Attached files
| file | filename |
|---|---|
| 8-K - 8-K - Zendesk, Inc. | zen_8-kxq4x2017.htm |
| EX-99.4 - EXHIBIT 99.4 - Zendesk, Inc. | zenasc606investordeck261.htm |
| EX-99.3 - EXHIBIT 99.3 - Zendesk, Inc. | zendeskq42017highlightsf.htm |
| EX-99.1 - EXHIBIT 99.1 - Zendesk, Inc. | zen_8-kxq4x2017xex991.htm |
| EX-3.1 - EXHIBIT 3.1 - Zendesk, Inc. | zendesk-amendedandrestated.htm |
Zendesk Shareholder Letter Q4 2017 - 1
Shareholder Letter
Q4 2017
February 6, 2018
Exhibit 99.2
Zendesk Shareholder Letter Q4 2017 - 2
Mikkel
Svane
CEO
Elena
Gomez
CFO
Marc
Cabi
Strategy & IR
Q4 2017 Revenue
Q4 Y/Y Revenue Growth
Paid Customer Accounts
INTRODUCTION
In 2017, we made great progress towards our goal of being a $1 billion
revenue company in 2020. Through disciplined execution, we expanded
our product line, increased our market penetration, and rapidly grew our
business. We also delivered on our important strategic goals for the year:
moving upmarket by landing larger deals with mid-market and enterprise
companies, and becoming a multiproduct company with new revenue
opportunities. With this performance, we delivered strong revenue growth,
our highest-ever annual net cash from operating activities, and—for the first
time in Zendesk’s history—positive full-year free cash flow.
As we move into 2018, we are focused on further maturing our omnichannel
offering and accelerating our push upmarket. We enter 2018 with a strong
team enhanced by two new board members and a new head of worldwide
sales, and a very high level of optimism about the sales opportunities our
teams are pursuing to begin the year. Based on our results and momentum,
we have gained additional confidence in our plan to reach our $1 billion 2020
revenue goal.
$123.4M
39%
119,000
Zendesk Shareholder Letter Q4 2017 - 3
Fourth quarter and full fiscal year 2017 financial summary
(in thousands, except per share data)
Three Months Ended
December 31,
Twelve Months Ended
December 31,
GAAP Results 2017 2016 2017 2016
Revenue $ 123,426 $ 88,623 $ 430,492 $ 311,999
Gross profit 88,468 63,041 303,070 218,099
Gross margin 71.7% 71.1% 70.4% 69.9%
Operating loss $ (28,523) $ (25,130) $ (114,643) $ (104,326)
Operating margin -23.1% -28.4% -26.6% -33.4%
Net loss $ (26,649) $ (24,548) $ (110,638) $ (103,799)
Net loss per share (0.26) (0.26) (1.11) (1.11)
Non-GAAP Results
Non-GAAP gross profit $ 91,998 $ 66,273 $ 317,623 $ 230,710
Non-GAAP gross margin 74.5% 74.8% 73.8% 73.9%
Non-GAAP operating loss $ (2,411) $ (4,394) $ (17,108) $ (21,076)
Non-GAAP operating margin -2.0% -5.0% -4.0% -6.8%
Non-GAAP net loss $ (537) $ (3,812) $ (13,103) $ (20,549)
Non-GAAP net loss per share (0.01) (0.04) (0.13) (0.22)
Our fourth quarter and full-year results highlight our upmarket progress. We
added many new large businesses as customers, while expanding with many
more existing enterprise customers during the quarter. We saw a significant
increase in our metric tracking the percentage of Zendesk Support MRR
coming from customers with 100 or more Support agents—ending 2017 at
38% compared to 34% a year earlier. Additionally, our portfolio of customer
success stories expanded in both number and variety throughout 2017,
showcasing our move into new use cases and our traction in key industry
segments.
For the fourth quarter of 2017, we achieved revenue of $123.4 million, with
an annual growth rate of 39%. For the full year, we ended 2017 with $430.5
million in revenue, with an annual growth rate of 38%. Looking forward to
2018, we project revenue to be in the range of $555 million to $565 million.
Our operating results continue to keep us on track to deliver both year-over-
year GAAP and non-GAAP operating margin improvement, and increased
net cash from operating activities and free cash flow, consistent with the
goals that we established in prior years.
Zendesk Shareholder Letter Q4 2017 - 4
2017 REVIEW
One of Zendesk’s biggest strengths has always been the broad appeal
of our products across industries and organizations of every size. In 2017,
our prevalence grew to a point where we saw Zendesk increasingly at the
center of customer experiences worldwide. For example, over the four days
between Black Friday and Cyber Monday last November, our chat widget
reached more than 400 million visitors collectively across our customers’
individual websites.
Throughout 2017, we saw solid improvement in growth opportunities and
operating fundamentals. Our mission to expand beyond customer service
to address customer journeys and relationships more broadly was a key
investment theme that generated positive results.
On the product front, we focused on creating a more unified customer
experience and simplifying the buying experience across our product family.
As part of that process, we launched Chat Enterprise in August and Talk
Enterprise in September, and brought greater consistency in feature set and
scalability across all our products. Zendesk Support, Chat, Talk, and Guide
can now be used together across a variety of use cases and degrees of
complexity to deliver improved customer experiences.
