Attached files
| file | filename |
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| 8-K - 8-K - Zendesk, Inc. | zen_8kxq2x2017.htm |
| EX-99.3 - EXHIBIT 99.3 - Zendesk, Inc. | q22017tweetpanelsfinal.htm |
| EX-99.1 - EXHIBIT 99.1 - Zendesk, Inc. | zen_8-kxq2x2017xex991x7.htm |
Shareholder Letter
Second Quarter 2017
August 03, 2017
Zendesk Guide, launched Q2 2017
Exhibit 99.2
Zendesk Shareholder Letter Q2 2017 - 2
Mikkel
Svane
CEO
Elena
Gomez
CFO
Marc
Cabi
Strategy & IR
Introduction
Zendesk heads into the second half of 2017 in a strong position
to deliver on both its strategic goals and growth targets for
the year after steady progress in the first half of the year. We
advanced across all of our growth drivers during the quarter,
while laying the foundation for greater go-to-market impact in
the second half of the year.
In our efforts to further expand our markets, we made
additional inroads with larger organizations by both closing a
greater number of bigger deals during the quarter and growing
our pipeline. We recently expanded our investments interna-
tionally with major events in Brazil, Japan, and Australia and the
announcement of plans for an additional Amazon Web Services
(AWS) data center in Australia. Meanwhile, we made advance-
ments toward selling solutions, reflecting our evolution to a
multi-product company.
We continued our multi-product momentum with strong early
adoption of Zendesk Guide, our self-service knowledge base
product, and general availability this month of Zendesk
Message (for popular messaging platforms like Facebook
Messenger) as part of a new Enterprise version of Zendesk
Chat. We enabled our customers to further innovate in
self-service with the broader release of Answer Bot, our
machine learning-based feature in Guide that enables organi-
zations to deliver automated answers to customers.
$101.3M
Q2 2017 revenue
36%
Y/Y revenue growth
107,400
Paid customer accounts
Zendesk Shareholder Letter Q2 2017 - 3
Second quarter 2017 financial summary
(in thousands, except per share data)
Three Months Ended June 30,
GAAP Results 2017 2016
Revenue $ 101,273 $ 74,200
Gross profit 70,610 51,264
Gross margin 69.7% 69.1%
Operating loss $ (30,504) $ (26,296)
Operating margin -30.1% -35.4%
Net loss $ (29,306) $ (26,254)
Net loss per share (0.29) (0.28)
Non-GAAP Results
Non-GAAP gross profit $ 74,266 $ 54,387
Non-GAAP gross margin 73.3% 73.3%
Non-GAAP operating loss $ (6,187) $ (5,632)
Non-GAAP operating margin -6.1% -7.6%
Non-GAAP net loss $ (4,989) $ (5,590)
Non-GAAP net loss per share (0.05) (0.06)
In the second quarter we delivered $101.3
million in revenue, which represents 36% revenue
growth when compared to the second quarter of
2016. Additionally, we ended the second quarter
with 107,400 paid customer accounts and saw
improvements in both the percentange of MRR
from customers with 100 or more agents and
dollar-based net expansion rate metrics.
Zendesk Shareholder Letter Q2 2017 - 4
Tom
Keiser
Chief Operating Officer
Chief Operating Officer appointment
We are pleased to announce the appointment of Tom Keiser as Chief Operating Officer.
In his new role, Tom will work with our CEO and the executive team to align, communicate, and drive
Zendesk’s organizational priorities. He will ensure these priorities are executed across the organization,
confirm that measurement and success criteria are clearly defined and implemented, and support our
efforts to meet near- and long-term growth and profitability targets.
Over the past 15 months as Zendesk’s Chief Information Officer (CIO), Tom has run Technology
Operations, Security and Compliance, Enterprise Data and Analytics, and IT. He has been instrumental
in bringing structure, discipline, and accountability into our most significant operational issues.
Tom’s career spans 20 years of leading global technology initiatives. He is the former CIO and Executive
Vice President of Global Product Operations at The Gap, Inc. He brings a wealth of experience in enter-
prise technology, sales, and operations and is a proven leader with dedication, vision, and insight.
Zendesk Shareholder Letter Q2 2017 - 5
Go-to-market activities
As we look to the second half of the year, we believe that we have overcome
most of the ripple effects of last year’s reorganization of our U.S. sales and
marketing departments. While the impacts of turnover in our sales force
lingered longer than we expected, we believe that later this year we will reap
the rewards of our work to bolster our go-to-market capabilities. We are now
in a stronger position to both land business with larger organizations and
expand the products used by our existing customers.
