Zendesk Announces Fourth Quarter and Fiscal Year 2020 Results

02/04/2021

Highlights:

  • Fourth quarter revenue increased 23% year over year to $283.5 million
  • Fourth quarter GAAP operating loss of $54.8 million and non-GAAP operating income of $18.5 million
  • Full year 2020 revenue increased 26% year over year to $1.030 billion
  • Full year 2020 GAAP operating loss of $155.9 million and non-GAAP operating income of $71.8 million

SAN FRANCISCO--(BUSINESS WIRE)-- Zendesk, Inc. (NYSE: ZEN) today reported financial results for the quarter and fiscal year ended December 31, 2020, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Fourth Quarter 2020

Revenue was $283.5 million for the quarter ended December 31, 2020, an increase of 23% over the prior year period. GAAP net loss for the quarter ended December 31, 2020 was $70.0 million, and GAAP net loss per share (basic and diluted) was $0.60. Non-GAAP net income was $13.1 million, and non-GAAP net income per share (basic and diluted) was $0.11. Non-GAAP net income excludes approximately $52.9 million in share-based compensation and related expenses (including $2.1 million of employer tax related to employee stock transactions and $0.7 million of amortization of share-based compensation capitalized in internal-use software), $15.0 million of real estate impairments, $12.4 million of amortization of debt discount and issuance costs,$3.4 million of amortization of purchased intangibles, $2.0 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $2.5 million. GAAP net loss per share for the quarter ended December 31, 2020 was based on 117.0 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended December 31, 2020 was based on 117.0 million weighted average shares outstanding (basic) and 124.8 million weighted average shares outstanding (diluted).

Results for the Full Fiscal Year 2020

Revenue was $1.030 billion for the year ended December 31, 2020, an increase of 26% over the prior year period. GAAP net loss for the year ended December 31, 2020 was $218.2 million, and GAAP net loss per share (basic and diluted) was $1.89. Non-GAAP net income was $63.0 million, non-GAAP net income per share (basic) was $0.55, and non-GAAP net income per share (diluted) was $0.52. Non-GAAP net income excludes approximately $194.2 million in share-based compensation and related expenses (including $10.0 million of employer tax related to employee stock transactions and $2.1 million of amortization of share-based compensation capitalized in internal-use software), $38.6 millionof amortization of debt discount and issuance costs, a $26.0 million loss on early extinguishment of debt, $15.0 million of real estate impairments, $10.7 million of amortization of purchased intangibles, $7.7 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $11.0 million. GAAP net loss per share for the year ended December 31, 2020 was based on 115.2 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the year ended December 31, 2020 was based on 115.2 million weighted average shares outstanding (basic) and 121.3 million weighted average shares outstanding (diluted).

Outlook

As of February 4, 2021, Zendesk provided guidance for the quarter ending March 31, 2021 and for the year ending December 31, 2021.

For the quarter ending March 31, 2021, Zendesk expects to report:

  • Revenue in the range of $291 - 296 million
  • GAAP operating income (loss) in the range of $(48) - (44) million, which includes share-based compensation and related expenses of approximately $59 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 $15 - 19 million, which excludes share-based compensation and related expenses of approximately $59 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
  • Approximately 118 million weighted average shares outstanding (basic)
  • Approximately 128 million weighted average shares outstanding (diluted)

For the full year ending December 31, 2021, Zendesk expects to report:

  • Revenue in the range of $1.280 - 1.305 billion
  • GAAP operating income (loss) in the range of $(165) - (150) million, which includes share-based compensation and related expenses of approximately $244 million, amortization of purchased intangibles of approximately $8 million, and acquisition-related expenses of approximately $3 million
  • Non-GAAP operating income (loss) in the range of $90 - 105 million, which excludes share-based compensation and related expenses of approximately $244 million, amortization of purchased intangibles of approximately $8 million, and acquisition-related expenses of approximately $3 million
  • Approximately 120 million weighted average shares outstanding (basic)
  • Approximately 130 million weighted average shares outstanding (diluted)
  • Free cash flow in the range of $85 - 100 million, which includes expected accelerated rent payments of up to $12 million related to our real estate changes in San Francisco

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, and the effect on demand for our products from customers which can result and has resulted in higher levels of contraction than historical levels.

