Zendesk Announces Second Quarter 2020 Results

Jul 30, 2020

Highlights

  • Second quarter revenue increased 27% year over year to $246.7 million
  • Second quarter GAAP operating loss of $31.5 million and non-GAAP operating income of $19.1 million
  • Archana Agrawal, Chief Marketing Officer of Airtable, joins board of directors

SAN FRANCISCO--(BUSINESS WIRE)-- Zendesk, Inc. (NYSE: ZEN) today reported financial results for the second quarter ended June 30, 2020, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Second Quarter 2020

Revenue was $246.7 million for the quarter ended June 30, 2020, an increase of 27% over the prior year period. GAAP net loss for the quarter ended June 30, 2020 was $64.7 million, and GAAP net loss per share (basic and diluted) was $0.56. Non-GAAP net income was $16.4 million, non-GAAP net income per share (basic and diluted) was $0.14. Non-GAAP net income excludes approximately $46.5 million in share-based compensation and related expenses (including $2.3 million of employer tax related to employee stock transactions and $0.5 million of amortization of share-based compensation capitalized in internal-use software), a $26.0 million loss on early extinguishment of debt, $7.5 million of amortization of debt discount and issuance costs, $2.3 million of amortization of purchased intangibles, $1.8 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $3.1 million. GAAP net loss per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic) and 120.4 million weighted average shares outstanding (diluted).

Appointment of Archana Agrawal to Board of Directors

Zendesk appointed Archana Agrawal to its board of directors, effective July 27, 2020. Archana is a seasoned technology executive with nearly two decades of experience in the software industry. She has served as the Chief Marketing Officer of Airtable, a low-code app development platform, since March 2020 and as a member of the board of directors of MongoDB, Inc., since August 2019. Previously, Archana served as the Head of Enterprise and Cloud Marketing at Atlassian, an enterprise software company, from May 2016 to March 2020. Archana joined Atlassian in 2013 as Head of Data Science and Growth Marketing. Prior to that, Archana was at Ladders, Inc. from 2007 until 2013, where she led corporate-wide analytics. She began her career at the IBM Almaden Research Center. She holds an M.B.A. from Harvard Business School and received her M.S. in computer science from the University of Illinois at Urbana-Champaign.

“Archana has a unique background in applying data science to enterprise marketing and customer acquisition,” said Mikkel Svane, Zendesk chief executive officer. “Her experience across fast-growing software companies will serve us well as we continue to expand our reach in the enterprise.”

“Zendesk has led the way in changing how organizations buy enterprise software and in making customer experience a critical differentiator for businesses,” Agrawal said. “I’m thrilled to be joining the board at a time when Zendesk has become so critical to companies of every size as they rapidly adapt to new customer and business realities.”

Outlook

We believe our financial performance will continue to be impacted by uncertain and highly disrupted global economic conditions. Many customers continue to face end-market demand challenges and we are seeing higher levels of contraction compared to historical trends. We continue to partner with customers who are undergoing business challenges to help them with modified invoicing and subscription terms. These conditions and actions have impacted and will continue to impact our near-term net expansion rate and overall financial performance, and have played a role in impacting our free cash flow generation. We are being disciplined and prudent in how we manage our business.

Longer term, with improved macroeconomic conditions, we continue to believe the fundamentals of our business model will drive meaningful revenue growth. In particular, we believe that our customer experience solutions will continue to lead in innovation and be more compelling relative to traditional larger enterprise competitors. We will continue to innovate and improve our product offering and how we operate and engage with consumers. These initiatives give us confidence in our plan to deliver high revenue growth and operating leverage.

As of July 30, 2020, Zendesk provided guidance for the quarter ending September 30, 2020.