119,000
Paid customer
accounts
1.25 BILLION
Support tickets solved
in 2017
150,000
Public apps installed
to date
640
Public apps on the
App Marketplace
20,000
Customers with active
web widgets
10,000
Apps using a
mobile SDK
2,000
Employees worldwide
2017
by the num
bers
Zendesk Shareholder Letter Q4 2017 - 5
2018 PRIORITIES
As we move into 2018, our key priorities will revolve around two major
themes: accelerating our upmarket business through larger deals and
greater penetration with enterprise customers, and empowering our
customers to provide the best omnichannel customer experiences possible.
In addition, our product development efforts are focused on delivering
innovation through new products and enhancements to existing products,
including harnessing more data and machine learning opportunities.
Focus on the Enterprise
No longer the obsession of small, nimble startups alone, digital
transformation initiatives are changing even the largest businesses. At
the same time, enterprises are recognizing the critical importance of the
customer experiences they deliver. We believe these trends and others are
creating new opportunities for us to both attract more enterprise customers
and build deeper relationships with our existing large customers.
Enterprise
During the second half of 2017, we observed acceleration in the primary
metric we use to measure our upmarket progress (percentage of Support
MRR from customers with 100 or more Support agents). We benefited
from a growing level of productivity from the salespeople who joined
Zendesk in the past year. In addition, we saw a strong general uptick in
new opportunities worldwide, closing 2017 with a solid set of opportunities
for new and expanded business across a growing family of products. Our
increasing number of customer references across certain industries has
contributed to our ability to repeat successes in those industries.
We believe our progress in 2017 was further underscored by several industry
analyst recognitions in the year. Gartner scored Zendesk the highest for
its business to consumer (B2C) use case in its December 2017 Critical
Capabilities for the CRM Customer Engagement Center report.* Earlier,
we improved our position in Gartner’s May 2017 Magic Quadrant for the
CRM Customer Engagement Center* (in which Zendesk is in the Leaders
quadrant). We also improved our position in The Forrester Wave™: Customer
Service Solutions For Midsize Teams, Q2 2017 (in which Zendesk is a Strong
Performer).
*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 highest 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 Q4 2017 - 6
Mike joins Hilarie Koplow-McAdams, who was appointed to the board in
September. Hilarie brings deep global enterprise software sales expertise to
Zendesk, having formerly held executive leadership positions at New Relic,
Salesforce, Intuit, and Oracle. Mike and Hilarie will be key product and sales
resources for us as we move upmarket toward our $1 billion revenue goal.
In addition, we announced the appointment of Norman Gennaro as senior
vice president of worldwide sales in December. Norman brings more than
25 years of business and technology experience leading and growing
global teams of sales professionals. Most recently, he helped to build the
mid-market segment for North America into a multibillion-dollar business
for Amazon Web Services, and prior to that, he spent 16 years in enterprise
sales with Oracle. Norman will partner with Jeff Titterton, who joined us as
senior vice president of marketing earlier in 2017.
Our new sales and marketing leadership is building experienced teams that
can meet the demands of our growing global business. These two teams are
working in concert on our many go-to-market activities worldwide, including
customer and prospect events. Our new 2018 events strategy includes
more than ten major Zendesk-produced events in our most significant
regions around the globe. These events are designed to help generate and
accelerate our pipeline of new and expansion business with their focus on
Zendesk products and customer experience best practices.
In 2018, we plan to expand our investments globally to build a broader
partner and channel ecosystem to support our upmarket activities.
While we continue to pride ourselves on our products’ ease of use and
implementation, we also recognize that our largest enterprise customers
frequently require the expertise of systems integrators and partners. Our
regional partnerships demonstrated the potential value and impact of
such alliances, and we expect to expand the number and scope of these
partnerships over this year.
Our largest customers value our ability to scale with them to serve their
growing demands. To that end, Zendesk continues to make reliability and
scalability top priorities. Our customers view Zendesk as a critical piece
of their businesses and rely on Zendesk products to achieve successful
outcomes. In 2017, we began to migrate our data center investments to cloud
infrastructure to enable greater reliability, flexibility, and scale. In early 2018,
we will finalize our transition plans to cloud infrastructure and develop a plan
for customer migration, which is likely to take several quarters.
Mike Frandsen, Board Member
Our product family enables large companies to transform their customer
experiences. In 2018, we are focused on building out even more
sophisticated product capabilities that our largest customers will expect as
they adapt to these new trends.
To help guide our teams as we continue to move upmarket, we put an
emphasis in the second half of 2017 on filling key roles with leaders
who have experience working with larger companies. Two of these key
additions were for our board of directors—most recently, the appointment
of Mike Frandsen in November. Mike brings more than three decades of
valuable enterprise product development experience with companies like
DemandTec and PeopleSoft. He is currently executive director of products
at Workday.
Zendesk Shareholder Letter Q4 2017 - 7
Focus on Omnichannel
The rise of new communication channels and ubiquitous access to
information has made customer journeys increasingly complex. Customers
have individual channel preferences, and they want to be recognized
across any and all channels they choose. As more power and control shifts
from companies to consumers, organizations are recognizing the critical
importance of their customer experiences and are searching for solutions to
improve their customer interactions.