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2021 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 2021 is not available without unreasonable effort.

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.

Chief Financial Officer Transition

Zendesk also announces today that Chief Financial Officer Elena Gomez has informed the company and its board of directors of her plans to depart the company in the coming months. We are initiating a search for her successor. Ms. Gomez will stay to ensure a smooth transition and will be with us as Chief Financial Officer until at least through the release of our financial results for the quarter ending March 31, 2021 and the filing of the company’s Quarterly Report on Form 10-Q for the same period.

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, February 4, 2021 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 170,000 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 and industries; (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) our ability to optimize the pricing for our solutions; (vii) 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; (viii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (ix) Zendesk's ability to effectively market and sell its products to larger enterprises; (x) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (xi) Zendesk's ability to maintain and develop its strategic relationships with third parties; (xii) Zendesk's reliance on third party services, including services for hosting, email, and messaging; (xiii) Zendesk's ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (xiv) Zendesk's ability to effectively manage its growth and organizational change, including its international expansion strategy; (xv) Zendesk's ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xvi) Zendesk's ability to comply with privacy and data security regulations; (xvii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xviii) the development of the market for software as a service business software applications; (xix) real or perceived errors, failures, or bugs in its products; (xx) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services; and (xxi) the amount and timing of any determination of real estate impairments relating to expected lease abandonment matters.

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 September 30, 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 Annual Report on Form 10-K for the year ended December 31, 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 December 31,

 

Year Ended December 31,

 

 

2020

 

2019

 

2020

 

2019

Revenue

 

$

283,498

 

 

$

229,871

 

 

$

1,029,564

 

 

$

816,416

 

Cost of revenue

 

67,219

 

 

61,749

 

 

251,255

 

 

234,282

 

Gross profit

 

216,279

 

 

168,122

 

 

778,309

 

 

582,134

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

71,134

 

 

55,719

 

 

255,400

 

 

207,548

 

Sales and marketing

 

142,897

 

 

110,764

 

 

512,339

 

 

396,514

 

General and administrative

 

57,041

 

 

33,941

 

 

166,469

 

 

141,076

 

Total operating expenses

 

271,072

 

 

200,424

 

 

934,208

 

 

745,138

 

Operating loss

 

(54,793

)

 

(32,302

)

 

(155,899

)

 

(163,004

)

Other income (expense), net:

 

 

 

 

 

 

 

 

Interest expense

 

(14,258

)

 

(6,823

)

 

(43,319

)

 

(26,708

)

Loss on early extinguishment of debt

 

 

 

 

 

(25,950

)

 

 

Interest and other income (expense), net

 

(1

)

 

3,646

 

 

12,751

 

 

21,409

 

Total other income (expense), net

 

(14,259

)

 

(3,177

)

 

(56,518

)

 

(5,299

)

Loss before provision for income taxes

 

(69,052

)

 

(35,479

)

 

(212,417

)

 

(168,303

)

Provision for income taxes

 

984

 

 

689

 

 

5,761

 

 

1,350

 

Net loss

 

$

(70,036

)

 

$

(36,168

)

 

$

(218,178

)

 

$

(169,653

)

Net loss per share, basic and diluted

 

$

(0.60

)

 

$

(0.32

)

 

$

(1.89

)

 

$

(1.53

)

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

 

116,986

 

 

112,496

 

 

115,240

 

 

110,606

 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 

 

December 31,
2020

 

December 31,
2019

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

405,430

 

 

$

196,591

 

Marketable securities

565,593

 

 

286,958

 

Accounts receivable, net of allowance for doubtful accounts of $5,787 and $2,846 as of December 31, 2020 and 2019, respectively

199,243

 

 

127,808

 

Deferred costs

51,878

 

 

35,619

 

Prepaid expenses and other current assets

53,829

 

 

45,847

 

Total current assets

1,275,973

 

 

692,823

 

Marketable securities, noncurrent

428,678

 

 

361,948

 

Property and equipment, net

94,208

 

 