For the quarter ending September 30, 2020, Zendesk expects to report:

  • Revenue in the range of $250 - 255 million
  • GAAP operating income (loss) in the range of $(42) - (38) million, which includes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
  • Non-GAAP operating income (loss) in the range of $10 - 14 million, which excludes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
  • Approximately 116 million weighted average shares outstanding (basic)
  • Approximately 122 million weighted average shares outstanding (diluted)

There are many factors that can affect our actual results which are discussed below and in the risk factors in our filings with the Securities and Exchange Commission. Some of the key risk factors include global macroeconomic conditions, the impact of the COVID-19 pandemic on our business, business conditions of customers in challenged industries, the effect on demand for our products from customers, and the ability of our customers to manage the current severe economic downturn.

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2020 because we do not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on our free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the full year 2020 is not available without unreasonable effort.

Additionally, Zendesk’s estimates of share-based compensation and related expenses, amortization of purchased intangibles, acquisition-related expenses, weighted average shares outstanding, and free cash flow in future periods assume, among other things, the occurrence of no additional acquisitions, investments, or restructurings and no further revisions to share-based compensation and related expenses.

COVID-19 Update

Over the last several months, we have continued to focus on supporting our employees, customers, and community as we navigate the COVID-19 pandemic. Our business continuity plans continue to ensure that we take care of health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. Additional information regarding these efforts and the expected impact on our business can be found in our Shareholder Letter for the quarter ended June 30, 2020, as well as our quarterly report on Form 10-Q for the quarter ended June 30, 2020 to be filed with the Securities and Exchange Commission.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a live video webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on Thursday, July 30, 2020 to discuss the results. The live video webcast can be accessed through Zendesk’s investor relations website at https://investor.zendesk.com. A replay of the webcast will be available for 12 months.

About Zendesk

Zendesk is a service-first CRM company that builds support, sales, and customer engagement software designed to foster better customer relationships. From large enterprises to startups, we believe that powerful, innovative customer experiences should be within reach for every company, no matter the size, industry or ambition. Zendesk serves more than 160,000 customers across a multitude of industries in over 30 languages. Zendesk is headquartered in San Francisco, and operates offices worldwide. Learn more at www.zendesk.com.

Forward-Looking Statements

This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, and progress toward its long-term financial objectives. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) the effect of uncertainties related to the COVID-19 pandemic on U.S. and global markets, Zendesk’s business, operations, revenue results, cash flow, operating expenses, hiring, demand for its solutions, sales cycles, customer retention, and its customers’ businesses; (ii) other adverse changes in general economic or market conditions; (iii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iv) Zendesk’s ability to effectively expand its sales capabilities; (v) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (vii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (viii) Zendesk’s ability to effectively market and sell its products to larger enterprises; (ix) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (x) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (xi) Zendesk’s ability to prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (xii) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (xiii) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xiv) Zendesk's ability to comply with privacy and data security regulations; (xv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xvi) the development of the market for software as a service business software applications; (xvii) real or perceived errors, failures, or bugs in its products; and (xviii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Condensed Consolidated Statements of Operations

(In thousands, except per share data; unaudited)

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2020

 

2019

 

2020

 

2019

Revenue

$

246,664

 

 

$

194,583

 

 

$

484,140

 

 

$

376,068

 

Cost of revenue

61,515

 

 

57,670

 

 

121,217

 

 

113,324

 

Gross profit

185,149

 

 

136,913

 

 

362,923

 

 

262,744

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

59,003

 

 

50,510

 

 

119,424

 

 

97,301

 

Sales and marketing

121,397

 

 

94,746

 

 

245,707

 

 

186,447

 

General and administrative

36,247

 

 

43,019

 

 

70,573

 

 

74,271

 

Total operating expenses

216,647

 

 

188,275

 

 

435,704

 

 

358,019

 

Operating loss

(31,498)

 

 

(51,362)

 

 

(72,781)

 

 

(95,275)

 

Other expense, net:

 

 

 

 

 

 

 

Interest expense

(8,086)

 

 

(6,614)

 

 

(14,973)

 

 

(13,158)

 

Loss on early extinguishment of debt

(25,950)

 

 

 

 

(25,950)

 

 

 

Interest and other income, net

2,166

 

