Highlights:
- Second quarter revenue increased 29% year over year to $318.2
million
- Second quarter GAAP operating loss of $42.4 million and
non-GAAP operating income of $22.6 million
- Shelagh Glaser joins as Chief Financial Officer
- Alex Constantinople joins as Chief Marketing Officer
Zendesk, Inc. (NYSE: ZEN) today reported financial results for
the second quarter ended June 30, 2021, and released a Shareholder
Letter on its investor relations website at
https://investor.zendesk.com.
Results for the Second Quarter 2021
Revenue was $318.2 million for the quarter ended June 30, 2021,
an increase of 29% over the prior year period. GAAP net loss for
the quarter ended June 30, 2021 was $58.4 million, and GAAP net
loss per share (basic and diluted) was $0.49. Non-GAAP net income
was $17.1 million, and non-GAAP net income per share was $0.14
(basic) and $0.13 (diluted). Non-GAAP net income excludes
approximately $61.0 million in share-based compensation and related
expenses (including $3.9 million of employer tax related to
employee stock transactions and $0.4 million of amortization of
share-based compensation capitalized in internal-use software),
$12.7 million of amortization of debt discount and issuance costs,
$1.8 million of amortization of purchased intangibles, $1.2 million
of real estate impairments, $1.1 million of acquisition-related
expenses, and non-GAAP income tax effects and adjustments of $2.2
million. GAAP net loss per share for the quarter ended June 30,
2021 was based on 119.1 million weighted average shares outstanding
(basic and diluted), and non-GAAP net income per share for the
quarter ended June 30, 2021 was based on 119.1 million weighted
average shares outstanding (basic) and 127.5 million weighted
average shares outstanding (diluted).
Outlook
As of July 29, 2021, Zendesk provided guidance for the quarter
ending September 30, 2021 and the full year ending December 31,
2021.
For the quarter ending September 30, 2021, Zendesk expects to
report:
- Revenue in the range of $332 - 337 million
- GAAP operating income (loss) in the range of $(43) - (39)
million, which includes share-based compensation and related
expenses of approximately $63 million and amortization of purchased
intangibles of approximately $2 million
- Non-GAAP operating income (loss) in the range of $22 - 26
million, which excludes share-based compensation and related
expenses of approximately $63 million and amortization of purchased
intangibles of approximately $2 million
- Approximately 120 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 $1.310 - 1.318 billion
- GAAP operating income (loss) in the range of $(164) - (159)
million, which includes share-based compensation and related
expenses of approximately $249 million, amortization of purchased
intangibles of approximately $7 million, acquisition-related
expenses of approximately $3 million, and real estate impairments
of approximately $1 million
- Non-GAAP operating income (loss) in the range of $96 - 101
million, which excludes share-based compensation and related
expenses of approximately $249 million, amortization of purchased
intangibles of approximately $7 million, acquisition-related
expenses of approximately $3 million, and real estate impairments
of approximately $1 million
- Approximately 120 million weighted average shares outstanding
(basic)
- Approximately 129 million weighted average shares outstanding
(diluted)
- Free cash flow in the range of $120 - 130 million, which
includes the impact of a lease termination payment of approximately
$7 million paid in the second quarter of 2021 related to our real
estate changes in San Francisco
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, real estate impairments, 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.
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 29, 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 started the customer experience revolution in 2007 by
enabling any business around the world to take their customer
service online. Today, Zendesk is the champion of great service
everywhere for everyone, and powers billions of conversations,
connecting more than 100,000 brands with hundreds of millions of
customers over telephony, chat, email, messaging, social channels,
communities, review sites and help centers. Zendesk products are
built with love to be loved. The company was conceived in
Copenhagen, Denmark, built and grown in California, taken public in
New York City, and today employs more than 5,000 people across the
world. Learn more at www.zendesk.com.
References to Zendesk, the “Company,” “our,” or “we” in this
press release refer to Zendesk, Inc. and its subsidiaries on a
consolidated basis.