102,090

 

Deferred costs, noncurrent

52,731

 

 

35,230

 

Lease right-of-use assets

84,013

 

 

89,983

 

Goodwill and intangible assets, net

196,218

 

 

206,883

 

Other assets

25,458

 

 

25,632

 

Total assets

$

2,157,279

 

 

$

1,514,589

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

15,428

 

 

$

38,376

 

Accrued liabilities

38,921

 

 

36,347

 

Accrued compensation and related benefits

103,437

 

 

61,512

 

Deferred revenue

378,935

 

 

320,642

 

Lease liabilities

23,533

 

 

21,804

 

Current portion of convertible senior notes, net

132,388

 

 

 

Total current liabilities

692,642

 

 

478,681

 

Convertible senior notes, net

935,576

 

 

483,464

 

Deferred revenue, noncurrent

4,423

 

 

3,320

 

Lease liabilities, noncurrent

85,275

 

 

83,478

 

Other liabilities

7,532

 

 

7,662

 

Total liabilities

1,725,448

 

 

1,056,605

 

Stockholders’ equity:

 

 

 

Preferred stock, par value $0.01 per share

 

 

 

Common stock, par value $0.01 per share

1,174

 

 

1,130

 

Additional paid-in capital

1,344,337

 

 

1,155,044

 

Accumulated other comprehensive income

3,203

 

 

591

 

Accumulated deficit

(916,883

)

 

(698,781

)

Total stockholders’ equity

431,831

 

 

457,984

 

Total liabilities and stockholders’ equity

$

2,157,279

 

 

$

1,514,589

 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 

 

 

Three Months Ended
December 31,

 

Year Ended
December 31,

 

 

2020

 

2019

 

2020

 

2019

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(70,036

)

 

$

(36,168

)

 

$

(218,178

)

 

$

(169,653

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

9,645

 

 

10,810

 

 

42,247

 

 

38,602

 

Share-based compensation

 

50,147

 

 

37,672

 

 

182,204

 

 

156,730

 

Amortization of deferred costs

 

13,036

 

 

9,133

 

 

45,426

 

 

32,116

 

Amortization of debt discount and issuance costs

 

12,358

 

 

6,457

 

 

38,588

 

 

25,288

 

Loss on early extinguishment of debt

 

 

 

 

 

25,950

 

 

 

Real estate impairment

 

14,975

 

 

 

 

14,975

 

 

 

Allowance for credit losses on accounts receivable

 

1,686

 

 

1,262

 

 

10,136

 

 

5,061

 

Repayment of convertible senior notes attributable to debt discount

 

 

 

 

 

(38,637

)

 

 

Other, net

 

7,909

 

 

(1,480

)

 

5,602

 

 

(4,321

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

(47,910

)

 

(30,229

)

 

(80,945

)

 

(50,061

)

Prepaid expenses and other current assets

 

1,207

 

 

2,648

 

 

(1,909

)

 

(8,349

)

Deferred costs

 

(30,088

)

 

(14,665

)

 

(77,380

)

 

(49,922

)

Lease right-of-use assets

 

4,900

 

 

4,918

 

 

20,372

 

 

18,940

 

Other assets and liabilities

 

1,821

 

 

3,060

 

 

799

 

 

(1,081

)

Accounts payable

 

5,404

 

 

(463

)

 

(20,804

)

 

22,128

 

Accrued liabilities

 

3,231

 

 

2,739

 

 

4,800

 

 

3,259

 

Accrued compensation and related benefits

 

20,206

 

 

7,933

 

 

38,458

 

 

11,282

 

Deferred revenue

 

55,028

 

 

32,427

 

 

59,397

 

 

78,110

 

Lease liabilities

 

(7,170

)

 

(3,843

)

 

(24,673

)

 

(18,868

)

Net cash provided by operating activities

 

46,349

 

 

32,211

 

 

26,428

 

 

89,261

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

(3,388

)

 

(13,512

)

 

(22,877

)

 

(39,140

)

Internal-use software development costs

 

(4,745

)

 

(2,834

)

 

(15,646

)

 

(7,841

)

Purchases of marketable securities

 

