Highlights
- Second quarter revenue increased 27% year over year to $246.7
million
- Second quarter GAAP operating loss of $31.5 million and
non-GAAP operating income of $19.1 million
- Archana Agrawal, Chief Marketing Officer of Airtable, joins
board of directors
Zendesk, Inc. (NYSE: ZEN) today reported financial results for
the second quarter ended June 30, 2020, and released a Shareholder
Letter on its investor relations website at
https://investor.zendesk.com.
Results for the Second Quarter 2020
Revenue was $246.7 million for the quarter ended June 30, 2020,
an increase of 27% over the prior year period. GAAP net loss for
the quarter ended June 30, 2020 was $64.7 million, and GAAP net
loss per share (basic and diluted) was $0.56. Non-GAAP net income
was $16.4 million, non-GAAP net income per share (basic and
diluted) was $0.14. Non-GAAP net income excludes approximately
$46.5 million in share-based compensation and related expenses
(including $2.3 million of employer tax related to employee stock
transactions and $0.5 million of amortization of share-based
compensation capitalized in internal-use software), a $26.0 million
loss on early extinguishment of debt, $7.5 million of amortization
of debt discount and issuance costs, $2.3 million of amortization
of purchased intangibles, $1.8 million of acquisition-related
expenses, and non-GAAP income tax effects and adjustments of $3.1
million. GAAP net loss per share for the quarter ended June 30,
2020 was based on 114.6 million weighted average shares outstanding
(basic and diluted), and non-GAAP net income per share for the
quarter ended June 30, 2020 was based on 114.6 million weighted
average shares outstanding (basic) and 120.4 million weighted
average shares outstanding (diluted).
Appointment of Archana Agrawal to Board of Directors
Zendesk appointed Archana Agrawal to its board of directors,
effective July 27, 2020. Archana is a seasoned technology executive
with nearly two decades of experience in the software industry. She
has served as the Chief Marketing Officer of Airtable, a low-code
app development platform, since March 2020 and as a member of the
board of directors of MongoDB, Inc., since August 2019. Previously,
Archana served as the Head of Enterprise and Cloud Marketing at
Atlassian, an enterprise software company, from May 2016 to March
2020. Archana joined Atlassian in 2013 as Head of Data Science and
Growth Marketing. Prior to that, Archana was at Ladders, Inc. from
2007 until 2013, where she led corporate-wide analytics. She began
her career at the IBM Almaden Research Center. She holds an M.B.A.
from Harvard Business School and received her M.S. in computer
science from the University of Illinois at Urbana-Champaign.
“Archana has a unique background in applying data science to
enterprise marketing and customer acquisition,” said Mikkel Svane,
Zendesk chief executive officer. “Her experience across
fast-growing software companies will serve us well as we continue
to expand our reach in the enterprise.”
“Zendesk has led the way in changing how organizations buy
enterprise software and in making customer experience a critical
differentiator for businesses,” Agrawal said. “I’m thrilled to be
joining the board at a time when Zendesk has become so critical to
companies of every size as they rapidly adapt to new customer and
business realities.”
Outlook
We believe our financial performance will continue to be
impacted by uncertain and highly disrupted global economic
conditions. Many customers continue to face end-market demand
challenges and we are seeing higher levels of contraction compared
to historical trends. We continue to partner with customers who are
undergoing business challenges to help them with modified invoicing
and subscription terms. These conditions and actions have impacted
and will continue to impact our near-term net expansion rate and
overall financial performance, and have played a role in impacting
our free cash flow generation. We are being disciplined and prudent
in how we manage our business.
Longer term, with improved macroeconomic conditions, we continue
to believe the fundamentals of our business model will drive
meaningful revenue growth. In particular, we believe that our
customer experience solutions will continue to lead in innovation
and be more compelling relative to traditional larger enterprise
competitors. We will continue to innovate and improve our product
offering and how we operate and engage with consumers. These
initiatives give us confidence in our plan to deliver high revenue
growth and operating leverage.
As of July 30, 2020, Zendesk provided guidance for the quarter
ending September 30, 2020.
For the quarter ending September 30, 2020, Zendesk expects to
report:
- Revenue in the range of $250 - 255 million
- GAAP operating income (loss) in the range of $(42) - (38)
million, which includes share-based compensation and related
expenses of approximately $48 million, amortization of purchased
intangibles of approximately $2 million, and acquisition-related
expenses of approximately $2 million
- Non-GAAP operating income (loss) in the range of $10 - 14
million, which excludes share-based compensation and related
expenses of approximately $48 million, amortization of purchased
intangibles of approximately $2 million, and acquisition-related
expenses of approximately $2 million
- Approximately 116 million weighted average shares outstanding
(basic)
- Approximately 122 million weighted average shares outstanding
(diluted)
There are many factors that can affect our actual results which
are discussed below and in the risk factors in our filings with the
Securities and Exchange Commission. Some of the key risk factors
include global macroeconomic conditions, the impact of the COVID-19
pandemic on our business, business conditions of customers in
challenged industries, the effect on demand for our products from
customers, and the ability of our customers to manage the current
severe economic downturn.