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)
Zendesk’s ability to adapt its products to changing market dynamics
and customer preferences or achieve increased market acceptance of
its products; (ii) Zendesk’s ability to effectively expand its
sales capabilities; (iii) the intensely competitive market in which
Zendesk operates and the difficulty that Zendesk may have in
competing effectively; (iv) the development of the market for
software as a service business software applications; (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 ability to
effectively market and sell its products to larger enterprises;
(viii) Zendesk’s ability to introduce and market new products and
to support its products on a unified, reliable shared services
platform; (ix) Zendesk's ability to maintain and develop its
strategic relationships with third parties; (x) real or perceived
errors, failures, or bugs in its products; (xi) Zendesk's reliance
on third party services, including services for hosting, email, and
messaging; (xii) Zendesk’s ability to accurately forecast
expenditures on third-party managed hosting services; (xiii)
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; (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 securely
maintain customer data and prevent, mitigate, and respond
effectively to both historical and future data breaches; (xvii)
potential service interruptions or performance problems associated
with Zendesk’s technology and infrastructure; (xviii) Zendesk's
ability to comply with privacy and data security regulations; (xix)
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; and (xx) other adverse changes in
general economic or market conditions.
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, 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, 2021.
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,
2021
2020
2021
2020
Revenue
$
318,216
$
246,664
$
616,264
$
484,140
Cost of revenue
66,743
61,515
127,637
121,217
Gross profit
251,473
185,149
488,627
362,923
Operating expenses:
Research and development
82,826
59,003
156,609
119,424
Sales and marketing
165,250
121,397
322,768
245,707
General and administrative
45,818
36,247
88,951
70,573
Total operating expenses
293,894
216,647
568,328
435,704
Operating loss
(42,421
)
(31,498
)
(79,701
)
(72,781
)
Other income (expense), net:
Interest expense
(14,591
)
(8,086
)
(29,006
)
(14,973
)
Loss on early extinguishment of debt
—
(25,950
)
—
(25,950
)
Interest and other income (expense),
net
960
2,166
6,044
9,068
Total other income (expense), net
(13,631
)
(31,870
)
(22,962
)
(31,855
)
Loss before provision for income taxes
(56,052
)
(63,368
)
(102,663
)
(104,636
)
Provision for income taxes
2,355
1,288
4,709
2,804
Net loss
$
(58,407
)
$
(64,656
)
$
(107,372
)
$
(107,440
)
Net loss per share, basic and diluted
$
(0.49
)
$
(0.56
)
$
(0.91
)
$
(0.94
)
Weighted-average shares used to compute
net loss per share, basic and diluted
119,050
114,600
118,484
114,069
Condensed Consolidated Balance
Sheets
(In thousands, except par value;
unaudited)
June 30, 2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents
$
422,810
$
405,430
Marketable securities
515,562
565,593
Accounts receivable, net of allowance for
credit losses of $6,015 and $5,787 as of June 30, 2021 and December
31, 2020, respectively
205,784
199,243
Deferred costs
62,642
51,878
Prepaid expenses and other current
assets
49,096
53,829
Total current assets
1,255,894
1,275,973
Marketable securities, noncurrent
540,294
428,678
Property and equipment, net
93,640
94,208
Deferred costs, noncurrent
65,605
52,731
Lease right-of-use assets
75,791
84,013
Goodwill and intangible assets, net
192,579
196,218
Other assets
25,259
25,458
Total assets
$
2,249,062
$
2,157,279
Liabilities and stockholders’
equity
Current liabilities:
Accounts payable
$
21,007
$
15,428
Accrued liabilities
36,264
38,921
Accrued compensation and related
benefits
95,965
103,437
Deferred revenue
438,779
378,935
Lease liabilities
20,302
23,533
Current portion of convertible senior
notes, net
136,011
132,388
Total current liabilities
748,328
692,642
Convertible senior notes, net
957,172
935,576
Deferred revenue, noncurrent
3,684
4,423
Lease liabilities, noncurrent
