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
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 million of 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.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210204006060/en/
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
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