I just felt like it was prudent to be measured about that guidance. And we're not out of the woods, as we just talked about in Europe, etc. So that's what that guidance reflects.

Drew Foster -- Citi -- Analyst

Okay, thanks so much.

Marc Cabi -- Vice President of Investor Relations

Thanks, Drew. Next up, let me make sure I get right Tom Roderick is on.

Tom Roderick -- Stifel -- Analyst

Yes, I am on Marc. Can you -- I think the video is going isn't working, here we go.

Marc Cabi -- Vice President of Investor Relations

Yes, we can hear you.

Tom Roderick -- Stifel -- Analyst

Okay. Okay, excellent, thanks. Thanks for taking my question. So, Mikkel, you've always been I mean, your business was very strong and relevant in Europe and international, early on, probably earlier than most companies for your size as you're growing up. So you've always had a great view with what's going on internationally. I think you call that European weakness, last year ahead of when a lot of companies saw it. So you got a pretty good feel for that. Would love to hear what you're seeing in real-time in particular, it sounds like you offered a little bit of caution relative to cases are on the rise, Europe is starting to see perhaps a little bit of a tick down. But anything beyond those sort of broader cautionary comments with what you're seeing internationally, or hearing from customers, I'd love to hear what the actual customer feedback is right now.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

I'm not sure I can provide so much insight that doesn't exist already. It's definitely gone, like just over the last month things have been accelerating quickly in Europe. And that's definitely affecting the move there. On the other hand, like there is a -- as the other question before, like there is a kind of a readiness for it, like, we know, what we're going into, we've kind of dealt with it. We all know there is light at the end of the tunnel, just have to get through these next, like very important months.

So I don't have any other insights about we see great strengths around the world, even in places where we shouldn't see great strength. So I think that talks a little bit more to the fact that everybody is a little bit more prepared for what we are going through than they were six months ago.

Marc Cabi -- Vice President of Investor Relations

Tom, I just remind you [Speech Overlap]

Tom Roderick -- Stifel -- Analyst

Yes, maybe.

Marc Cabi -- Vice President of Investor Relations

Last year we did reorganize how we approached the SMB category of our business and that has had some payoff where we've enabled our self-service capabilities and improved on our customers being able to join us in a self-service environment. I think that's been very helpful for us through this period.

Tom Roderick -- Stifel -- Analyst

Yes, that's a good reminder. Thanks for that. Quick follow-up, just more on the product side. Anything you can offer relative to the trend line of suite sales over the last 90 days, 180 days? What's happening with the demand for the suites and what's happening with the deal sizes as a function of that?

Marc Cabi -- Vice President of Investor Relations

I'll take that. So we've been seeing some really good demand for our support suite. Within that support suite, there is conversational messaging capability that's being built-in as we bring more messaging channels natively. And so we feel that our bundled offers that around the support suite especially have been showing some really good demand. And actually outperforming our stand-alone, kind of, demand for support-only products.

Tom Roderick -- Stifel -- Analyst

Outstanding. Thank you. I'll jump back and appreciate it.

Marc Cabi -- Vice President of Investor Relations

Thank you, Tom. Next up is Alex Zukin from RBC.

Alex Zukin -- RBC Capital Markets -- Analyst

Hey, Marc. I think you've disabled my video.

Marc Cabi -- Vice President of Investor Relations

I did not, but I'm going to turn it back out for you. There you go. There you go.

Alex Zukin -- RBC Capital Markets -- Analyst

Thank you guys for taking the question. I guess, maybe the first one for whoever wants to take it. If you think about the business from an enterprise perspective versus velocity. Talk about where you saw most of the outperformance was it in deals that were kind of held up last quarter that got done. And then also maybe just talk about the pipeline for both businesses and where you're, kind of, building confidence and strength?

Elena Gomez -- Chief Financial Officer

Yes, I can start and you guys can chime in. So, Alex, the business, if I look at the strong performance of Q3, it's really across all of our segments. So -- and I just shared that with the Board a couple of days ago that, one of the things that we really were encouraged by is that, we did see broad-based return if you will, of the business, now we don't want to make one quarter trend and so we're cautiously optimistic. But yes, I do think there were certain deals that in Q2 or maybe put on pause, if you will, that came back, but I don't want to point to any one deal. I think the performance we saw in Q3 was really broad-based.

