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Highlights

  • First quarter revenue increased 40% year over year to $181.5 million
  • First quarter GAAP operating loss of $43.9 million and non-GAAP
    operating income of $0.6 million
  • Michael Curtis, former Airbnb, Inc. vice president of engineering,
    joins board of directors

SAN FRANCISCO–(BUSINESS WIRE)–Zendesk, Inc. (NYSE: ZEN) today reported financial results for the
fiscal quarter ended March 31, 2019, and released a Shareholder Letter
on its investor relations website at https://investor.zendesk.com.

Results for the First Quarter 2019

Revenue was $181.5 million for the quarter ended March 31, 2019, an
increase of 40% over the prior year period. GAAP net loss for the
quarter ended March 31, 2019 was $44.7 million, and GAAP net loss per
share (basic and diluted) was $0.41. Non-GAAP net income was $5.1
million, and non-GAAP net income per share (basic) was $0.05, and
non-GAAP net income per share (diluted) was $0.04. Non-GAAP net income
excludes approximately $40.6 million in share-based compensation and
related expenses (including $3.5 million of employer tax related to
employee stock transactions and $0.4 million of amortization of
share-based compensation capitalized in internal-use software), $6.2
million of amortization of debt discount and issuance costs, $2.2
million of amortization of purchased intangibles, $1.7 million of
acquisition-related expenses, and non-GAAP income tax effects of $0.9
million. GAAP net loss per share for the quarter ended March 31, 2019
was based on 108.6 million weighted average shares outstanding (basic
and diluted), and non-GAAP net income per share for the quarter ended
March 31, 2019 was based on 108.6 million weighted average shares
outstanding (basic) and 117.0 million weighted average shares
outstanding (diluted).

Appointment of Michael Curtis to Board of Directors

Zendesk appointed Michael Curtis to its board of directors, effective
April 24, 2019. Mike has more than 15 years of experience in leading
engineering organizations and product innovation. He most recently
served as the vice president of engineering of Airbnb, Inc., an online
marketplace and hospitality company, from February 2013 to March 2019.
Prior to that, he was a director of engineering at Facebook, Inc. from
August 2011 to February 2013 and a vice president of engineering at
Yahoo! from January 2004 to August 2011. Mike currently serves as a
trustee on the board of Harvey Mudd College.

“Mike has driven product innovation and scaled technology at some of the
world’s fastest growing companies,” said Mikkel Svane, Zendesk chief
executive officer, chairman and founder. “His history of pushing
boundaries and advancing bold ideas will help us continue to build our
product innovation and scaled technology.”

“Zendesk has reached a level of scale and ubiquity that is rare in
enterprise software,” Curtis said. “I’m excited to join the board at
such a pivotal time in the company’s growth and support its fast pace of
innovation and its moves into new markets.”

Outlook

As of April 30, 2019, Zendesk provided guidance for the quarter ending
June 30, 2019 and updated its guidance for the year ending December 31,
2019.

For the quarter ending June 30, 2019, Zendesk expects to report:

  • Revenue in the range of $191 – 193 million
  • GAAP operating income (loss) in the range of $(44) – (42) million,
    which includes share-based compensation and related expenses of
    approximately $41 million, amortization of purchased intangibles of
    approximately $2 million, and acquisition-related expenses of
    approximately $1 million
  • Non-GAAP operating income (loss) in the range of $0 – 2 million, which
    excludes share-based compensation and related expenses of
    approximately $41 million, amortization of purchased intangibles of
    approximately $2 million, and acquisition-related expenses of
    approximately $1 million
  • Approximately 110 million weighted average shares outstanding (basic)
  • Approximately 120 million weighted average shares outstanding (diluted)

For the full year ending December 31, 2019, Zendesk expects to report:

  • Revenue in the range of $802 – 810 million
  • GAAP operating income (loss) in the range of $(164) – (160) million,
    which includes share-based compensation and related expenses of
    approximately $165 million, amortization of purchased intangibles of
    approximately $9 million, and acquisition-related expenses of
    approximately $4 million
  • Non-GAAP operating income (loss) in the range of $14 – 18 million,
    which excludes share-based compensation and related expenses of
    approximately $165 million, amortization of purchased intangibles of
    approximately $9 million, and acquisition-related expenses of
    approximately $4 million
  • Approximately 111 million weighted average shares outstanding (basic)
  • Approximately 121 million weighted average shares outstanding (diluted)
  • Free cash flow in the range of $55 – 65 million

We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2019 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 2019 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.