We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2020 because we do not
provide guidance on the reconciling items between net cash from
operating activities and free cash flow, as a result of the
uncertainty regarding, and the potential variability of, these
items. The actual amount of such reconciling items will have a
significant impact on our free cash flow and, accordingly, a
reconciliation of net cash from operating activities to free cash
flow for the full year 2020 is not available without unreasonable
effort.
Additionally, Zendesk’s estimates of share-based compensation
and related expenses, amortization of purchased intangibles,
acquisition-related expenses, weighted average shares outstanding,
and free cash flow in future periods assume, among other things,
the occurrence of no additional acquisitions, investments, or
restructurings and no further revisions to share-based compensation
and related expenses.
COVID-19 Update
Over the last several months, we have continued to focus on
supporting our employees, customers, and community as we navigate
the COVID-19 pandemic. Our business continuity plans continue to
ensure that we take care of health and safety of our employees
while continuing to drive innovation in customer experience
solutions for our customers. Additional information regarding these
efforts and the expected impact on our business can be found in our
Shareholder Letter for the quarter ended June 30, 2020, as well as
our quarterly report on Form 10-Q for the quarter ended June 30,
2020 to be filed with the Securities and Exchange Commission.
Shareholder Letter and Conference Call Information
The detailed Shareholder Letter is available at
https://investor.zendesk.com and Zendesk will host a live video
webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on
Thursday, July 30, 2020 to discuss the results. The live video
webcast can be accessed through Zendesk’s investor relations
website at https://investor.zendesk.com. A replay of the webcast
will be available for 12 months.
About Zendesk
Zendesk is a service-first CRM company that builds support,
sales, and customer engagement software designed to foster better
customer relationships. From large enterprises to startups, we
believe that powerful, innovative customer experiences should be
within reach for every company, no matter the size, industry or
ambition. Zendesk serves more than 160,000 customers across a
multitude of industries in over 30 languages. Zendesk is
headquartered in San Francisco, and operates offices worldwide.
Learn more at www.zendesk.com.
Forward-Looking Statements
This press release contains forward-looking statements,
including, among other things, statements regarding Zendesk’s
future financial performance, its continued investment to grow its
business, and progress toward its long-term financial objectives.
Words such as “may,” “should,” “will,” “believe,” “expect,”
“anticipate,” “target,” “project,” and similar phrases that denote
future expectation or intent regarding Zendesk’s financial results,
operations, and other matters are intended to identify
forward-looking statements. You should not rely upon
forward-looking statements as predictions of future events.
The outcome of the events described in these forward-looking
statements is subject to known and unknown risks, uncertainties,
and other factors that may cause Zendesk’s actual results,
performance, or achievements to differ materially, including (i)
the effect of uncertainties related to the COVID-19 pandemic on
U.S. and global markets, Zendesk’s business, operations, revenue
results, cash flow, operating expenses, hiring, demand for its
solutions, sales cycles, customer retention, and its customers’
businesses; (ii) other adverse changes in general economic or
market conditions; (iii) Zendesk’s ability to adapt its products to
changing market dynamics and customer preferences or achieve
increased market acceptance of its products; (iv) Zendesk’s ability
to effectively expand its sales capabilities; (v) Zendesk’s
substantial reliance on its customers renewing their subscriptions
and purchasing additional subscriptions; (vi) Zendesk’s expectation
that the future growth rate of its revenues will decline, and that,
as its costs increase, Zendesk may not be able to generate
sufficient revenues to achieve or sustain profitability; (vii) the
intensely competitive market in which Zendesk operates and the
difficulty that Zendesk may have in competing effectively; (viii)
Zendesk’s ability to effectively market and sell its products to
larger enterprises; (ix) Zendesk’s ability to introduce and market
new products and to support its products on a shared services
platform; (x) Zendesk’s ability to maintain and develop its
strategic relationships with third parties; (xi) Zendesk’s ability
to prevent, mitigate, and respond effectively to both historical
and future data breaches and to securely maintain customer data;
(xii) Zendesk’s ability to effectively manage its growth and
organizational change, including its international expansion
strategy; (xiii) Zendesk’s ability to integrate acquired businesses
and technologies successfully or achieve the expected benefits of
such acquisitions; (xiv) Zendesk's ability to comply with privacy
and data security regulations; (xv) potential service interruptions
or performance problems associated with Zendesk’s technology and
infrastructure; (xvi) the development of the market for software as
a service business software applications; (xvii) real or perceived
errors, failures, or bugs in its products; and (xviii) Zendesk’s
ability to accurately forecast expenditures on third-party managed
hosting services.
