Attached files
| file | filename |
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| EX-99.3 - EXHIBIT 99.3 - Zendesk, Inc. | a2016q3tweetexhibit993fi.htm |
| EX-99.1 - EXHIBIT 99.1 - Zendesk, Inc. | zen_8-kxq3x2016xex991x7.htm |
| EX-3.1 - EXHIBIT 3.1 - Zendesk, Inc. | zendesk-amendedandrestated.htm |
| 8-K - 8-K - Zendesk, Inc. | zen_8-kxq3.htm |
Zendesk Shareholder Letter Q3 2016 - 1
v
Third Quarter 2016
Shareholder Letter
November 01, 2016
Exhibit 99.2
Zendesk Shareholder Letter Q3 2016 - 2
Mikkel Svane
CEO
In case you haven’t noticed, a lot has changed at
Zendesk. Over the past year we have invested
to broaden our family of products. Last week,
we unveiled our new corporate branding and
an expanded product portfolio, furthering our
vision of delivering better customer experiences.
The new Zendesk family of products represents
Zendesk’s shift from a single customer service
product to a unified product family focused on
improving customer relationships. The Zendesk
family of products helps organizations understand
their customers, improve communication, and
offer support where and when it’s needed most.
For the third quarter of 2016, we achieved
revenue of $80.7 million. While this represents
substantial growth of 45% over the third quarter
of 2015 and exceeded our previously published
guidance, we feel we did not execute to our
fullest potential. In July, we realigned our
sales and marketing activities with the goal
of more efficiently winning new business and
expanding within our installed customer base.
That reorganization caused more employee
turnover and disruption than we had expected
and impacted our ability to convert pipeline into
closed business, especially late in the quarter
and in our largest Americas region. We also fell
short of our expectations on service uptime,
disappointing our customers in ways that aren’t
acceptable. We’ve taken immediate action to
address this issue, as discussed in more
detail below.
Despite those challenges, there was much to
be excited about in our business performance
during the quarter. Our core low-touch business
continued to thrive, with the result being that a
very substantial portion of our business is being
closed with short and highly efficient sales cycles.
We crossed 87,000 paid customer accounts, a
number that demonstrates our success in landing
new customers. Additionally, we remain focused
on landing with larger organizations, continuing
to employ our land-and-expand strategy to
efficiently manage our customer acquisition costs.
We have high confidence in our ability to expand
with many of these new customers.
Elena Gomez
CFO
Marc Cabi
Strategy & IR
Zendesk Shareholder Letter Q3 2016 - 3
Third quarter 2016 financial summary
(in thousands, except per share data)
Three Months Ended September 30,
GAAP Results 2016 2015
Revenue $ 80,717 $ 55,661
Gross profit 56,851 38,622
Gross margin 70.4% 69.4%
Operating loss $ (26,213) $ (18,807)
Operating margin -32.5% -33.8%
Net loss $ (25,826) $ (18,924)
Net loss per share (0.27) (0.22)
Non-GAAP Results
Non-GAAP gross profit $ 60,090 $ 40,407
Non-GAAP gross margin 74.4% 72.6%
Non-GAAP operating loss $ (4,256) $ (4,131)
Non-GAAP operating margin -5.3% -7.4%
Non-GAAP net loss $ (3,869) $ (4,248)
Non-GAAP net loss per share (0.04) (0.05)
We remain focused on scaling our operations
and delivering year-over-year operating margin
improvement. For the third quarter of 2016 versus
the third quarter of 2015, we expanded GAAP gross
margin to 70.4% from 69.4% and GAAP operating
margin to -32.5% from -33.8%. When comparing the
same periods on a non-GAAP basis, we expanded
gross margin to 74.4% from 72.6% and operating
margin to -5.3% from -7.4%.
With the re-architecting of our go-to-market
organization largely complete and the roll-out of
our new brand messaging and family of products,
we believe we are well positioned to close out
2016 and turn to 2017. We will maintain our focus on
sustaining high growth while demonstrating scale
through improved operating margins over time as
we pursue our ultimate goal of helping organizations
build better relationships with their customers.
Zendesk Shareholder Letter Q3 2016 - 4
The new Zendesk
As we prepare for the future of Zendesk, we
look back at our accomplishments over the
last 9 years. We have come a long way with
our customers, who define innovation in a
new economy where listening to the voice of
the customer and customer satisfaction are
prerequisites for success. We have learned so
much from our next-generation customers like
AdRoll, Instacart, Lonely Planet, MailChimp,
Shopify, and a long list of others. They have
demonstrated that building relationships and
loyalty through a journey of customer interactions
and experiences is how to achieve success, not
one-off transactions of the days past. In fact,
today’s most successful companies are moving
away from an old view that customers need to be
managed and automated, to a new view where
building customer relationships is at the core of
their business.
The new reality is that business software must
be built for customers f irst. Modern software
should allow companies to deliver positive
experiences without being held back by the
inefficiencies of silos created by departments
and functions within companies.
We embark on a new journey to provide our
customers with software tools that allow
companies to broaden how they address their
customer relationships. Our future strategy is not
to replicate an old view of CRM -- defined by sales
automation, marketing automation, and service
automation -- rather, our vision is to build software
for relationships first.