Sales hiring
Last year we reorganized our U.S. sales and marketing efforts around a more
territory-based approach to help us more efficiently win new business and
expand within our existing customer base. As discussed in previous quarters,
this change created more employee turnover than expected in that group
in the third and fourth quarters of 2016. We spent much of the fourth quar-
ter of last year and the first quarter of 2017 re-hiring for those lost positions
and filling open territories to bring our sales capacity to levels that support
our growth ambitions. We expect to see sales force productivity continue to
increase during the second half of the year as our most recent hires continue
to ramp.
In addition to closing the headcount gap in sales, we hired more sales
professionals outside San Francisco in key regions throughout the United
States. By putting strategic account executives closer to their customers,
we believe we can foster better relationships in markets that are currently
less penetrated. We also believe these strategic relationships will continue
to help generate more wins in the enterprise space. Additionally, we are
encouraged by the expanding population of household names in
our pipeline.
Zendesk Shareholder Letter Q2 2017 - 6
Selling solutions
At Zendesk’s Analyst and Investor Day in May, we previewed our plans to
move toward selling solutions. This shift reflects our evolution from a single
product to a multi-product company with sophisticated multichannel
solutions that bring together siloed departments with shared context and
intelligence about the customer journey.
As customer journeys become more complex, customer support software
must be built for the needs of customers and businesses alike. Zendesk
helps businesses transform their customer experiences and deliver effortless
engagement through the varied communication channels and service styles
preferred by their customers. With solutions built to improve every point of
interaction across a complex journey, Zendesk brings together currently
siloed departments—such as support, marketing, and sales—and adds
context and intelligence to help businesses deliver on the promise of great
service in a personalized style, whether that’s self-service, a quick call, live
chat, messaging, or a simple email.
platformfuture
2017+
2014
solutions
products
Zendesk Shareholder Letter Q2 2017 - 7
Products
Zendesk Guide
In May we launched Guide, our new smart
knowledge base solution. Guide gives
customers advanced self-service support
powered by machine learning, while also
empowering customer service agents to resolve
inquiries with contextual insights. As companies
face increasingly complex inquiries, Guide offers
the ability to deflect calls and tickets that might be
easily solved using machine learning and self-
service. By helping our customers reduce the
volume of simple requests, agents can focus on
more complex issues that require a human touch.
When machine learning is unable to solve a
customer’s inquiry, Guide can hand off the
conversation to an agent with context such as
what has been offered to the customer and which
help articles the customer has already read,
decreasing duplicative suggestions for faster
resolution and a better customer experience.
In the first quarter of availability, new
customers adopted the Guide Professional plan
at a strong rate. We attribute the early success to
the self-service value proposition resonating with
our core customer service buyer and to the
benefits of a transactional and low-friction
purchase experience. Additionally, Answer Bot
came out of its early access program at the end of
July and was made available as a paid add-on to
a select group of customers. Later this month, we
expect to make Answer Bot generally available to
all customers.
Zendesk Shareholder Letter Q2 2017 - 8
Outbound by Zendesk
In May we announced the acquisition of
Outbound. With this small acquisition, we
expanded the product scope and market
opportunity of the Zendesk Connect product,
ultimately accelerating our time to meaningful
revenue. Outbound by Zendesk enables
businesses to automate and deliver relevant
messages across web, email, and mobile
channels and to better measure their effectiveness.
Since closing the acquisition, we have continued
to market and sell Outbound, while we work to
combine the Connect and Outbound products
into a single solution. As we discussed last
quarter, we do not expect the acquisition to have
a material impact on our 2017 revenue. However,
customer interest in Outbound has increased
significantly since the acquisition, and our focus
in the third quarter will be ramping up additional
sales specialists and working on integration with
Zendesk Support.
Zendesk Chat + Message
At the beginning of August, we launched Chat
Enterprise, designed to help businesses deliver
an effortless customer experience by providing
the tools necessary to offer real-time support
on websites, in mobile apps, and through messag-
ing channels. Chat Enterprise goes above and
beyond our previous Chat offerings to serve
larger use cases with features like skills-based
routing and roles and permissions to ensure
that customers can mitigate risk and scale
strategically. The Chat workflow and management
features have enabled our largest customers to
deploy live chat across multiple countries,
languages, and brands.
Additionally, we announced general availability for
Zendesk Message as part of the Chat Enterprise
offering. By combining Chat and Message, Chat
agents can continue to focus on their live chat
responsibilities, while extending that real-time
expertise to serve inbound queries from linked
messaging channels such as Facebook Messen-
ger, Twitter Direct Message, and LINE. We have
built our Message offering to integrate with more
messaging platforms in the future.