The forward-looking statements contained in this press release
are also subject to additional risks, uncertainties, and factors,
including those more fully described in Zendesk’s filings with the
Securities and Exchange Commission, including its Quarterly Report
on Form 10-Q for the quarter ended March 31, 2020. Further
information on potential risks that could affect actual results
will be included in the subsequent periodic and current reports and
other filings that Zendesk makes with the Securities and Exchange
Commission from time to time, including its Quarterly Report on
Form 10-Q for the quarter ended June 30, 2020.
Forward-looking statements represent Zendesk’s management’s
beliefs and assumptions only as of the date such statements are
made. Zendesk undertakes no obligation to update any
forward-looking statements made in this press release to reflect
events or circumstances after the date of this press release or to
reflect new information or the occurrence of unanticipated events,
except as required by law.
Condensed Consolidated Statements of
Operations
(In thousands, except per share data;
unaudited)
Three Months Ended June
30,
Six Months Ended June
30,
2020
2019
2020
2019
Revenue
$
246,664
$
194,583
$
484,140
$
376,068
Cost of revenue
61,515
57,670
121,217
113,324
Gross profit
185,149
136,913
362,923
262,744
Operating expenses:
Research and development
59,003
50,510
119,424
97,301
Sales and marketing
121,397
94,746
245,707
186,447
General and administrative
36,247
43,019
70,573
74,271
Total operating expenses
216,647
188,275
435,704
358,019
Operating loss
(31,498)
(51,362)
(72,781)
(95,275)
Other expense, net:
Interest expense
(8,086)
(6,614)
(14,973)
(13,158)
Loss on early extinguishment of debt
(25,950)
—
(25,950)
—
Interest and other income, net
2,166
4,026
9,068
10,196
Total other expense, net
(31,870)
(2,588)
(31,855)
(2,962)
Loss before provision for income taxes
(63,368)
(53,950)
(104,636)
(98,237)
Provision for income taxes
1,288
591
2,804
1,024
Net loss
$
(64,656)
$
(54,541)
$
(107,440)
$
(99,261)
Net loss per share, basic and diluted
$
(0.56)
$
(0.50)
$
(0.94)
$
(0.91)
Weighted-average shares used to compute
net loss per share, basic and diluted
114,600
109,986
114,069
109,312
Condensed Consolidated Balance
Sheets
(In thousands, except par value;
unaudited)
June 30, 2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents
$
700,457
$
196,591
Marketable securities
296,829
286,958
Accounts receivable, net of allowance for
doubtful accounts of $7,914 and $2,846 as of June 30, 2020 and
December 31, 2019, respectively
143,017
127,808
Deferred costs
40,939
35,619
Prepaid expenses and other current
assets
50,210
45,847
Total current assets
1,231,452
692,823
Marketable securities, noncurrent
303,861
361,948
Property and equipment, net
102,601
102,090
Deferred costs, noncurrent
38,192
35,230
Lease right-of-use assets
93,523
89,983
Goodwill and intangible assets, net
201,804
206,883
Other assets
24,585
25,632
Total assets
$
1,996,018
$
1,514,589
Liabilities and stockholders’
equity
Current liabilities:
Accounts payable
$
13,793
$
38,376
Accrued liabilities
35,904
36,347
Accrued compensation and related
benefits
64,270
61,512
Deferred revenue
314,179
320,642
Lease liabilities
23,309
21,804
Total current liabilities
451,455
478,681
Convertible senior notes, net
1,043,365
483,464
Deferred revenue, noncurrent
1,934
3,320
Lease liabilities, noncurrent
83,495
83,478
Other liabilities
5,460
7,662
Total liabilities
1,585,709
1,056,605
Stockholders’ equity:
Preferred stock, par value $0.01 per
share
—
—
Common stock, par value $0.01 per
share
1,151
1,130
Additional paid-in capital
1,212,469
1,155,044
Accumulated other comprehensive income
2,834
591
Accumulated deficit
(806,145)
(698,781)
Total stockholders’ equity
410,309
457,984
Total liabilities and stockholders’
equity
$
1,996,018
$
1,514,589
Condensed Consolidated Statements of
Cash Flows
(In thousands; unaudited)
Three Months Ended June
30,
2020
2019
Cash flows from operating
activities
Net loss
$
(64,656)
$
(54,541)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization
10,749
8,969
Share-based compensation
43,712
43,751
Amortization of deferred costs
10,765
7,622
Amortization of debt discount and issuance
costs
7,487
6,277
Loss on early extinguishment of debt
25,950
—
Repayment of convertible senior notes
attributable to debt discount
(38,637)
—
Other
3,090
452
Changes in operating assets and
liabilities:
Accounts receivable
(46,666)
(15,901)
Prepaid expenses and other current
assets
(4,959)
(5,380)