We believe that we are well positioned to help companies deliver the
omnichannel experiences their customers expect today. The Zendesk
product family is purpose-built to unify disparate channels and departments
and to simplify the process of providing great customer service, whether that
is through self-service, a phone call, live chat, messaging, or a simple email.
In 2017, we put an emphasis on rolling out features that would bring the
rest of our products in-line with the scope and scalability of our Support
product, including launching Enterprise versions of Chat and Talk. All
of that foundational work last year paved the way for our 2018 focus on
omnichannel, and our product organization is now well positioned for a
unified omnichannel offering.
Throughout 2018, we will continue to implement new features for our core
products, including an Enterprise version of Guide in the first half of this year.
This and other ongoing improvements to all our products ensure that we are
always delivering the best capabilities to our customers through a robust
omnichannel solution that can scale to meet the needs of even our largest
customers.
Zendesk Shareholder Letter Q4 2017 - 8
Focus on Innovation
While we added many new products to our
family in 2017, our development efforts in 2018
are focused both on continuing new product
development and delivering enhancements for
our existing products.
An example of this strategy is Answer Bot,
our first machine learning product to directly
monetize our data assets. A paid add-on to our
Guide product, Answer Bot continues to gain
traction within our customer base, and we have
rolled out new features to enhance the customer
experience. In January, we launched Answer
Bot for Web Forms, allowing it to work in more
customer touchpoints and handle more requests.
Answer Bot increases self-service efficiency by
responding to customers’ questions with relevant
knowledge base articles. In addition, Answer Bot
is now available in both Spanish and Portuguese.
We expect to add additional channels and
languages this year.
Meanwhile, we are continuing our development
of two new products—currently in early access
programs—that we believe will deliver greater
innovation for our customers and expand our
market opportunities in the longer term. The
Outbound technology we acquired last year has
been folded into our development efforts for
Zendesk Connect, a product that we believe will
open more opportunities for us to address the
customer experience beyond traditional customer
service. Connect will initially offer new customer
segmentation opportunities and customer activity
history for our Support customers as well as
power proactive campaigns across web, email,
and mobile channels.
Zendesk Explore also continues to progress. This
new customer analytics product will supplement
our current Insights and Benchmark capabilities—
both of which we plan to expand while Explore is
in development. Explore’s modern architecture
will give our customers better decision-making
power by combining Zendesk data with external
data sources for a broader, more integrated
picture of the entire customer data set.
Answer Bot
The good kind of
know-it-all
Zendesk Shareholder Letter Q4 2017 - 9
CUSTOMERS
Increasingly, companies are turning to Zendesk
when seeking a flexible solution for digital
transformation projects centered on improving
the customer experience. Large enterprises—and
even more traditional mid-sized companies—
often are challenged by legacy processes,
infrastructure, and systems that don’t provide
enough agility for large-scale change. With our
ease of integration and quick deployment times,
we are seeing many such companies start down
the path to digital transformation using Zendesk.
Among the customers to join us or expand with us
recently include:
amaysim - an Australian provider of mobile,
broadband, and energy services as well as
devices
Chime - an online bank focused on automatic
savings
Circles.Life - a digital telecommunications
operator in Singapore
Conrad Electronic SE - a European online retailer
of electronic products
Etsy - an online retail marketplace for sellers of
creative goods
FINALCAD - mobile apps and predictive
analytics for construction
GoFundMe - a social fundraising platform with
50 million donors
JD Sports Fashion - a U.K. retailer of branded
trainer and sports fashion
Nexway - solutions for online sales and digital
distribution
ProctorU - online proctoring and identity
management solutions
Rappi - a Mexico City-based ecommerce
company active in Mexico, Brazil, and Colombia
Ryanair - a leading European airline serving 33
countries in Europe, Africa, and the Middle East
Soothe - a global, on-demand massage service
available in 50 cities
Stride Health - a service to connect individual
workers with health insurance plans
Tile - devices and technologies to help locate
missing things
UncommonGoods - an online retailer of unique
gifts by independent makers
Zendesk Shareholder Letter Q4 2017 - 10
OPERATING METRICS
A key metric we use to gauge our penetration within larger
organizations is represented by the percentage of Support
MRR generated by customers with 100 or more Support
agents. That percentage grew to 38% at the end of the fourth
quarter of 2017, compared to 37% at the end of the third
quarter of 2017 and 34% at the end of the fourth quarter of
2016. While we expect this metric to grow gradually, we see
these increases in the second half of 2017 as evidence of
improving upmarket momentum.
As a proxy of our success with upmarket opportunities, we
measure our number of contracts signed with an annual value
of $50,000 or greater. In the fourth quarter of 2017, the number
of these contracts we closed was over 25% greater than in
the fourth quarter of 2016. However, we saw a decrease in the
average size of these transactions as compared to the same
period last year.
