Zendesk Announces First Quarter 2020 Results

Highlights

• First quarter revenue increased 31% year over year to $237.5 million
• First quarter GAAP operating loss of $41.3 million and non-GAAP operating income of $9.2 million

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

Results for the First Quarter 2020

Revenue was $237.5 million for the quarter ended March 31, 2020, an increase of 31% over the prior year period. GAAP net loss for the quarter ended March 31, 2020 was $42.8 million, and GAAP net loss per share (basic and diluted) was $0.38. Non-GAAP net income was $12.4 million, non-GAAP net income per share (basic) was $0.11, and non-GAAP net income per share (diluted) was $0.10. Non-GAAP net income excludes approximately $45.8 million in share-based compensation and related expenses (including $3.3 million of employer tax related to employee stock transactions and $0.5 million of amortization of share-based compensation capitalized in internal-use software), $6.5 million of amortization of debt discount and issuance costs, $2.8 million of amortization of purchased intangibles, $1.9 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $1.8 million. GAAP net loss per share for the quarter ended March 31, 2020 was based on 113.5 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended March 31, 2020 was based on 113.5 million weighted average shares outstanding (basic) and 120.2 million weighted average shares outstanding (diluted).

Outlook

As of April 30, 2020, Zendesk provided guidance for the quarter ending June 30, 2020. Given uncertainties related to the ongoing the novel coronavirus and resulting COVID-19 disease ("COVID-19") pandemic and rapidly changing global economic environment, Zendesk is withdrawing its previously issued full-year 2020 guidance provided February 6, 2020.

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

• Revenue in the range of $237 - 243 million
• GAAP operating income (loss) in the range of $(43) - (39) million, which includes share-based compensation and related expenses of approximately $47 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 $8 - 12 million, which excludes share-based compensation and related expenses of approximately $47 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
• Approximately 115 million weighted average shares outstanding (basic)
• Approximately 119 million weighted average shares outstanding (diluted)

There are many factors that can affect our actual results which are discussed below and in the risk factors in our filings with the Securities and Exchange Commission. Some of the key risk factors include global macroeconomic conditions, the impact of the COVID-19 pandemic on our business, business conditions of customers in challenged industries, the effect on demand for our products from large customers, and the ability of small and midsized customers to survive this severe economic downturn. Additionally, Zendesk’s estimates of share-based compensation and related expenses, amortization of purchased intangibles, acquisition-related expenses, and weighted average shares outstanding in future periods assume, among other things, the occurrence of no additional acquisitions, investments, or restructurings and no further revisions to share-based compensation and related expenses.

COVID-19 Update

Over the last several months, we have been focused on supporting our employees, customers, and community as we navigate the COVID-19 pandemic. We have implemented business continuity plans that ensure we take care of the health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. Additional information regarding these efforts and the expected impact on our business can be found in our Shareholder Letter for the quarter ended March 31, 2020, as well as our quarterly report on Form 10-Q for the quarter ended March 31, 2020 to be filed with the Securities and Exchange Commission.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a conference call to answer questions today, April 30, 2020, 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 1395302. 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 1395302. The dial-in replay will be available until the end of day May 3, 2020. The webcast replay will be available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk.

Zendesk is a CRM company that builds flexible support, sales, and customer engagement software that is quick to implement and scales to meet changing needs. From large enterprises to startups, we believe that powerful, innovative customer experiences should be within reach for every company, no matter the size, industry or ambition. Zendesk serves more than 160,000 customers across a multitude of industries in over 30 languages. Zendesk is headquartered in San Francisco, and operates 17 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, demand for its solutions, sales cycles, customer retention and its customers’ businesses; (ii) other adverse changes in general economic or market conditions; (iii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iv) Zendesk’s ability to effectively expand its sales capabilities; (v) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (vii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (viii) Zendesk’s ability to effectively market and sell its products to larger enterprises; (ix) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (x) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (xi) Zendesk's ability to prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (xii) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (xiii) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xiv) Zendesk's ability to comply with privacy and data security regulations; (xv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xvi) the development of the market for software as a service business software applications; (xvii) real or perceived errors, failures, or bugs in its products; and (xviii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2019. 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, 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 March 31,
	2020				2019
Revenue	$	237,475			$	181,484
Cost of revenue	59,702				55,654
Gross profit	177,773				125,830
Operating expenses:
Research and development	60,421				46,791
Sales and marketing	124,310				91,700
General and administrative	34,326				31,253
Total operating expenses	219,057				169,744
Operating loss	(41,284		)		(43,914		)
Other income (expense), net:
Interest income	4,570				5,472
Interest expense	(6,887		)		(6,544		)
Other income, net	2,334				700
Total other income (expense), net	17				(372		)
Loss before provision for income taxes	(41,267		)		(44,286		)
Provision for income taxes	1,516				434
Net loss	$	(42,783	)		$	(44,720	)
Net loss per share, basic and diluted	$	(0.38	)		$	(0.41	)
Weighted-average shares used to compute net loss per share, basic and diluted	113,538				108,630

Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)
	March 31, 2020				December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	199,092			$	196,591
Marketable securities	269,003				286,958
Accounts receivable, net of allowance for doubtful accounts of $5,796 and $2,846 as of March 31, 2020 and December 31, 2019, respectively	101,027				127,808
Deferred costs	38,215				35,619
Prepaid expenses and other current assets	45,785				45,847
Total current assets	653,122				692,823
Marketable securities, noncurrent	369,091				361,948
Property and equipment, net	103,017				102,090
Deferred costs, noncurrent	36,520				35,230
Lease right-of-use assets	96,307				89,983
Goodwill and intangible assets, net	204,093				206,883
Other assets	26,640				25,632
Total assets	$	1,488,790			$	1,514,589
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	26,227			$	38,376
Accrued liabilities	42,629				36,347
Accrued compensation and related benefits	61,996				61,512
Deferred revenue	301,402				320,642
Lease liabilities	21,253				21,804
Total current liabilities	453,507				478,681
Convertible senior notes, net	490,014				483,464
Deferred revenue, noncurrent	1,941				3,320
Lease liabilities, noncurrent	86,535				83,478
Other liabilities	6,850				7,662
Total liabilities	1,038,847				1,056,605
Stockholders’ equity:
Preferred stock, par value $0.01 per share	—				—
Common stock, par value $0.01 per share	1,139				1,130
Additional paid-in capital	1,200,521				1,155,044
Accumulated other comprehensive income (loss)	(10,152		)		591
Accumulated deficit	(741,565		)		(698,781		)
Total stockholders’ equity	449,943				457,984
Total liabilities and stockholders’ equity	$	1,488,790			$	1,514,589

Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)
	Three Months Ended March 31,
	2020				2019
Cash flows from operating activities
Net loss	$	(42,783	)		$	(44,720	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	11,240				8,732
Share-based compensation	42,082				36,657
Amortization of deferred costs	9,965				6,918
Amortization of debt discount and issuance costs	6,549				6,188
Other	2,061				394
Changes in operating assets and liabilities:
Accounts receivable	26,023				(6,966		)
Prepaid expenses and other current assets	1,743				(3,774		)
Deferred costs	(13,448		)		(10,190		)
Lease right-of-use assets	4,975				4,373
Other assets and liabilities	(232		)		(498		)
Accounts payable	(10,323		)		15,655
Accrued liabilities	(662		)		2,512
Accrued compensation and related benefits	(9,541		)		(4,629		)
Deferred revenue	(21,464		)		12,149
Lease liabilities	(8,794		)		(3,832		)
Net cash provided by (used in) operating activities	(2,609		)		18,969
Cash flows from investing activities
Purchases of property and equipment	(9,938		)		(9,258		)
Internal-use software development costs	(3,058		)		(1,213		)
Purchases of marketable securities	(121,430		)		(145,142		)
Proceeds from maturities of marketable securities	74,231				47,265
Proceeds from sales of marketable securities	54,784				91,562
Purchases of strategic investments	(1,500		)		(500		)
Net cash used in investing activities	(6,911		)		(17,286		)
Cash flows from financing activities
Proceeds from exercises of employee stock options	4,001				8,437
Proceeds from employee stock purchase plan	10,115				8,415
Taxes paid related to net share settlement of share-based awards	(1,897		)		(2,416		)
Net cash provided by financing activities	12,219				14,436
Effect of exchange rate changes on cash, cash equivalents and restricted cash	16				33
Net increase in cash, cash equivalents and restricted cash	2,715				16,152
Cash, cash equivalents and restricted cash at beginning of period	199,897				128,876
Cash, cash equivalents and restricted cash at end of period	$	202,612			$	145,028