 

4,026

 

 

9,068

 

 

10,196

 

Total other expense, net

(31,870)

 

 

(2,588)

 

 

(31,855)

 

 

(2,962)

 

Loss before provision for income taxes

(63,368)

 

 

(53,950)

 

 

(104,636)

 

 

(98,237)

 

Provision for income taxes

1,288

 

 

591

 

 

2,804

 

 

1,024

 

Net loss

$

(64,656)

 

 

$

(54,541)

 

 

$

(107,440)

 

 

$

(99,261)

 

Net loss per share, basic and diluted

$

(0.56)

 

 

$

(0.50)

 

 

$

(0.94)

 

 

$

(0.91)

 

Weighted-average shares used to compute net loss per share, basic and diluted

114,600

 

 

109,986

 

 

114,069

 

 

109,312

 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 

 

June 30,
2020

 

December 31,
2019

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

700,457

 

 

$

196,591

 

Marketable securities

296,829

 

 

286,958

 

Accounts receivable, net of allowance for doubtful accounts of $7,914 and $2,846 as of June 30, 2020 and December 31, 2019, respectively

143,017

 

 

127,808

 

Deferred costs

40,939

 

 

35,619

 

Prepaid expenses and other current assets

50,210

 

 

45,847

 

Total current assets

1,231,452

 

 

692,823

 

Marketable securities, noncurrent

303,861

 

 

361,948

 

Property and equipment, net

102,601

 

 

102,090

 

Deferred costs, noncurrent

38,192

 

 

35,230

 

Lease right-of-use assets

93,523

 

 

89,983

 

Goodwill and intangible assets, net

201,804

 

 

206,883

 

Other assets

24,585

 

 

25,632

 

Total assets

$

1,996,018

 

 

$

1,514,589

 

Liabilities and stockholders’ equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

13,793

 

 

$

38,376

 

Accrued liabilities

35,904

 

 

36,347

 

Accrued compensation and related benefits

64,270

 

 

61,512

 

Deferred revenue

314,179

 

 

320,642

 

Lease liabilities

23,309

 

 

21,804

 

Total current liabilities

451,455

 

 

478,681

 

Convertible senior notes, net

1,043,365

 

 

483,464

 

Deferred revenue, noncurrent

1,934

 

 

3,320

 

Lease liabilities, noncurrent

83,495

 

 

83,478

 

Other liabilities

5,460

 

 

7,662

 

Total liabilities

1,585,709

 

 

1,056,605

 

 

 

 

 

Stockholders’ equity:

 

 

 

Preferred stock, par value $0.01 per share

 

 

 

Common stock, par value $0.01 per share

1,151

 

 

1,130

 

Additional paid-in capital

1,212,469

 

 

1,155,044

 

Accumulated other comprehensive income

2,834

 

 

591

 

Accumulated deficit

(806,145)

 

 

(698,781)

 

Total stockholders’ equity

410,309

 

 

457,984

 

Total liabilities and stockholders’ equity

$

1,996,018

 

 

$

1,514,589

 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 

 

Three Months Ended June 30,

 

2020

 

2019

Cash flows from operating activities

 

 

 

Net loss

$

(64,656)

 

 

$

(54,541)

 

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

Depreciation and amortization

10,749

 

 

8,969

 

Share-based compensation

43,712

 

 

43,751

 

Amortization of deferred costs

10,765

 

 

7,622

 

Amortization of debt discount and issuance costs

7,487

 

 

6,277

 

Loss on early extinguishment of debt

25,950

 

 

 

Repayment of convertible senior notes attributable to debt discount

(38,637)

 

 

 

Other

3,090

 

 

452

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

(46,666)

 

 

(15,901)

 

Prepaid expenses and other current assets

(4,959)

 

 

(5,380)

 

Deferred costs

(14,867)

 

 

(14,123)

 

Lease right-of-use assets

5,272

 

 

4,734

 

Other assets and liabilities

(308)

 

 

(1,242)