Our dollar-based net expansion rate, which we use to quantify
our annual expansion within existing customers, increased
by one percentage point to end the fourth quarter at 119%,
compared to 118% at the end of the third quarter of 2017. Our
dollar-based net expansion rate was 115% at the end of the
fourth 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
38%100+ Agents
Q4 2017
Zendesk Shareholder Letter Q4 2017 - 11
CORPORATE SOCIAL RESPONSIBILITY (CSR)
Our commitment to social responsibility is unwavering as we enter 2018.
One of our 2017 projects involved seeking evidence of what we believed
to be true: that CSR activity and employee volunteering have a positive
downstream impact on a business’s customer experience and satisfaction.
To that end, our CSR team commissioned a study from Drexel University to
help substantiate whether and how CSR activities influence how customer-
facing employees at Zendesk interact with customers and how those
interactions affect customer satisfaction. The main takeaways from the
research include:
• Customer support agents who volunteered at least once every two months
were more than three times more likely to be rated among the top third in
the company for empathy.
• CSR can drive customer satisfaction by stimulating helping behaviors
among Zendesk’s customer support agents. Helping behaviors are
important because the more an advocate seeks help from others at the
company, the higher their CSAT scores.
The Zendesk Neighbor Foundation issued $2.1 million in grants in 2017 to
its nonprofit partners across the globe. Meanwhile, Zendesk employees
invested more than 9,500 engagement hours in their communities around
the world. Zendesk’s CSR team also sponsored 28 pro bono customer
accounts for a total of $596,000 worth of donated product.
Zendesk Shareholder Letter Q4 2017 - 12
FINANCIAL MEASURES AND CASH FLOW
We made solid progress on operating fundamentals in 2017. Our strong
revenue growth and continued focus on improving operating margins
have been a key focus of management. In 2017, we achieved GAAP and
non-GAAP operating margin expansion based on continued improvements
across all our cost categories, despite the impact on our gross margin
incurred by our recent decision to move our infrastructure operations to
cloud infrastructure from our current co-located data centers. Our focus in
2018 and beyond is to continue to deliver high revenue growth and further
scale our business as measured by expanding GAAP and non-GAAP
operating margins.
Our revenue growth and improvements in margins also helped drive positive
results in net cash from operating activities and results for free cash flow. In
2017, we achieved positive net cash from operating activties and free cash
flow in each quarter and for the year.
Fourth Quarter Results
Our fourth quarter and full-year 2017 results below are based on the revenue
recognition standard ASC 605. Our guidance for 2018 will be based on the
new revenue recognition standard ASC 606, as discussed further in that
section.
Revenue was $123.4 million for the fourth quarter of 2017, up 39% year-over-
year compared to $88.6 million in the fourth quarter of 2016. GAAP gross
margin increased quarter over quarter to 71.7% in the fourth quarter of 2017,
from 70.1% in the third quarter of 2017. GAAP gross margin in the fourth
quarter of 2016 was 71.1%. Non-GAAP gross margin increased quarter over
quarter to 74.5% in the fourth quarter of 2017 compared to 73.5% in the third
quarter of 2017. Non-GAAP gross margin in the fourth quarter of 2016 was
74.8%. Both GAAP and non-GAAP gross margin continues to be impacted by
our dual infrastructure deployments.
GAAP operating loss for the fourth quarter of 2017 was $28.5 million
compared to GAAP operating loss for the third quarter of 2017 of $28.4
million. GAAP operating loss for the fourth quarter of 2016 was $25.1 million.
Non-GAAP operating loss for the fourth quarter of 2017 was $2.4 million,
compared to non-GAAP operating loss for the third quarter of 2017 of $3.3
million. Non-GAAP operating loss for the fourth quarter of 2016 was
$4.4 million.
GAAP operating margin improvement is attributed to overall sales force
productivity gains and G&A operational scaling. GAAP operating margin for
the fourth quarter of 2017 improved to -23.1% from -25.2% in the third quarter
of 2017. GAAP operating margin was -28.4% in the fourth quarter of 2016.
Non-GAAP operating margin improved to -2.0% in the fourth quarter of 2017
from -2.9% in the third quarter of 2017. Non-GAAP operating margin was
-5.0% in the fourth quarter of 2016.
GAAP net loss for the fourth quarter of 2017 was $26.6 million or $0.26 per
share compared to GAAP net loss of $27.7 million or $0.28 per share for the
third quarter of 2017. GAAP net loss was $24.5 million or $0.26 per share for
the fourth quarter of 2016.
Non-GAAP net loss for the fourth quarter of 2017 was $0.5 million or $0.01
per share compared to non-GAAP net loss of $2.5 million or $0.02 per share
for the third quarter of 2017. Non-GAAP net loss was $3.8 million or $0.04
per share for the fourth quarter of 2016. Weighted average shares used to
compute both GAAP and non-GAAP net loss per share for the fourth quarter
of 2017 was 102.0 million.
Non-GAAP results for the fourth quarter of 2017 exclude $24.7 million in
share-based compensation and related expenses (including $2.0 million
of employer tax related to employee stock transactions and $0.4 million
of amortization of share-based compensation capitalized in internal-use
software), $0.7 million of amortization of purchased intangibles, and
$0.7 million of acquisition-related expenses. Non-GAAP results for the
third quarter of 2017 exclude $23.7 million in share-based compensation
and related expenses (including $0.7 million of employer tax related to
Zendesk Shareholder Letter Q4 2017 - 13
Full-Year 2017 Results
Revenue was $430.5 million for the full year of
2017, up 38% year-over-year compared to $312.0
million for 2016. GAAP gross margin increased
to 70.4% in 2017 compared to 69.9% in 2016.