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,
	2020				2019
Reconciliation of gross profit and gross margin
GAAP gross profit	$	177,773				$	125,830
Plus: Share-based compensation	5,059					4,937
Plus: Employer tax related to employee stock transactions	426					450
Plus: Amortization of purchased intangibles	2,106					1,618
Plus: Amortization of share-based compensation capitalized in internal-use software	451					420
Plus: Acquisition-related expenses	141					114
Non-GAAP gross profit	$	185,956				$	133,369
GAAP gross margin	75		%			69			%
Non-GAAP adjustments	3		%			4			%
Non-GAAP gross margin	78		%			73			%
Reconciliation of operating expenses
GAAP research and development	$	60,421				$	46,791
Less: Share-based compensation	(12,626		)			(11,636			)
Less: Employer tax related to employee stock transactions	(887		)			(1,292			)
Less: Acquisition-related expenses	(1,011		)			(568			)
Non-GAAP research and development	$	45,897				$	33,295
GAAP research and development as percentage of revenue	25		%			26			%
Non-GAAP research and development as percentage of revenue	19		%			18			%
GAAP sales and marketing	$	124,310				$	91,700
Less: Share-based compensation	(16,559		)			(12,399			)
Less: Employer tax related to employee stock transactions	(1,174		)			(1,028			)
Less: Amortization of purchased intangibles	(699		)			(577			)
Less: Acquisition-related expenses	(621		)			(392			)
Non-GAAP sales and marketing	$	105,257				$	77,304
GAAP sales and marketing as percentage of revenue	52		%			51			%
Non-GAAP sales and marketing as percentage of revenue	44		%			43			%
GAAP general and administrative	$	34,326				$	31,253
Less: Share-based compensation	(7,838		)			(7,685			)
Less: Employer tax related to employee stock transactions	(763		)			(750			)
Less: Acquisition-related expenses	(104		)			(631			)
Non-GAAP general and administrative	$	25,621				$	22,187
GAAP general and administrative as percentage of revenue	14		%			17			%
Non-GAAP general and administrative as percentage of revenue	11		%			12			%
Reconciliation of operating income (loss) and operating margin
GAAP operating loss	$	(41,284	)			$	(43,914		)
Plus: Share-based compensation	42,082					36,657
Plus: Employer tax related to employee stock transactions	3,250					3,520
Plus: Amortization of purchased intangibles	2,805					2,195
Plus: Acquisition-related expenses	1,877					1,705
Plus: Amortization of share-based compensation capitalized in internal-use software	451					420
Non-GAAP operating income	$	9,181				$	583
GAAP operating margin	(17		)%			(24			)%
Non-GAAP adjustments	21		%			24			%
Non-GAAP operating margin	4		%			—			%
	Three Months Ended March 31,
	2020					2019
Reconciliation of net income (loss)
GAAP net loss	$	(42,783	)			$		(44,720	)
Plus: Share-based compensation	42,082					36,657
Plus: Employer tax related to employee stock transactions	3,250					3,520
Plus: Amortization of purchased intangibles	2,805					2,195
Plus: Acquisition-related expenses	1,877					1,705
Plus: Amortization of share-based compensation capitalized in internal-use software	451					420
Plus: Amortization of debt discount and issuance costs	6,549					6,188
Less: Income tax effects and adjustments	(1,791		)			(911			)
Non-GAAP net income	$	12,440				$		5,054
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic	$	(0.38	)			$		(0.41	)
Non-GAAP adjustments to net loss	0.49					0.46
Non-GAAP net income per share, basic	$	0.11				$		0.05
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted	$	(0.38	)			$		(0.41	)
Non-GAAP adjustments to net loss	0.48					0.45
Non-GAAP net income per share, diluted	$	0.10				$		0.04
Weighted-average shares used in GAAP per share calculation, basic and diluted	113,538					108,630
Weighted-average shares used in non-GAAP per share calculation
Basic	113,538					108,630
Diluted	120,167					116,985
Computation of free cash flow
Net cash provided by (used in) operating activities	$	(2,609	)			$		18,969
Less: purchases of property and equipment	(9,938		)			(9,258			)
Less: internal-use software development costs	(3,058		)			(1,213			)
Free cash flow	$	(15,605	)			$		8,498
Net cash provided by (used in) operating activities margin	(1		)%			10			%
Non-GAAP adjustments	(6		)%			(5			)%
Free cash flow margin	(7		)%			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.

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.

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk's current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2020, Zendesk has determined the projected non-GAAP tax rate to be 21%.

Contacts

Zendesk, Inc.
Investor Contact:
Karen Sansot, +1 415-852-3877
ir@zendesk.com
or
Media Contact:
Paige Young, +1 425-442-3981
press@zendesk.com

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