In terms of pipeline, we're encouraged with what we saw in Q3. But again, one quarter is not a trend. So we'll -- we don't like to talk about pipeline specifically anyway, but I'll let Mikkel and Marc add more color if they want.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

I don't have anything else to add to that one.

Alex Zukin -- RBC Capital Markets -- Analyst

Maybe just into follow-up, given this was kind of a unique quarter, given the puts and takes from last quarter to this quarter. And the unique year ago compare, I know, you're not -- you don't guide to it, but there's quite a dispersion between what your billings growth is, what your current RPO growth is, what your current RPO billings growth is. And so as we think about Q4, as we think about growth going forward, I know, you guys don't want to make a trend out of a quarter, but we -- that's what we do. And so what would you point us to on some of those forward looking -- what would you caution us, remind us in terms of seasonality, and then also, what's the right way to think about, your kind of growth outlook? Are you a second order beneficiary from a -- of the demand environment, you figured out how to sell, you know what to expect, etc? Or what's the right way to kind of put into perspective?

Elena Gomez -- Chief Financial Officer

So I think you got like five questions in one, but well played. So I think the first thing is, this is not a normal year. So like, that's -- and we all know that. So while typically we talk about seasonality, I'm paying attention to that, but I'm not expecting everything is going to be exactly the same now, encouraged by what we did in Q3, of course. And I'm not going to guide obviously to next year, but what I will tell you is the initial shock of the pandemic and COVID was in Q2, and as time goes on, that impact on our financials is less and less.

Marc Cabi -- Vice President of Investor Relations

Yes, Alex. I think it's really important to remember that some of that contraction we took on in Q2 from the travel, those categories. They -- we continue to carry that until those companies bring back their employees and bring back their agents. And so that has an impact here in near-term. And as we kind of see a recovery in those categories that will help us.

Alex Zukin -- RBC Capital Markets -- Analyst

Understood. Thank you, guys.

Marc Cabi -- Vice President of Investor Relations

Thanks, Alex. Next up is Chris Merwin from Goldman. Chris, are you on?

Chris Merwin -- Goldman Sachs -- Analyst

Hey, sorry about that. Can you guys hear me OK?

Marc Cabi -- Vice President of Investor Relations

Yes, we can hear you, yes.

Chris Merwin -- Goldman Sachs -- Analyst

Okay, perfect.

Elena Gomez -- Chief Financial Officer

Can't see.

Chris Merwin -- Goldman Sachs -- Analyst

I wanted to ask -- I'm sorry, I think, I have a little trouble with my video. But as you can hear me, I'll go ahead and ask. I think last quarter you talked about the customer segments a bit and it sounded like there was some relative strength in SMB and in the enterprise segment, little less a mid-market. Curious this quarter given the broad-based recovery we saw in pretty much all your metrics, in particular, RPO can you talk a bit about what you saw by customer segment, did you see some stronger mid-market performance, particularly with larger and longer duration deals. Just curious, anything you would call out there? Thanks.

Elena Gomez -- Chief Financial Officer

Yes, Chris, I would just repeat what I said earlier, which is we really did see the performance in all of our segments this quarter, which we're encouraged by it's obviously not a trend and the backdrop that we have in the macro environment, but definitely the mid-market and all of our segments had strength in Q3.

Chris Merwin -- Goldman Sachs -- Analyst

Great. And then maybe just one follow up, in the shareholder letter there was a number of mentions of Sunshine conversations, that seemingly as part of some of the deals that you called out, I guess, when we think about Sunshine, being utilized more as the core CRM platform for your customers, anything else you can share there and is the [Technical Issues] for that to become a more material contributor next year? Thanks.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Yes. So maybe I can just -- no doubt that messaging and the capabilities we both offer and use for the Sunshine conversation platform is a big part of our future. We're going to talk a lot more about that in the coming months and next year and that's something we are very excited about, it is where the trends are going.

Chris Merwin -- Goldman Sachs -- Analyst

Okay, thank you.

Marc Cabi -- Vice President of Investor Relations

Thanks, Chris. Up next is Stan Zlotsky from Morgan Stanley.