Zendesk Shareholder Letter Q2 2017 - 9
Embeddables
Our Web Widget and Mobile SDKs allow our customers to leverage data across Support,
Chat, and Guide and to put it all into one cohesive experience. At the end of the second
quarter, we had more than 19,000 monthly active Web Widgets, which customers can use
to start a chat, access the help center, or email for support, all without interrupting their
online experience. Over 60% of those active Web Widget customers were using it across
more than one product.
Additionally, mobile adoption continues to rise, with a 25% quarter-over-quarter increase in
the number of tickets created using our Support SDK.
As we move closer to a true multichannel solutions offering, our Embeddables will help us
collect information tied to interactions and events across the entire customer journey. With
the ability to aggregate information across every interaction, every channel, and every
customer-facing department, we will help businesses create a valuable and shared context
that improves current engagements and optimizes future ones.
Web Widget on mobile with contact options
Zendesk Shareholder Letter Q2 2017 - 10
International presence
In the second quarter, we continued with expansion activities in several regions to support our
global business, grow our customer base in key geographies, and serve our customers around
the world.
We recently announced growth plans for our Dublin office to support our business in EMEA, where
we have approximately 40,000 paid customer accounts as of the end of the second quarter. We
signed a lease for a larger office near our current Dublin location and plan to move in 2018. Along
with our current 200 employees, our expanded EMEA headquarters in Dublin provides us the space
to add 300 employees in the future.
We also are continuing to see good momentum in both Asian and Latin American markets. In June
we held our largest 2017 event to date: Zendesk Presents São Paulo, with more than 1,300
attendees. We also held one of our largest gatherings of regional reseller and implementation
partners at a summit before the event.
Our growing team in Japan is seeking broader opportunities and expanding the customer base. As
of the end of the second quarter, we have more than 1,200 paid customer accounts in Japan,
representing 60% growth year over year. That momentum was reflected in a mid-June Tokyo event—
our biggest to date in Japan—with more than 140 attendees.
In Australia, the recent Zendesk Presents Sydney event drew 160 attendees, making it the largest
Zendesk event in the Asia-Pacific region this year. In association with that event, we announced
plans to launch a new data center pod in Sydney this month in a secure AWS environment. Approxi-
mately 1,000 customers from Australia and New Zealand will move to the new data center beginning
in the third quarter.
Zendesk Shareholder Letter Q2 2017 - 11
Industry recognition
As we expand our global footprint, Zendesk has earned an increased
amount of attention from industry analysts. The opinions of these analysts
are increasingly important for us as we attract customers in larger, enter-
prise organizations. Zendesk believes that it continues to perform well in two
industry analyses that we feel are most valued by the business and IT
leaders who are focused on developing and implementing customer engage-
ment strategies. For the second consecutive year, Zendesk is a Leader in
Gartner’s Magic Quadrant for the CRM Customer Engagement Center, which
was published in May 2017. In addition, Zendesk is a Strong Performer in The
Forrester Wave™: Customer Service Solutions For Midsize Teams, Q2 2017.
A notable customer success story from the second quarter of 2017 is an
industry analyst ROI award for our customer AdRoll, the retargeting and pros-
pecting platform for more than 35,000 advertisers worldwide. AdRoll unified
13 siloed support channels into a centralized engagement center on Zendesk
for customer-facing support and account management. AdRoll
was selected from more than 176 nominations as a winner of the Nucleus
Research 2017 ROI Awards. The company’s selection was based on AdRoll’s
implementation of Zendesk and the 812% ROI that the company realized with
the project. The AdRoll story is a good example of how Zendesk often lands
in one part of a customer’s business and expands with them over time.
Gartner does not endorse any vendor, product or service
depicted in its research publications, and does not advise
technology users to select only those vendors with the high-
est ratings or other designation. Gartner research publications
consist of the opinions of Gartner’s research organization and
should not be construed as statements of fact. Gartner disclaims
all warranties, expressed or implied, with respect to this research,
including any warranties of merchantability or fitness for a
particular purpose.
