Highlights
-
First quarter revenue increased 38% year-over-year to $129.8 million
-
First quarter GAAP operating loss of $33.6 million and non-GAAP
operating loss of $3.0 million
SAN FRANCISCO--(BUSINESS WIRE)--
Zendesk, Inc. (NYSE: ZEN) today reported financial results for the
fiscal quarter ended March 31, 2018, and released a Shareholder Letter
on its investor relations website at https://investor.zendesk.com.
All results and guidance are based on the new revenue recognition
standard ASC 606.
Results for the First Quarter 2018
Revenue was $129.8 million for the quarter ended March 31, 2018, an
increase of 38% over the prior year period. GAAP net loss for the
quarter ended March 31, 2018 was $29.3 million, and GAAP net loss per
share was $0.28. Non-GAAP net income was $2.0 million, and non-GAAP net
income per share was $0.02. Non-GAAP net income excludes approximately
$29.2 million in share-based compensation and related expenses
(including $1.9 million of employer tax related to employee stock
transactions and $0.4 million of amortization of share-based
compensation capitalized in internal-use software), $0.7 million of
amortization of purchased intangibles, $0.7 million of
acquisition-related expenses, and $0.7 million of amortization of debt
discount and issuance costs. GAAP net loss per share for the quarter
ended March 31, 2018 was based on 103.7 million weighted average shares
outstanding (basic), and non-GAAP net income per share for the quarter
ended March 31, 2018 was based on 103.7 million weighted averages shares
outstanding (basic) and 108.9 million weighted average shares
outstanding (diluted).
Outlook
As of May 1, 2018, Zendesk provided guidance for the quarter ending June
30, 2018 and updated its guidance for the year ending December 31, 2018.
For the quarter ending June 30, 2018, Zendesk expects to report:
-
Revenue in the range of $136.0 - 138.0 million
-
GAAP operating income (loss) in the range of $(34.0) - (32.0) million,
which includes share-based compensation and related expenses of
approximately $30.7 million, amortization of purchased intangibles of
approximately $0.7 million, and acquisition-related expenses of
approximately $0.6 million
-
Non-GAAP operating income (loss) in the range of $(2.0) - 0.0 million,
which excludes share-based compensation and related expenses of
approximately $30.7 million, amortization of purchased intangibles of
approximately $0.7 million, and acquisition-related expenses of
approximately $0.6 million
-
Approximately 105.2 million weighted average shares outstanding (basic)
-
Approximately 109.9 million weighted average shares outstanding
(diluted)
For the full year 2018, Zendesk expects to report:
-
Revenue in the range of $565.0 - 572.0 million
-
GAAP operating income (loss) in the range of $(132.0) - (127.0)
million, which includes share-based compensation and related expenses
of approximately $126.8 million, amortization of purchased intangibles
of approximately $2.7 million, and acquisition-related expenses of
approximately $2.5 million
-
Non-GAAP operating income (loss) in the range of $0.0 - 5.0 million,
which excludes share-based compensation and related expenses of
approximately $126.8 million, amortization of purchased intangibles of
approximately $2.7 million, and acquisition-related expenses of
approximately $2.5 million
-
Approximately 106.0 million weighted average shares outstanding (basic)
-
Approximately 111.8 million weighted average shares outstanding
(diluted)
-
Free cash flow in the range of $25.0 - 30.0 million
We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2018 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 2018 is not available without
unreasonable effort.
Zendesk’s estimates of share-based compensation and related expenses,
amortization of purchased intangibles, and acquisition-related expenses
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.
Shareholder Letter and Conference Call Information
The detailed Shareholder Letter is available at https://investor.zendesk.com
and Zendesk will host a conference call to answer questions today, May
1, 2018, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live
webcast of the conference call will be available at https://investor.zendesk.com.
The conference call can also be accessed by dialing 833-287-0801, or +1
647-689-4460 (outside the U.S. and Canada). The conference ID is
9976616. A replay of the call via webcast will be available at https://investor.zendesk.com
or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and
Canada) and entering passcode 9976616. The dial-in replay will be
available until the end of day May 3, 2018. The webcast replay will be
available for 12 months.