Stan Zlotsky -- Morgan Stanley -- Analyst

All right.

Marc Cabi -- Vice President of Investor Relations

All right.

Stan Zlotsky -- Morgan Stanley -- Analyst

Hey guys. Thank you so much for taking my questions. So a couple that I wanted to double click into. First one on current RPO specific array, I think Alex started too, to allude to it. But was there any meaningful shift in customers going from monthly [Phonetic] to annual contract thing that benefited that? Or was it just pure more bookings?

Marc Cabi -- Vice President of Investor Relations

Yes. I don't think and I observed a very big shift in our shorter than 12-month business mix. So I think that was just more of an indicator of the strength of our, kind of, our momentum of the business in the quarter.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Okay, that's great. And then just also double click on some of the questions that were asked. Specifically into Q4 and it's a big enterprise selling cycle. How are you thinking about that part of the business, which is usually really strong in the quarter?

Elena Gomez -- Chief Financial Officer

Yes. I mean, I think our guidance definitely was done with the backdrop in mind, Stan. And so we've just got to, kind of, see this through. I'm super encouraged and proud of the team for what happened in Q3 across all segments, as we said. And Q4 typically is our big enterprise quarter as you know, but this is a different year. So we're just trying to be cautiously optimistic about that and not get ahead of our skies.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. And then so for that particular segment, do you -- is it fair to say that you apply, like an extra layer of conservatism to that segment versus what you may have done in prior years?

Elena Gomez -- Chief Financial Officer

I wouldn't say that. I think we'd be falsely precise to be honest. So I wouldn't go there. I would just say our guidance reflects a prudent view of the business right now.

Stan Zlotsky -- Morgan Stanley -- Analyst

Got it. Okay. All right, thank you guys.

Marc Cabi -- Vice President of Investor Relations

Thanks, Stan. I don't see Shebly on the call. So we're going to move to Samad from Jefferies. Let me unmute you bro. Did Samad just dropped? It looks like it's...

Elena Gomez -- Chief Financial Officer

Marc you need to unmute him, Marc.

Samad Samana -- Jefferies -- Analyst

There we go. Can you guys hear me now?

Elena Gomez -- Chief Financial Officer

Yes.

Marc Cabi -- Vice President of Investor Relations

Yes.

Samad Samana -- Jefferies -- Analyst

I'm sorry. 2020, everything starts with can you hear me now. Thank you for taking the question. It's good to see you all and I hope you're all doing well. So I wanted to ask maybe more of a high-level question. As we think about some of that strength in new bookings, and as we think about, kind of, the source of new customer adds. How should we think about that in relation to, we're hearing from companies whether it's Shopify or BigCommerce, as they're adding more new merchants, we've seen record new business formation, actually in the US during the third quarter. Can you maybe help us think about the mix of your new customers added in 3Q in relation to you maybe the sources some of these other companies that would be adjacent to Zendesk are adding? And just how was that for the third quarter?

Marc Cabi -- Vice President of Investor Relations

I'll start this. So I think that we saw a lot of good demand from new customers and a lot of it has to do with working with customers differently. The end customer interactions are evolving, whether it's messaging channels, whether it's curb pick up and the other, kind of, tools that companies need to employ and I think were important eco-provider for that ecosystem. So I do think we benefit from that. I'm not going to say that that's like the only thing that we benefited from, the overall health of the business was much better in Q3 than in Q1 and Q2 of this year. So I think we saw a nice general recovery. So I don't want to attribute all of our upside to that.

Samad Samana -- Jefferies -- Analyst

And I guess maybe just as a follow-up to that, as you think about your customer base, when you think about where they are in terms of different pieces of technology, how long after somebody maybe either whether it's starting an online store, or if they're moving to buy online pickup, or curbside pickup. I guess, how quickly do they -- can they set up something like Zendesk to support that? I guess, we're just trying to triangulate on whether some of the success with some of these other companies as a leading indicator, or a lagging indicator for future customer growth?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

And this is really speculation, you know, I didn't like -- I wouldn't make any correlations between these businesses. We do like -- we do believe that we are in a time right now where we see that reflected in our own business too, with short cycles, quick iterations, very quick deployments, lot of activities, lot of traffic on the platform, people need speed, agility and like smartness, you know, they don't want to spend years and years on big massive projects, they want to move fast, especially in our category, it's about engaging with customers. And like, that's a trend we're seeing right now. It has implications to our business. And we believe it has long-term implications to how we think about IT and IT spending the next many, many years.