Last week, we introduced our new and
expanded product family that is designed to help
organizations build better customer relationships.
Customer support remains a core part of that
effort, as does delivering products that enable
customers to communicate with companies across
multiple channels. In addition, we are expanding
our software to better understand customers.
Zendesk Shareholder Letter Q3 2016 - 5
A beautifully simple system for
tracking, prioritizing, and solving
customer support tickets
A self-service destination with
articles, interactive forums, and
community that helps customers
help themselves
Live chat software that provides a fast
and responsive way to connect with
customers in the moment
Call center software for more
personal and productive phone
support conversations
Message software that helps
companies engage customers on
their favorite messaging apps
Analytics software that unifies data for all Zendesk
products and numerous third-party sources to
help businesses measure and understand the
entire customer experience
Customer intelligence so businesses can
proactively reach out with relevant and
helpful messages
Specifically, we have added two new products to
the family that together help organizations build
more personal connections with their customers
through analytics and customer intelligence.
Zendesk Explore powers analytics and unifies
data for all of Zendesk’s products and a vast
number of third-party sources. It makes customer
data accessible across an organization, so
businesses can measure and understand the
entire customer experience. Zendesk Connect
provides customer intelligence so businesses
can proactively reach out with relevant and
helpful messages. It combines historical data
with individual customer activity from websites,
mobile apps, and other digital interactions.
Using Zendesk Connect, businesses can guide
customers through new product experiences,
provide relevant information to avoid support
issues, and recommend related products -- letting
businesses reach out at the right time and place.
Along with Zendesk Explore and Zendesk
Connect, the Zendesk family of products includes
Zendesk Support, Zendesk Help Center, Zendesk
Chat, Zendesk Talk, and Zendesk Message.
Explore, Connect, and Message are in early access programs. We expect Explore will be generally available for Support and Chat
in Q1 2017, with general availability for additional Zendesk products beginning in Q2 2017. We expect Connect and Message will be
generally available in Q2 2017.
Zendesk Shareholder Letter Q3 2016 - 6
A scalable brand
Along with new products, we introduced our entirely
new brand identity for Zendesk. Our challenge was
to create a new brand system that allowed us to
have unique identities for our individual products,
while unifying them under our company brand.
Drawing inspiration from our roots in Danish design,
we unveiled unique logos for each of our products
built on a concept called “Relationshapes.” Each
product is identified by the interaction of two
everyday shapes. Those shapes come together as a
large “Z” to form our new corporate identity.
Our brand has long played a key role in our success.
As we look to the future, the Zendesk brand will
continue to expand toward our broader addressable
market of products for better customer relationships.
Zendesk Shareholder Letter Q3 2016 - 7
Product investment
A big part of our move toward being a unified family
of products is our investments in making sure our
products work well together. We are investing in
their deep and seamless integration. All of them
share a common interface and are being developed
to support a single login and ultimately, a shared
customer data platform.
To underscore our commitment to these goals
and the expanded reach of our products, we are
pleased to announce the appointment of Adrian
McDermott as our President of Products. Over
the last six years, Adrian has been instrumental in
translating our aspirations into software built for
better customer relationships. In this new leadership
role, he will continue moving us forward on the path
toward building out our unified product family, and
transforming the customer and agent experience.
Scaling and maturing
our infrastructure
As the ongoing relationship between organizations
and their customers becomes central to the
success of modern business models, we recognize
and appreciate the trust our customers have
placed in us to help manage those relationships.
We’ve worked hard to earn that trust by investing
in our infrastructure to support the high traffic
volume needs of our biggest and fastest growing
customers. Zendesk now processes individual
customer service requests at a rate of over 1 billion
per year.
As recent attacks on internet infrastructure have
revealed, businesses are increasingly dependent on
the availability and performance of mission critical
services like ours to manage their operations.
Zendesk is not immune to these disruptions and,
over the course of 2016, our customers have
been impacted by them as well as other incidents
more directly under our control. That customer
experience is not acceptable to us and we are
redoubling our efforts to ensure the availability and
Adrian McDermott
President of Products
Tom Keiser
Chief Information Officer &
SVP Technology Operations
performance of our products are best-in-class. As
part of that effort, we have brought our infrastructure
and technology operations organizations under the
leadership of Tom Keiser. He joined us as our CIO
in the second quarter and will now also serve as
our SVP of Technology Operations. We believe that
Tom, who managed operations teams at scale while
at Gap and LBrands and has been transformative
in his short tenure at Zendesk, is the right leader to
help continue to mature this part of our organization.
Another aspect of our evolving operations
strategy is the continued refinement of our hosting
infrastructure to optimize for reliability, performance,
and cost. We currently provide our services through
a combination of co-located managed data centers
and cloud infrastructure providers such as Amazon
Web Services (AWS) and Google Cloud Platform.
Earlier this year, Zendesk successfully launched its
first AWS implementation in the APAC region. As
a result, our pursuit of opportunities to leverage
efficient, scalable, and resilient managed hosting
solutions has accelerated. During the third quarter,
we launched two US-based AWS instances. We will
continue to evaluate the success of these efforts
over the next few quarters and our approach to
infrastructure investments.