(148,289

)

 

(79,943

)

 

(849,656

)

 

(454,649

)

Proceeds from maturities of marketable securities

 

94,210

 

 

31,205

 

 

375,686

 

 

177,376

 

Proceeds from sales of marketable securities

 

24,581

 

 

28,289

 

 

130,087

 

 

328,921

 

Business combinations, net of cash acquired

 

 

 

(125

)

 

 

 

(70,919

)

Purchases of strategic investments

 

 

 

 

 

(1,500

)

 

(500

)

Proceeds from sales of strategic investments

 

 

 

 

 

1,577

 

 

 

Net cash used in investing activities

 

(37,631

)

 

(36,920

)

 

(382,329

)

 

(66,752

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of 2025 convertible senior notes, net of issuance costs paid of $21,030

 

(20

)

 

 

 

1,128,970

 

 

 

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

 

4,532

 

 

4,518

 

 

29,123

 

 

26,495

 

Proceeds from employee stock purchase plan

 

11,541

 

 

8,433

 

 

40,454

 

 

31,490

 

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

 

(2,720

)

 

(2,172

)

 

(8,847

)

 

(9,574

)

Net cash provided by financing activities

 

13,333

 

 

10,779

 

 

563,817

 

 

48,411

 

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

 

(191

)

 

16

 

 

46

 

 

101

 

Net increase in cash, cash equivalents and restricted cash

 

21,860

 

 

6,086

 

 

207,962

 

 

71,021

 

Cash, cash equivalents and restricted cash at beginning of period

 

385,999

 

 

193,811

 

 

199,897

 

 

128,876

 

Cash, cash equivalents and restricted cash at end of period

 

$

407,859

 

 

$

199,897

 

 

$

407,859

 

 

$

199,897

 

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
December 31,

 

Year Ended
December 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Reconciliation of gross profit and gross margin

 

 

 

 

 

 

 

 

GAAP gross profit

 

$

216,279

 

 

$

168,122

 

 

$

778,309

 

 

$

582,134

 

Plus: Share-based compensation

 

4,990

 

 

5,278

 

 

20,068

 

 

20,858

 

Plus: Employer tax related to employee stock transactions

 

279

 

 

225

 

 

1,242

 

 

1,374

 

Plus: Amortization of purchased intangibles

 

2,737

 

 

2,106

 

 

7,987

 

 

7,732

 

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

 

700

 

 

440

 

 

2,075

 

 

1,711

 

Plus: Acquisition-related expenses

 

54

 

 

138

 

 

346

 

 

597

 

Non-GAAP gross profit

 

$

225,039

 

 

$

176,309

 

 

$

810,027

 

 

$

614,406

 

GAAP gross margin

 

76

%

 

73

%

 

76

%

 

71

%

Non-GAAP adjustments

 

3

%

 

4

%

 

3

%

 

4

%

Non-GAAP gross margin

 

79

%

 

77

%

 

79

%

 

75

%

 

 

 

 

 

 

 

 

 

Reconciliation of operating expenses

 

 

 

 

 

 

 

 

GAAP research and development

 

$

71,134

 

 

$

55,719

 

 

$

255,400

 

 

$

207,548

 

Less: Share-based compensation

 

(14,892

)

 

(11,248

)

 

(53,967

)

 

(46,965

)

Less: Employer tax related to employee stock transactions

 

(606

)

 

(435

)

 

(2,687

)

 

(3,292

)

Less: Acquisition-related expenses

 

(947

)

 

(754

)

 

(4,329

)

 

(3,159

)

Non-GAAP research and development

 

$

54,689

 

 

$

43,282

 

 

$

194,417

 

 

$

154,132

 

GAAP research and development as percentage of revenue

 

25

%

 

24

%

 

25

%

 

25

%

Non-GAAP research and development as percentage of revenue

 

19

%

 

19

%

 

19

%

 

19

%

 

 

 

 

 

 

 

 

 

GAAP sales and marketing

 

$

142,897

 

 

$

110,764

 

 

$

512,339

 

 

$

396,514

 

Less: Share-based compensation

 

(21,329

)

 