70,120
85,275
Other liabilities
5,631
7,532
Total liabilities
1,784,935
1,725,448
Stockholders’ equity:
Preferred stock, par value $0.01 per
share
—
—
Common stock, par value $0.01 per
share
1,197
1,174
Additional paid-in capital
1,492,117
1,344,337
Accumulated other comprehensive (loss)
income
(5,216
)
3,203
Accumulated deficit
(1,023,971
)
(916,883
)
Total stockholders’ equity
464,127
431,831
Total liabilities and stockholders’
equity
$
2,249,062
$
2,157,279
Condensed Consolidated Statements of
Cash Flows
(In thousands; unaudited)
Three Months Ended June
30,
2021
2020
Cash flows from operating
activities
Net loss
$
(58,407
)
$
(64,656
)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization
9,108
10,749
Share-based compensation
56,694
43,712
Amortization of deferred costs
16,185
10,765
Amortization of debt discount and issuance
costs
12,694
7,487
Loss on early extinguishment of debt
—
25,950
Repayment of convertible senior notes
attributable to debt discount
—
(38,637
)
Allowance for credit losses on accounts
receivable
1,327
3,349
Other, net
1,088
(259
)
Changes in operating assets and
liabilities:
Accounts receivable
(27,868
)
(46,666
)
Prepaid expenses and other current
assets
(1,272
)
(4,959
)
Deferred costs
(32,267
)
(14,867
)
Lease right-of-use assets
4,354
5,272
Other assets and liabilities
(2,166
)
(308
)
Accounts payable
(420
)
(12,692
)
Accrued liabilities
(483
)
1,638
Accrued compensation and related
benefits
14,152
13,329
Deferred revenue
45,720
13,616
Lease liabilities
(11,561
)
(3,534
)
Net cash provided by (used in)
operating activities
26,878
(50,711
)
Cash flows from investing
activities
Purchases of property and equipment
(2,896
)
(5,622
)
Internal-use software development
costs
(3,070
)
(3,225
)
Purchases of marketable securities
(199,540
)
(111,906
)
Proceeds from maturities of marketable
securities
182,044
117,752
Proceeds from sales of marketable
securities
20,462
39,814
Net cash (used in) provided by
investing activities
(3,000
)
36,813
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
11,204
5,101
Proceeds from employee stock purchase
plan
11,594
8,802
Taxes paid related to net share settlement
of share-based awards
(3,502
)
(2,241
)
Net cash provided by financing
activities
19,296
515,379
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
(11
)
15
Net increase in cash, cash equivalents and
restricted cash
43,163
501,496
Cash, cash equivalents and restricted cash
at beginning of period
380,085
202,620
Cash, cash equivalents and restricted
cash at end of period
$
423,248
$
704,116
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,
2021
2020
2021
2020
Reconciliation of gross profit and
gross margin
GAAP gross profit
$
251,473
$
185,149
$
488,627
$
362,923
Plus: Share-based compensation
5,218
5,187
9,704
10,246
Plus: Employer tax related to employee
stock transactions
327
292
780
717
Plus: Amortization of purchased
intangibles
1,136
1,617
2,355
3,724
Plus: Acquisition-related expenses
55
66
124
207
Plus: Amortization of share-based
compensation capitalized in internal-use software
387
464
771
914
Non-GAAP gross profit
$
258,596
$
192,775
$
502,361
$
378,731
GAAP gross margin
79
%
75
%
79
%
75
%
Non-GAAP adjustments
2
%
3
%
3
%
3
%
Non-GAAP gross margin
81
%
78
%
82
%
78
%
Reconciliation of operating
expenses
GAAP research and development
$
82,826
$
59,003
$
156,609
$
119,424
Less: Share-based compensation
(17,024
)
(12,529
)
(32,697
)
(25,155
)
Less: Employer tax related to employee
stock transactions
(1,082
)
(700
)
(2,509
)
(1,587
)
Less: Acquisition-related expenses
(811
)
(1,167
)
(1,779
)
(2,178
)
Less: Amortization of share-based
compensation capitalized in internal-use software
(17
)
—
(34
)
—
Non-GAAP research and development
$
63,892
$
44,607
$
119,590
$
90,504
GAAP research and development as
percentage of revenue
26
%
24
%
25
%
25
%
Non-GAAP research and development as
percentage of revenue
20
%
18
%
19
%
19
%
GAAP sales and marketing
$
165,250
$
121,397
$
322,768
$
245,707
Less: Share-based compensation
(24,501
)
(17,573
)
(47,733
)
(34,132
)
Less: Employer tax related to employee
stock transactions
(1,385
)
(890
)
(3,454
)
(2,064
)
Less: Amortization of purchased
intangibles
(642
)
(671
)