Non-GAAP gross margin decreased slightly to
73.8% in 2017 compared to 73.9% in 2016. As
mentioned above, our gross margins in 2017
were negatively impacted by the migration of our
infrastructure operations to cloud infrastructure
from our current co-located data centers.
GAAP operating loss for 2017 was $114.6 million
compared to GAAP operating loss for 2016 of
$104.3 million. Non-GAAP operating loss for
2017 was $17.1 million, compared to non-GAAP
operating loss for 2016 of $21.1 million.
GAAP operating margin in 2017 improved to
-26.6% from -33.4% in 2016. Non-GAAP operating
margin improved to -4.0% in 2017 from -6.8% in
2016.
GAAP net loss in 2017 was $110.6 million or $1.11
per share compared to GAAP net loss of $103.8
million or $1.11 per share for 2016. Non-GAAP
net loss in 2017 was $13.1 million or $0.13 per
share compared to non-GAAP net loss of $20.5
million or $0.22 per share in 2016. Weighted
average shares used to compute both GAAP and
non-GAAP net loss per share for 2017 was 99.9
million.
Non-GAAP results for 2017 exclude $91.6 million
in share-based compensation and related
expenses (including $4.8 million of employer
tax related to employee stock transactions
and $1.8 million of amortization of share-
based compensation capitalized in internal-
use software), $3.7 million of amortization
of purchased intangibles, and $2.2 million
of acquisition-related expenses. Non-GAAP
results for 2016 exclude $79.5 million in share-
based compensation and related expenses
(including $3.9 million of employer tax related
to employee stock transactions and $1.8 million
of amortization of share-based compensation
capitalized in internal-use software), and $3.8
million of amortization of purchased intangibles.
For the full year of 2017, net cash from operating
activities was $42.1 million, and we achieved
positive free cash flow of $18.2 million.
employee stock transactions and $0.5 million
of amortization of share-based compensation
capitalized in internal-use software), $1.0 million
of amortization of purchased intangibles, and
$0.5 million in acquisition-related expenses.
Non-GAAP results for the fourth quarter of
2016 exclude $19.8 million in share-based
compensation and related expenses (including
$1.8 million of employer tax related to
employee stock transactions and $0.6 million
of amortization of share-based compensation
capitalized in internal-use software), and $0.9
million of amortization of purchased intangibles.
During the fourth quarter of 2017, net cash from
operating activities was $17.4 million, and we
achieved positive free cash flow of $12.0 million.
We ended the fourth quarter of 2017 with $109.4
million of cash and equivalents, and we had an
additional $137.6 million of short-term marketable
securities and $97.4 million of long-term
marketable securities.
Zendesk Shareholder Letter Q4 2017 - 14
GUIDANCE
Our guidance for 2018 is based on the new revenue recognition standard
ASC 606. The new standard has a minimal impact on our revenue
recognition, however the requirement to defer sales commissions under
the new standard results in a benefit to our operating margins. The new
standard does not impact net cash from operating activities or free cash flow.
For comparability, we have provided restated historical financial statements
under the new standard for the full year of 2016 and the full year and
quarters of 2017 on our investor relations website.
For the first quarter of 2018, we expect revenue to range between $125.0
and $127.0 million and we expect our GAAP operating loss to range between
$33.0 and $35.0 million. We expect our non-GAAP operating loss for the
first quarter of 2018 to range between $3.0 and $5.0 million. Our GAAP
operating loss for the first quarter of 2018 is estimated to include share-
based compensation and related expenses of approximately $28.7 million,
amortization of purchased intangibles of approximately $0.7 million, and
acquisition-related expenses of $0.6 million.
For the full year of 2018, we expect revenue to range between $555.0
and $565.0 million, representing growth between 29% and 31% year-over-
year. We expect our GAAP operating loss for the full year of 2018 to range
between $113.0 and $118.0 million, and we expect our non-GAAP operating
income to range between $0.0 (breakeven) and $5.0 million. Our GAAP
operating loss for the full year of 2018 is estimated to include share-based
compensation and related expenses of approximately $112.8 million,
amortization of purchased intangibles of approximately $2.7 million, and
acquisition-related expenses of $2.5 million.
Our full-year guidance reflects our confidence in maintaining a high growth
rate in 2018. We note, however, that several factors affect our revenue
recognition primarily in the first half of the year, as evidenced by our first
quarter 2018 guidance. The first half of the year tends to be more heavily
weighted toward our transactional business, whereas we see more
enterprise deals close in the second half of the year. Our first quarter
revenue guidance reflects this seasonal trend.
As part of our infrastructure migration, we will continue to incur expenses for
both Amazon Web Services and our co-located data centers while we host
customers in both environments during the transition period. We expect to
incur up to approximately 100 basis points of additional depreciation and
related costs in each period while the migration continues. We expect to
finalize our migration plan in the first quarter and will disclose information
about the schedule of expense recognition on our first quarter earnings call.