Zendesk Shareholder Letter Q3 2016 - 8
Expanding developer channels
Earlier this year, we announced an integration
with Google Play that allows Zendesk customers
to automatically convert Google Play Store
reviews into support tickets. We expanded on
this in the third quarter, releasing the Channel
Framework, which allows developers to build
their own integrations and bring customer
communications from anywhere into Zendesk.
With the Channel Framework, Zendesk customers
can turn reviews, comments, and messages into
two-way customer service conversations. These
channel integrations are currently available on our
redesigned Apps Marketplace. We also updated
the marketplace with better search and browsing
of our apps. We expect the Apps Marketplace
to be the foundation for a new multi-product
experience where customers will soon be able
to install apps into Chat and other emerging
products.
Zendesk Shareholder Letter Q3 2016 - 9
Advanced
Voice
Key accomplishments
Jan
2015
Zendesk
Neighbor
Foundation
Facebook
Messenger
Analyst Day
Zendesk
MessageAnalytics
Gartner MQ
Visionary
Forrester
Wave
Pathfinder
Automatic
Answers
65K 75K 85K80K
1,000
Employee Count
Paid Customer Accounts
July
2016
1,500
70K
Satisfaction
Prediction
1,200
Jan
2016
60K
Gartner MQ
Leader
Premium
Live Chat SMS
Google Play
Help Center
“Copenhagen”
Channel
Framework
New
Products
RebrandIndia Of_f_ice
Opening
Of_f_ice 365
Customers
Notable customer success stories from the third
quarter include Vend, a cloud point-of-sale software
company based in New Zealand. Zendesk is at the
heart of Vend’s award-winning support. Following
the announcement of our Automatic Answers
machine learning feature in July, the company was
excited to be a part of the early access program to
test it on their email and web form channels. With
over 6,000 interactions per month with retailers
from over 100 countries, Automatic Answers is
now solving a couple of hundred requests per
month without any input from a retailer advocate.
Automatic Answers has helped Vend’s retail
customers get the answers they seek faster, without
creating extra work for their support team.
Other noteworthy customers that recently joined
us or expanded with us include:
• Instacart, a popular internet-based grocery
delivery service
• MailChimp, an online email marketing solution
• Konami Gaming, innovators of slot machines
and gaming enterprise management systems
• Neato Robotics, a robotics company making
automatic, cordless robot vacuums
• Easynvest, a Brazilian investment
management company
Advanced
Voice
Key accomplishments
Jan
2015
Zendesk
Neighbor
Foundation
Facebook
Messenger
Analyst Day
Zendesk
MessageAnalytics
Gartner MQ
Visionary
Forrester
Wave
Pathfinder
Automatic
Answers
65K 75K 85K80K
1,000
Employee Count
Paid Customer Accounts
July
2016
1,500
70K
Satisfaction
Prediction
1,200
Jan
2016
60K
Gartner MQ
Leader
Premium
Live Chat SMS
Google Play
Help Center
“Copenhagen”
Channel
Framework
New
Products
RebrandIndia Of_f_ice
Opening
Of_f_ice 365
Key accomplishments
Timeline not to scale
Zendesk Shareholder Letter Q3 2016 - 10
Operating metrics
Earlier in 2016, we shared our goal of focusing
our sales and marketing investments on pursuing
opportunities we believe result in building a
repeatable and efficient model for customer
acquisition. With our Chief Revenue Officer
Bryan Cox on board, we’ve refined our go-to-
market strategy to focus on these low-touch,
more efficient sales cycle opportunities, while
still driving efforts to land and pursue expansion
opportunities within larger organizations.
As a proxy of our success with larger
opportunities, we measure our number of
contracts signed with an annual value of $50,000
or greater. In the third quarter, we closed 44%
more of these contracts versus a year ago. We
saw a decrease in the average size of these
transactions as compared to the same period last
year, which reflects the unpredictable nature of
closing some of our largest opportunities.
Another metric we use to gauge our penetration
within larger organizations is represented by
the percentage of recurring revenue generated
by customers with more than 100 agents, which
remained strong at 33% in the third quarter of
2016 versus 31% in the third quarter of 2015.
Our dollar-based net expansion rate at the end
of the third quarter was 114%. This result is in line
with expectations and, similar to last quarter, is
impacted by the anniversary of large wins in the
same period of 2015. The combined churn and
contraction rate, which is a component of this
metric, has not significantly changed since the
time of our IPO. We expect our dollar-based net
expansion rate to range between 110-120% over
the next several quarters.
% of total quarter-ending MRR
from paid customer accounts with 100+ seats
Zendesk Shareholder Letter Q3 2016 - 11
Corporate Social Responsibility
At Zendesk, corporate social responsibility is
a core component of our brand. In September,
we were proud to receive the Corporate Partner
Award for our dedication and commitment
to building neighborhood and community
partnerships at the 39th Annual Wu Yee Gala
hosted in San Francisco. Wu Yee Children’s
Services connects diverse and low-income
families to critical health and education resources.
We have had the pleasure of offering the
agency our community space located in our San
Francisco headquarters to host family dinners,
graduation ceremonies, and even a Frozen Sing-
Along night for Wu Yee families.