 

Accounts payable

(12,692)

 

 

5,678

 

Accrued liabilities

1,638

 

 

(2,057)

 

Accrued compensation and related benefits

13,329

 

 

8,887

 

Deferred revenue

13,616

 

 

27,294

 

Lease liabilities

(3,534)

 

 

(2,562)

 

Net cash provided by (used in) operating activities

(50,711)

 

 

17,858

 

Cash flows from investing activities

 

 

 

Purchases of property and equipment

(5,622)

 

 

(4,896)

 

Internal-use software development costs

(3,225)

 

 

(1,753)

 

Purchases of marketable securities

(111,906)

 

 

(125,681)

 

Proceeds from maturities of marketable securities

117,752

 

 

53,031

 

Proceeds from sales of marketable securities

39,814

 

 

151,550

 

Business combinations, net of cash acquired

 

 

(70,794)

 

Net cash provided by investing activities

36,813

 

 

1,457

 

Cash flows from financing activities

 

 

 

Proceeds from issuance of convertible senior notes, net of issuance costs paid of $20,400

1,129,600

 

 

 

Purchase of capped calls related to 2025 convertible senior notes

(129,950)

 

 

 

Payments for 2023 convertible senior notes partial repurchase

(578,973)

 

 

 

Proceeds from capped calls related to 2023 convertible senior notes

83,040

 

 

 

Proceeds from exercises of employee stock options

5,101

 

 

4,773

 

Proceeds from employee stock purchase plan

8,802

 

 

6,895

 

Taxes paid related to net share settlement of share-based awards

(2,241)

 

 

(2,663)

 

Net cash provided by financing activities

515,379

 

 

9,005

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

15

 

 

33

 

Net increase in cash, cash equivalents and restricted cash

501,496

 

 

28,353

 

Cash, cash equivalents and restricted cash at beginning of period

202,620

 

 

145,028

 

Cash, cash equivalents and restricted cash at end of period

$

704,116

 

 

$

173,381

 

Non-GAAP Results

(In thousands, except per share data)

The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this release.

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2020

 

2019

 

2020

 

2019

Reconciliation of gross profit and gross margin

 

 

 

 

 

 

 

GAAP gross profit

$

185,149

 

 

$

136,913

 

 

$

362,923

 

 

$

262,744

 

Plus: Share-based compensation

5,187

 

 

5,246

 

 

10,246

 

 

10,183

 

Plus: Employer tax related to employee stock transactions

292

 

 

391

 

 

717

 

 

840

 

Plus: Amortization of purchased intangibles

1,617

 

 

1,943

 

 

3,724

 

 

3,561

 

Plus: Amortization of share-based compensation capitalized in internal-use software

464

 

 

413

 

 

914

 

 

833

 

Plus: Acquisition-related expenses

66

 

 

160

 

 

$

207

 

 

$

274

 

Non-GAAP gross profit

$

192,775

 

 

$

145,066

 

 

$

378,731

 

 

$

278,435

 

GAAP gross margin

75

%

 

70

%

 

75

%

 

70

%

Non-GAAP adjustments

3

%

 

5

%

 

3

%

 

4

%

Non-GAAP gross margin

78

%

 

75

%

 

78

%

 

74

%

 

 

 

 

 

 

 

 

Reconciliation of operating expenses

 

 

 

 

 

 

 

GAAP research and development

$

59,003

 

 

$

50,510

 

 

$

119,424

 

 

$

97,301

 

Less: Share-based compensation

(12,529)

 

 

(11,911)

 

 

(25,155)

 

 

(23,548)

 

Less: Employer tax related to employee stock transactions

(700)

 

 

(931)

 

 

(1,587)

 

 

(2,223)

 

Less: Acquisition-related expenses

(1,167)

 

 

(864)

 

 

(2,178)

 

 

(1,431)

 

Non-GAAP research and development

$

44,607

 

 

$

36,804

 

 

$

90,504

 

 

$

70,099

 