We expect net cash from operating activities to be positive for the full year of
2018, and for the first time, we are introducing annual guidance on free cash
flow. For the full year of 2018, we expect free cash flow between $25 million
and $30 million, representing a year over year growth of 51% at the midpoint.
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 103.8 million weighted
average shares outstanding for the first quarter of 2018 and 106.2 million
weighted average shares outstanding for the full year of 2018, each based
only on current shares outstanding and anticipated activity associated with
equity incentive plans.
Zendesk Shareholder Letter Q4 2017 - 15
Condensed consolidated
statements of operations
(In thousands, except per
share data; unaudited)
Three Months Ended
December 31,
Year Ended
December 31,
2017 2016 2017 2016
Revenue $123,426 $88,623 $430,492 $311,999
Cost of revenue 34,958 25,582 127,422 93,900
Gross profit 88,468 63,041 303,070 218,099
Operating expenses:
Research and development 30,779 24,383 115,291 91,067
Sales and marketing 64,035 47,566 220,742 166,987
General and administrative 22,177 16,222 81,680 64,371
Total operating expenses 116,991 88,171 417,713 322,425
Operating loss (28,523) (25,130) (114,643) (104,326)
Other income, net 1,142 775 2,487 1,520
Loss before provision for (benefit from) income taxes (27,381) (24,355) (112,156) (102,806)
Provision for (benefit from) income taxes (732) 193 (1,518) 993
Net loss $(26,649) $(24,548) $(110,638) $(103,799)
Net loss per share, basic and diluted $(0.26) $(0.26) $(1.11) $(1.11)
Weighted-average shares used to compute net loss per share,
basic and diluted 102,044 95,793 99,918 93,161
Zendesk Shareholder Letter Q4 2017 - 16
Condensed consolidated
balance sheets
(In thousands, except par
value; unaudited)
December 31,
2017
December 31,
2016
Assets
Current assets:
Cash and cash equivalents $109,370 $93,677
Marketable securities 137,576 131,190
Accounts receivable, net of allowance for
doubtful accounts of $1,252 and $1,269 as of
December 31, 2017 and December 31, 2016,
respectively
57,096 37,343
Prepaid expenses and other
current assets 24,165 17,608
Total current assets 328,207 279,818
Marketable securities, noncurrent 97,447 75,168
Property and equipment, net 59,157 62,731
Goodwill and intangible assets, net 67,034 53,296
Other assets 8,359 4,272
Total assets $560,204 $475,285
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $5,307 $4,555
Accrued liabilities 21,876 19,106
Accrued compensation and
related benefits 29,017 20,281
Deferred revenue 174,524 123,276
Total current liabilities 230,724 167,218
Deferred revenue, noncurrent 1,213 1,257
Other liabilities 6,626 7,382
Total liabilities 238,563 175,857
Stockholders’ equity:
Preferred stock, par value $0.01 per share — —
Common stock, par value $0.01 per share 1,031 971
Additional paid-in capital 753,568 624,026
Accumulated other comprehensive loss (2,372) (5,197)
Accumulated deficit (430,586) (319,720)
Treasury stock, at cost — (652)
Total stockholders’ equity 321,641 299,428
Total liabilities and stockholders’ equity $560,204 $475,285
Zendesk Shareholder Letter Q4 2017 - 17
Condensed consolidated
statements of cash flows
(In thousands; unaudited)
Three Months Ended
December 31,
Year Ended
December 31,
2017 2016 2017 2016
Cash flows from operating activities
Net loss $(26,649) $(24,548) $(110,638) $(103,799)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 7,668 7,506 31,931 27,506
Share-based compensation 22,244 17,444 85,049 73,779
Excess tax benefit from share-based award acvitity — (204) — (337)
Other 222 1,884 603 3,106
Changes in operating assets and liabilities:
Accounts receivable (6,162) (26) (21,201) (11,808)
Prepaid expenses and other current assets 54 1,115 (5,055) (6,286)
Other assets and liabilities (442) (2,058) (5,955) (3,887)
Accounts payable (5,398) (1,266) 1,839 (3,486)
Accrued liabilities 76 2,616 6,919 5,261
Accrued compensation and related benefits 5,896 5,243 7,399 6,055
Deferred revenue 19,847 12,822 51,204 38,418
Net cash provided by operating activities 17,356 20,528 42,095 24,522
Cash flows from investing activities
Purchases of property and equipment (3,062) (8,153) (16,396) (20,647)
Internal-use software development costs (2,284) (1,997) (7,521) (6,310)
Purchases of marketable securities (42,030) (32,408) (177,309) (249,048)
Proceeds from maturities of marketable securities 27,775 15,719 116,735 39,690
Proceeds from sale of marketable securities 2,946 14,707 31,090 53,951
Cash paid for acquisition of Outbound, net of cash acquired — — (16,470) —
Net cash used in investing activities (16,655) (12,132) (69,871) (182,364)
Cash flows from financing activities
Proceeds from exercise of employee stock options 13,332 5,526 31,882 25,412
Proceeds from employee stock purchase plan 3,268 2,300 14,248 11,004
Taxes paid related to net share settlement of share-based awards (574) (177) (2,989) (803)
Excess tax benefit from share-based award acvitity — 204 — 337
Principal payments on debt — — — (323)
Net cash provided by financing activities 16,026 7,853 43,141 35,627
Effect of exchange rate changes on cash
and cash equivalents 40 (161) 328 (334)
Net increase (decrease) in cash and cash equivalents 16,767 16,088 15,693 (122,549)
Cash and cash equivalents at beginning of period 92,603 77,589 93,677 216,226
Cash and cash equivalents at end of period $109,370 $93,677 $109,370 $93,677
Zendesk Shareholder Letter Q4 2017 - 18
Non-GAAP results
(In thousands, except per
share data)
The following table shows
Zendesk’s GAAP results
reconciled to non-GAAP
results included in this letter.