Deferred costs
(14,867)
(14,123)
Lease right-of-use assets
5,272
4,734
Other assets and liabilities
(308)
(1,242)
Accounts payable
(12,692)
5,678
Accrued liabilities
1,638
(2,057)
Accrued compensation and related
benefits
13,329
8,887
Deferred revenue
13,616
27,294
Lease liabilities
(3,534)
(2,562)
Net cash provided by (used in)
operating activities
(50,711)
17,858
Cash flows from investing
activities
Purchases of property and equipment
(5,622)
(4,896)
Internal-use software development
costs
(3,225)
(1,753)
Purchases of marketable securities
(111,906)
(125,681)
Proceeds from maturities of marketable
securities
117,752
53,031
Proceeds from sales of marketable
securities
39,814
151,550
Business combinations, net of cash
acquired
—
(70,794)
Net cash provided by investing
activities
36,813
1,457
Cash flows from financing
activities
Proceeds from issuance of convertible
senior notes, net of issuance costs paid of $20,400
1,129,600
—
Purchase of capped calls related to 2025
convertible senior notes
(129,950)
—
Payments for 2023 convertible senior notes
partial repurchase
(578,973)
—
Proceeds from capped calls related to 2023
convertible senior notes
83,040
—
Proceeds from exercises of employee stock
options
5,101
4,773
Proceeds from employee stock purchase
plan
8,802
6,895
Taxes paid related to net share settlement
of share-based awards
(2,241)
(2,663)
Net cash provided by financing
activities
515,379
9,005
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
15
33
Net increase in cash, cash equivalents and
restricted cash
501,496
28,353
Cash, cash equivalents and restricted cash
at beginning of period
202,620
145,028
Cash, cash equivalents and restricted
cash at end of period
$
704,116
$
173,381
Non-GAAP Results
(In thousands, except per share data)
The following table shows Zendesk’s GAAP
results reconciled to non-GAAP results included in this
release.
Three Months Ended June
30,
Six Months Ended June
30,
2020
2019
2020
2019
Reconciliation of gross profit and
gross margin
GAAP gross profit
$
185,149
$
136,913
$
362,923
$
262,744
Plus: Share-based compensation
5,187
5,246
10,246
10,183
Plus: Employer tax related to employee
stock transactions
292
391
717
840
Plus: Amortization of purchased
intangibles
1,617
1,943
3,724
3,561
Plus: Amortization of share-based
compensation capitalized in internal-use software
464
413
914
833
Plus: Acquisition-related expenses
66
160
$
207
$
274
Non-GAAP gross profit
$
192,775
$
145,066
$
378,731
$
278,435
GAAP gross margin
75
%
70
%
75
%
70
%
Non-GAAP adjustments
3
%
5
%
3
%
4
%
Non-GAAP gross margin
78
%
75
%
78
%
74
%
Reconciliation of operating
expenses
GAAP research and development
$
59,003
$
50,510
$
119,424
$
97,301
Less: Share-based compensation
(12,529)
(11,911)
(25,155)
(23,548)
Less: Employer tax related to employee
stock transactions
(700)
(931)
(1,587)
(2,223)
Less: Acquisition-related expenses
(1,167)
(864)
(2,178)
(1,431)
Non-GAAP research and development
$
44,607
$
36,804
$
90,504
$
70,099
GAAP research and development as
percentage of revenue
24
%
26
%
25
%
26
%
Non-GAAP research and development as
percentage of revenue
18
%
19
%
19
%
19
%
GAAP sales and marketing
$
121,397
$
94,746
$
245,707
$
186,447
Less: Share-based compensation
(17,573)
(13,575)
(34,132)
(25,973)
Less: Employer tax related to employee
stock transactions
(890)
(763)
(2,064)
(1,791)
Less: Amortization of purchased
intangibles
(671)
(658)
(1,370)
(1,235)
Less: Acquisition-related expenses
(470)
(379)
(1,091)
(771)
Non-GAAP sales and marketing
$
101,793
$
79,371
$
207,050
$
156,677
GAAP sales and marketing as percentage of
revenue
49
%
49
%
51
%
50
%
Non-GAAP sales and marketing as percentage
of revenue
41
%
41
%
43
%
42
%
GAAP general and administrative
$
36,247
$
43,019
$
70,573
$
74,271
Less: Share-based compensation
(8,423)
(13,019)
(16,261)
(20,704)
Less: Employer tax related to employee
stock transactions
(462)
(567)
(1,225)
(1,318)
Less: Acquisition-related expenses
(134)
(4,358)
(238)
(4,989)
Non-GAAP general and administrative
$
27,228
$
25,075
$
52,849
$
47,260
GAAP general and administrative as
percentage of revenue
15
%
22
%
15
%
20
%
Non-GAAP general and administrative as
percentage of revenue
11
%
13
%
11
%
13
%
Reconciliation of operating income
(loss) and operating margin
GAAP operating loss
$
(31,498)
$
(51,362)
$
(72,781)
$
(95,275)
Plus: Share-based compensation
43,712
43,751
85,794
80,408
Plus: Employer tax related to employee
stock transactions
2,344
2,652
5,593
6,172
Plus: Amortization of purchased
intangibles
2,288
2,601
5,094