GAAP research and development as percentage of revenue

24

%

 

26

%

 

25

%

 

26

%

Non-GAAP research and development as percentage of revenue

18

%

 

19

%

 

19

%

 

19

%

 

 

 

 

 

 

 

 

GAAP sales and marketing

$

121,397

 

 

$

94,746

 

 

$

245,707

 

 

$

186,447

 

Less: Share-based compensation

(17,573)

 

 

(13,575)

 

 

(34,132)

 

 

(25,973)

 

Less: Employer tax related to employee stock transactions

(890)

 

 

(763)

 

 

(2,064)

 

 

(1,791)

 

Less: Amortization of purchased intangibles

(671)

 

 

(658)

 

 

(1,370)

 

 

(1,235)

 

Less: Acquisition-related expenses

(470)

 

 

(379)

 

 

(1,091)

 

 

(771)

 

Non-GAAP sales and marketing

$

101,793

 

 

$

79,371

 

 

$

207,050

 

 

$

156,677

 

GAAP sales and marketing as percentage of revenue

49

%

 

49

%

 

51

%

 

50

%

Non-GAAP sales and marketing as percentage of revenue

41

%

 

41

%

 

43

%

 

42

%

 

 

 

 

 

 

 

 

GAAP general and administrative

$

36,247

 

 

$

43,019

 

 

$

70,573

 

 

$

74,271

 

Less: Share-based compensation

(8,423)

 

 

(13,019)

 

 

(16,261)

 

 

(20,704)

 

Less: Employer tax related to employee stock transactions

(462)

 

 

(567)

 

 

(1,225)

 

 

(1,318)

 

Less: Acquisition-related expenses

(134)

 

 

(4,358)

 

 

(238)

 

 

(4,989)

 

Non-GAAP general and administrative

$

27,228

 

 

$

25,075

 

 

$

52,849

 

 

$

47,260

 

GAAP general and administrative as percentage of revenue

15

%

 

22

%

 

15

%

 

20

%

Non-GAAP general and administrative as percentage of revenue

11

%

 

13

%

 

11

%

 

13

%

 

 

 

 

 

 

 

 

Reconciliation of operating income (loss) and operating margin

 

 

 

 

 

 

 

GAAP operating loss

$

(31,498)

 

 

$

(51,362)

 

 

$

(72,781)

 

 

$

(95,275)

 

Plus: Share-based compensation

43,712

 

 

43,751

 

 

85,794

 

 

80,408

 

Plus: Employer tax related to employee stock transactions

2,344

 

 

2,652

 

 

5,593

 

 

6,172

 

Plus: Amortization of purchased intangibles

2,288

 

 

2,601

 

 

5,094

 

 

4,796

 

Plus: Acquisition-related expenses

1,837

 

 

5,761

 

 

3,714

 

 

7,465

 

Plus: Amortization of share-based compensation capitalized in internal-use software

464

 

 

413

 

 

914

 

 

833

 

Non-GAAP operating income

$

19,147

 

 

$

3,816

 

 

$

28,328

 

 

$

4,399

 

GAAP operating margin

(13)

%

 

(26)

%

 

(15)

%

 

(25)

%

Non-GAAP adjustments

21

%

 

28

%

 

21

%

 

26

%

Non-GAAP operating margin

8

%

 

2

%

 

6

%

 

1

%

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2020

 

2019

 

2020

 

2019

Reconciliation of net income (loss)

 

 

 

 

 

 

 

GAAP net loss

$

(64,656)

 

 

$

(54,541)

 

 

$

(107,440)

 

 

$

(99,261)

 

Plus: Share-based compensation

43,712

 

 

43,751

 

 

85,794

 

 

80,408

 

Plus: Employer tax related to employee stock transactions

2,344

 

 

2,652

 

 

5,593

 

 

6,172

 

Plus: Amortization of purchased intangibles

2,288

 

 

2,601

 

 

5,094

 

 

4,796

 

Plus: Acquisition-related expenses

1,837

 