Also in September, Mikkel gave the keynote
address at the C.H.E.F.S. Class 61 graduation
ceremony, which was hosted in our community
space. C.H.E.F.S. (Conquering Homelessness
through Employment in Food Services) is a
five-month culinary training program operated
by Episcopal Community Services that prepares
homeless and formerly homeless individuals for
jobs in food services.
FPO
Zendesk Shareholder Letter Q3 2016 - 12
Financial measures and cash flows
Our mission to demonstrate scale through year-
over-year margin improvement continued during
the third quarter of 2016. During this quarter, we
achieved gross margin expansion based primarily
on continued improvement in utilization of our
capitalized internal-use software, employee
resources, and data center capacity. GAAP gross
margin increased to 70.4% in the third quarter of
2016 compared to 69.1% in the second quarter
of 2016. GAAP gross margin in the third quarter
of 2015 was 69.4%. Non-GAAP gross margin
increased to 74.4% in the third quarter of 2016
compared to 73.3% in the second quarter of 2016.
Non-GAAP gross margin in the third quarter of
2015 was 72.6%.
GAAP operating loss for the third quarter of 2016
was $26.2 million compared to GAAP operating
loss for the second quarter of 2016 of $26.3
million. GAAP operating loss for the third quarter
of 2015 was $18.8 million. Non-GAAP operating
loss for the third quarter of 2016 was $4.3 million,
which was better than our outlook for the quarter,
and compares to non-GAAP operating loss for the
second quarter of 2016 of $5.6 million. Non-GAAP
operating loss for the third quarter of 2015 was
$4.1 million.
GAAP operating margin improvement is attributed
to improvements in gross margin, and overall
productivity gains in administrative and research
and development costs. GAAP operating margin
for the third quarter of 2016 improved to -32.5%
from -35.4% in the second quarter of 2016. GAAP
operating margin was -33.8% in the third quarter
of 2015. Non-GAAP operating margin improved
to -5.3% in the third quarter of 2016 from -7.6% in
the second quarter of 2016. Non-GAAP operating
margin was -7.4% in the third quarter of 2015.
GAAP net loss for the third quarter of 2016 was
$25.8 million or $0.27 per share compared to
GAAP net loss of $26.3 million or $0.28 per share
for the second quarter of 2016. GAAP net loss
was $18.9 million or $0.22 per share for the third
quarter of 2015.
Non-GAAP net loss for the third quarter of 2016
was $3.9 million or $0.04 per share compared to
non-GAAP net loss of $5.6 million or $0.06 per
share for the second quarter of 2016. Non-GAAP
net loss was $4.2 million or $0.05 per share
for the third quarter of 2015. Weighted average
shares used to compute both GAAP and non-
GAAP net loss per share for the third quarter of
2016 was 94.1 million.
Non-GAAP results for the third quarter of
2016 exclude $21.0 million in share-based
compensation and related expenses (including
$0.6 million of employer tax related to employee
stock transactions and $0.4 million of amortized
share-based compensation capitalized in internal-
use software), and $1.0 million of amortization of
purchased intangibles. Non-GAAP results for the
second quarter of 2016 exclude $19.7 million in
share-based compensation and related expenses
(including $0.7 million of employer tax related to
employee stock transactions and $0.4 million of
amortized share-based compensation capitalized
in internal-use software), and $1.0 million of
amortization of purchased intangibles. Non-GAAP
results for the third quarter of 2015 exclude $14.0
million in share-based compensation and related
expenses (including $0.2 million of employer tax
related to employee stock transactions and $0.3
million of amortized share-based compensation
capitalized in internal-use software), $0.3 million
of acquisition related costs, and $0.4 million of
amortization of purchased intangibles.
During the third quarter of 2016, net cash from
operating activities was -$0.6 million. We ended
the third quarter of 2016 with $77.6 million of cash
and equivalents, and we had an additional $133.8
million of short-term marketable securities and
$71.1 million in long-term marketable securities.
Zendesk Shareholder Letter Q3 2016 - 13
Guidance
The evolution and scaling of our core product to
meet our customers’ needs, introduction of an
expanded family of products, and the unveiling
of our new brand provide a solid foundation upon
which we believe we can continue to capitalize
and grow our business. We are also excited by
the immediate impact our new leaders have had
on helping us understand the different dynamics
of our business and setting us up to execute more
sustainably over the next year. Our core low-
touch, high velocity business segment continues
to grow at a highly predictable pace. We enter
the fourth quarter of 2016 with a healthy pipeline
of new and large prospective opportunities.
Our financial guidance for the remainder of 2016
reflects the fact that many of our early go-to-market
strategies to capitalize on larger opportunities
remain unpredictable from quarter to quarter. We
are confident in our ability to build a company that
can sustain solid revenue growth and meet our goal
of $1 billion in revenues in 2020.
For the fourth quarter of 2016, we expect revenue
to range between $86.0 and $88.0 million and we
expect our GAAP operating loss to range between
$29.0 and $30.0 million. We expect our non-GAAP
operating loss for the fourth quarter of 2016 to
range between $5.0 and $6.0 million. Our GAAP
operating loss for the fourth quarter of 2016 is
estimated to include share-based compensation
and related expenses of approximately $23.0
million, and amortization of purchased intangibles
of approximately $1.0 million.
For the full year of 2016, we expect revenue
to range between $309.0 and $311.0 million.