About Zendesk
The best customer experiences are built with Zendesk. Zendesk’s powerful
and flexible customer service and engagement platform scales to meet the
needs of any business, from startups and small businesses to growth
companies and enterprises. Zendesk serves businesses across a multitude
of industries, with more than 100,000 paid customer accounts offering
service and support in more than 30 languages. Headquartered in San
Francisco, Zendesk operates worldwide with 15 offices in North America,
Europe, Asia, Australia, and South America. 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
towards its long-term financial objectives. The 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) adverse changes in general economic or
market conditions; (ii) Zendesk’s ability to adapt its products to
changing market dynamics and customer preferences or achieve increased
market acceptance of its products; (iii) Zendesk’s ability to
effectively expand its sales capabilities, (iv) Zendesk’s ability to
effectively market and sell its products to larger enterprises, (v)
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; (vi)
the market in which Zendesk operates is intensely competitive, and
Zendesk may not compete effectively; (vii) the development of the market
for software as a service business software applications; (viii)
Zendesk’s ability to introduce and market new products and to support
its products on a shared services platform; (ix) Zendesk’s ability to
integrate acquired businesses and technologies successfully or achieve
the expected benefits of such acquisitions; (x) Zendesk’s ability to
effectively manage its growth and organizational change; (xi) breaches
in Zendesk’s security measures or unauthorized access to its customers’
data; (xii) service interruptions or performance problems associated
with Zendesk’s technology and infrastructure; (xiii) real or perceived
errors, failures, or bugs in its products; and (xiv) Zendesk’s
substantial reliance on its customers renewing their subscriptions and
purchasing additional subscriptions.
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 Annual Report on Form 10-K for the
year ended December 31, 2017. 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 March 31, 2018.
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 March 31,
|
|
|
2018
|
|
2017
|
|
|
|
* As adjusted
|
Revenue
|
|
$
|
129,791
|
|
|
$
|
93,888
|
|
Cost of revenue
|
|
39,056
|
|
|
28,107
|
|
Gross profit
|
|
90,735
|
|
|
65,781
|
|
Operating expenses:
|
|
|
|
|
Research and development
|
|
37,085
|
|
|
26,456
|
|
Sales and marketing
|
|
65,058
|
|
|
46,269
|
|
General and administrative
|
|
22,207
|
|
|
18,317
|
|
Total operating expenses
|
|
124,350
|
|
|
91,042
|
|
Operating loss
|
|
(33,615
|
)
|
|
(25,261
|
)
|
Other income, net
|
|
1,000
|
|
|
218
|
|
Loss before provision for (benefit from) income taxes
|
|
(32,615
|
)
|
|
(25,043
|
)
|
Provision for (benefit from) income taxes
|
|
(3,290
|
)
|
|
38
|
|
Net loss
|
|
$
|
(29,325
|
)
|
|
$
|
(25,081
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
Weighted-average shares used to compute net loss per share, basic
and diluted
|
|
103,692
|
|
|
97,475
|
|
*Adjusted to reflect the adoption of ASC 606.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Balance Sheets
(In thousands, except par value; unaudited)
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
|
|
|
|
*As adjusted
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
609,229
|
|
|
$
|
109,370
|
|
Marketable securities
|
|
128,751
|
|
|
137,576
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,445 and $1,252 as of March 31, 2018 and December 31, 2017,
respectively
|
|
52,738
|
|
|
57,096
|
|
Deferred costs
|
|
17,010
|
|
|
15,771
|
|
Prepaid expenses and other current assets
|
|
29,412
|
|
|
24,165
|
|
Total current assets
|
|
837,140
|
|
|
343,978
|
|
Marketable securities, noncurrent
|
|
121,754
|
|
|
97,447
|
|
Property and equipment, net
|
|
61,000
|
|
|
59,157
|
|
Deferred costs, noncurrent
|
|
16,851
|
|
|
15,395
|
|
Goodwill and intangible assets, net
|
|
66,316
|
|
|
67,034
|
|
Other assets
|
|
9,462
|
|
|
8,359
|
|
Total assets
|
|
$
|
1,112,523
|
|
|
$
|
591,370