 

5,761

 

 

3,714

 

 

7,465

 

Plus: Amortization of share-based compensation capitalized in internal-use software

464

 

 

413

 

 

914

 

 

833

 

Plus: Amortization of debt discount and issuance costs

7,487

 

 

6,277

 

 

14,036

 

 

12,465

 

Plus: Loss on early extinguishment of debt

25,950

 

 

 

 

25,950

 

 

 

Less: Income tax effects and adjustments

(3,063)

 

 

(985)

 

 

(4,854)

 

 

(1,896)

 

Non-GAAP net income

$

16,363

 

 

$

5,929

 

 

$

28,801

 

 

$

10,982

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, basic

 

 

 

 

 

 

 

GAAP net loss per share, basic

$

(0.56)

 

 

$

(0.50)

 

 

$

(0.94)

 

 

$

(0.91)

 

Non-GAAP adjustments to net loss

0.70

 

 

0.55

 

 

1.19

 

 

1.01

 

Non-GAAP net income per share, basic

$

0.14

 

 

$

0.05

 

 

$

0.25

 

 

$

0.10

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, diluted

 

 

 

 

 

 

 

GAAP net loss per share, diluted

$

(0.56)

 

 

$

(0.50)

 

 

$

(0.94)

 

 

$

(0.91)

 

Non-GAAP adjustments to net loss

0.70

 

 

0.55

 

 

1.18

 

 

1.00

 

Non-GAAP net income per share, diluted

$

0.14

 

 

$

0.05

 

 

$

0.24

 

 

$

0.09

 

 

 

 

 

 

 

 

 

Weighted-average shares used in GAAP per share calculation, basic and diluted

114,600

 

 

109,986

 

 

114,069

 

 

109,312

 

 

 

 

 

 

 

 

 

Weighted-average shares used in non-GAAP per share calculation

 

 

 

 

 

 

 

Basic

114,600

 

 

109,986

 

 

114,069

 

 

109,312

 

Diluted

120,397

 

 

119,678

 

 

120,309

 

 

118,339

 

 

 

 

 

 

 

 

 

Computation of free cash flow

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

$

(50,711)

 

 

$

17,858

 

 

$

(53,320)

 

 

$

36,827

 

Plus: repayment of convertible senior notes attributable to debt discount

38,637

 

 

 

 

38,637

 

 

 

Less: purchases of property and equipment

(5,622)

 

 

(4,896)

 

 

(15,560)

 

 

(14,154)

 

Less: internal-use software development costs

(3,225)

 

 

(1,753)

 

 

(6,283)

 

 

(2,966)

 

Free cash flow

$

(20,921)

 

 

$

11,209

 

 

$

(36,526)

 

 

$

19,707

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities margin

(21)

%

 

9

%

 

(11)

%

 

10

%

Non-GAAP adjustments

13

%

 

(3)

%

 

3

%

 

(5)

%

Free cash flow margin

(8)

%

 

6

%

 

(8)

%

 

5

%

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin.

Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable:

Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in Internal-use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.

Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.

Loss on Early Extinguishment of Debt: In March 2018, Zendesk issued $575 million aggregate principal amount of 0.25% convertible senior notes due in 2023 (the “2023 Notes”). In June 2020, Zendesk issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due in 2025 (the “2025 Notes”). In connection with the offering of the 2025 Notes, Zendesk used $618 million of the net proceeds from the offering of the 2025 Notes to repurchase $426 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions (the “2023 Notes Partial Repurchase”). Of the $618 million consideration, $393 million and $225 million were allocated to the debt and equity components, respectively. As of the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Notes Partial Repurchase, net of unamortized debt discount and issuance costs, was $367 million. The 2023 Notes Partial Repurchase resulted in a $26 million loss on early debt extinguishment. As of June 30, 2020, $149 million of principal remains outstanding on the 2023 Notes. The loss on early extinguishment of debt is a non-cash item, and we believe the exclusion of this expense will provide for a more useful comparison of our operational performance in different periods.