We expect our GAAP operating loss for the
full year of 2016 to range between $108.5 and
$109.5 million, and we expect our non-GAAP
operating loss to range between $22.0 and
$23.0 million. Our GAAP operating loss for the
full year of 2016 is estimated to include share-
based compensation and related expenses of
approximately $82.7 million, and amortization
of purchased intangibles of approximately
$3.8 million.
The timing of our data center investments and
our decision to supplement our co-located data
center investments with the use of third-party
hosting solutions may impact the allocation of
cash flows between cash flows from operations
and cash used for investing activities. We
currently estimate our net cash from operating
activities and free cash flow for the fourth quarter
of 2016 to be positive.
We continue to target to be free cash flow
positive for the full year of 2017.
This target regarding free cash flow includes cash
used for purchases of property and equipment
and internal-use software development costs. We
have not reconciled free cash flow guidance to
net cash from operating activities for this future
period 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 period is not available
without unreasonable effort.
Finally, we estimate we will have approximately
95.6 million weighted average shares outstanding
for the fourth quarter of 2016 and 93.1 million
weighted average shares outstanding for the full
year of 2016, each based only on current shares
outstanding and anticipated activity associated
with equity incentive plans.
Zendesk Shareholder Letter Q3 2016 - 14
Condensed
consolidated statements
of operations
(In thousands, except per
share data; unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Revenue $80,717 $55,661 $223,376 $146,122
Cost of revenue 23,866 17,039 68,318 47,491
Gross profit 56,851 38,622 155,058 98,631
Operating expenses:
Research and development 22,953 16,031 66,683 43,517
Sales and marketing 43,899 29,079 119,421 79,725
General and administrative 16,212 12,319 48,149 33,982
Total operating expenses 83,064 57,429 234,253 157,224
Operating loss (26,213) (18,807) (79,195) (58,593)
Other income (expense), net 681 145 745 (428)
Loss before provision for income taxes (25,532) (18,662) (78,450) (59,021)
Provision for income taxes 294 262 800 554
Net loss (25,826) (18,924) (79,250) (59,575)
Net loss per share, basic and diluted $(0.27) $(0.22) $(0.86) $(0.71)
Weighted-average shares used to compute
net loss per share, basic and diluted
94,085
87,777
92,274
83,536
Zendesk Shareholder Letter Q3 2016 - 15
Condensed consolidated
balance sheets
(In thousands, except par
value; unaudited)
September 30, 2016 December 31, 2015
Assets
Current Assets:
Cash and cash equivalents $77,589 $ 216,226
Marketable securities 133,758 29,414
Accounts receivable, net of allowance for doubtful accounts of $1,213 and
$763 as of September 30, 2016 and December 31, 2015, respectively
37,645
26,168
Prepaid expenses and other current assets 19,437 11,423
Total current assets 268,429 283,231
Marketable securities, noncurrent 71,139 22,336
Property and equipment, net 57,507 56,540
Goodwill and intangible assets, net 54,848 57,050
Other assets 4,504 3,529
Total assets $456,427 $ 422,686
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $5,491 $ 9,332
Accrued liabilities 12,839 9,742
Accrued compensation and related benefits 17,929 14,115
Deferred revenue 110,174 84,210
Total current liabilities 146,433 117,399
Deferred revenue, noncurrent 1,538 1,405
Other liabilities 9,922 10,592
Total liabilities 157,893 129,396
Stockholders’ equity:
Preferred stock, par value $0.01 per share — —
Common stock, par value $0.01 per share 953 905
Additional paid-in capital 595,135 511,183
Accumulated other comprehensive loss (1,730) (2,225)
Accumulated deficit (295,172) (215,921)
Treasury stock, at cost (652) (652)
Total stockholders’ equity 298,534 293,290
Total liabilities and stockholders’ equity $456,427 $ 422,686
Zendesk Shareholder Letter Q3 2016 - 16
Three Months Ended
September 30,
2016 2015
Cash flows from operating activities
Net loss $(25,826) $(18,924)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 6,853 4,868
Share-based compensation 19,995 13,442
Other 622 207
Excess tax benefit from share-based award activity (133) (29)
Changes in operating assets and liabilities:
Accounts receivable (9,355) (9,692)
Prepaid expenses and other current assets 459 (900)
Other assets and liabilities (1,449) (257)
Accounts payable (1,641) (856)
Accrued liabilities 842 991
Accrued compensation and related benefits (286) (96)
Deferred revenue 9,353 11,068
Net cash used in operating activities (566) (178)
Cash flows from investing activities
Purchases of property and equipment (4,084) (6,825)
Internal-use software development costs (1,540) (1,165)
Purchases of marketable securities (80,469) (21,144)
Proceeds from maturities of marketable securities 7,495 12,405
Proceeds from sale of marketable securities 25,613 14,333
Cash paid for the acquisition of Zopim, net of cash acquired — (551)
Net cash used in investing activities (52,985) (2,947)
Cash flows from financing activities
Proceeds from exercise of employee stock options 10,499 797
Taxes paid related to net share settlement of equity awards (281) (278)