Zendesk Shareholder Letter Q2 2017 - 12
Key accomplishments
Timeline not to scale
1600 1800
Google
Play
Channel
Framework
80K
Satisfaction
Prediction
70K
Inaugural
Analyst
Day
SMS Rebrand
1400
Office 365Pathfinder
Gartner MQ
Leader
Forrester
Wave
Strong
Performer
Jan
2016
Jan
2017
July
2017
India
Office
Opening
TokyoSao Paulo
São Paulo
Sydney
Answer
Bot
Enterprise
90K
Manila
Office
Opening
100K
AWS
Connect
Integration
SDK
Fabric
Montpellier
Office
Opening
Singapore
Office
Opening
+
+
ZENDESK PRESENTS
Lorem ipsum
Zendesk Shareholder Letter Q2 2017 - 13
Customers
Some of the customers to join us or expand with us recently include:
Harry’s - a popular men’s shaving supply company
MeUndies - underwear for men and women
Mixpanel - product analytics for mobile, web, and beyond
OVH - a French cloud computing company that offers virtual private servers
Peloton - a popular exercise bike with streaming indoor cycling classes
PlanGrid - a leader in construction productivity software
Rapha - creator of cycling clothing and accessories
ROBLOX - a user-generated online gaming platform
Zendesk Shareholder Letter Q2 2017 - 14
25%
27%
31%
32%
33% 33% 33%
34% 34%
35%
Operating metrics
As a proxy of our success with larger opportuni-
ties, we measure our number of contracts signed
with an annual value of $50,000 or greater. In
the second quarter, we closed over 45% more of
these contracts versus a year ago, with the
average contract size remaining roughly equal to
the second quarter of 2016. Another metric we
use to gauge our penetration within larger orga-
nizations is the percentage of recurring revenue
generated by customers with 100 or more agents,
which grew to 35% at the end of the second quar-
ter of 2017, compared to 34% at the end of the first
quarter of 2017 and 33% at the end of the second
quarter of 2016. While we expect this metric
to grow gradually, we see this second quarter
increase as a sign of growing enterprise momen-
tum as we enter into the second half of the year,
which correlates with returns from our expanding
investment in strategic account executives.
Our dollar-based net expansion rate also
increased by one percentage point to end the
second quarter at 116%, compared to 115% at the
end of the first quarter of 2017 and 118% at the
end of the second quarter of 2016. Consistent
with expectations in prior quarters, we expect our
dollar-based net expansion rate to remain in the
110-120% range over the next several quarters.
% of total quarter-ending Support MRR
from paid customer accounts with 100+ Support agents
Q1’15 Q2’15 Q3’15 Q4’15 Q1’16 Q2’16 Q3’16 Q4’16 Q1’17 Q2’17
35%100+ agents
Q2 2017
Zendesk Shareholder Letter Q2 2017 - 15
Corporate social responsibility
Our corporate social responsibility programs this year have
drawn some of our greatest employee and community engage-
ment. Employee involvement is strong across our offices, and
for the first half of 2017, both our San Francisco and Dublin
offices doubled volunteer hours as compared to the same
period in 2016. Zendesk employees completed approximately
4,600 volunteer hours globally, and the Zendesk Neighbor
Foundation donated more than $800,000 to 40 organizations
during the first half of 2017.
Zendesk values diversity among its employees and a culture in
which everyone feels welcome and can excel and grow in their
work and career. We recently hired a senior manager of
diversity and inclusion to help us further advance our efforts
worldwide. The new leader already has helped train employees
on unconscious bias and developed internal groups for our
LGBTQ employees and persons of color. We also expanded on
our tradition of participating in Pride festivities with nearly all of
our global offices taking part in local events.
San Francisco Pride Parade, June 2017
Zendesk Shareholder Letter Q2 2017 - 16
Financial measures and cash flow
We surpassed $100 million in quarterly revenue for the first time in our
history, closing out the second quarter with $101.3 million in revenue, up
36% over the second quarter of 2016. From a gross margin perspective, we
embarked on an expanded investment cycle in infrastructure to support
our continued growth, ensure our scalability, and support our growing
complexity of infrastructure requirements as part of our multi-product efforts.
As we previously stated, we anticipate our step-up investment in
infrastructure will continue throughout 2017 as we continue our transition
from co-located data centers into cloud infrastructure hosted from multiple
providers. As a result of these investments, our GAAP gross margin declined
quarter over quarter to 69.7% in the second quarter of 2017, from 69.8% in
the first quarter of 2017. GAAP gross margin increased year over year from
69.1% in the second quarter of 2016. Non-GAAP gross margin declined
quarter over quarter to 73.3%, from 73.6% in the first quarter of 2017, and
remained flat year over year when compared to 73.3% in the second quarter
of 2016.
GAAP operating loss for the second quarter of 2017 was $30.5 million
compared to GAAP operating loss for the first quarter of 2017 of $27.2 million.
GAAP operating loss for the second quarter of 2016 was $26.3 million. Non-
GAAP operating loss for the second quarter of 2017 was $6.2 million and
compares to non-GAAP operating loss for the first quarter of 2017 of $5.2
million. Non-GAAP operating loss for the second quarter of 2016 was
$5.6 million.