Amortization of Debt Discount and Issuance Costs: The imputed interest rates of the 2023 Notes and the 2025 Notes were approximately 5.26% and 5.00%, respectively. This is a result of the debt discounts recorded for the conversion features of the Notes that are required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instruments. The debt discounts are amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense will provide for a more useful comparison of our operational performance in different periods.

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2020, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities, plus repayment of convertible senior notes attributable to debt discount, less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations.

Zendesk has not reconciled free cash flow guidance to net cash from operating activities for the year ending December 31, 2020 because Zendesk does not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the year ending December 31, 2020 is not available without unreasonable effort.

Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP operating margin beyond the fiscal quarter ending September 30, 2020 because Zendesk does not provide guidance on the reconciling items between GAAP operating margin and non-GAAP operating margin for such periods, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP operating margin to non-GAAP operating margin guidance for such periods is not available without unreasonable effort.

Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include adjustments to its expectations for its GAAP gross margin that exclude share-based compensation and related expenses in Zendesk’s cost of revenue, amortization of purchased intangibles primarily related to developed technology, and acquisition-related expenses. The share-based compensation and related expenses excluded due to such adjustments are primarily comprised of the share-based compensation and related expenses for employees associated with Zendesk’s infrastructure and customer experience organization.

Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross margin for future periods because Zendesk does not provide guidance on the reconciling items between GAAP gross margin and non-GAAP gross margin, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s non-GAAP gross margin and, accordingly, a reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not available without unreasonable effort.

Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management.

Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, and acquisition-related expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

About Operating Metrics

Zendesk reviews a number of operating metrics to evaluate its business, measure performance, identify trends, formulate business plans, and make strategic decisions. These include the number of paid customer accounts on Zendesk Support, Zendesk Chat, and its other products, dollar-based net expansion rate, annual recurring revenue represented by its churned customers, and the percentage of its annual recurring revenue from Support originating from customers with 100 or more agents on Support.

Zendesk defines the number of paid customer accounts at the end of any particular period as the sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free trials, or other free services, (ii) the number of accounts using Chat, exclusive of free trials or other free services, and (iii) the number of accounts on all of its other products, exclusive of free trials and other free services, each as of the end of the period and as identified by a unique account identifier. In the quarter ended June 30, 2018, Zendesk began to offer an omnichannel subscription which provides access to multiple products through a single paid customer account, Zendesk Suite, and in the quarter ended June 30, 2019, Zendesk began to offer a subscription which provides access to Sell and Support through a single paid customer account, Zendesk Duet. In the quarter ended March 31, 2020, Zendesk began to offer two new omnichannel subscriptions, the Zendesk Support Suite and the Zendesk Sell Suite, which provide access to multiple support solutions and sales solutions, respectively, through a single paid customer account. The number of Support Suite paid customer accounts are included in the number of paid customer accounts on Suite, which are included in the number of paid customer accounts on products other than Support and Chat and are not included in the number of paid customer accounts on Support or Chat. The number of Sell Suite paid customer accounts are included in the number of paid customer accounts on products other than Support and Chat and are not included in the number of paid customer accounts on Support or Chat. Each Duet paid customer account is included once in the number of paid customer accounts on Support and once in the number of paid customer accounts on products other than Support and Chat.

Existing customers may also expand their utilization of Zendesk’s products by adding new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s products to service separate subsidiaries, divisions, or work processes. Other than usage of Zendesk’s products through its omnichannel subscription offering, each of these accounts is also treated as a separate paid customer account.

Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase revenue across its existing customer base through expansion of authorized agents associated with a paid customer account, upgrades in subscription plans, and the purchase of additional products as offset by churn, contraction in authorized agents associated with a paid customer account, and downgrades in subscription plans. Zendesk’s dollar-based net expansion rate is based upon annual recurring revenue for a set of paid customer accounts on its products. Zendesk determines the annual recurring revenue value of a contract by multiplying the monthly recurring revenue for such contract by twelve.