Proceeds from employee stock purchase plan 3,032 2,295
Excess tax benefit from share-based award activity 133 29
Net cash provided by financing activities 13,383 2,843
Effect of exchange rate changes on cash and cash equivalents (279) (1)
Net decrease in cash and cash equivalents (40,447) (283)
Cash and cash equivalents at the beginning of period 118,036 255,669
Cash and cash equivalents at the end of period $77,589 $255,386
Condensed consolidated
statements of cash flows
(In thousands; unaudited)
Zendesk Shareholder Letter Q3 2016 - 17
Non-GAAP results
(In thousands, except per
share data) The follow-
ing table shows Zendesk’s
GAAP results reconciled to
non-GAAP results included
in this letter.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Reconciliation of gross profit and gross margin
GAAP gross profit $56,851 $38,622 $155,058 $98,631
Plus: Share-based compensation 1,919 1,131 5,355 3,136
Plus: Employer tax related to equity transactions 85 33 277 142
Plus: Amortization of purchased intangibles 848 352 2,525 1,058
Plus: Amortization of share-based compensation
capitalized in internal-use software
387
269
1,223
753
Non-GAAP gross profit $60,090 $40,407 $164,438 $103,720
GAAP gross margin 70% 69% 69% 67%
Non-GAAP adjustments 4% 4% 5% 4%
Non-GAAP gross margin 74% 73% 74% 71%
Reconciliation of operating expenses
GAAP research and development $22,953 $16,031 $66,683 $43,517
Less: Share-based compensation (7,172) (4,974) (20,548) (13,484)
Less: Employer tax related to equity transactions (232) (87) (802) (348)
Non-GAAP research and development $15,549 $10,970 $45,333 $29,685
GAAP research and development as percentage of revenue 28% 29% 30% 30%
Non-GAAP research and development as percentage of revenue 19% 20% 20% 20%
GAAP sales and marketing $43,899 $29,079 $119,421 $79,725
Less: Share-based compensation (6,657) (3,786) (17,780) (10,154)
Less: Employer tax related to equity transactions (184) (50) (574) (301)
Less: Amortization of purchased intangibles (106) (77) (314) (243)
Non-GAAP sales and marketing $36,952 $25,166 $100,753 $69,027
GAAP sales and marketing as percentage of revenue 54% 52% 53% 55%
Non-GAAP sales and marketing as percentage of revenue 46% 45% 45% 47%
GAAP general and administrative $16,212 $12,319 $48,149 $33,982
Less: Share-based compensation (4,247) (3,551) (12,654) (10,283)
Less: Employer tax related to equity transactions (120) (76) (462) (314)
Less: Transaction costs related to acquisition — (290) — (290)
Non-GAAP general and administrative $11,845 $8,402 $35,033 $23,095
GAAP general and administrative as percentage of revenue 20% 22% 22% 23%
Non-GAAP general and administrative as percentage of revenue 15% 15% 16% 16%
Zendesk Shareholder Letter Q3 2016 - 18
(continued...)
Non-GAAP results
(In thousands, except per
share data) The follow-
ing table shows Zendesk’s
GAAP results reconciled to
non-GAAP results included
in this letter.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2016 2015 2016 2015
Reconciliation of operating loss and operating margin
GAAP operating loss $(26,213) $(18,807) $(79,195) $(58,593)
Plus: Share-based compensation 19,995 13,442 56,337 37,057
Plus: Employer tax related to equity transactions 621 246 2,115 1,105
Plus: Amortization of purchased intangibles 954 429 2,839 1,301
Plus: Transaction costs related to acquisition — 290 — 290
Plus: Amortization of share-based compensation
capitalized in internal-use software
387
269
1,223
753
Non-GAAP operating loss $(4,256) $(4,131) $(16,681) $(18,087)
GAAP operating margin (32)% (34)% (35)% (40)%
Non-GAAP adjustments 27% 27% 28% 28%
Non-GAAP operating margin (5)% (7)% (7)% (12)%
Reconciliation of net loss
GAAP net loss $(25,826) $(18,924) $(79,250) $(59,575)
Plus: Share-based compensation 19,995 13,442 56,337 37,057
Plus: Employer tax related to equity transactions 621 246 2,115 1,105
Plus: Amortization of purchased intangibles 954 429 2,839 1,301
Plus: Transaction costs related to acquisition — 290 — 290
Plus: Amortization of share-based compensation
capitalized in internal-use software
387
269
1,223
753
Non-GAAP net loss $(3,869) $(4,248) $(16,736) $(19,069)
Reconciliation of net loss per share, basic and diluted
GAAP net loss per share, basic and diluted $(0.27) $(0.22) $(0.86) $(0.71)
Non-GAAP adjustments to net loss 0.23 0.17 0.68 0.48
Non-GAAP net loss per share, basic and diluted $(0.04) $(0.05) $(0.18) $(0.23)
Weighted-average shares used to compute
net loss per share, basic and diluted
94,085
87,777
92,274
83,536
Computation of free cash flow
Net cash provided by (used in) operating activities $(566) $(178) $3,994 $(4,951)
Less: purchases of property and equipment (4,084) (6,825) (12,494) (14,231)
Less: internal-use software development costs (1,540) (1,165) (4,313) (3,548)
Free cash flow $(6,190) $(8,168) $(12,813) $(22,730)
Zendesk Shareholder Letter Q3 2016 - 19
About Zendesk
Zendesk builds software for better customer relationships. It empowers
organizations to improve customer engagement and better understand their
customers. More than 87,000 paid customer accounts in over 150 countries and
territories use Zendesk products. Based in San Francisco, Zendesk has operations
in the United States, Europe, Asia, Australia, and South America. Learn more at
www.zendesk.com.