(14,151

)

 

(74,796

)

 

(53,964

)

Less: Employer tax related to employee stock transactions

 

(764

)

 

(437

)

 

(3,687

)

 

(2,788

)

Less: Amortization of purchased intangibles

 

(652

)

 

(699

)

 

(2,692

)

 

(2,633

)

Less: Acquisition-related expenses

 

(87

)

 

(683

)

 

(1,233

)

 

(1,844

)

Non-GAAP sales and marketing

 

$

120,065

 

 

$

94,794

 

 

$

429,931

 

 

$

335,285

 

GAAP sales and marketing as percentage of revenue

 

50

%

 

48

%

 

50

%

 

49

%

Non-GAAP sales and marketing as percentage of revenue

 

42

%

 

41

%

 

42

%

 

41

%

 

 

 

 

 

 

 

 

 

GAAP general and administrative

 

$

57,041

 

 

$

33,941

 

 

$

166,469

 

 

$

141,076

 

Less: Share-based compensation

 

(8,936

)

 

(6,995

)

 

(33,373

)

 

(34,943

)

Less: Employer tax related to employee stock transactions

 

(440

)

 

(326

)

 

(2,354

)

 

(2,113

)

Less: Acquisition-related expenses

 

(876

)

 

(26

)

 

(1,814

)

 

(5,644

)

Less: Real estate impairments

 

(15,003

)

 

 

 

(15,003

)

 

 

Non-GAAP general and administrative

 

$

31,786

 

 

$

26,594

 

 

$

113,925

 

 

$

98,376

 

GAAP general and administrative as percentage of revenue

 

20

%

 

15

%

 

16

%

 

17

%

Non-GAAP general and administrative as percentage of revenue

 

11

%

 

12

%

 

11

%

 

12

%

 

 

 

 

 

 

 

 

 

Reconciliation of operating income (loss) and operating margin

 

 

 

 

 

 

 

 

GAAP operating loss

 

$

(54,793

)

 

$

(32,302

)

 

$

(155,899

)

 

$

(163,004

)

Plus: Share-based compensation

 

50,147

 

 

37,672

 

 

182,204

 

 

156,730

 

Plus: Employer tax related to employee stock transactions

 

2,089

 

 

1,423

 

 

9,970

 

 

9,567

 

Plus: Amortization of purchased intangibles

 

3,389

 

 

2,805

 

 

10,679

 

 

10,365

 

Plus: Acquisition-related expenses

 

1,964

 

 

1,601

 

 

7,722

 

 

11,244

 

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

 

700

 

 

440

 

 

2,075

 

 

1,711

 

Plus: Real estate impairments

 

15,003

 

 

 

 

15,003

 

 

 

Non-GAAP operating income

 

$

18,499

 

 

$

11,639

 

 

$

71,754

 

 

$

26,613

 

GAAP operating margin

 

(19

)%

 

(14

)%

 

(15

)%

 

(20

)%

Non-GAAP adjustments

 

26

%

 

19

%

 

22

%

 

23

%

Non-GAAP operating margin

 

7

%

 

5

%

 

7

%

 

3

%

 

 

Three Months Ended
December 31,

 

Year Ended
December 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Reconciliation of net income (loss)

 

 

 

 

 

 

 

 

GAAP net loss

 

$

(70,036

)

 

$

(36,168

)

 

$

(218,178

)

 

$

(169,653

)

Plus: Share-based compensation

 

50,147

 

 

37,672

 

 

182,204

 

 

156,730

 

Plus: Employer tax related to employee stock transactions

 

2,089

 

 

1,423

 

 

9,970

 

 

9,567

 

Plus: Amortization of purchased intangibles

 

3,389

 

 

2,805

 

 

10,679

 

 

10,365

 

Plus: Acquisition-related expenses

 

1,964

 

 

1,601

 

 

7,722

 

 

11,244

 

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

 

700

 

 

440

 

 

2,075

 

 

1,711

 

Plus: Real estate impairments

 

15,003

 

 

 

 

15,003

 

 

 

Plus: Amortization of debt discount and issuance costs

 

12,358

 

 

6,457

 