In the second quarter of 2017, GAAP operating margin was -30.1% versus
-29.2% in the first quarter of 2017 and -35.4% in the second quarter of 2016.
Non-GAAP operating margin declined quarter over quarter to -6.1% in the
second quarter of 2017 from -5.6% in the first quarter of 2017. Non-GAAP
operating margin was -7.6% in the second quarter of 2016.
GAAP net loss for the second quarter of 2017 was $29.3 million or $0.29 per
share, compared to GAAP net loss of $27.0 million or $0.28 per share in the
first quarter of 2017. GAAP net loss was $26.3 million or $0.28 per share for
the second quarter of 2016. Non-GAAP net loss for the second quarter of
2017 was $5.0 million or $0.05 per share, compared to non-GAAP net loss
of $5.1 million or $0.05 per share for the first quarter of 2017. Non-GAAP
net loss was $5.6 million or $0.06 per share for the second quarter of 2016.
Weighted average shares used to compute both GAAP and non-GAAP net
loss per share for the second quarter of 2017 was 99.5 million.
Non-GAAP results for the second quarter of 2017 exclude $22.4 million in
share-based compensation and related expenses (including $0.9 million
of employer tax related to employee stock transactions and $0.4 million of
amortization of share-based compensation capitalized in internal-use
software), $1.0 million of amortization of purchased intangibles, and $0.9
million in acquisition-related expenses. Non-GAAP results for the first
quarter of 2017 exclude $21.0 million in share-based compensation and
related expenses (including $1.4 million of employer tax related to employee
stock transactions and $0.4 million of amortization of share-based compen-
sation capitalized in internal-use software), and $0.9 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 amortization of share-based compensation capitalized in
internal-use software), and $1.0 million of amortization of purchased intangibles.
During the second quarter of 2017, net cash from operating activities was
$10.1 million, and free cash flow was $4.1 million. We ended the second
quarter of 2017 with $102.8 million of cash and equivalents, and we had an
additional $137.5 million of short-term marketable securities and $68.5 million
in long-term marketable securities.
Zendesk Shareholder Letter Q2 2017 - 17
Guidance
For the third quarter of 2017, we expect revenue to range between $108.0
and $110.0 million. We expect our GAAP operating loss for the third quarter
of 2017 to range between $31.0 and $32.0 million. We expect our non-GAAP
operating loss for the third quarter of 2017 to range between $6.0 and
$7.0 million, which we estimate to exclude share-based compensation and
related expenses of approximately $23.4 million, amortization of purchased
intangibles of approximately $1.0 million and acquisition-related expenses of
$0.6 million.
For the full year of 2017, we expect revenue to range between $420.0 and
$425.0 million, compared to our previous full-year guidance range of $417.0
to $425.0 million. This range represents revenue growth between 35% and
36% year over year. We expect our GAAP operating loss to range between
$115.0 and $119.0 million. We expect our non-GAAP operating loss to range
between $16.0 and $20.0 million, which we estimate to exclude share-
based compensation and related expenses of approximately $93.3 million,
amortization of purchased intangibles of approximately $3.7 million and
acquisition-related expenses of $2.0 million. Our updated full-year guidance
reflects our confidence in being able to maintain a high growth rate in 2017.
We continue to expect net cash from operating activities and free cash flow
to be positive for the full year 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 100.7 million weighted
average shares outstanding for the third quarter of 2017 and 100.0 million
weighted average shares outstanding for the full year of 2017, each based
only on current shares outstanding and anticipated activity associated with
equity incentive plans.