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
6,586
|
|
|
$
|
5,307
|
|
Accrued liabilities
|
|
37,633
|
|
|
21,876
|
|
Accrued compensation and related benefits
|
|
33,142
|
|
|
29,017
|
|
Deferred revenue
|
|
183,936
|
|
|
173,147
|
|
Total current liabilities
|
|
261,297
|
|
|
229,347
|
|
Convertible senior notes, net
|
|
439,953
|
|
|
—
|
|
Deferred revenue, noncurrent
|
|
1,334
|
|
|
1,213
|
|
Other liabilities
|
|
9,286
|
|
|
6,626
|
|
Total liabilities
|
|
711,870
|
|
|
237,186
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, par value $0.01 per share
|
|
—
|
|
|
—
|
|
Common stock, par value $0.01 per share
|
|
1,042
|
|
|
1,031
|
|
Additional paid-in capital
|
|
830,741
|
|
|
753,568
|
|
Accumulated other comprehensive loss
|
|
(3,762
|
)
|
|
(2,372
|
)
|
Accumulated deficit
|
|
(427,368
|
)
|
|
(398,043
|
)
|
Total stockholders’ equity
|
|
400,653
|
|
|
354,184
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,112,523
|
|
|
$
|
591,370
|
|
*Adjusted to reflect the adoption of ASC 606.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
*As adjusted
|
Cash flows from operating activities
|
|
|
|
|
Net loss
|
|
$
|
(29,325
|
)
|
|
$
|
(25,081
|
)
|
Adjustments to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
Depreciation and amortization
|
|
9,865
|
|
|
7,923
|
|
Share-based compensation
|
|
26,988
|
|
|
19,104
|
|
Amortization of deferred costs
|
|
4,510
|
|
|
3,179
|
|
Amortization of debt discount and issuance costs
|
|
720
|
|
|
—
|
|
Other
|
|
250
|
|
|
697
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
|
3,691
|
|
|
(2,316
|
)
|
Prepaid expenses and other current assets
|
|
(3,364
|
)
|
|
(380
|
)
|
Deferred costs
|
|
(7,043
|
)
|
|
(4,102
|
)
|
Other assets and liabilities
|
|
(12,027
|
)
|
|
(332
|
)
|
Accounts payable
|
|
1,052
|
|
|
1,958
|
|
Accrued liabilities
|
|
10,986
|
|
|
2,524
|
|
Accrued compensation and related benefits
|
|
(971
|
)
|
|
(2,596
|
)
|
Deferred revenue
|
|
10,910
|
|
|
6,704
|
|
Net cash provided by operating activities
|
|
16,242
|
|
|
7,282
|
|
Cash flows from investing activities
|
|
|
|
|
Purchases of property and equipment
|
|
(6,808
|
)
|
|
(4,791
|
)
|
Internal-use software development costs
|
|
(2,344
|
)
|
|
(1,852
|
)
|
Purchases of marketable securities
|
|
(78,321
|
)
|
|
(40,758
|
)
|
Proceeds from maturities of marketable securities
|
|
55,263
|
|
|
31,654
|
|
Proceeds from sales of marketable securities
|
|
6,982
|
|
|
8,602
|
|
Net cash used in investing activities
|
|
(25,228
|
)
|
|
(7,145
|
)
|
Cash flows from financing activities
|
|
|
|
|
Proceeds from issuance of convertible senior notes, net of issuance
costs paid of $12,937
|
|
562,063
|
|
|
—
|
|
Purchase of capped call related to convertible senior notes
|
|
(63,940
|
)
|
|
—
|
|
Proceeds from exercises of employee stock options
|
|
6,193
|
|
|
11,689
|
|
Proceeds from employee stock purchase plan
|
|
5,096
|
|
|
3,844
|
|
Taxes paid related to net share settlement of share-based awards
|
|
(734
|
)
|
|
(154
|
)
|
Net cash provided by financing activities
|
|
508,678
|
|
|
15,379
|
|
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
|
|
(35
|
)
|
|
198
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
499,657
|
|
|
15,714
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
110,888
|
|
|
95,062
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
610,545
|
|
|
$
|
110,776
|
|
*Adjusted to reflect the adoption of ASC 606 and ASU 2016-18.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31,
|
|
|
2018
|
|
2017
|
|
|
|
*As adjusted
|
Reconciliation of gross profit and gross margin
|
|
|
|
|
GAAP gross profit
|
|
$
|
90,735
|
|
|
$
|
65,781
|
|
Plus: Share-based compensation
|
|
3,098
|
|
|
2,104
|
|
Plus: Employer tax related to employee stock transactions
|
|
260
|
|
|
169
|
|
Plus: Amortization of purchased intangibles
|
|
612
|
|
|
830
|
|
Plus: Amortization of share-based compensation capitalized in
internal-use software
|
|
362
|
|
|
430
|
|
Non-GAAP gross profit
|
|
$
|
95,067
|
|
|
$
|
69,314
|
|
GAAP gross margin
|
|
70
|
%
|
|
70
|
%
|
Non-GAAP adjustments
|
|
3
|
%
|
|
4
|
%
|
Non-GAAP gross margin
|
|
73
|
%
|
|
74
|
%
|
|
|
|
|
|
Reconciliation of operating expenses
|
|
|
|
|
GAAP research and development