4,796
Plus: Acquisition-related expenses
1,837
5,761
3,714
7,465
Plus: Amortization of share-based
compensation capitalized in internal-use software
464
413
914
833
Non-GAAP operating income
$
19,147
$
3,816
$
28,328
$
4,399
GAAP operating margin
(13)
%
(26)
%
(15)
%
(25)
%
Non-GAAP adjustments
21
%
28
%
21
%
26
%
Non-GAAP operating margin
8
%
2
%
6
%
1
%
Three Months Ended June
30,
Six Months Ended June
30,
2020
2019
2020
2019
Reconciliation of net income
(loss)
GAAP net loss
$
(64,656)
$
(54,541)
$
(107,440)
$
(99,261)
Plus: Share-based compensation
43,712
43,751
85,794
80,408
Plus: Employer tax related to employee
stock transactions
2,344
2,652
5,593
6,172
Plus: Amortization of purchased
intangibles
2,288
2,601
5,094
4,796
Plus: Acquisition-related expenses
1,837
5,761
3,714
7,465
Plus: Amortization of share-based
compensation capitalized in internal-use software
464
413
914
833
Plus: Amortization of debt discount and
issuance costs
7,487
6,277
14,036
12,465
Plus: Loss on early extinguishment of
debt
25,950
—
25,950
—
Less: Income tax effects and
adjustments
(3,063)
(985)
(4,854)
(1,896)
Non-GAAP net income
$
16,363
$
5,929
$
28,801
$
10,982
Reconciliation of net income (loss) per
share, basic
GAAP net loss per share, basic
$
(0.56)
$
(0.50)
$
(0.94)
$
(0.91)
Non-GAAP adjustments to net loss
0.70
0.55
1.19
1.01
Non-GAAP net income per share, basic
$
0.14
$
0.05
$
0.25
$
0.10
Reconciliation of net income (loss) per
share, diluted
GAAP net loss per share, diluted
$
(0.56)
$
(0.50)
$
(0.94)
$
(0.91)
Non-GAAP adjustments to net loss
0.70
0.55
1.18
1.00
Non-GAAP net income per share, diluted
$
0.14
$
0.05
$
0.24
$
0.09
Weighted-average shares used in GAAP per
share calculation, basic and diluted
114,600
109,986
114,069
109,312
Weighted-average shares used in non-GAAP
per share calculation
Basic
114,600
109,986
114,069
109,312
Diluted
120,397
119,678
120,309
118,339
Computation of free cash flow
Net cash provided by (used in) operating
activities
$
(50,711)
$
17,858
$
(53,320)
$
36,827
Plus: repayment of convertible senior
notes attributable to debt discount
38,637
—
38,637
—
Less: purchases of property and
equipment
(5,622)
(4,896)
(15,560)
(14,154)
Less: internal-use software development
costs
(3,225)
(1,753)
(6,283)
(2,966)
Free cash flow
$
(20,921)
$
11,209
$
(36,526)
$
19,707
Net cash provided by (used in) operating
activities margin
(21)
%
9
%
(11)
%
10
%
Non-GAAP adjustments
13
%
(3)
%
3
%
(5)
%
Free cash flow margin
(8)
%
6
%
(8)
%
5
%
About Non-GAAP Financial Measures
To provide investors and others with additional information
regarding Zendesk’s results, the following non-GAAP financial
measures were disclosed: non-GAAP gross profit and gross margin,
non-GAAP operating expenses, non-GAAP operating income (loss) and
operating margin, non-GAAP net income (loss), non-GAAP net income
(loss) per share, basic and diluted, free cash flow, and free cash
flow margin.
Specifically, Zendesk excludes the following from its historical
and prospective non-GAAP financial measures, as applicable:
Share-Based Compensation and Amortization of Share-Based
Compensation Capitalized in Internal-use Software: Zendesk utilizes
share-based compensation to attract and retain employees. It is
principally aimed at aligning their interests with those of its
stockholders and at long-term retention, rather than to address
operational performance for any particular period. As a result,
share-based compensation expenses vary for reasons that are
generally unrelated to financial and operational performance in any
particular period.
Employer Tax Related to Employee Stock Transactions: Zendesk
views the amount of employer taxes related to its employee stock
transactions as an expense that is dependent on its stock price,
employee exercise and other award disposition activity, and other
factors that are beyond Zendesk’s control. As a result, employer
taxes related to its employee stock transactions vary for reasons
that are generally unrelated to financial and operational
performance in any particular period.
Amortization of Purchased Intangibles: Zendesk views
amortization of purchased intangible assets, including the
amortization of the cost associated with an acquired entity’s
developed technology, as items arising from pre-acquisition
activities determined at the time of an acquisition. While these
intangible assets are evaluated for impairment regularly,
amortization of the cost of purchased intangibles is an expense
that is not typically affected by operations during any particular
period.