Zendesk Shareholder Letter Q2 2017 - 18
Condensed consolidated
statements of operations
(In thousands, except per
share data; unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Revenue $101,273 $74,200 $194,280 $142,659
Cost of revenue 30,663 22,936 58,770 44,452
Gross profit 70,610 51,264 135,510 98,207
Operating expenses:
Research and development 28,698 22,134 55,154 43,731
Sales and marketing 52,628 39,350 99,929 75,522
General and administrative 19,788 16,076 38,105 31,937
Total operating expenses 101,114 77,560 193,188 151,190
Operating loss (30,504) (26,296) (57,678) (52,983)
Other income, net 508 134 726 64
Loss before provision for (benefit from) income taxes (29,996) (26,162) (56,952) (52,919)
Provision for (benefit from) income taxes (690) 92 (652) 506
Net loss $(29,306) $(26,254) $(56,300) $(53,425)
Net loss per share, basic and diluted $(0.29) $(0.28) $(0.57) $(0.58)
Weighted-average shares used to compute net loss per share, basic
and diluted 99,506 92,174 98,545 91,351
Zendesk Shareholder Letter Q2 2017 - 19
Condensed consolidated
balance sheets
(In thousands, except par
value; unaudited)
June 30, 2017 December 31, 2016
Assets
Current assets:
Cash and cash equivalents $102,775 $93,677
Marketable securities 137,489 131,190
Accounts receivable, net of allowance for doubtful
accounts of $919 and $1,269 as of June 30, 2017
and December 31, 2016, respectively
41,311 37,343
Prepaid expenses and other current assets 21,141 17,608
Total current assets 302,716 279,818
Marketable securities, noncurrent 68,502 75,168
Property and equipment, net 61,753 62,731
Goodwill and intangible assets, net 68,762 53,296
Other assets 7,909 4,272
Total assets $509,642 $475,285
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $8,161 $4,555
Accrued liabilities 19,935 19,106
Accrued compensation and related benefits 21,982 20,281
Deferred revenue 141,345 123,276
Total current liabilities 191,423 167,218
Deferred revenue, noncurrent 1,773 1,257
Other liabilities 8,477 7,382
Total liabilities 201,673 175,857
Stockholders’ equity:
Preferred stock, par value $0.01 per share — —
Common stock, par value $0.01 per share 1,007 971
Additional paid-in capital 686,336 624,026
Accumulated other comprehensive loss (2,474) (5,197)
Accumulated deficit (376,248) (319,720)
Treasury stock, at cost (652) (652)
Total stockholders’ equity 307,969 299,428
Total liabilities and stockholders’ equity $509,642 $475,285
Condensed consolidated
statements of cash flows
(In thousands; unaudited)
Three Months Ended
June 30,
2017 2016
Cash flows from operating activities
Net loss $(29,306) $(26,254)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 8,209 6,621
Share-based compensation 21,074 18,646
Other (338) 196
Changes in operating assets and liabilities:
Accounts receivable (2,303) (4,325)
Prepaid expenses and other current assets (2,502) (8,722)
Other assets and liabilities (3,262) 3
Accounts payable 1,851 1,272
Accrued liabilities 1,664 (504)
Accrued compensation and related benefits 3,990 3,164
Deferred revenue 10,999 9,874
Net cash provided by (used in) operating activities 10,076 (29)
Cash flows from investing activities
Purchases of property and equipment (4,485) (5,161)
Internal-use software development costs (1,463) (1,422)
Purchases of marketable securities (41,567) (115,376)
Proceeds from maturities of marketable securities 30,032 6,425
Proceeds from sales of marketable securities 12,141 6,027
Cash paid for the acquisition of Outbound, net of cash acquired (16,470) —
Net cash used in investing activities (21,812) (109,507)
Cash flows from financing activities
Proceeds from exercise of employee stock options 3,486 7,472
Proceeds from employee stock purchase plan 3,295 2,528
Taxes paid related to net share settlement of equity awards (1,609) (156)
Principal payment on debt — (323)
Net cash provided by financing activities 5,172 9,521
Effect of exchange rate changes on cash and cash equivalents 81 260
Net decrease in cash and cash equivalents (6,483) (99,755)
Cash and cash equivalents at beginning of period 109,258 217,791
Cash and cash equivalents at end of period $102,775 $118,036
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
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Reconciliation of gross profit and gross margin
GAAP gross profit $70,610 $51,264 $135,510 $98,207
Plus: Share-based compensation 2,156 1,802 4,260 3,435
Plus: Employer tax related to employee
stock transactions 133 95 303 193
Plus: Amortization of purchased intangibles 919 846 1,748 1,677
Plus: Amortization of shared-based
compensation capitalized in
internal-use software
448 380 878 836
Non-GAAP gross profit $74,266 $54,387 $142,699 $104,348
GAAP gross margin 70% 69% 70% 69%
Non-GAAP adjustments 3% 4% 3% 4%
Non-GAAP gross margin 73% 73% 73% 73%
Reconciliation of operating expenses
GAAP research and development $28,698 $22,134 $55,154 $43,731
Less: Share-based compensation (7,584) (6,749) (14,497) (13,376)
Less: Employer tax related to employee
stock transactions (356) (277) (904) (571)
Less: Acquisition-related expenses (175) — (175) —
Non-GAAP research and development $20,583 $15,108 $39,578 $29,784
GAAP research and development as percentage