Samad Samana -- Jefferies -- Analyst

Great. I'll turn it over to the next analyst. Thanks again and good to see you all.

Marc Cabi -- Vice President of Investor Relations

All right, thanks, Samad. Good to see you. Next up is Phil Winslow.

Phil Winslow -- Wells Fargo Securities -- Analyst

Alright. Hey, team, thanks for taking my question. There we go. There is no video with me. A question for you Mikkel and there is a follow-up to Elena. Mikkel some of your research in the benchmark data shows that ticket volumes are up significantly, year-over-year, I think in the high teens 16% to 17%, it hasn't really been going down. The question for you is because what are your customers doing to deal with that? So in the meantime your resolution doesn't go up? Is that what's driving the interest in things like Sunshine conversations, chat, just different types of channels that are maybe asynchronous versus synchronous?

And then, Elena, if that is maybe what's driving some of the issues? And those how do you think about penetration of those add-ons into the customer base? And how do you expect that to evolve? Thanks.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Elena, maybe I can start here. But no doubt, Phil that we are seeing a flurry of activity and like a lot of traffic on our platform. And a lot of that is because it's moving from other channels that way, you don't have the option today like moving a lot from offline to online. And it becomes natural, simple. Like this is where you engage with your customers, your customer engagement is now online, primarily.

There's no doubt that like as business is thinking about, like, how can we provide a fantastic customer experience this way? And like, especially for a lot of the new ones that are seeing a ton of new volume. They're thinking about like, how can we increasingly automate this give our customers much more self-service. And that's, of course also where we help them with all these tools we're providing a great self-service experience, but that's also traffic on our platform. So we've got to continue to see a lot ton of traffic, ton of products to sell to our customers very excited.

Marc Cabi -- Vice President of Investor Relations

Yes, Phil, I'm just going to add from a penetration point of view, from our customers, messaging channels are all fairly new. So we're in the first couple of innings of this, but definitely consumer demand to message with companies rather than wait on hold for, yesterday I called Delta Airlines 58 minutes, that's not acceptable to stay in age. I also note the customers are also looking at using our explore products, so they understand more of the data behind those customer conversations. And like Mikkel said, the help center, the ability to self-serve is very critical in this world. So I think we're seeing a lot of that demand out there and we have a nice portfolio of products to serve that. So we're pretty excited.

Phil Winslow -- Wells Fargo Securities -- Analyst

Okay. So Elena, all that in a ton of add-on to the model next year, right?

Elena Gomez -- Chief Financial Officer

Be careful. Be careful.

Marc Cabi -- Vice President of Investor Relations

Remember though, we also offer a lot of bundled support suite offerings that raise the average selling price on its own. So as you think about building your models, a lot of our customers are coming to us with a more bundled mentality around the support suite. For example, another products, other bundles that we might create in the future.

Phil Winslow -- Wells Fargo Securities -- Analyst

Great, thanks a lot.

Marc Cabi -- Vice President of Investor Relations

All right. Up next is Koji from Oppenheimer. Let me find you on my screen here.

Koji Ikeda -- Oppenheimer -- Analyst

Hey, March. Can you hear me?

Marc Cabi -- Vice President of Investor Relations

Here you are.

Koji Ikeda -- Oppenheimer -- Analyst

Got to give it to Go Dodgers. Hey, just real quick one question from me on the dollar based net expansion rate expanding by a point to 112%. That's really fantastic. And I think that should mean that the trough number of last quarter is hopefully behind the business. So I guess -- can you walk us through the mechanics of the expansion? Was it seat expansion, more products, maybe a combination of both of that? And really thinking about the downside, too? I mean, what would it really take from here for that metric to dip back to the 111%, we saw last quarter. Thank you.