|
|
$
|
37,085
|
|
|
$
|
26,456
|
|
Less: Share-based compensation
|
|
(10,231
|
)
|
|
(6,914
|
)
|
Less: Employer tax related to employee stock transactions
|
|
(742
|
)
|
|
(548
|
)
|
Less: Acquisition-related expenses
|
|
(384
|
)
|
|
—
|
|
Non-GAAP research and development
|
|
$
|
25,728
|
|
|
$
|
18,994
|
|
GAAP research and development as percentage of revenue
|
|
29
|
%
|
|
28
|
%
|
Non-GAAP research and development as percentage of revenue
|
|
20
|
%
|
|
20
|
%
|
|
|
|
|
|
GAAP sales and marketing
|
|
$
|
65,058
|
|
|
$
|
46,269
|
|
Less: Share-based compensation
|
|
(8,007
|
)
|
|
(5,524
|
)
|
Less: Employer tax related to employee stock transactions
|
|
(575
|
)
|
|
(367
|
)
|
Less: Amortization of purchased intangibles
|
|
(110
|
)
|
|
(102
|
)
|
Less: Acquisition-related expenses
|
|
(281
|
)
|
|
—
|
|
Non-GAAP sales and marketing
|
|
$
|
56,085
|
|
|
$
|
40,276
|
|
GAAP sales and marketing as percentage of revenue
|
|
50
|
%
|
|
49
|
%
|
Non-GAAP sales and marketing as percentage of revenue
|
|
43
|
%
|
|
43
|
%
|
|
|
|
|
|
GAAP general and administrative
|
|
$
|
22,207
|
|
|
$
|
18,317
|
|
Less: Share-based compensation
|
|
(5,652
|
)
|
|
(4,562
|
)
|
Less: Employer tax related to employee stock transactions
|
|
(307
|
)
|
|
(270
|
)
|
Non-GAAP general and administrative
|
|
$
|
16,248
|
|
|
$
|
13,485
|
|
GAAP general and administrative as percentage of revenue
|
|
17
|
%
|
|
20
|
%
|
Non-GAAP general and administrative as percentage of revenue
|
|
13
|
%
|
|
14
|
%
|
|
|
|
|
|
Reconciliation of operating loss and operating margin
|
|
|
|
|
GAAP operating loss
|
|
$
|
(33,615
|
)
|
|
$
|
(25,261
|
)
|
Plus: Share-based compensation
|
|
26,988
|
|
|
19,104
|
|
Plus: Employer tax related to employee stock transactions
|
|
1,884
|
|
|
1,354
|
|
Plus: Amortization of purchased intangibles
|
|
722
|
|
|
932
|
|
Plus: Acquisition-related expenses
|
|
665
|
|
|
—
|
|
Plus: Amortization of share-based compensation capitalized in
internal-use software
|
|
362
|
|
|
430
|
|
Non-GAAP operating loss
|
|
$
|
(2,994
|
)
|
|
$
|
(3,441
|
)
|
GAAP operating margin
|
|
(26
|
)%
|
|
(27
|
)%
|
Non-GAAP adjustments
|
|
24
|
%
|
|
23
|
%
|
Non-GAAP operating margin
|
|
(2
|
)%
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2018
|
|
2017
|
|
|
|
*As adjusted
|
Reconciliation of net income (loss)
|
|
|
|
|
GAAP net loss
|
|
$
|
(29,325
|
)
|
|
$
|
(25,081
|
)
|
Plus: Share-based compensation
|
|
26,988
|
|
|
19,104
|
|
Plus: Employer tax related to employee stock transactions
|
|
1,884
|
|
|
1,354
|
|
Plus: Amortization of purchased intangibles
|
|
722
|
|
|
932
|
|
Plus: Acquisition-related expenses
|
|
665
|
|
|
—
|
|
Plus: Amortization of share-based compensation capitalized in
internal-use software
|
|
362
|
|
|
430
|
|
Plus: Amortization of debt discount and issuance costs
|
|
720
|
|
|
—
|
|
Non-GAAP net income (loss)
|
|
$
|
2,016
|
|
|
$
|
(3,261
|
)
|
|
|
|
|
|
Reconciliation of net income (loss) per share, basic
|
|
|
|
|
GAAP net loss per share, basic
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
Non-GAAP adjustments to net loss
|
|
0.30
|
|
|
0.23
|
|
Non-GAAP net income (loss) per share, basic
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
Reconciliation of net income (loss) per share, diluted
|
|
|
|
|
GAAP net loss per share, diluted
|
|
$
|
(0.28
|
)
|
|
$
|
(0.26
|
)
|
Non-GAAP adjustments to net loss
|
|
0.30
|
|
|
0.23
|
|
Non-GAAP net income (loss) per share, diluted
|
|
$
|
0.02
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
Weighted-average shares used in GAAP per share calculation, basic
and diluted
|
|
103,692
|
|
|
97,475
|
|
|
|
|
|
|
Weighted-average shares used in non-GAAP per share calculation
|
|
|
|
|
Basic
|
|
103,692
|
|
|
97,475
|
|
Diluted
|
|
108,923
|
|
|
97,475
|
|
|
|
|
|
|
Computation of free cash flow
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
16,242
|
|
|
$
|
7,282
|
|
Less: purchases of property and equipment
|
|
(6,808
|
)
|
|
(4,791
|
)
|
Less: internal-use software development costs
|
|
(2,344
|
)
|
|
(1,852
|
)
|
Free cash flow
|
|
$
|
7,090
|
|
|
$
|
639
|
|
*Adjusted to reflect the adoption of ASC 606.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, and free cash flow.