of revenue 28% 30% 28% 31%
Non-GAAP research and development as
percentage of revenue 20% 20% 20% 21%
GAAP sales and marketing $52,628 $39,350 $99,929 $75,522
Less: Share-based compensation (6,013) (5,684) (11,646) (11,123)
Less: Employer tax related to employee
stock transactions (247) (167) (614) (390)
Less: Amortization of purchased intangibles (123) (106) (225) (208)
Less: Acquisition-related expenses (187) — (187) —
Non-GAAP sales and marketing $46,058 $33,393 $87,257 $63,801
GAAP sales and marketing as percentage
of revenue 52% 53% 51% 53%
Non-GAAP sales and marketing as percentage
of revenue 45% 45% 45% 45%
GAAP general and administrative $19,788 $16,076 $38,105 $31,937
Less: Share-based compensation (5,321) (4,410) (9,884) (8,407)
Less: Employer tax related to employee
stock transactions (133) (148) (403) (342)
Less: Acquisition-related expenses (522) — (522) —
Non-GAAP general and administrative $13,812 $11,518 $27,296 $23,188
GAAP general and administrative as percentage
of revenue 20% 22% 20% 22%
Non-GAAP general and administrative as
percentage of revenue 14% 16% 14% 16%
Zendesk Shareholder Letter Q2 2017 - 22
(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
June 30,
Six Months Ended
June 30,
2017 2016 2017 2016
Reconciliation of operating loss and
operating margin
GAAP operating loss $(30,504) $(26,296) $(57,678) $(52,983)
Plus: Share-based compensation 21,074 18,645 40,287 36,341
Plus: Employer tax related to employee stock
transactions 869 687 2,224 1,496
Plus: Amortization of purchased intangibles 1,042 952 1,973 1,885
Plus: Acquisition-related expenses 884 — 884 —
Plus: Amortization of shared-based compensation
capitalized in internal-use software 448 380 878 836
Non-GAAP operating loss $(6,187) $(5,632) $(11,432) $(12,425)
GAAP operating margin (30)% (35)% (30)% (37)%
Non-GAAP adjustments 24% 27% 24% 28%
Non-GAAP operating margin (6)% (8)% (6)% (9)%
Reconciliation of net loss
GAAP net loss $(29,306) $(26,254) $(56,300) $(53,425)
Plus: Share-based compensation 21,074 18,645 40,287 36,341
Plus: Employer tax related to employee
stock transactions 869 687 2,224 1,496
Plus: Amortization of purchased intangibles 1,042 952 1,973 1,885
Plus: Acquisition-related expenses 884 — 884 —
Plus: Amortization of shared-based compensation
capitalized in internal-use software 448 380 878 836
Non-GAAP net loss $(4,989) $(5,590) $(10,054) $12,867)
Reconciliation of net loss per share, basic
and diluted
GAAP net loss per share, basic and diluted $(0.29) $(0.28) $(0.57) $(0.58)
Non-GAAP adjustments to net loss 0.24 0.22 0.47 0.44
Non-GAAP net loss per share, basic and diluted $(0.05) $(0.06) $(0.10) $(0.14)
Weighted-average shares used to compute net loss
per share, basic and diluted 99,506 92,174 98,545 91,351
Computation of free cash flow
Net cash provided by (used in) operating activities $10,076 $(29) $17,225 $4,560
Less: purchases of property and equipment (4,485) (5,161) (9,276) (8,410)
Less: internal-use software development costs (1,463) (1,422) (3,315) (2,773)
Free cash flow $4,128 $(6,612) $4,634 $(6,623)
Zendesk Shareholder Letter Q2 2017 - 23
About Zendesk
Zendesk builds software for better customer relationships. It empowers organizations to
improve customer engagement and better understand their customers. More than 107,000
paid customer accounts in over 160 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 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 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 products to chang-
ing market dynamics and customer preferences or achieve increased market acceptance of
its products; (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
introduce and market new products and to support its products on a shared services plat-
form; (ix) Zendesk’s ability to integrate acquired businesses and technologies successfully or
achieve the expected benefits of such acquisitions; (x) breaches in Zendesk’s security mea-
sures 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 press release are also subject to additional
risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with
the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for
the quarter ended March 31, 2017. Further information on potential risks that could affect actu-
al 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, 2017.
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 unantici-
pated 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 perfor-
mance 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 in-
ternal-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.
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 informa-
tion regarding free cash flow provides investors with an important perspective on the cash
available to fund ongoing operations.
Zendesk’s disclosures regarding its expectations for its non-GAAP operating margin include
adjustments to its expectations for its GAAP operating margin that exclude the expected
share-based compensation and related expenses, amortization of purchased intangibles,
and acquisition-related expenses excluded from its expectations for non-GAAP operating
loss as compared to its expectation for GAAP operating loss for the same period.