Monthly recurring revenue for a paid customer account is a legal and contractual determination made by assessing the contractual terms of each paid customer account, as of the date of determination, as to the revenue Zendesk expects to generate in the next monthly period for that paid customer account, assuming no changes to the subscription and without taking into account any platform usage above the subscription base, if any, that may be applicable to such subscription. Beginning with the quarter ended June 30, 2019, we excluded the impact of revenue that we expect to generate from fixed-term contracts that are each associated with an existing account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring revenue. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other GAAP financial measure over any period. It is forward-looking and contractually derived as of the date of determination.

Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of contraction and churn by Zendesk’s base revenue. Zendesk defines its base revenue as the aggregate annual recurring revenue across its products for customers with paid customer accounts as of the date one year prior to the date of calculation. Zendesk defines the retained revenue net of contraction and churn as the aggregate annual recurring revenue across its products for the same customer base included in the measure of base revenue at the end of the annual period being measured. The dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that Zendesk identifies involving the consolidation of customer accounts or the split of a single paid customer account into multiple paid customer accounts. In addition, the dollar-based net expansion rate is adjusted to include paid customer accounts in the customer base used to determine retained revenue net of contraction and churn that share common corporate information with customers in the customer base that are used to determine the base revenue. Giving effect to this consolidation results in Zendesk’s dollar-based net expansion rate being calculated across approximately 108,300 customers, as compared to the approximately 164,200 total paid customer accounts as of June 30, 2020.

To the extent that Zendesk can determine that the underlying customers do not share common corporate information, Zendesk does not aggregate paid customer accounts associated with reseller and other similar channel arrangements for the purposes of determining its dollar-based net expansion rate. While not material, Zendesk believes the failure to account for these activities would otherwise skew the dollar-based net expansion metrics associated with customers that maintain multiple paid customer accounts across its products and paid customer accounts associated with reseller and other similar channel arrangements.

Zendesk does not currently incorporate operating metrics associated with its legacy analytics product, its legacy Outbound product, its legacy Starter plan, Sell, Sunshine Conversations, its legacy Smooch product, free trials, or other free services into its measurement of dollar-based net expansion rate.

For a more detailed description of how Zendesk calculates its dollar-based net expansion rate, please refer to Zendesk’s periodic reports filed with the Securities and Exchange Commission.

Zendesk’s percentage of annual recurring revenue from Support that is generated by customers with 100 or more agents on Support is determined by dividing the annual recurring revenue from Support for paid customer accounts with 100 or more agents on Support as of the measurement date by the annual recurring revenue from Support for all paid customer accounts on Support as of the measurement date. Zendesk determines the customers with 100 or more agents on Support as of the measurement date based on the number of activated agents on Support at the measurement date and includes adjustments to aggregate paid customer accounts that share common corporate information. For the purpose of determining this metric, Zendesk builds an estimation of the proportion of annual recurring revenue from Suite attributable to Support and includes such portion in the annual recurring revenue from Support.

Zendesk does not currently incorporate operating metrics associated with products other than Support into its measurement of the percentage of annual recurring revenue from Support that is generated by customers with 100 or more agents on Support.

Zendesk’s annual revenue run rate is based on its revenue for the most recent applicable quarter. Zendesk annualizes such results to estimate its annual revenue run rate by multiplying the revenue for its most recent applicable quarter by four. Zendesk’s annual revenue run rate is not a comprehensive statement of its financial results for such period and should not be viewed as a substitute for full annual or interim financial statements prepared in accordance with GAAP. In addition, Zendesk’s revenue for the most recent applicable quarter or annual revenue run rate are not necessarily indicative of the results to be achieved in any future period.

Source: Zendesk, Inc.

Zendesk, Inc.
Investor Contact:
Karen Sansot, +1 415-852-3877
ir@zendesk.com
or
Media Contact:
Marissa Tree, +1 415-609-4510
press@zendesk.com

Source: Zendesk, Inc.

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