Highlights
- Third quarter revenue increased 24% year over year to $261.9
million
- Third quarter GAAP operating loss of $28.3 million and non-GAAP
operating income of $24.9 million
- Zendesk achieved a significant milestone by crossing a
billion-dollar annual revenue run rate during the third
quarter
Zendesk, Inc. (NYSE: ZEN) today reported financial results for
the third quarter ended September 30, 2020, and released a
Shareholder Letter on its investor relations website at
https://investor.zendesk.com.
Results for the Third Quarter 2020
Revenue was $261.9 million for the quarter ended September 30,
2020, an increase of 24% over the prior year period. GAAP net loss
for the quarter ended September 30, 2020 was $40.7 million, and
GAAP net loss per share (basic and diluted) was $0.35. Non-GAAP net
income was $21.1 million, and non-GAAP net income was $0.18 per
share (basic) and $0.17 per share (diluted). Non-GAAP net income
excludes approximately $49.0 million in share-based compensation
and related expenses (including $2.3 million of employer tax
related to employee stock transactions and $0.5 million of
amortization of share-based compensation capitalized in
internal-use software), $12.2 million of amortization of debt
discount and issuance costs, $2.2 million of amortization of
purchased intangibles, $2.0 million of acquisition-related
expenses, and non-GAAP income tax effects and adjustments of $3.6
million. GAAP net loss per share for the quarter ended September
30, 2020 was based on 115.8 million weighted average shares
outstanding (basic and diluted), and non-GAAP net income per share
for the quarter ended September 30, 2020 was based on 115.8 million
weighted average shares outstanding (basic) and 121.4 million
weighted average shares outstanding (diluted).
Outlook
As of October 29, 2020, Zendesk provided guidance for the
quarter and full year ending December 31, 2020.
For the quarter ending December 31, 2020, Zendesk expects to
report:
- Revenue in the range of $274 - 279 million
- GAAP operating income (loss) in the range of $(39) - (35)
million, which includes share-based compensation and related
expenses of approximately $51 million, amortization of purchased
intangibles of approximately $2 million, and acquisition-related
expenses of approximately $2 million. This guidance may be impacted
by the real estate impairment discussed below, depending on the
amount and timing of its determination, and such impact has not
been included in this guidance.
- Non-GAAP operating income (loss) in the range of $16 - 20
million, which excludes share-based compensation and related
expenses of approximately $51 million, amortization of purchased
intangibles of approximately $2 million, and acquisition-related
expenses of approximately $2 million. We may additionally exclude a
portion or all of the real estate impairment discussed below,
depending the amount and timing of its determination, and such
exclusions have not been included in this guidance.
- Approximately 116 million weighted average shares outstanding
(basic)
- Approximately 122 million weighted average shares outstanding
(diluted)
For the full year ending December 31, 2020, Zendesk expects to
report:
- Revenue in the range of $1.020 - 1.025 billion
- GAAP operating income (loss) in the range of $(139) - (135)
million, which includes share-based compensation and related
expenses of approximately $192 million, amortization of purchased
intangibles of approximately $9 million, and acquisition-related
expenses of approximately $7 million. This guidance may be impacted
by the real estate impairment discussed below, depending on the
amount and timing of its determination, and such impact has not
been included in this guidance.
- Non-GAAP operating income (loss) in the range of $69 - 73
million, which excludes share-based compensation and related
expenses of approximately $192 million, amortization of purchased
intangibles of approximately $9 million, and acquisition-related
expenses of approximately $7 million. We may additionally exclude a
portion or all of the real estate impairment discussed below,
depending the amount and timing of its determination, and such
exclusions have not been included in this guidance.
- Approximately 115 million weighted average shares outstanding
(basic)
- Approximately 121 million weighted average shares outstanding
(diluted)
- Free cash flow to be approximately $15 million or higher, which
could be impacted by the real estate changes discussed below, and
such impact has not been included in this guidance.
In the fourth quarter of 2020, we concluded that we will no
longer occupy two of our leased office buildings in San Francisco.
As a result, we estimate that before March 31, 2021, we expect to
record an impairment charge of approximately $13 - 17 million
related to these lease assets, which will impact our GAAP operating
income. Additionally, we estimate that before March 31, 2021, we
may accelerate remaining contractual rent payments, which total
approximately $12 million, plus additional operating costs. Such
costs, depending on the amount and timing of their determination,
will impact our cash flow results. The actual amount and timing of
the impairments and the cash outflows will depend on the outcome of
negotiations with landlords and potential subtenants, and the
timing of completion of lease decommission activities.