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 reconcili-
ation of GAAP operating margin to non-GAAP operating margin guidance for such periods is
not available without unreasonable effort.
Zendesk Shareholder Letter Q2 2017 - 24
About operating metrics
Zendesk reviews a number of operating metrics to evaluate its business, measure
performance, identify trends, formulate business plans, and make strategic decisions. These
include the number of paid customer accounts on Zendesk Support, Zendesk Chat, and its
other products, dollar-based net expansion rate, monthly recurring revenue represented by
its churned customers, and the percentage of its monthly recurring revenue from Support
originating from customers with 100 or more agents on Support.
Zendesk defines the number of paid customer accounts at the end of any particular period
as the sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free
trials, or other free services, (ii) the number of accounts using Chat, exclusive of free trials
or other free services, and (iii) the number of accounts on all of its other products, exclusive
of free trials and other free services, each as of the end of the period and as identified by
a unique account identifier. Use of Support, Chat, and Zendesk’s other products 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 products by
adding new accounts and a single consolidated organization or customer may have multiple
accounts across each of Zendesk’s products to service separate subsidiaries, divisions, or
work processes. Each of these accounts is also treated as a separate paid customer account.
Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase
revenue across its existing customer base through expansion of authorized agents associ-
ated with a paid customer account, upgrades in subscription plans, and the purchase of addi-
tional products as offset by churn, contraction in authorized agents associated with a paid
customer account, and downgrades in subscription plans. Zendesk’s dollar-based net expan-
sion rate is based upon monthly recurring revenue for a set of paid customer accounts on its
products. 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 sub-
scription 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 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 across its products for customers with paid
customer accounts on Support or Chat as of the date one year prior to the date of calcula-
tion. Zendesk defines the retained revenue net of contraction and churn as the aggregate
monthly recurring revenue across its products for the same customer base included in the
measure of base revenue at the end of the annual period being measured. The dollar-based
net expansion rate is also adjusted to eliminate the effect of certain activities that Zendesk
identifies involving the 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 con-
traction 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 87,500
customers, as compared to the approximately 107,400 total paid customer accounts as of
June 30, 2017.
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 deter-
mining its dollar-based net expansion rate. While not material, Zendesk believes the failure
to account for these activities would otherwise skew the dollar-based net expansion metrics
associated with customers that maintain multiple paid customer accounts across its products
and paid customer accounts associated with reseller and other similar
channel arrangements.
Zendesk does not currently incorporate operating metrics associated with its analytics
product or its Outbound product 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 disclosures regarding its expectations for its non-GAAP gross margin include
adjustments to its expectations for its GAAP gross margin that exclude share-based com-
pensation and related expenses in Zendesk’s cost of revenue and amortization of purchased
intangibles related to developed technology. 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 platform
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 rec-
onciling 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 inves-
tors 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 purchased intangibles, and 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 mea-
sure in a forward-looking manner for future periods, and a reconciliation is not determinable
Zendesk Shareholder Letter Q2 2017 - 25
About customer metrics June 30, 2016
September
30, 2016
December
31, 2016
March
31, 2017
June
30, 2017
Paid Customer Accounts on Zendesk
Support (approx.)
43,700 47,400 50,800 54,900 57,800
+Paid Customer Accounts on Zendesk
Chat (approx.)
37,800 40,000 41,300 44,000 45,300
+Paid Customer Accounts on Other
Zendesk Products (approx.)
1,300 1,700 2,200 2,900 4,300
=Approximate Number of Paid Customer
Accounts
82,800 89,100 94,300 101,800 107,400
Source: Zendesk, Inc.
Contact:
Investor Contact
Marc Cabi, +1 415-852-3877
ir@zendesk.com
Media Contact
Tian Lee, +1 415-231-0847
press@zendesk.com
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
Support 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 associ-
ated with paid customer accounts on Support 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 cus-
tomer 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 Support.
Zendesk’s percentage of monthly recurring revenue from Support that is generated by cus-
tomers with 100 or more agents on Support is determined by dividing the monthly recurring
revenue from Support for paid customer accounts with 100 or more agents on Support as of
the measurement date by the monthly recurring revenue from Support for all paid customer
accounts on Support as of the measurement date. Zendesk determines the customers with
100 or more agents on Support as of the measurement date based on the number of acti-
vated agents on Support 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 products other
than Support into its measurement of monthly recurring revenue represented by its churned
customers or the percentage of monthly recurring revenue from Support that is generated by
customers with 100 or more agents on Support.