Acquisition-Related Expenses: Zendesk views acquisition-related
expenses, such as transaction costs, integration costs,
restructuring costs, and acquisition-related retention payments,
including amortization of acquisition-related retention payments
capitalized in internal-use software, as events that are not
necessarily reflective of operational performance during a period.
In particular, Zendesk believes the consideration of measures that
exclude such expenses can assist in the comparison of operational
performance in different periods which may or may not include such
expenses.
Loss on Early Extinguishment of Debt: In March 2018, Zendesk
issued $575 million aggregate principal amount of 0.25% convertible
senior notes due in 2023 (the “2023 Notes”). In June 2020, Zendesk
issued $1,150 million aggregate principal amount of 0.625%
convertible senior notes due in 2025 (the “2025 Notes”). In
connection with the offering of the 2025 Notes, Zendesk used $618
million of the net proceeds from the offering of the 2025 Notes to
repurchase $426 million aggregate principal amount of the 2023
Notes in cash through individual privately negotiated transactions
(the “2023 Notes Partial Repurchase”). Of the $618 million
consideration, $393 million and $225 million were allocated to the
debt and equity components, respectively. As of the repurchase
date, the carrying value of the 2023 Notes subject to the 2023
Notes Partial Repurchase, net of unamortized debt discount and
issuance costs, was $367 million. The 2023 Notes Partial Repurchase
resulted in a $26 million loss on early debt extinguishment. As of
June 30, 2020, $149 million of principal remains outstanding on the
2023 Notes. The loss on early extinguishment of debt is a non-cash
item, and we believe the exclusion of this expense will provide for
a more useful comparison of our operational performance in
different periods.
Amortization of Debt Discount and Issuance Costs: The imputed
interest rates of the 2023 Notes and the 2025 Notes were
approximately 5.26% and 5.00%, respectively. This is a result of
the debt discounts recorded for the conversion features of the
Notes that are required to be separately accounted for as equity,
and debt issuance costs, which reduce the carrying value of the
convertible debt instruments. The debt discounts are amortized as
interest expense together with the issuance costs of the debt. The
expense for the amortization of debt discount and debt issuance
costs is a non-cash item, and we believe the exclusion of this
interest expense will provide for a more useful comparison of our
operational performance in different periods.
Income Tax Effects: Zendesk utilizes a fixed long-term projected
tax rate in its computation of non-GAAP income tax effects to
provide better consistency across interim reporting periods. In
projecting this long-term non-GAAP tax rate, Zendesk utilizes a
financial projection that excludes the direct impact of other
non-GAAP adjustments. The projected rate considers other factors
such as Zendesk’s current operating structure, existing tax
positions in various jurisdictions, and key legislation in major
jurisdictions where Zendesk operates. For the year ending December
31, 2020, Zendesk has determined the projected non-GAAP tax rate to
be 21%. Zendesk will periodically re-evaluate this tax rate, as
necessary, for significant events, based on relevant tax law
changes, material changes in the forecasted geographic earnings
mix, and any significant acquisitions.
Zendesk provides disclosures regarding its free cash flow, which
is defined as net cash from operating activities, plus repayment of
convertible senior notes attributable to debt discount, less
purchases of property and equipment and internal-use software
development costs. Free cash flow margin is calculated as free cash
flow as a percentage of total revenue. Zendesk uses free cash flow,
free cash flow margin, and other measures, to evaluate the ability
of its operations to generate cash that is available for purposes
other than capital expenditures and capitalized software
development costs. Zendesk believes that information regarding free
cash flow and free cash flow margin provides investors with an
important perspective on the cash available to fund ongoing
operations.
Zendesk has not reconciled free cash flow guidance to net cash
from operating activities for the year ending December 31, 2020
because Zendesk does not provide guidance on the reconciling items
between net cash from operating activities and free cash flow, as a
result of the uncertainty regarding, and the potential variability
of, these items. The actual amount of such reconciling items will
have a significant impact on Zendesk’s free cash flow and,
accordingly, a reconciliation of net cash from operating activities
to free cash flow for the year ending December 31, 2020 is not
available without unreasonable effort.
Zendesk does not provide a reconciliation of its non-GAAP
operating margin guidance to GAAP operating margin beyond the
fiscal quarter ending September 30, 2020 because Zendesk does not
provide guidance on the reconciling items between GAAP operating
margin and non-GAAP operating margin for such periods, as a result
of the uncertainty regarding, and the potential variability of,
these items. The actual amount of such reconciling items will have
a significant impact on Zendesk’s non-GAAP operating margin and,
accordingly, a reconciliation of GAAP operating margin to non-GAAP
operating margin guidance for such periods is not available without
unreasonable effort.