Three Months Ended
December 31,
Year Ended
December 31,
2017 2016 2017 2016
Reconciliation of gross profit and gross margin
GAAP gross profit $88,468 $63,041 $303,070 $218,099
Plus: Share-based compensation 2,372 1,691 9,040 7,045
Plus: Employer tax related to employee stock transactions 129 106 530 383
Plus: Amortization of purchased intangibles 612 837 3,209 3,362
Plus: Amortization of share-based compensation
capitalized in internal-use software 417 598 1,774 1,821
Non-GAAP gross profit $91,998 $66,273 $317,623 $230,710
GAAP gross margin 72% 71% 70% 70%
Non-GAAP adjustments 3% 4% 4% 4%
Non-GAAP gross margin 75% 75% 74% 74%
Reconciliation of operating expenses
GAAP research and development $30,779 $24,383 $115,291 $91,067
Less: Share-based compensation (7,697) (6,535) (29,970) (27,083)
Less: Employer tax related to employee stock transactions (816) (756) (1,971) (1,559)
Less: Acquisition-related expenses (406) — (843) —
Non-GAAP research and development $21,860 $17,092 $82,507 $62,425
GAAP research and development as percentage of revenue 25% 28% 27% 29%
Non-GAAP research and development as percentage of revenue 18% 19% 19% 20%
GAAP sales and marketing $64,035 $47,566 $220,742 $166,987
Less: Share-based compensation (6,414) (5,263) (24,776) (23,043)
Less: Employer tax related to employee stock transactions (356) (768) (1,164) (1,342)
Less: Amortization of purchased intangibles (135) (104) (495) (418)
Less: Acquisition-related expenses (281) — (750) —
Non-GAAP sales and marketing $56,849 $41,431 $193,557 $142,184
GAAP sales and marketing as percentage of revenue 52% 54% 51% 54%
Non-GAAP sales and marketing as percentage of revenue 46% 47% 45% 46%
Zendesk Shareholder Letter Q4 2017 - 19
(continued...)
Non-GAAP results
(In thousands, except per
share data)
The following table shows
Zendesk’s GAAP results
reconciled to non-GAAP
results included in this letter.
Three Months Ended
December 31,
Year Ended
December 31,
2017 2016 2017 2016
GAAP general and administrative $22,177 $16,222 $81,680 $64,371
Less: Share-based compensation (5,761) (3,955) (21,263) (16,608)
Less: Employer tax related to employee stock transactions (671) (123) (1,184) (586)
Less: Acquisition-related expenses (45) — (566) —
Non-GAAP general and administrative $15,700 $12,144 $58,667 $47,177
GAAP general and administrative as percentage of revenue 18% 18% 19% 21%
Non-GAAP general and administrative as percentage of revenue 13% 14% 14% 15%
Reconciliation of operating loss and operating margin
GAAP operating loss $(28,523) $(25,130) $(114,643) $(104,326)
Plus: Share-based compensation 22,244 17,444 85,049 73,779
Plus: Employer tax related to employee stock transactions 1,972 1,753 4,849 3,870
Plus: Amortization of purchased intangibles 747 941 3,704 3,780
Plus: Acquistion-related expenses 732 — 2,159 —
Plus: Amortization of share-based compensation capitalized in
internal-use software 417 598 1,774 1,821
Non-GAAP operating loss $(2,411) $(4,394) $(17,108) $(21,076)
GAAP operating margin (23)% (28)% (27)% (33)%
Non-GAAP adjustment 21% 23% 23% 26%
Non-GAAP operating margin (2)% (5)% (4)% (7)%
Reconciliation of net loss
GAAP net loss
$(26,649) $(24,548) $(110,638)
$(103,799)
Plus: Share-based compensation 22,244 17,444 85,049 73,779
Plus: Employer tax related to employee stock transactions 1,972 1,753 4,849 3,870
Plus: Amortization of purchased intangibles 747 941 3,704 3,780
Plus: Acquistion-related expenses 732 — 2,159 —
Plus: Amortization of share-based compensation capitalized in
internal-use software 417 598 1,774 1,821
Non-GAAP net loss $(537) $(3,812) $(13,103) $(20,549)
Zendesk Shareholder Letter Q4 2017 - 20
Three Months Ended
December 31,
Year Ended
December 31,
2017 2016 2017 2016
Reconciliation of net loss per share, basic and diluted
GAAP net loss per share, basic and diluted $(0.26) $(0.26) $(1.11) $(1.11)
Non-GAAP adjustments to net loss 0.25 0.22 0.98 0.89
Non-GAAP net loss per share, basic and diluted $(0.01) $(0.04) $(0.13) $(0.22)
Weighted-average shares used to compute
net loss per share, basic and diluted 102,044 95,793 99,918 93,161
Computation of free cash flow
Net cash provided by operating activities $17,356 $20,528 $42,095 $24,522
Less: purchases of property and equipment (3,062) (8,153) (16,396) (20,647)
Less: internal-use software development costs (2,284) (1,997) (7,521) (6,310)
Free cash flow $12,010 $10,378 $18,178 $(2,435)
(continued...)