Elena Gomez -- Chief Financial Officer

Yes. So Koji, you're right. I mean, I think that number is obvious. First of all, it's in a healthy range for us. We don't like to take any one quarter and say this is a trend. But that said, I think it's -- it was impacted by the contraction we saw early in the year and continue to have a little bit of a lag on that. Just remember that, that's an annual metric, right, and look back a year. So that dynamic, as Marc said earlier, is going to continue with us for a little bit. But we're encouraged by the expansion, we saw with some of those customers that contracted in Q2, at least a quarter of them are back now they're not back to pre-COVID levels in terms of expansion. But we'll keep an eye on that. For that to get to continue to decrease would mean another elevated level of churn and contraction. And we don't know that, right, with this environment, we just don't know. It's hard to predict.

Koji Ikeda -- Oppenheimer -- Analyst

Yes, yes, great. Thank you for taking my question. Appreciate it.

Marc Cabi -- Vice President of Investor Relations

Thanks, Koji. Next up is Derrick Wood from Cowen.

Derrick Wood -- Cowen & Company -- Analyst

Great, congrats, good to see everyone. Want to ask my first question on pricing. And I know, you know, just kind of curious how you've dealt with that throughout the pandemic. I think you've kind of had been more forgiving and given concessions and working to preserve PCB [Phonetic] was some of the things you talked about early on. How has that evolved to where we are today and are you enforcing more pricing? Are you less focused on these PCB flexibility contracts? How should we think about how that's evolved?

Elena Gomez -- Chief Financial Officer

Yes. So, you are right in Q2, we had to do a lot more of that, especially early on, when COVID hit and there was a lot of uncertainty. It's not to say that won't happen to the extent we have customers, but it's gone down significantly from the Q2 levels and to the extent we could our approach was to preserve the total TCV [Phonetic] for those customers, and do the right thing, and we do believe that will pay off over time.

Derrick Wood -- Cowen & Company -- Analyst

Great. Then maybe I'd just to kind of hit on geo performance. I know you talked about a pretty broad-based from a customer segment standpoint and a go-to-market sales motion standpoint. But how about geo -- I look at kind of calculated growth across it looks like EMEA and APAC accelerated a little bit, US decelerated but those can be backward-looking numbers. And so just curious from a bookings standpoint, how you characterize geo performance in Q3?

Elena Gomez -- Chief Financial Officer

Yes, you know, I think we had good performance generally around the globe. I would say, EMEA definitely had a strong, we had uneven as I think it was last year and we brought in some leaders there and we saw pretty strong performance in Q3. And LatAm too, but I wouldn't say any outliers, if you will, I think all around, we had globally strong performance from our region.

Derrick Wood -- Cowen & Company -- Analyst

Great, thanks.

Marc Cabi -- Vice President of Investor Relations

Thanks, Derrick. Next up, let me see is DJ Hynes, I'm going to find you on my page here.

DJ Hynes -- Canaccord Genuity -- Analyst

Hey, guys. Can you hear me?

Marc Cabi -- Vice President of Investor Relations

Yes, there you are.

DJ Hynes -- Canaccord Genuity -- Analyst

Awesome. So Elena, you talked about customers making longer-term commitment and I guess I'm curious what the trade-offs is there, are you having to bundle more product? Are those relationships more back-end loaded as a favorable pricing? Just like any broad color on how those contracts are structured to get longer-term deals done in this environment?

Elena Gomez -- Chief Financial Officer

They're all a little bit different. I don't know that, if there is one thing to point to, I think it's really the focus on improving the customer experience and moving quickly as opposed to the way we're setting up the contract terms. These are companies, who are realizing the urgency of sort of the meeting their customers and digital channels and things like that. So there isn't any one trend and they're all a little different as you know when you get to larger customers. So there is nothing I would point out here that's unique.

DJ Hynes -- Canaccord Genuity -- Analyst

Yes, OK. And then Mikkel maybe one for you. Curious what you're seeing on Answer Bot. We had Five9 tonight as well and they talked about interest in virtual agency, they made an acquisition in the space, customer is trying to do more with less. Are you seeing the same kind of interest there? And what's adoption with the Answer Bot look like?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Yes, we are very happy about Answer Bot adoptions. We have a lot more coming up to improve in that field, a lot more that can help with automation and kind of improving for optimizing for the customer experience. Not all automation gives a better customer experience, so we're very focused on providing that data customers, simply provided making a lot easier snappier of customers to help themselves. So very happy about it. It's been a -- for a lot of our customers when they have seen this massive spike in traffic that they've seen, it's been lifeline for a lot of them, that they have this extra level of help that gives some kind of confidence that it's not -- they are not just waiting, but I think they have an opportunity to help themselves to. So very happy about it.