 

38,588

 

 

25,288

 

Plus: Loss on early extinguishment of debt

 

 

 

 

 

25,950

 

 

 

Less: Income tax effects and adjustments

 

(2,501

)

 

(2,444

)

 

(10,993

)

 

(8,438

)

Non-GAAP net income

 

$

13,113

 

 

$

11,786

 

 

$

63,020

 

 

$

36,814

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, basic

 

 

 

 

 

 

 

 

GAAP net loss per share, basic

 

$

(0.60

)

 

$

(0.32

)

 

$

(1.89

)

 

$

(1.53

)

Non-GAAP adjustments to net loss

 

0.71

 

 

0.42

 

 

2.44

 

 

1.86

 

Non-GAAP net income per share, basic

 

$

0.11

 

 

$

0.10

 

 

$

0.55

 

 

$

0.33

 

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, diluted

 

 

 

 

 

 

 

 

GAAP net loss per share, diluted

 

$

(0.60

)

 

$

(0.32

)

 

$

(1.89

)

 

$

(1.53

)

Non-GAAP adjustments to net loss

 

0.71

 

 

0.42

 

 

2.41

 

 

1.84

 

Non-GAAP net income per share, diluted

 

$

0.11

 

 

$

0.10

 

 

$

0.52

 

 

$

0.31

 

 

 

 

 

 

 

 

 

 

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

 

116,986

 

 

112,496

 

 

115,240

 

 

110,606

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Basic

 

116,986

 

 

112,496

 

 

115,240

 

 

110,606

 

Diluted

 

124,781

 

 

118,809

 

 

121,301

 

 

118,696

 

 

 

 

 

 

 

 

 

 

Computation of free cash flow

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

46,349

 

 

$

32,211

 

 

$

26,428

 

 

$

89,261

 

Plus: repayment of convertible senior notes attributable to debt discount

 

 

 

 

 

38,637

 

 

 

Less: purchases of property and equipment

 

(3,388

)

 

(13,512

)

 

(22,877

)

 

(39,140

)

Less: internal-use software development costs

 

(4,745

)

 

(2,834

)

 

(15,646

)

 

(7,841

)

Free cash flow

 

$

38,216

 

 

$

15,865

 

 

$

26,542

 

 

$

42,280

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities margin

 

16

%

 

14

%

 

3

%

 

11

%

Non-GAAP adjustments

 

(3

) %

 

(7

) %

 

%

 

(6

) %

Free cash flow margin

 

13

%

 

7

%

 

3

%

 

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.

Real Estate Impairments: Due to a strategic initiative to increase the percentage of remote teams, Zendesk records impairments for certain assets associated with leased properties, or portions thereof, that it ceases to occupy. Any losses and gains associated with these activities are generally unrelated to financial and operational performance in any particular period and Zendesk believes the exclusion of such losses and gains provides for a more useful comparison of operational performance in comparative periods that may or may not include such losses and gains.

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 December 31, 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 ended 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, 2021 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, 2021 is not available without unreasonable effort.

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, 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, acquisition-related expenses, loss on early extinguishment of debt, and real estate impairments, 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, the percentage of its annual recurring revenue from Support originating from customers with 100 or more agents on Support, and the percentage of its annual recurring revenue from customers with more than $100,000 in annual recurring revenue.

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 also 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 112,300 customers, as compared to the approximately 173,600 total paid customer accounts as of December 31, 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.

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’s percentage of annual recurring revenue from that is generated by customers with more than $100,000 in annual recurring revenue is determined by dividing the total annual recurring revenue from paid customer accounts with more than $100,000 in annual recurring revenue from our products other than Sell and Sunshine Conversations as of the measurement date by the total annual recurring revenue for all paid customer accounts from our products other than Sell and Sunshine Conversations as of the measurement date. Zendesk determines the customers with $100,000 in annual recurring revenue as of the measurement date based on the annual recurring revenue of a paid customer account at the measurement date.

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 determines its bookings as the annual recurring revenue from contracts that were entered into during the referenced fiscal quarter, either with new customers or for additional products and services with existing customers.

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:
Jun Wang, +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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