Non-GAAP results
(In thousands, except per
share data)
The following table shows
Zendesk’s GAAP results
reconciled to non-GAAP
results included
in this letter.
Zendesk Shareholder Letter Q4 2017 - 21
About Zendesk
Zendesk builds software for better customer relationships. It empowers organizations to im-
prove customer engagement and better understand their customers. Approximately 119,000
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) the market in which Zendesk oper-
ates is intensely competitive, and Zendesk may not compete effectively; (vi) the development
of the market for software as a service business software applications; (vii) Zendesk’s ability
to introduce and market new products and to support its products on a shared services
platform; (viii) Zendesk’s ability to integrate acquired businesses and technologies success-
fully or achieve the expected benefits of such acquisitions; (ix) Zendesk’s ability to effectively
manage its growth and organizational change; (x) breaches in Zendesk’s security measures
or unauthorized access to its customers’ data; (xi) service interruptions or performance prob-
lems 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 September 30, 2017. Further information on potential risks that could
affect actual results will be included in the subsequent periodic and current reports and other
filings that Zendesk makes with the Securities and Exchange Commission from time to time,
including its Annual Report on Form 10-K for the year ended December 31, 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 transac-
tion costs, integration costs, restructuring costs, and acquisition-related retention payments,
including amortization of acquisition-related retention payments capitalized in internal-use
software, as events that are not necessarily reflective of operational performance during
a period. In particular, Zendesk believes the consideration of measures that exclude such
expenses can assist in the comparison of operational performance in different periods which
may or may not include such expenses.
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 has not reconciled free cash flow guidance to net cash from operating activities for
the year ending December 31, 2018 because Zendesk does not provide guidance on the
reconciling items between net cash from operating activities and free cash flow, as a result
of the uncertainty regarding, and the potential variability of, these items. The actual amount
of such reconciling items will have a significant impact on Zendesk’s free cash flow and,
accordingly, a reconciliation of net cash from operating activities to free cash flow for the year
ending December 31, 2018 is not available without unreasonable effort.
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 Shareholder Letter Q4 2017 - 22
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’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 relat-
ed expenses, amortization of purchased intangibles, and acquisition-related expenses, and
the non-GAAP measures that exclude such information in order to assess the performance
of Zendesk’s business and for planning and forecasting in subsequent periods. When Ze-
ndesk 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 fi-
nancial measure. When Zendesk uses such a non-GAAP financial measure in a forward-look-
ing manner for future periods, and a reconciliation is not determinable without unreasonable
effort, Zendesk provides the reconciling information that is determinable without unreason-
able 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 per-
formance, 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 custom-
er 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 asso-
ciated with a paid customer account, upgrades in subscription plans, and the purchase of
additional products as offset by churn, contraction in authorized agents associated with a
paid customer account, and downgrades in subscription plans. Zendesk’s dollar-based net
expansion rate is based upon 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 con-
tractual determination made by assessing the contractual terms of each paid customer ac-
count, 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 subscrip-
tion 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
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 cus-
tomer 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 92,800
customers, as compared to the approximately 118,900 total paid customer accounts as of
December 31, 2017.
Zendesk Shareholder Letter Q4 2017 - 23
To the extent that Zendesk can determine that the underlying customers do not share com-
mon corporate information, Zendesk does not aggregate paid customer accounts associated
with reseller and other similar channel arrangements for the purposes of determining its
dollar-based net expansion rate. While not material, Zendesk believes the failure to account
for these activities would otherwise skew the dollar-based net expansion metrics associated
with customers that maintain multiple paid customer accounts across its products and paid
customer accounts associated with reseller and other similar channel arrangements.
Zendesk does not currently incorporate operating metrics associated with its analytics prod-
uct 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 Com-
mission.
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 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 rev-
enue 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 activat-
ed 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.
December 31,
2016
March 31,
2017
June 30,
2017
September 30,
2017
December 31,
2017
Paid customer accounts on
Zendesk Support (approx.) 50,800 54,900 57,800 61,200 64,100
+ Paid customer accounts on
Zendesk Chat (approx.) 41,300 44,000 45,300 46,600 47,000
+ Paid customer accounts on
other Zendesk products (approx.) 2,200 2,900 4,300 6,100 7,800
= Approximate number of
paid customer accounts 94,300 101,800 107,400 113,900 118,900
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
Customer Metrics
Geographic Information
United States
EMEA
Other
Q4’17
53.2%
28.9%
17.9%
FY’17
53.3%
28.6%
18.1%
Revenue by geography: