Zendesk Announces 2014 Third Quarter Results

Zendesk, Inc. (NYSE: ZEN) today reported financial results for its third quarter ending September 30, 2014.

"We continued to drive the democratization of customer service so that any organization, big or small, can build lasting relationships with its customers through Zendesk,” said Mikkel Svane, founder, chairman, and CEO of Zendesk. "In the third quarter, we announced our dedicated Enterprise Team and an upgraded Enterprise Elite plan for the largest organizations, while introducing a beta of Zendesk Inbox as a separate tool for small teams to manage email together. Those launches show the broad flexibility and appeal of our customer service platform.”

Results for the Third Quarter 2014

Revenue was $33.9 million for the quarter ended September 30, 2014, an increase of 76% over the prior year period and an increase of 15% from the quarter ended June 30, 2014.

GAAP net loss for the quarter ending September 30, 2014 was $17.9 million, and GAAP net loss per share was $0.25. Non-GAAP net loss was $6.5 million, which excludes approximately $10.9 million in share-based compensation related expenses (including $0.1 million of amortized share-based compensation capitalized in internal-use software) and $0.5 million of amortization of purchased intangibles. Non-GAAP net loss per share was $0.09. Zendesk’s GAAP and Non-GAAP net loss per share are based on 71.7 million weighted average shares outstanding.

Cash and cash equivalents were approximately $80.4 million and marketable securities were $47.9 million as of September 30, 2014.

Outlook

As of October 30, 2014, Zendesk updated its guidance as follows. For the fourth quarter of 2014, Zendesk expects to report:

• Revenue in the range of $35.0 - 37.0 million.
• GAAP operating loss of $18.5 - 19.5 million, which includes share-based compensation related expense of $9.0 million and amortization of intangibles of $0.5 million.
• Non-GAAP operating loss of $9.0 - 10.0 million, which excludes share-based compensation related expense of $9.0 million and amortization of intangibles of $0.5 million.

For the full year 2014, the company expects to report:

• Revenue in the range of $123.5 - 125.5 million.
• GAAP operating loss of $67.4 - 68.4 million, which includes share-based compensation related expense of $32.9 million, amortization of intangibles of $1.5 million, and $0.6 million of acquisition-related expenses.
• Non-GAAP operating loss of $32.4 - 33.4 million, which excludes share-based compensation related expense of approximately $32.9 million and amortization of intangibles of $1.5 million, and $0.6 million of acquisition-related expenses.

Conference Call Information

Zendesk will host a conference call today, October 30, 2014, to discuss financial results 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 877-201-0168, or +1 647-788-4901 (outside the U.S. and Canada). The conference ID is 19618194. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 855-859-2056 or +1 404-537-3406 (outside the U.S. and Canada) and entering passcode 19618194. The dial-in replay will be available until the end of day November 1, 2014. The webcast replay will be available for 12 months.

About Zendesk

Zendesk provides a customer service platform designed to bring organizations and their customers closer together. With more than 48,000 customer accounts, Zendesk is used by organizations in 150 countries and territories to provide support in more than 40 languages. Founded in 2007 and headquartered in San Francisco, Zendesk has operations in the United States, 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 re-investment to grow its business, progress towards its long-term financial objectives, and its current leadership team. 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 customer service platform to changing market dynamics and customer preferences or achieve increased market acceptance of its platform; (iii) 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; (iv) Zendesk’s limited operating history, which makes it difficult to evaluate its prospects and future operating results; (v) Zendesk’s ability to effectively manage its growth and organizational change; (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 sell its live chat software as a standalone service and more fully integrate its live chat software with its customer service platform; (ix) breaches in Zendesk’s security measures or unauthorized access to its customers’ data; (x) service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xi) real or perceived errors, failures, or bugs in its products; (xii) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xiii) Zendesk’s ability to effectively expand its sales capabilities.

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 June 30, 2014. 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 September 30, 2014.

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.

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 loss and operating margin, non-GAAP net loss attributable to common stockholders, non-GAAP net loss per share attributable to common stockholders, basic and diluted, and non-GAAP weighted-average shares.

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.

Amortization of Purchased Intangibles and Acquisition Related Expenses: 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. Zendesk views acquisition related expenses 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.

As a result of Zendesk’s initial public offering, all outstanding shares of redeemable convertible preferred stock were automatically converted into shares of common stock. Consequently, the non-GAAP weighted-average shares outstanding used to compute non-GAAP net loss per share assumes that the conversion of Zendesk's redeemable convertible preferred stock that occurred in connection with its initial public offering occurred at the beginning of the relevant period. Zendesk believes this facilitates comparison with prior periods.

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 expense, amortization of share based compensation capitalized in internal-use software, amortization of purchased intangibles, transaction costs related to acquisitions, 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. Whenever Zendesk uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial 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 Key Operating Metrics

Zendesk reviews a number of key operating metrics, including the number of customer accounts and annualized dollar-based net expansion rate, to evaluate its business, measure performance, identify trends, formulate business plans, and make strategic decisions. Zendesk defines the number of customer accounts at the end of any particular period as the number of accounts on our customer service platform, exclusive of free trials or other free services, at the end of the period as identified by a unique account identifier. Zendesk’s annualized dollar-based net expansion rate provides a measurement of its ability to increase revenue across our existing customer base through expansion of authorized agents associated with a customer account, and upgrades in subscription plan, as offset by churn, contraction in authorized agents associated with a customer account, and downgrades in subscription plans. Zendesk’s annualized dollar-based net expansion rate is based upon “monthly recurring revenue” for a set of customer accounts. Monthly recurring revenue for a customer account is a legal and contractual determination made by assessing the contractual terms of each customer account, as of the date of determination, as to the revenue Zendesk expects to generate in the next monthly period for that customer account, assuming no changes to the subscription and without taking into account any one-time discounts, 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 United States generally accepted accounting principles, or GAAP, financial measure over any period. It is forward-looking and contractually derived as of the date of determination. For a detailed description of how Zendesk calculates its annualized dollar-based net expansion rate, please refer to Zendesk’s periodic reports as filed with the Securities and Exchange Commission. Zendesk does not currently incorporate operating metrics associated with Zopim live chat software into its measurement of customer accounts or annualized dollar-based net expansion rate.

Source: Zendesk, Inc.