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.
Amortization of Debt Discount and Issuance Costs: In March 2018,
Zendesk issued $575 million of convertible senior notes due in 2023,
which bear interest at an annual fixed rate of 0.25%. The imputed
interest rate of the convertible senior notes was approximately 5.26%.
This is a result of the debt discount recorded for the conversion
feature that is required to be separately accounted for as equity, and
debt issuance costs, which reduce the carrying value of the convertible
debt instrument. The debt discount is 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.
Zendesk provides disclosures regarding its free cash flow, which is
defined as net cash from operating activities, less purchases of
property and equipment and internal-use software development costs.
Zendesk uses free cash flow, among 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 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, 2018 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, 2018 is not available without unreasonable effort.
Zendesk’s disclosures regarding its expectations for its non-GAAP
operating margin include adjustments to its expectations for its GAAP
operating margin that exclude the expected share-based compensation and
related expenses, amortization of purchased intangibles, and
acquisition-related expenses excluded from its expectations for non-GAAP
operating income (loss) as compared to its expectation for GAAP
operating income (loss) for the same period.
Zendesk does not provide a reconciliation of its non-GAAP operating
margin guidance to GAAP operating margin for future periods beyond the
current fiscal year 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 and amortization of purchased intangibles related to
developed technology. 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
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, monthly recurring revenue represented by its churned
customers, and the percentage of its monthly 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. Use of Support, Chat, and Zendesk’s other products requires
separate subscriptions and each of these accounts are treated as a
separate paid customer account. 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. 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 monthly recurring revenue
for a set of paid customer accounts on its products. 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 one-time discounts or any platform usage above
the subscription base, if any, that may be applicable to such
subscription. 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 monthly recurring
revenue across its products for customers with paid customer accounts on
Support or Chat 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 monthly 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 transfer of agents between paid
customer accounts, 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 95,800 customers, as compared to the approximately 125,500
total paid customer accounts as of March 31, 2018.
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 analytics product or its Outbound product 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 monthly recurring revenue from Support that is
generated by customers with 100 or more agents on Support is determined
by dividing the monthly recurring revenue from Support for paid customer
accounts with 100 or more agents on Support as of the measurement date
by the monthly 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.
Zendesk determines the annualized value of a contract by annualizing the
monthly recurring revenue for such contract.
Zendesk does not currently incorporate operating metrics associated with
products other than Support into its measurement of the percentage of
monthly recurring revenue from Support that is generated by customers
with 100 or more agents on Support.
Source: Zendesk, Inc.
View source version on businesswire.com:
https://www.businesswire.com/news/home/20180501006742/en/
Zendesk, Inc.
Investor Contact:
Marc Cabi, +1
415-852-3877
ir@zendesk.com
or
Media
Contact:
Tian Lee, +1 415-231-0847
press@zendesk.com
Source: Zendesk, Inc.