Zendesk’s disclosures regarding its expectations for its
non-GAAP gross margin include adjustments to its expectations for
its GAAP gross margin that exclude share-based compensation and
related expenses in Zendesk’s cost of revenue, amortization of
purchased intangibles primarily related to developed technology,
and acquisition-related expenses. The share-based compensation and
related expenses excluded due to such adjustments are primarily
comprised of the share-based compensation and related expenses for
employees associated with Zendesk’s infrastructure and customer
experience organization.
Zendesk does not provide a reconciliation of its non-GAAP gross
margin guidance to GAAP gross margin for future periods because
Zendesk does not provide guidance on the reconciling items between
GAAP gross margin and non-GAAP gross margin, as a result of the
uncertainty regarding, and the potential variability of, these
items. The actual amount of such reconciling items will have a
significant impact on Zendesk’s non-GAAP gross margin and,
accordingly, a reconciliation of GAAP gross margin to non-GAAP
gross margin guidance for the period is not available without
unreasonable effort.
Zendesk uses non-GAAP financial information to evaluate its
ongoing operations and for internal planning and forecasting
purposes. Zendesk’s management does not itself, nor does it suggest
that investors should, consider such non-GAAP financial measures in
isolation from, or as a substitute for, financial information
prepared in accordance with GAAP. Zendesk presents such non-GAAP
financial measures in reporting its financial results to provide
investors with an additional tool to evaluate Zendesk’s operating
results. Zendesk believes these non-GAAP financial measures are
useful because they allow for greater transparency with respect to
key metrics used by management in its financial and operational
decision-making. This allows investors and others to better
understand and evaluate Zendesk’s operating results and future
prospects in the same manner as management.
Zendesk’s management believes it is useful for itself and
investors to review, as applicable, both GAAP information that may
include items such as share-based compensation and related
expenses, amortization of debt discount and issuance costs,
amortization of purchased intangibles, and acquisition-related
expenses, and the non-GAAP measures that exclude such information
in order to assess the performance of Zendesk’s business and for
planning and forecasting in subsequent periods. When Zendesk uses
such a non-GAAP financial measure with respect to historical
periods, it provides a reconciliation of the non-GAAP financial
measure to the most closely comparable GAAP financial measure. When
Zendesk uses such a non-GAAP financial measure in a forward-looking
manner for future periods, and a reconciliation is not determinable
without unreasonable effort, Zendesk provides the reconciling
information that is determinable without unreasonable effort and
identifies the information that would need to be added or
subtracted from the non-GAAP measure to arrive at the most directly
comparable GAAP measure. Investors are encouraged to review the
related GAAP financial measures and the reconciliation of these
non-GAAP financial measures to their most directly comparable GAAP
financial measure as detailed above.
About Operating Metrics
Zendesk reviews a number of operating metrics to evaluate its
business, measure performance, identify trends, formulate business
plans, and make strategic decisions. These include the number of
paid customer accounts on Zendesk Support, Zendesk Chat, and its
other products, dollar-based net expansion rate, annual recurring
revenue represented by its churned customers, and the percentage of
its annual recurring revenue from Support originating from
customers with 100 or more agents on Support.
Zendesk defines the number of paid customer accounts at the end
of any particular period as the sum of (i) the number of accounts
on Support, exclusive of its legacy Starter plan, free trials, or
other free services, (ii) the number of accounts using Chat,
exclusive of free trials or other free services, and (iii) the
number of accounts on all of its other products, exclusive of free
trials and other free services, each as of the end of the period
and as identified by a unique account identifier. In the quarter
ended June 30, 2018, Zendesk began to offer an omnichannel
subscription which provides access to multiple products through a
single paid customer account, Zendesk Suite, and in the quarter
ended June 30, 2019, Zendesk began to offer a subscription which
provides access to Sell and Support through a single paid customer
account, Zendesk Duet. In the quarter ended March 31, 2020, Zendesk
began to offer two new omnichannel subscriptions, the Zendesk
Support Suite and the Zendesk Sell Suite, which provide access to
multiple support solutions and sales solutions, respectively,
through a single paid customer account. The number of Support Suite
paid customer accounts are included in the number of paid customer
accounts on Suite, which are included in the number of paid
customer accounts on products other than Support and Chat and are
not included in the number of paid customer accounts on Support or
Chat. The number of Sell Suite paid customer accounts are included
in the number of paid customer accounts on products other than
Support and Chat and are not included in the number of paid
customer accounts on Support or Chat. Each Duet paid customer
account is included once in the number of paid customer accounts on
Support and once in the number of paid customer accounts on
products other than Support and Chat.
Existing customers may also expand their utilization of
Zendesk’s products by adding new accounts and a single consolidated
organization or customer may have multiple accounts across each of
Zendesk’s products to service separate subsidiaries, divisions, or
work processes. Other than usage of Zendesk’s products through its
omnichannel subscription offering, each of these accounts is also
treated as a separate paid customer account.