There are many factors that can affect our actual results which
are discussed below and in the risk factors in our filings with the
Securities and Exchange Commission. Some of the key risk factors
include global macroeconomic conditions, the impact of the COVID-19
pandemic on our business, business conditions of customers in
challenged industries, the effect on demand for our products from
customers which can and has resulted in higher levels of
contraction than historical levels, and the ability of our
customers to manage the current severe economic downturn.
We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2020 because we do not
provide guidance on the reconciling items between net cash from
operating activities and free cash flow, as a result of the
uncertainty regarding, and the potential variability of, these
items. The actual amount of such reconciling items will have a
significant impact on our free cash flow and, accordingly, a
reconciliation of net cash from operating activities to free cash
flow for the full year 2020 is not available without unreasonable
effort.
Zendesk’s estimates of share-based compensation and related
expenses, amortization of purchased intangibles,
acquisition-related expenses, weighted average shares outstanding,
and free cash flow in future periods assume, among other things,
the occurrence of no additional acquisitions, investments, or
restructurings and no further revisions to share-based compensation
and related expenses.
Annual revenue run rate was calculated by multiplying our
revenue for the third quarter of 2020 by four. For more information
about our revenue run rate, please see the “About Operating
Metrics” section at the back of this press release.
Shareholder Letter and Conference Call Information
The detailed Shareholder Letter is available at
https://investor.zendesk.com and Zendesk will host a live video
webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on
Thursday, October 29, 2020 to discuss the results. The live video
webcast can be accessed through Zendesk’s investor relations
website at https://investor.zendesk.com. A replay of the webcast
will be available for 12 months.
About Zendesk
Zendesk is a service-first CRM company that builds support,
sales, and customer engagement software designed to foster better
customer relationships. From large enterprises to startups, we
believe that powerful, innovative customer experiences should be
within reach for every company, no matter the size, industry or
ambition. Zendesk serves more than 160,000 customers across a
multitude of industries in over 30 languages. Zendesk is
headquartered in San Francisco, and operates offices worldwide.
Learn more at www.zendesk.com.
Forward-Looking Statements
This press release contains forward-looking statements,
including, among other things, statements regarding Zendesk’s
future financial performance, its continued investment to grow its
business, and progress toward its long-term financial objectives.
Words such as “may,” “should,” “will,” “believe,” “expect,”
“anticipate,” “target,” “project,” and similar phrases that denote
future expectation or intent regarding Zendesk’s financial results,
operations, and other matters are intended to identify
forward-looking statements. You should not rely upon
forward-looking statements as predictions of future events.
The outcome of the events described in these forward-looking
statements is subject to known and unknown risks, uncertainties,
and other factors that may cause Zendesk’s actual results,
performance, or achievements to differ materially, including (i)
the effect of uncertainties related to the COVID-19 pandemic on
U.S. and global markets, Zendesk’s business, operations, revenue
results, cash flow, operating expenses, hiring, demand for its
solutions, sales cycles, customer retention, and its customers’
businesses and industries; (ii) other adverse changes in general
economic or market conditions; (iii) Zendesk’s ability to adapt its
products to changing market dynamics and customer preferences or
achieve increased market acceptance of its products; (iv) Zendesk’s
ability to effectively expand its sales capabilities; (v) Zendesk’s
substantial reliance on its customers renewing their subscriptions
and purchasing additional subscriptions; (vi) 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; (vii) the
intensely competitive market in which Zendesk operates and the
difficulty that Zendesk may have in competing effectively; (viii)
Zendesk’s ability to effectively market and sell its products to
larger enterprises; (ix) Zendesk’s ability to introduce and market
new products and to support its products on a shared services
platform; (x) Zendesk’s ability to maintain and develop its
strategic relationships with third parties; (xi) Zendesk’s ability
to prevent, mitigate, and respond effectively to both historical
and future data breaches and to securely maintain customer data;
(xii) Zendesk’s ability to effectively manage its growth and
organizational change, including its international expansion
strategy; (xiii) Zendesk’s ability to integrate acquired businesses
and technologies successfully or achieve the expected benefits of
such acquisitions; (xiv) Zendesk's ability to comply with privacy
and data security regulations; (xv) potential service interruptions
or performance problems associated with Zendesk’s technology and
infrastructure; (xvi) the development of the market for software as
a service business software applications; (xvii) real or perceived
errors, failures, or bugs in its products; (xviii) Zendesk’s
ability to accurately forecast expenditures on third-party managed
hosting services; and (xix) the amount and timing of any
determination of real estate impairments relating to expected lease
abandonment matters.
The forward-looking statements contained in this press release
are also subject to additional risks, uncertainties, and factors,
including those more fully described in Zendesk’s filings with the
Securities and Exchange Commission, including its Quarterly Report
on Form 10-Q for the quarter ended June 30, 2020. Further
information on potential risks that could affect actual results
will be included in the subsequent periodic and current reports and
other filings that Zendesk makes with the Securities and Exchange
Commission from time to time, including its Quarterly Report on
Form 10-Q for the quarter ended September 30, 2020.
Forward-looking statements represent Zendesk’s management’s
beliefs and assumptions only as of the date such statements are
made. Zendesk undertakes no obligation to update any
forward-looking statements made in this press release to reflect
events or circumstances after the date of this press release or to
reflect new information or the occurrence of unanticipated events,
except as required by law.
Condensed Consolidated Statements of
Operations
(In thousands, except per share data;
unaudited)
Three Months Ended September
30,
Nine Months Ended September
30,
2020
2019
2020
2019
Revenue
$
261,926
$
210,477
$
746,066
$
586,545
Cost of revenue
62,819
59,210
184,036
172,534
Gross profit
199,107
151,267
562,030
414,011
Operating expenses:
Research and development
64,842
54,528
184,266
151,829
Sales and marketing
123,737
99,303
369,442
285,750
General and administrative
38,854
32,864
109,427
107,135
Total operating expenses
227,433
186,695
663,135
544,714
Operating loss
(28,326
)
(35,428
)
(101,105
)
(130,703
)
Other income (expense), net:
Interest expense
(14,087
)
(6,727
)
(29,060
)
(19,885
)
Loss on early extinguishment of debt
—
—
(25,950
)
—
Interest and other income, net
3,683
7,567
12,750
17,764
Total other income (expense), net
(10,404
)
840
(42,260
)
(2,121
)
Loss before provision for (benefit from)
income taxes
(38,730
)
(34,588
)
(143,365
)
(132,824
)
Provision for (benefit from) income
taxes
1,973
(364
)
4,777
661
Net loss
$
(40,703
)
$
(34,224
)
$
(148,142
)
$
(133,485
)
Net loss per share, basic and diluted
$
(0.35
)
$
(0.31
)
$
(1.29
)
$
(1.21
)
Weighted-average shares used to compute
net loss per share, basic and diluted
115,809
111,261
114,653
109,969
Condensed Consolidated Balance
Sheets
(In thousands, except par value;
unaudited)
September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents
$
383,318
$
196,591
Marketable securities
559,682
286,958
Accounts receivable, net of allowance for
doubtful accounts of $9,322 and $2,846 as of September 30, 2020 and
December 31, 2019, respectively
151,160
127,808
Deferred costs
44,722
35,619
Prepaid expenses and other current
assets
50,047
45,847
Total current assets
1,188,929
692,823
Marketable securities, noncurrent
407,141
361,948
Property and equipment, net
102,098
102,090
Deferred costs, noncurrent
42,256
35,230
Lease right-of-use assets
89,477
89,983
Goodwill and intangible assets, net
199,607
206,883
Other assets
24,731
25,632
Total assets
$
2,054,239
$
1,514,589
Liabilities and stockholders’
equity
Current liabilities:
Accounts payable
$
10,237
$
38,376
Accrued liabilities
33,720
36,347
Accrued compensation and related
benefits
89,179
61,512
Deferred revenue
324,766
320,642
Lease liabilities
22,300
21,804
Convertible senior notes, net
130,615
—
Total current liabilities
610,817
478,681
Convertible senior notes, net
925,007
483,464
Deferred revenue, noncurrent
2,885
3,320
Lease liabilities, noncurrent
80,507
83,478
Other liabilities
4,904
7,662
Total liabilities
1,624,120
1,056,605
Stockholders’ equity:
Preferred stock, par value $0.01 per
share
—
—
Common stock, par value $0.01 per
share
1,164
1,130
Additional paid-in capital
1,273,242
1,155,044
Accumulated other comprehensive income
2,560
591
Accumulated deficit
(846,847
)
(698,781
)
Total stockholders’ equity
430,119
457,984
Total liabilities and stockholders’
equity
$
2,054,239
$
1,514,589
Condensed Consolidated Statements of
Cash Flows
(In thousands; unaudited)
Three Months Ended September
30,
2020
2019
Cash flows from operating
activities
Net loss
$
(40,703
)
$
(34,224
)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization
10,613
10,091
Share-based compensation
46,263
38,650
Amortization of deferred costs
11,660
8,443
Amortization of debt discount and issuance
costs
12,194
6,366
Other
988
112
Changes in operating assets and
liabilities:
Accounts receivable
(12,392
)
3,035
Prepaid expenses and other current
assets
100
(1,843
)
Deferred costs
(18,976
)
(10,944
)
Lease right-of-use assets
5,225
4,915
Other assets and liabilities
(482
)
(2,401
)
Accounts payable
(3,193
)
1,258
Accrued liabilities
593
65
Accrued compensation and related
benefits
14,463
(909
)
Deferred revenue
12,217
6,240
Lease liabilities
(5,175
)
(8,631
)
Net cash provided by operating
activities
33,395
20,223
Cash flows from investing
activities
Purchases of property and equipment
(3,931
)
(11,474
)
Internal-use software development
costs
(4,618
)
(2,041
)
Purchases of marketable securities
(468,032
)
(103,883
)
Proceeds from maturities of marketable
securities
89,493
45,875
Proceeds from sales of marketable
securities
10,908
57,520
Proceeds from sales of strategic
investments
1,577
—
Net cash used in investing
activities
(374,603
)
(14,003
)
Cash flows from financing
activities
Proceeds from exercises of employee stock
options
15,489
8,767
Proceeds from employee stock purchase
plan
9,996
7,747
Taxes paid related to net share settlement
of share-based awards
(1,990
)
(2,323
)
Other
(610
)
Net cash provided by financing
activities
22,885
14,191
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
206
19
Net increase (decrease) in cash, cash
equivalents and restricted cash
(318,117
)
20,430
Cash, cash equivalents and restricted cash
at beginning of period
704,116
173,381
Cash, cash equivalents and restricted
cash at end of period
$
385,999
$
193,811
Non-GAAP Results
(In thousands, except per share data)
The following table shows Zendesk’s GAAP
results reconciled to non-GAAP results included in this
release.
Three Months Ended September
30,
Nine Months Ended September
30,
2020
2019
2020
2019
Reconciliation of gross profit and
gross margin
GAAP gross profit
$
199,107
$
151,267
$
562,030
$
414,011
Plus: Share-based compensation
4,831
5,397
15,077
15,580
Plus: Employer tax related to employee
stock transactions
247
310
963
1,149
Plus: Amortization of purchased
intangibles
1,525
2,065
5,249
5,626
Plus: Amortization of share-based
compensation capitalized in internal-use software
460
438
1,375
1,272
Plus: Acquisition-related expenses
85
185
$
292
$
459
Non-GAAP gross profit
$
206,255
$
159,662
$
584,986
$
438,097
GAAP gross margin
76
%
72
%
75
%
71
%
Non-GAAP adjustments
3
%
4
%
3
%
4
%
Non-GAAP gross margin
79
%
76
%
78
%
75
%
Reconciliation of operating
expenses
GAAP research and development
$
64,842
$
54,528
$
184,266
$
151,829
Less: Share-based compensation
(13,921
)
(12,169
)
(39,076
)
(35,717
)
Less: Employer tax related to employee
stock transactions
(495
)
(634
)
(2,081
)
(2,856
)
Less: Acquisition-related expenses
(1,204
)
(973
)
(3,382
)
(2,404
)
Non-GAAP research and development
$
49,222
$
40,752
$
139,727
$
110,852
GAAP research and development as
percentage of revenue
25
%
26
%
25
%
26
%
Non-GAAP research and development as
percentage of revenue
19
%
19
%
19
%
19
%
GAAP sales and marketing
$
123,737
$
99,303
$
369,442
$
285,750
Less: Share-based compensation
(19,335
)
(13,839
)
(53,467
)
(39,813
)
Less: Employer tax related to employee
stock transactions
(860
)
(562
)
(2,923
)
(2,352
)
Less: Amortization of purchased
intangibles
(671
)
(699
)
(2,041
)
(1,934
)
Less: Acquisition-related expenses
(55
)
(390
)
(1,146
)
(1,161
)
Non-GAAP sales and marketing
$
102,816
$
83,813
$
309,865
$
240,490
GAAP sales and marketing as percentage of
revenue
47
%
47
%
50
%
49
%
Non-GAAP sales and marketing as percentage
of revenue
39
%
40
%
42
%
41
%
GAAP general and administrative
$
38,854
$
32,864
$
109,427
$
107,135
Less: Share-based compensation
(8,176
)
(7,244
)
(24,437
)
(27,948
)
Less: Employer tax related to employee
stock transactions
(689
)
(470
)
(1,914
)
(1,788
)
Less: Acquisition-related expenses
(699
)
(628
)
(937
)
(5,618
)
Non-GAAP general and administrative
$
29,290
$
24,522
$
82,139
$
71,781
GAAP general and administrative as
percentage of revenue
15
%
16
%
15
%
18
%
Non-GAAP general and administrative as
percentage of revenue
11
%
12
%
11
%
12
%
Reconciliation of operating income
(loss) and operating margin
GAAP operating loss
$
(28,326
)
$
(35,428
)
$
(101,105
)
$
(130,703
)
Plus: Share-based compensation
46,263
38,649
132,057
119,058
Plus: Employer tax related to employee
stock transactions
2,291
1,976
7,881
8,145
Plus: Amortization of purchased
intangibles
2,196
2,764
7,290
7,560
Plus: Acquisition-related expenses
2,043
2,176
5,757
9,642
Plus: Amortization of share-based
compensation capitalized in internal-use software
460
438
1,375
1,272
Non-GAAP operating income
$
24,927
$
10,575
$
53,255
$
14,974
GAAP operating margin
(11
)%
(17
)%
(14
)%
(22
)%
Non-GAAP adjustments
21
%
22
%
21
%
25
%
Non-GAAP operating margin
10
%
5
%
7
%
3
%
Three Months Ended September
30,
Nine Months Ended September
30,
2020
2019
2020
2019
Reconciliation of net income
(loss)
GAAP net loss
$
(40,703
)
$
(34,224
)
$
(148,142
)
$
(133,485
)
Plus: Share-based compensation
46,263
38,649
132,057
119,058
Plus: Employer tax related to employee
stock transactions
2,291
1,976
7,881
8,145
Plus: Amortization of purchased
intangibles
2,196
2,764
7,290
7,560
Plus: Acquisition-related expenses
2,043
2,176
5,757
9,642
Plus: Amortization of share-based
compensation capitalized in internal-use software
460
438
1,375
1,272
Plus: Amortization of debt discount and
issuance costs
12,194
6,366
26,230
18,831
Plus: Loss on early extinguishment of
debt
—
—
25,950
—
Less: Income tax effects and
adjustments
(3,638
)
(4,098
)
(8,490
)
(5,594
)
Non-GAAP net income
$
21,106
$
14,047
$
49,908
$
25,429
Reconciliation of net income (loss) per
share, basic
GAAP net loss per share, basic
$
(0.35
)
$
(0.31
)
$
(1.29
)
$
(1.21
)
Non-GAAP adjustments to net loss
0.53
0.44
1.73
1.44
Non-GAAP net income per share, basic
$
0.18
$
0.13
$
0.44
$
0.23
Reconciliation of net income (loss) per
share, diluted
GAAP net loss per share, diluted
$
(0.35
)
$
(0.31
)
$
(1.29
)
$
(1.21
)
Non-GAAP adjustments to net loss
0.52
0.43
1.70
1.42
Non-GAAP net income per share, diluted
$
0.17
$
0.12
$
0.41
$
0.21
Weighted-average shares used in GAAP per
share calculation, basic and diluted
115,809
111,261
114,653
109,969
Weighted-average shares used in non-GAAP
per share calculation
Basic
115,809
111,261
114,653
109,969
Diluted
121,369
119,689
120,635
118,750
Computation of free cash flow
Net cash provided by (used in) operating
activities
$
33,395
$
20,223
$
(19,929
)
$
57,050
Plus: repayment of convertible senior
notes attributable to debt discount
—
—
38,637
—
Less: purchases of property and
equipment
(3,931
)
(11,474
)
(19,489
)
(25,628
)
Less: internal-use software development
costs
(4,618
)
(2,041
)
(10,901
)
(5,007
)
Free cash flow
$
24,846
$
6,708
$
(11,682
)
$
26,415
Net cash provided by (used in) operating
activities margin
13
%
10
%
(3
)%
10
%
Non-GAAP adjustments
(4
)%
(7
)%
1
%
(5
)%
Free cash flow margin
9
%
3
%
(2
)%
5
%
About Non-GAAP Financial Measures
To provide investors and others with additional information
regarding Zendesk’s results, the following non-GAAP financial
measures were disclosed: non-GAAP gross profit and gross margin,
non-GAAP operating expenses, non-GAAP operating income (loss) and
operating margin, non-GAAP net income (loss), non-GAAP net income
(loss) per share, basic and diluted, free cash flow, and free cash
flow margin.
Specifically, Zendesk excludes the following from its historical
and prospective non-GAAP financial measures, as applicable:
Share-Based Compensation and Amortization of Share-Based
Compensation Capitalized in Internal-use Software: Zendesk utilizes
share-based compensation to attract and retain employees. It is
principally aimed at aligning their interests with those of its
stockholders and at long-term retention, rather than to address
operational performance for any particular period. As a result,
share-based compensation expenses vary for reasons that are
generally unrelated to financial and operational performance in any
particular period.
Employer Tax Related to Employee Stock Transactions: Zendesk
views the amount of employer taxes related to its employee stock
transactions as an expense that is dependent on its stock price,
employee exercise and other award disposition activity, and other
factors that are beyond Zendesk’s control. As a result, employer
taxes related to its employee stock transactions vary for reasons
that are generally unrelated to financial and operational
performance in any particular period.
Amortization of Purchased Intangibles: Zendesk views
amortization of purchased intangible assets, including the
amortization of the cost associated with an acquired entity’s
developed technology, as items arising from pre-acquisition
activities determined at the time of an acquisition. While these
intangible assets are evaluated for impairment regularly,
amortization of the cost of purchased intangibles is an expense
that is not typically affected by operations during any particular
period.
Acquisition-Related Expenses: Zendesk views acquisition-related
expenses, such as transaction costs, integration costs,
restructuring costs, and acquisition-related retention payments,
including amortization of acquisition-related retention payments
capitalized in internal-use software, as events that are not
necessarily reflective of operational performance during a period.
In particular, Zendesk believes the consideration of measures that
exclude such expenses can assist in the comparison of operational
performance in different periods which may or may not include such
expenses.
Loss on Early Extinguishment of Debt: In March 2018, Zendesk
issued $575 million aggregate principal amount of 0.25% convertible
senior notes due in 2023 (the “2023 Notes”). In June 2020, Zendesk
issued $1,150 million aggregate principal amount of 0.625%
convertible senior notes due in 2025 (the “2025 Notes”). In
connection with the offering of the 2025 Notes, Zendesk used $618
million of the net proceeds from the offering of the 2025 Notes to
repurchase $426 million aggregate principal amount of the 2023
Notes in cash through individual privately negotiated transactions
(the “2023 Notes Partial Repurchase”). Of the $618 million
consideration, $393 million and $225 million were allocated to the
debt and equity components, respectively. As of the repurchase
date, the carrying value of the 2023 Notes subject to the 2023
Notes Partial Repurchase, net of unamortized debt discount and
issuance costs, was $367 million. The 2023 Notes Partial Repurchase
resulted in a $26 million loss on early debt extinguishment. As of
September 30, 2020, $149 million of principal remains outstanding
on the 2023 Notes. The loss on early extinguishment of debt is a
non-cash item, and we believe the exclusion of this expense will
provide for a more useful comparison of our operational performance
in different periods.
Amortization of Debt Discount and Issuance Costs: The imputed
interest rates of the 2023 Notes and the 2025 Notes were
approximately 5.26% and 5.00%, respectively. This is a result of
the debt discounts recorded for the conversion features of the
Notes that are required to be separately accounted for as equity,
and debt issuance costs, which reduce the carrying value of the
convertible debt instruments. The debt discounts are amortized as
interest expense together with the issuance costs of the debt. The
expense for the amortization of debt discount and debt issuance
costs is a non-cash item, and we believe the exclusion of this
interest expense will provide for a more useful comparison of our
operational performance in different periods.
Income Tax Effects: Zendesk utilizes a fixed long-term projected
tax rate in its computation of non-GAAP income tax effects to
provide better consistency across interim reporting periods. In
projecting this long-term non-GAAP tax rate, Zendesk utilizes a
financial projection that excludes the direct impact of other
non-GAAP adjustments. The projected rate considers other factors
such as Zendesk’s current operating structure, existing tax
positions in various jurisdictions, and key legislation in major
jurisdictions where Zendesk operates. For the year ending December
31, 2020, Zendesk has determined the projected non-GAAP tax rate to
be 21%. Zendesk will periodically re-evaluate this tax rate, as
necessary, for significant events, based on relevant tax law
changes, material changes in the forecasted geographic earnings
mix, and any significant acquisitions.
Zendesk provides disclosures regarding its free cash flow, which
is defined as net cash from operating activities, plus repayment of
convertible senior notes attributable to debt discount, less
purchases of property and equipment and internal-use software
development costs. Free cash flow margin is calculated as free cash
flow as a percentage of total revenue. Zendesk uses free cash flow,
free cash flow margin, and other measures, to evaluate the ability
of its operations to generate cash that is available for purposes
other than capital expenditures and capitalized software
development costs. Zendesk believes that information regarding free
cash flow and free cash flow margin provides investors with an
important perspective on the cash available to fund ongoing
operations.
Zendesk has not reconciled free cash flow guidance to net cash
from operating activities for the year ending December 31, 2020
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, 2020 is not
available without unreasonable effort.
Zendesk does not provide a reconciliation of its non-GAAP
operating margin guidance to GAAP operating margin beyond the
fiscal quarter ending December 31, 2020 because Zendesk does not
provide guidance on the reconciling items between GAAP operating
margin and non-GAAP operating margin for such periods, as a result
of the uncertainty regarding, and the potential variability of,
these items. The actual amount of such reconciling items will have
a significant impact on Zendesk’s non-GAAP operating margin and,
accordingly, a reconciliation of GAAP operating margin to non-GAAP
operating margin guidance for such periods is not available without
unreasonable effort.
Zendesk’s disclosures regarding its expectations for its
non-GAAP gross margin include adjustments to its expectations for
its GAAP gross margin that exclude share-based compensation and
related expenses in Zendesk’s cost of revenue, amortization of
purchased intangibles primarily related to developed technology,
and acquisition-related expenses. The share-based compensation and
related expenses excluded due to such adjustments are primarily
comprised of the share-based compensation and related expenses for
employees associated with Zendesk’s infrastructure and customer
experience organization.
Zendesk does not provide a reconciliation of its non-GAAP gross
margin guidance to GAAP gross margin for future periods because
Zendesk does not provide guidance on the reconciling items between
GAAP gross margin and non-GAAP gross margin, as a result of the
uncertainty regarding, and the potential variability of, these
items. The actual amount of such reconciling items will have a
significant impact on Zendesk’s non-GAAP gross margin and,
accordingly, a reconciliation of GAAP gross margin to non-GAAP
gross margin guidance for the period is not available without
unreasonable effort.
Zendesk uses non-GAAP financial information to evaluate its
ongoing operations and for internal planning and forecasting
purposes. Zendesk’s management does not itself, nor does it suggest
that investors should, consider such non-GAAP financial measures in
isolation from, or as a substitute for, financial information
prepared in accordance with GAAP. Zendesk presents such non-GAAP
financial measures in reporting its financial results to provide
investors with an additional tool to evaluate Zendesk’s operating
results. Zendesk believes these non-GAAP financial measures are
useful because they allow for greater transparency with respect to
key metrics used by management in its financial and operational
decision-making. This allows investors and others to better
understand and evaluate Zendesk’s operating results and future
prospects in the same manner as management.
Zendesk’s management believes it is useful for itself and
investors to review, as applicable, both GAAP information that may
include items such as share-based compensation and related
expenses, amortization of debt discount and issuance costs,
amortization of purchased intangibles, 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 Zendesk uses
such a non-GAAP financial measure with respect to historical
periods, it provides a reconciliation of the non-GAAP financial
measure to the most closely comparable GAAP financial measure. When
Zendesk uses such a non-GAAP financial measure in a forward-looking
manner for future periods, and a reconciliation is not determinable
without unreasonable effort, Zendesk provides the reconciling
information that is determinable without unreasonable effort and
identifies the information that would need to be added or
subtracted from the non-GAAP measure to arrive at the most directly
comparable GAAP measure. Investors are encouraged to review the
related GAAP financial measures and the reconciliation of these
non-GAAP financial measures to their most directly comparable GAAP
financial measure as detailed above.
About Operating Metrics
Zendesk reviews a number of operating metrics to evaluate its
business, measure performance, identify trends, formulate business
plans, and make strategic decisions. These include the number of
paid customer accounts on Zendesk Support, Zendesk Chat, and its
other products, dollar-based net expansion rate, annual recurring
revenue represented by its churned customers, and the percentage of
its annual 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. In the quarter
ended June 30, 2018, Zendesk began to offer an omnichannel
subscription which provides access to multiple products through a
single paid customer account, Zendesk Suite, and in the quarter
ended June 30, 2019, Zendesk began to offer a subscription which
provides access to Sell and Support through a single paid customer
account, Zendesk Duet. In the quarter ended March 31, 2020, Zendesk
began to offer two new omnichannel subscriptions, the Zendesk
Support Suite and the Zendesk Sell Suite, which provide access to
multiple support solutions and sales solutions, respectively,
through a single paid customer account. The number of Support Suite
paid customer accounts are included in the number of paid customer
accounts on Suite, which are included in the number of paid
customer accounts on products other than Support and Chat and are
not included in the number of paid customer accounts on Support or
Chat. The number of Sell Suite paid customer accounts are included
in the number of paid customer accounts on products other than
Support and Chat and are not included in the number of paid
customer accounts on Support or Chat. Each Duet paid customer
account is included once in the number of paid customer accounts on
Support and once in the number of paid customer accounts on
products other than Support and Chat.
Existing customers may also expand their utilization of
Zendesk’s products by adding new accounts and a single consolidated
organization or customer may have multiple accounts across each of
Zendesk’s products to service separate subsidiaries, divisions, or
work processes. Other than usage of Zendesk’s products through its
omnichannel subscription offering, each of these accounts is also
treated as a separate paid customer account.
Zendesk’s dollar-based net expansion rate provides a measurement
of its ability to increase revenue across its existing customer
base through expansion of authorized agents associated with a paid
customer account, upgrades in subscription plans, and the purchase
of additional products as offset by churn, contraction in
authorized agents associated with a paid customer account, and
downgrades in subscription plans. Zendesk’s dollar-based net
expansion rate is based upon annual recurring revenue for a set of
paid customer accounts on its products. Zendesk determines the
annual recurring revenue value of a contract by multiplying the
monthly recurring revenue for such contract by twelve.
Monthly recurring revenue for a paid customer account is a legal
and contractual determination made by assessing the contractual
terms of each paid customer account, as of the date of
determination, as to the revenue Zendesk expects to generate in the
next monthly period for that paid customer account, assuming no
changes to the subscription and without taking into account any
platform usage above the subscription base, if any, that may be
applicable to such subscription. Beginning with the quarter ended
June 30, 2019, we excluded the impact of revenue that we expect to
generate from fixed-term contracts that are each associated with an
existing account, are solely for additional temporary agents, and
are not contemplated to last for the duration of the primary
contract for the existing account from our determination of monthly
recurring revenue. Monthly recurring revenue is not determined by
reference to historical revenue, deferred revenue, or any other
GAAP financial measure over any period. It is forward-looking and
contractually derived as of the date of determination.
Zendesk calculates its dollar-based net expansion rate by
dividing the retained revenue net of contraction and churn by
Zendesk’s base revenue. Zendesk defines its base revenue as the
aggregate annual recurring revenue across its products for
customers with paid customer accounts as of the date one year prior
to the date of calculation. Zendesk defines the retained revenue
net of contraction and churn as the aggregate annual recurring
revenue across its products for the same customer base included in
the measure of base revenue at the end of the annual period being
measured. The dollar-based net expansion rate is also adjusted to
eliminate the effect of certain activities that Zendesk identifies
involving the consolidation of customer accounts or the split of a
single paid customer account into multiple paid customer accounts.
In addition, the dollar-based net expansion rate is adjusted to
include paid customer accounts in the customer base used to
determine retained revenue net of contraction and churn that share
common corporate information with customers in the customer base
that are used to determine the base revenue. Giving effect to this
consolidation results in Zendesk’s dollar-based net expansion rate
being calculated across approximately 111,000 customers, as
compared to the approximately 169,600 total paid customer accounts
as of September 30, 2020.
To the extent that Zendesk can determine that the underlying
customers do not share common corporate information, Zendesk does
not aggregate paid customer accounts associated with reseller and
other similar channel arrangements for the purposes of determining
its dollar-based net expansion rate.
Zendesk does not currently incorporate operating metrics
associated with its legacy analytics product, its legacy Outbound
product, its legacy Starter plan, Sell, Sunshine Conversations, its
legacy Smooch product, free trials, or other free services into its
measurement of dollar-based net expansion rate.
For a more detailed description of how Zendesk calculates its
dollar-based net expansion rate, please refer to Zendesk’s periodic
reports filed with the Securities and Exchange Commission.
Zendesk’s percentage of annual recurring revenue from Support
that is generated by customers with 100 or more agents on Support
is determined by dividing the annual recurring revenue from Support
for paid customer accounts with 100 or more agents on Support as of
the measurement date by the annual recurring revenue from Support
for all paid customer accounts on Support as of the measurement
date. Zendesk determines the customers with 100 or more agents on
Support as of the measurement date based on the number of activated
agents on Support at the measurement date and includes adjustments
to aggregate paid customer accounts that share common corporate
information. For the purpose of determining this metric, Zendesk
builds an estimation of the proportion of annual recurring revenue
from Suite attributable to Support and includes such portion in the
annual recurring revenue from Support.
Zendesk does not currently incorporate operating metrics
associated with products other than Support into its measurement of
the percentage of annual recurring revenue from Support that is
generated by customers with 100 or more agents on Support.
Zendesk determines its bookings as the annual recurring revenue
from contracts that were entered into during the referenced fiscal
quarter, either with new customers or for additional products and
services with existing customers.
Zendesk’s annual revenue run rate is based on its revenue for
the most recent applicable quarter. Zendesk annualizes such results
to estimate its annual revenue run rate by multiplying the revenue
for its most recent applicable quarter by four. Zendesk’s annual
revenue run rate is not a comprehensive statement of its financial
results for such period and should not be viewed as a substitute
for full annual or interim financial statements prepared in
accordance with GAAP. In addition, Zendesk’s revenue for the most
recent applicable quarter or annual revenue run rate are not
necessarily indicative of the results to be achieved in any future
period.
Source: Zendesk, Inc.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20201029006222/en/
Zendesk, Inc. Investor Contact: Karen Sansot, +1
415-852-3877 ir@zendesk.com or Media Contact: Marissa Tree,
+1 415-609-4510 press@zendesk.com
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