Forward-Looking Statements
This shareholder letter contains forward-looking statements, including, among other
things, statements regarding Zendesk’s future financial performance, its continued
investment to grow its business, and progress towards its long-term financial
objectives. The words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,”
“target,” “project,” and similar phrases that denote future expectation or intent
regarding Zendesk’s financial results, operations, and other matters are intended
to identify forward-looking statements. You should not rely upon forward-looking
statements as predictions of future events.
The outcome of the events described in these forward-looking statements is
subject to known and unknown risks, uncertainties, and other factors that may cause
Zendesk’s actual results, performance, or achievements to differ materially, including
(i) adverse changes in general economic or market conditions; (ii) Zendesk’s ability
to adapt its customer service platform to changing market dynamics and customer
preferences or achieve increased market acceptance of its platform; (iii) Zendesk’s
expectation that the future growth rate of its revenues will decline, and that, as
its costs increase, Zendesk may not be able to generate sufficient revenues to
achieve or sustain profitability; (iv) Zendesk’s limited operating history, which makes
it difficult to evaluate its prospects and future operating results; (v) Zendesk’s ability
to effectively manage its growth and organizational change; (vi) the market in
which Zendesk operates is intensely competitive, and Zendesk may not compete
effectively; (vii) the development of the market for software as a service business
software applications; (viii) Zendesk’s ability to sell its live chat software as a
standalone service and more fully integrate its live chat software with its customer
service platform; (ix) Zendesk’s ability to integrate We Are Cloud SAS with its existing
corporate operations, to sell its analytics software as a standalone service, and to
integrate Zendesk’s analytics software with Zendesk’s customer service platform; (x)
breaches in Zendesk’s security measures or unauthorized access to its customers’
data; (xi) service interruptions or performance problems associated with Zendesk’s
technology and infrastructure; (xii) real or perceived errors, failures, or bugs in
its products; (xiii) Zendesk’s substantial reliance on its customers renewing their
subscriptions and purchasing additional subscriptions; and (xiv) Zendesk’s ability to
effectively expand its sales capabilities.
The forward-looking statements contained in this shareholder letter are also subject
to additional risks, uncertainties, and factors, including those more fully described
in Zendesk’s filings with the Securities and Exchange Commission, including its
Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. Further
information on potential risks that could affect actual results will be included in the
subsequent periodic and current reports and other filings that Zendesk makes with
the Securities and Exchange Commission from time to time, including its Quarterly
Report on Form 10-Q for the quarter ended September 30, 2016.
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 shareholder
letter to reflect events or circumstances after the date of this shareholder letter or
to reflect new information or the occurrence of unanticipated events, except as
required by law.
About Non-GAAP Financial Measures
To provide investors and others with additional information regarding Zendesk’s
results, the following non-GAAP financial measures were disclosed: non-GAAP
gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating
loss and operating margin, non-GAAP net loss, non-GAAP net loss per share, basic
and diluted, and free cash flow.
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 and Acquisition Related Expenses: Zendesk
views amortization of purchased intangible assets, including the amortization of the
cost associated with an acquired entity’s developed technology, as items arising
from pre-acquisition activities determined at the time of an acquisition. While these
intangible assets are evaluated for impairment regularly, amortization of the cost
of purchased intangibles is an expense that is not typically affected by operations
during any particular period. Zendesk views acquisition related expenses as events
that are not necessarily reflective of operational performance during a period.
In particular, Zendesk believes the consideration of measures that exclude such
expenses can assist in the comparison of operational performance in different
periods which may or may not include such expenses.
Zendesk Shareholder Letter Q3 2016 - 20
Zendesk provides disclosures regarding its free cash flow, which is defined as
net cash from operating activities, less purchases of property and equipment and
internal-use software development costs. Zendesk uses free cash flow, among 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 provides investors
with an important perspective on the cash available to fund ongoing operations.
Zendesk uses non-GAAP financial information to evaluate its ongoing operations
and for internal planning and forecasting purposes. Zendesk’s management does
not itself, nor does it suggest that investors should, consider such non-GAAP
financial measures in isolation from, or as a substitute for, financial information
prepared in accordance with GAAP. Zendesk presents such non-GAAP financial
measures in reporting its financial results to provide investors with an additional
tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP
financial measures are useful because they allow for greater transparency with
respect to key metrics used by management in its financial and operational
decision-making. This allows investors and others to better understand and
evaluate Zendesk’s operating results and future prospects in the same manner as
management.
Zendesk’s management believes it is useful for itself and investors to review, as
applicable, both GAAP information that may include items such as share-based
compensation expense, amortization of share-based compensation capitalized
in internal-use software, amortization of purchased intangibles, transaction costs
related to acquisitions, and the non-GAAP measures that exclude such information
in order to assess the performance of Zendesk’s business and for planning
and forecasting in subsequent periods. 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 for its customer
service platform (Zendesk Support) and live chat software (Zendesk Chat), dollar-
based net expansion rate, monthly recurring revenue represented by its churned
customers, and the percentage of its monthly recurring revenue originating from
customers with more than 100 agents.