Zendesk’s dollar-based net expansion rate provides a measurement
of its ability to increase revenue across its existing customer
base through expansion of authorized agents associated with a paid
customer account, upgrades in subscription plans, and the purchase
of additional products as offset by churn, contraction in
authorized agents associated with a paid customer account, and
downgrades in subscription plans. Zendesk’s dollar-based net
expansion rate is based upon annual recurring revenue for a set of
paid customer accounts on its products. Zendesk determines the
annual recurring revenue value of a contract by multiplying the
monthly recurring revenue for such contract by twelve.
Monthly recurring revenue for a paid customer account is a legal
and contractual determination made by assessing the contractual
terms of each paid customer account, as of the date of
determination, as to the revenue Zendesk expects to generate in the
next monthly period for that paid customer account, assuming no
changes to the subscription and without taking into account any
platform usage above the subscription base, if any, that may be
applicable to such subscription. Beginning with the quarter ended
June 30, 2019, we excluded the impact of revenue that we expect to
generate from fixed-term contracts that are each associated with an
existing account, are solely for additional temporary agents, and
are not contemplated to last for the duration of the primary
contract for the existing account from our determination of monthly
recurring revenue. Monthly recurring revenue is not determined by
reference to historical revenue, deferred revenue, or any other
GAAP financial measure over any period. It is forward-looking and
contractually derived as of the date of determination.
Zendesk calculates its dollar-based net expansion rate by
dividing the retained revenue net of contraction and churn by
Zendesk’s base revenue. Zendesk defines its base revenue as the
aggregate annual recurring revenue across its products for
customers with paid customer accounts as of the date one year prior
to the date of calculation. Zendesk defines the retained revenue
net of contraction and churn as the aggregate annual recurring
revenue across its products for the same customer base included in
the measure of base revenue at the end of the annual period being
measured. The dollar-based net expansion rate is also adjusted to
eliminate the effect of certain activities that Zendesk identifies
involving the consolidation of customer accounts or the split of a
single paid customer account into multiple paid customer accounts.
In addition, the dollar-based net expansion rate is adjusted to
include paid customer accounts in the customer base used to
determine retained revenue net of contraction and churn that share
common corporate information with customers in the customer base
that are used to determine the base revenue. Giving effect to this
consolidation results in Zendesk’s dollar-based net expansion rate
being calculated across approximately 108,300 customers, as
compared to the approximately 164,200 total paid customer accounts
as of June 30, 2020.
To the extent that Zendesk can determine that the underlying
customers do not share common corporate information, Zendesk does
not aggregate paid customer accounts associated with reseller and
other similar channel arrangements for the purposes of determining
its dollar-based net expansion rate. While not material, Zendesk
believes the failure to account for these activities would
otherwise skew the dollar-based net expansion metrics associated
with customers that maintain multiple paid customer accounts across
its products and paid customer accounts associated with reseller
and other similar channel arrangements.
Zendesk does not currently incorporate operating metrics
associated with its legacy analytics product, its legacy Outbound
product, its legacy Starter plan, Sell, Sunshine Conversations, its
legacy Smooch product, free trials, or other free services into its
measurement of dollar-based net expansion rate.
For a more detailed description of how Zendesk calculates its
dollar-based net expansion rate, please refer to Zendesk’s periodic
reports filed with the Securities and Exchange Commission.
Zendesk’s percentage of annual recurring revenue from Support
that is generated by customers with 100 or more agents on Support
is determined by dividing the annual recurring revenue from Support
for paid customer accounts with 100 or more agents on Support as of
the measurement date by the annual recurring revenue from Support
for all paid customer accounts on Support as of the measurement
date. Zendesk determines the customers with 100 or more agents on
Support as of the measurement date based on the number of activated
agents on Support at the measurement date and includes adjustments
to aggregate paid customer accounts that share common corporate
information. For the purpose of determining this metric, Zendesk
builds an estimation of the proportion of annual recurring revenue
from Suite attributable to Support and includes such portion in the
annual recurring revenue from Support.
Zendesk does not currently incorporate operating metrics
associated with products other than Support into its measurement of
the percentage of annual recurring revenue from Support that is
generated by customers with 100 or more agents on Support.
Zendesk’s annual revenue run rate is based on its revenue for
the most recent applicable quarter. Zendesk annualizes such results
to estimate its annual revenue run rate by multiplying the revenue
for its most recent applicable quarter by four. Zendesk’s annual
revenue run rate is not a comprehensive statement of its financial
results for such period and should not be viewed as a substitute
for full annual or interim financial statements prepared in
accordance with GAAP. In addition, Zendesk’s revenue for the most
recent applicable quarter or annual revenue run rate are not
necessarily indicative of the results to be achieved in any future
period.
Source: Zendesk, Inc.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20200730006031/en/
Zendesk, Inc. Investor Contact: Karen Sansot, +1
415-852-3877 ir@zendesk.com or Media Contact: Marissa Tree,
+1 415-609-4510 press@zendesk.com
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