DJ Hynes -- Canaccord Genuity -- Analyst

Awesome. All right, guys, thanks very much.

Marc Cabi -- Vice President of Investor Relations

Well, thanks, DJ. Next up is Ken Wong from Guggenheim.

Ken Wong -- Guggenheim -- Analyst

Hey, great. So it's pretty clear that 3Q is in a better place than 2Q. Would love to get a sense of what the shape of the improvement, look like through the quarter maybe even to the extent you can comment on October. Any sense of what that [Technical Issues] in terms of the improvement look like?

Elena Gomez -- Chief Financial Officer

So I'm definitely not going to comment on October. But in Q3 -- but those are nice try. In Q3, we had a great quarter out of the gate and obviously pacing always is an important factor for us. But that was encouraging. I think there was -- it's almost like the -- our customers, kind of, got back to normal things settled in, people got kind of used to working-from-home from their living room. So there is a little bit of -- we're not back to normal, so I don't want to signal that, but definitely more adjustment to the environment we are in. People got more comfortable making decisions, etc. And we saw that pretty much out of the gate.

Ken Wong -- Guggenheim -- Analyst

Got it. And then maybe just circling back to the new paid customer dynamic. I guess on that metric, how close are we to normal and any sense of kind of when we might get there?

Marc Cabi -- Vice President of Investor Relations

Well, I think it's always difficult to predict normal set of new customers we bring in overtime, especially since we're starting to sell more of the suite where we have multiple products being sold. But we were very happy with new customer activity in this quarter. I think that we have an opportunity and a compelling story as customer service becomes a much more integral part of the demand environment. So I think we're well-positioned this quarter, new business was definitely a key contributor to our growth rate.

Ken Wong -- Guggenheim -- Analyst

Great. Thanks a lot, guys.

Marc Cabi -- Vice President of Investor Relations

Thank you, Ken. Next up is Brent from Piper.

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Hey, Brent.

Brent Bracelin -- Piper Jaffray -- Analyst

Hey, how are you?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Good.

Brent Bracelin -- Piper Jaffray -- Analyst

So yes, listen, I appreciate the randomizors, but it -- with given -- and back of the list here next quarter maybe we should go alphabetical.

Elena Gomez -- Chief Financial Officer

Nice.

Brent Bracelin -- Piper Jaffray -- Analyst

That might not be fair to Zukin so, but all good. Two questions if I could. I guess first, Mikkel, I'd love to get your view around larger brands. We're seeing larger brands embrace this whole direct-to-consumer wave here for the last six months. Zendesk is the gold standard for direct-to-consumer support for the digital natives. My question is, are you seeing a change with some of these larger brands that are struggling, that have maybe a greater need or want to modernize their support apps as they try to engage consumers with these new digital channels?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Well, I think that we all see that, apologize for the noise here, there's a UPS truck outside my window.

Brent Bracelin -- Piper Jaffray -- Analyst

I'm sure they are [Speech Overlap]

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Yes. I think we all see that in the market like across the spectrum here. Like, we all read stories about Disney and Home Depot, etc, etc. and that's definitely accelerating, kind of, that needs to see the direct-to-consumer other than the direct-to-consumer model, we've seen that across the board.

Brent Bracelin -- Piper Jaffray -- Analyst

Fair enough. We will dive into that maybe offline more, it feels like it's a bigger opportunity here I'd love to explore. And then I guess Elena as we just think about maybe the broader support business, 2,600 net ads here on the support side, that's actually higher than we've seen in each of the last three quarters. So as you think about the acceleration and just net support ads, what drove that in Q3? It seems a little unusually strong here and love to get any color on what drove that acceleration just across the support business.

Elena Gomez -- Chief Financial Officer

Yes, I don't know if I have any more color for you Brent, other than we had momentum in our business for the quarter across all of our segments and we're really pleased by a lot of the self-service and investments we're making to make our try and buy motion very friction-free, etc, and that continues to be a really important part of our journey here. So other than that, I don't know if there's anything I'd point out different other than we saw really strength across all of our segments in the quarter.

Brent Bracelin -- Piper Jaffray -- Analyst

Okay, great. That's all I had. Thank you so much.

Elena Gomez -- Chief Financial Officer

Yes.

Marc Cabi -- Vice President of Investor Relations

Thanks, Brent. And next up is Arjun from William Blair.

Arjun Bhatia -- William Blair -- Analyst

Hey guys, can you hear me?

Marc Cabi -- Vice President of Investor Relations

Yes, and if you'd like turn on your video.

Arjun Bhatia -- William Blair -- Analyst

Here you go. Okay. Hey, thanks for taking my question. Quick one, maybe for Mikkel, it seems like the new customer activity has picked up, just when you're looking at across these new customer ads, can you get a sense for how much these customers are making a new platform decision, where they're saying Zendesk is my customer service platform of choice versus maybe trying to solve somewhat of a more immediate and urgent digital problem that is just arisen, because of the pandemic? Are you able to decipher that at all?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Yes, Arjun. I'm not going to sit here like, well, 10,000, businesses decided we would be their platform of choice, but that's not the climate we live in today. I think that 10 customers come to us, because they trust us to be somebody, who can give them and help them with quick results and really get up and running quickly and harvest the results. And they believe in our agility and our flexibility continue to scale with them. And that's how -- that's been off-premise since we started this business through kind of be a very agile tool for our customers. And that's what we're focusing on. And the climate we're seeing today is a lot of activity. And that goes all the way from small business to the large enterprises. And we are a good partner for our customers on that path.

But again like as I said before, I believe this is not just moment in time picture, I think this is a trend for the future and that's how we're going to think about our IT investments going forward. Like, nobody wants to do these three-year projects anymore.

Arjun Bhatia -- William Blair -- Analyst

That's fair. And maybe on that last point between SMB mid-market enterprise. I know we have talked about in the past about accelerating, kind of, the enterprise motion with your sales team and account-based marketing things like that. When you're looking at the current environment, have those resources shifted at all? Are you focusing more on small businesses, mid-market or is it still let's push into larger companies and the enterprise?

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Well, I think we are investing across the board here, also because, like we see a lot of activity in the enterprise that has been like, what we would characterize as traditional enterprise activity. There is a lot of movement, there is a lot of activity like that. So we are continuing to invest across the board. I think where there is definitely like a web -- where we definitely kind of need it for the small and the mid-sized businesses like this. There will always be things we believe we can do better for the large enterprises and we will of course continue to invest in that.

Arjun Bhatia -- William Blair -- Analyst

Perfect. Thanks for taking my questions and congrats on the quarter.

Marc Cabi -- Vice President of Investor Relations

Thanks, Arjun. I think, I didn't see anybody join that was on my list that we missed. So at this point, we're going to close this call. Just a reminder, a replay of this call will be available on our investor website shortly after this call. And if you have any follow-up questions, you can email ir@zendesk.com and Alison, and our team will make sure that we get you on our calendar for a callback. And thanks again and we'll see you next quarter.

Duration: 51 minutes

Call participants:

Marc Cabi -- Vice President of Investor Relations

Mikkel Svane -- Founder, Chairman and Chief Executive Officer

Elena Gomez -- Chief Financial Officer

Jen Lowe -- UBS -- Analyst

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

Drew Foster -- Citi -- Analyst

Tom Roderick -- Stifel -- Analyst

Alex Zukin -- RBC Capital Markets -- Analyst

Chris Merwin -- Goldman Sachs -- Analyst

Stan Zlotsky -- Morgan Stanley -- Analyst

Samad Samana -- Jefferies -- Analyst

Phil Winslow -- Wells Fargo Securities -- Analyst

Koji Ikeda -- Oppenheimer -- Analyst

Derrick Wood -- Cowen & Company -- Analyst

DJ Hynes -- Canaccord Genuity -- Analyst

Ken Wong -- Guggenheim -- Analyst

Brent Bracelin -- Piper Jaffray -- Analyst

Arjun Bhatia -- William Blair -- Analyst

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