Zendesk defines the number of paid customer accounts at the end of any particular
period as the sum of the number of accounts on its customer service platform,
exclusive of its legacy Starter plan, free trials or other free services, and the number
of accounts using its live chat software, exclusive of free trials or other free services,
each as of the end of the period and as identified by a unique account identifier. Use
of Zendesk’s customer service platform and live chat software requires separate
subscriptions and each of these accounts are treated as a separate paid customer
account. Existing customers may also expand their utilization of Zendesk’s customer
service platform or live chat software by adding new accounts and a single
consolidated organization or customer may have multiple accounts across each
of Zendesk’s customer service platform and live chat software to service separate
subsidiaries, divisions, or work processes. Each of these accounts is also treated as
a separate paid customer account. Zendesk does not currently incorporate accounts
using its analytics software into the determination of the number of paid customer
accounts. Accounts that subscribe to Zendesk’s Essential plan are included in the
determination of the number of paid customer accounts.
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 features on Zendesk’s customer service platform,
such as voice subscriptions, 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 monthly recurring
revenue for a set of paid customer accounts on its customer service platform and
live chat software. 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 one-time discounts or any platform usage above the subscription base, if
any, that may be applicable to such subscription. Monthly recurring revenue is
not determined by reference to historical revenue, deferred revenue, or any other
United States generally accepted accounting principles, or GAAP, financial measure
over any period. It is forward-looking and contractually derived as of the date of
determination.
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 monthly recurring revenue of the paid customer
accounts on Zendesk’s customer service platform and live chat software 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 monthly recurring revenue
of 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
Zendesk Shareholder Letter Q3 2016 - 21
the transfer of agents between paid customer accounts, 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 74,300 customers, as compared to the approximately 87,400
total paid customer accounts as of September 30, 2016. 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
on its customer service platform or live chat software and paid customer accounts
associated with reseller and other similar channel arrangements.
Starting in the quarter ended March 31, 2016, Zendesk began incorporating
operating metrics associated with its live chat software into its dollar-based
net expansion rate. Zendesk does not currently incorporate operating metrics
associated with its analytics software 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 calculates its monthly recurring revenue represented by its churned
customers on an annualized basis by dividing base revenue associated with paid
customer accounts on Zendesk’s customer service platform that churn, either
by termination of the subscription or failure to renew, during the annual period
being measured, by Zendesk’s base revenue. Zendesk’s monthly recurring
revenue represented by its churned customers excludes expansion or contraction
associated with paid customer accounts on Zendesk’s customer service platform
and the effect of upgrades or downgrades in subscription plan. The monthly
recurring revenue represented by its churned customers is adjusted to exclude paid
customer accounts that churned from the customer base used that share common
corporate information with customer accounts that did not churn from the customer
base during the annual period being measured. While not material, Zendesk
believes the failure to make this adjustment could otherwise skew the monthly
recurring revenue represented by its churned customers as a result of customers
that maintain multiple paid customer accounts on its customer service platform.
Zendesk’s percentage of monthly recurring revenue that is generated by customers
with 100 or more agents is determined by dividing the monthly recurring revenue for
paid customer accounts with more than 100 agents on its customer service platform
as of the measurement date by the monthly recurring revenue for all paid customer
accounts on its customer service platform as of the measurement date. Zendesk
determines the customers with 100 or more agents as of the measurement date based
on the number of activated agents at the measurement date and includes adjustments
to aggregate paid customer accounts that share common corporate information.
Zendesk determines the annualized value of a contract by annualizing the monthly
recurring revenue for such contract.
Zendesk does not currently incorporate operating metrics associated with its live
chat software or its analytics software into its measurement of monthly recurring
revenue represented by its churned customers or percentage of monthly recurring
revenue that is generated by customers with 100 or more agents.
Zendesk’s freemium plans include its legacy Starter plan for its customer service
platform, its Lite plan for its live chat software, and its Inbox service for facilitating
and simplifying email collaboration on group email aliases. Zendesk believes
these services provide exposure to its brand and establish a relationship that can
facilitate further adoption of its customer service platform and live chat software as
organizations grow in size and their service needs grow more complex. A customer
account on Zendesk’s freemium plans is considered active based on whether
functionality of the service has been utilized within the 90-day period preceding
the measurement date. A single consolidated organization or customer may have
multiple freemium customer accounts across each of Zendesk’s customer service
platform, live chat software, and Inbox service. Each of these accounts is treated as
a separate customer account on Zendesk’s freemium products.
About customer metrics
Source and contact: Zendesk, Inc.
September
30, 2015
December
31, 2015
March
31, 2016
June
30, 2016
September
30, 2016
Paid customer accounts on
Zendesk Support (approx.) 32,700 35,700 39,900 43,700 47,400
+ Paid customer accounts on
Zendesk Chat (approx.) 31,600 33,400 35,700 37,800 40,000
= Approximate number of
paid customer accounts 64,300 69,100 75,600 81,500 87,400
Investor contact: Media contact:
Marc Cabi, +1 415-852-3877 Matt Hicks, +1 415-529-5606
ir@zendesk.com press@zendesk.com