(1,284
)
(1,370
)
Less: Acquisition-related expenses
(64
)
(470
)
(112
)
(1,091
)
Non-GAAP sales and marketing
$
138,658
$
101,793
$
270,185
$
207,050
GAAP sales and marketing as percentage of
revenue
52
%
49
%
52
%
51
%
Non-GAAP sales and marketing as percentage
of revenue
44
%
41
%
44
%
43
%
GAAP general and administrative
$
45,818
$
36,247
$
88,951
$
70,573
Less: Share-based compensation
(9,951
)
(8,423
)
(18,934
)
(16,261
)
Less: Employer tax related to employee
stock transactions
(1,124
)
(462
)
(2,288
)
(1,225
)
Less: Acquisition-related expenses
(141
)
(134
)
(463
)
(238
)
Less: Real estate impairments
(1,176
)
—
(1,176
)
—
Non-GAAP general and administrative
$
33,426
$
27,228
$
66,090
$
52,849
GAAP general and administrative as
percentage of revenue
14
%
15
%
14
%
15
%
Non-GAAP general and administrative as
percentage of revenue
11
%
11
%
11
%
11
%
Reconciliation of operating income
(loss) and operating margin
GAAP operating loss
$
(42,421
)
$
(31,498
)
$
(79,701
)
$
(72,781
)
Plus: Share-based compensation
56,694
43,712
109,068
85,794
Plus: Employer tax related to employee
stock transactions
3,918
2,344
9,031
5,593
Plus: Amortization of purchased
intangibles
1,778
2,288
3,639
5,094
Plus: Acquisition-related expenses
1,071
1,837
2,478
3,714
Plus: Amortization of share-based
compensation capitalized in internal-use software
404
464
805
914
Plus: Real estate impairments
1,176
—
1,176
—
Non-GAAP operating income
$
22,620
$
19,147
$
46,496
$
28,328
GAAP operating margin
(13
)%
(13
)%
(13
)%
(15
)%
Non-GAAP adjustments
20
%
21
%
21
%
21
%
Non-GAAP operating margin
7
%
8
%
8
%
6
%
Three Months Ended June
30,
Six Months Ended June
30,
2021
2020
2021
2020
Reconciliation of net income
(loss)
GAAP net loss
$
(58,407
)
$
(64,656
)
$
(107,372
)
$
(107,440
)
Plus: Share-based compensation
56,694
43,712
109,068
85,794
Plus: Employer tax related to employee
stock transactions
3,918
2,344
9,031
5,593
Plus: Amortization of purchased
intangibles
1,778
2,288
3,639
5,094
Plus: Acquisition-related expenses
1,071
1,837
2,478
3,714
Plus: Amortization of share-based
compensation capitalized in internal-use software
404
464
805
914
Plus: Real estate impairments
1,176
—
1,176
—
Plus: Amortization of debt discount and
issuance costs
12,695
7,487
25,220
14,036
Plus: Loss on early extinguishment of
debt
—
25,950
—
25,950
Less: Income tax effects and
adjustments
(2,198
)
(3,063
)
(5,529
)
(4,854
)
Non-GAAP net income
$
17,131
$
16,363
$
38,516
$
28,801
Reconciliation of net income (loss) per
share, basic
GAAP net loss per share, basic
$
(0.49
)
$
(0.56
)
$
(0.91
)
$
(0.94
)
Non-GAAP adjustments to net loss
0.63
0.70
1.24
1.19
Non-GAAP net income per share, basic
$
0.14
$
0.14
$
0.33
$
0.25
Reconciliation of net income (loss) per
share, diluted
GAAP net loss per share, diluted
$
(0.49
)
$
(0.56
)
$
(0.91
)
$
(0.94
)
Non-GAAP adjustments to net loss
0.62
0.70
1.21
1.18
Non-GAAP net income per share, diluted
$
0.13
$
0.14
$
0.30
$
0.24
Weighted-average shares used in GAAP per
share calculation, basic and diluted
119,050
114,600
118,484
114,069
Weighted-average shares used in non-GAAP
per share calculation
Basic
119,050
114,600
118,484
114,069
Diluted
127,515
120,397
127,384
120,309
Computation of free cash flow
Net cash provided by (used in) operating
activities
$
26,878
$
(50,711
)
$
60,473
$
(53,320
)
Plus: Repayment of convertible senior
notes attributable to debt discount
—
38,637
—
38,637
Less: Purchases of property and
equipment
(2,896
)
(5,622
)
(5,957
)
(15,560
)
Less: Internal-use software development
costs
(3,070
)
(3,225
)
(7,538
)
(6,283
)
Free cash flow
$
20,912
$
(20,921
)
$
46,978
$
(36,526
)
Net cash provided by (used in) operating
activities margin
8
%
(21
)%
10
%
(11
)%
Non-GAAP adjustments
(1
)%
13
%
(2
)%
3
%
Free cash flow margin
7
%
(8
)%
8
%
(8
)%
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: To support an increased 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
June 30, 2021, $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, 2021, 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
logos, annual recurring revenue and the percentage of its annual
recurring revenue from customers with more than $250,000 in annual
recurring revenue.
Zendesk's number of logos is a consolidation of paid customer
accounts across our solutions, exclusive of Zendesk's legacy
Starter plan, free trials, or other free services, as of the end of
the period. A paid customer account is one individual billing
relationship for subscription to our services. Zendesk calculates
its logo number by consolidating paid customer accounts that share
common corporate information as a single organization or customer
may have multiple paid customer accounts across its solutions to
service separate subsidiaries, divisions, or work processes. As of
June 30, 2021, Zendesk had approximately 112,300 logos. Zendesk
does not currently include in its logo metric logos associated with
its legacy analytics product, its legacy Outbound product, its
legacy Starter plan, its legacy Sell product, legacy Sunshine
Conversations, its legacy Smooch product, free trials, or other
free services. We may from time to time refer to "customers" or
"brands" in our publicly-available disclosures, each of which
refers to our number of logos.
Zendesk’s dollar-based net expansion rate provides a measurement
of our ability to increase revenue across our existing customer
base through expansion of authorized agents associated with a logo,
upgrades in subscription plans, and the purchase of additional
products as offset by contraction and churn in authorized agents
associated with a logo, and downgrades in subscription plans.
Zendesk does not currently incorporate operating metrics associated
with its legacy analytics product, its legacy Outbound product, its
legacy Starter plan, its legacy Sell product, legacy Sunshine
Conversations, its legacy Smooch product, free trials, or other
free services into its measurement of dollar-based net expansion
rate. Dollar-based net expansion rate is based upon our annual
recurring revenue for a set of logos on Zendesk's products. Annual
recurring revenue is determined by multiplying monthly recurring
revenue by twelve. Monthly recurring revenue is a legal and
contractual determination made by assessing contractual terms, as
of the date of determination, as to the revenue we expect to
generate in the next monthly period, assuming no changes to the
subscription and without taking into account any usage above the
subscription base, if any, that may be applicable to such
subscription. Zendesk excludes the impact of revenue that it
expects 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 its
determination of monthly recurring revenue. Zendesk additionally
excludes the impact of accounts that are free-trial accounts that
did not result in paid subscriptions, and temporary coupons, such
as short-term discounts that were applied to customer accounts due
to the COVID-19 pandemic, from its annual recurring revenue.
Monthly recurring revenue is not determined by reference to
historical revenue, deferred revenue, or any other United States
generally accepted accounting principles, or GAAP, financial
measure over any period.
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 from logos
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.
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 that is
generated by customer accounts with more than $250,000 in annual
recurring revenue is determined by dividing the total annual
recurring revenue from customer accounts with more than $250,000 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 customer accounts from our
products other than Sell and Sunshine Conversations as of the
measurement date. Zendesk determines the customer accounts with
$250,000 in annual recurring revenue as of the measurement date
based on the annual recurring revenue of a customer account at the
measurement date. A "customer account" is based on an identifier
tracked in our internal sales system as a separate and distinct
buying entity.
Zendesk determines its bookings as the incremental additional
annual recurring revenue from contracts that were entered into
during the referenced fiscal quarter. Zendesk determines its net
bookings as bookings less any annual recurring revenue lost from
contracts which have not been renewed or a decrease in the level of
paid services with our solutions over the referenced fiscal
quarter.
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.
Zendesk determines its average deal size by dividing the annual
recurring revenue from bookings for our products other than Sell
and Sunshine Conversations in a quarter by the number of deals that
were entered into during that quarter.
Source: Zendesk, Inc.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20210729006098/en/
Zendesk, Inc. Investor Contact: Jason Tsai, +1
415-997-8882 ir@zendesk.com
or
Media Contact: Stephanie Barnes, +1 415-722-0883
press@zendesk.com
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