Revised Non-GAAP Net Income Calculation

In our presentations of non-GAAP net income (which is a non-GAAP
financial measure) in our earnings release and shareholder letter for
each of the quarters ending June 30, 2018, September 30, 2018, and
December 31, 2018, and the year ended December 31, 2018, we inaccurately
determined our hypothetical income tax effect, which was one of the
adjustments in the calculation of non-GAAP net income and its
reconciliation to GAAP net loss. We have now revised our non-GAAP net
income calculations (and our reconciliations to GAAP net loss) and
non-GAAP net income per share for each of such quarters and the year
ended December 31, 2018 and such revised information is provided
below. No revisions have been made to any other adjustments in the
calculation of each of non-GAAP net income or non-GAAP net income per
share for such periods, and our consolidated financial results as
calculated under GAAP are not affected.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com
and Zendesk will host a conference call to answer questions today, April
30, 2019, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live
webcast of the conference call will be available at https://investor.zendesk.com.
The conference call can also be accessed by dialing 833-287-0801, or +1
647-689-4460 (outside the U.S. and Canada). The conference ID is
9699254. A replay of the call via webcast will be available at https://investor.zendesk.com
or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and
Canada) and entering passcode 9699254. The dial-in replay will be
available until the end of day May 2, 2019. The webcast replay will be
available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk. Zendesk’s powerful
and flexible customer service and engagement platform scales to meet the
needs of any business, from startups and small businesses to growth
companies and enterprises. Zendesk serves businesses across a multitude
of industries, with more than 125,000 paid customer accounts offering
service and support in more than 30 languages. Headquartered in San
Francisco, Zendesk operates worldwide with 16 offices in North America,
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
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) adverse changes in general economic or
market conditions; (ii) Zendesk’s ability to adapt its products to
changing market dynamics and customer preferences or achieve increased
market acceptance of its products; (iii) Zendesk’s ability to
effectively expand its sales capabilities; (iv) Zendesk’s ability to
effectively market and sell its products to larger enterprises; (v)
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; (vi)
the intensely competitive market in which Zendesk operates and the
difficulty that Zendesk may have in competing effectively; (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 successfully or achieve
the expected benefits of such acquisitions; (ix) Zendesk’s ability to
effectively manage its growth and organizational change, including its
international expansion strategy; (x) potential breaches in Zendesk’s
security measures or unauthorized access to its customers’ data; (xi)
Zendesk’s ability to comply with privacy and data security regulations;
(xii) the development of the market for software as a service business
software applications; (xiii) potential service interruptions or
performance problems associated with Zendesk’s technology and
infrastructure; (xiv) real or perceived errors, failures, or bugs in its
products; (xv) Zendesk’s substantial reliance on its customers renewing
their subscriptions and purchasing additional subscriptions; and (xvi)
Zendesk’s ability to accurately forecast expenditures on third-party
managed hosting services.

The forward-looking statements contained in this press release are also
subject to additional risks, uncertainties, and factors, including those
more fully described in Zendesk’s filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the
year ended December 31, 2018. 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 March 31, 2019.

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 March 31,
2019   2018
Revenue $ 181,484 $ 129,791
Cost of revenue 55,654   39,056  
Gross profit 125,830 90,735
Operating expenses:
Research and development 46,791 37,085
Sales and marketing 91,700 65,058
General and administrative 31,253   22,207  
Total operating expenses 169,744   124,350  
Operating loss (43,914 ) (33,615 )
Other income (expense), net
Interest income 5,472 1,519
Interest expense (6,544 ) (764 )
Other income, net 700   245  
Total other income (expense), net (372 ) 1,000  
Loss before provision for (benefit from) income taxes (44,286 ) (32,615 )
Provision for (benefit from) income taxes 434   (3,290 )
Net loss $ (44,720 ) $ (29,325 )
Net loss per share, basic and diluted $ (0.41 ) $ (0.28 )
Weighted-average shares used to compute net loss per share, basic
and diluted
108,630   103,692  
 
 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

   
March 31,
2019
December 31,
2018
Assets
Current assets:
Cash and cash equivalents $ 142,418 $ 126,518
Marketable securities 301,941 300,213
Accounts receivable, net of allowance for doubtful accounts of
$3,060 and $2,571 as of March 31, 2019 and December 31, 2018,
respectively
90,465 85,280
Deferred costs 26,882 24,712
Prepaid expenses and other current assets 38,629   35,873  
Total current assets 600,335 572,596
Marketable securities, noncurrent 401,079 393,671
Property and equipment, net 75,619 75,654
Deferred costs, noncurrent 28,312 26,914
Lease right-of-use assets 99,435
Goodwill and intangible assets, net 144,069 146,327
Other assets 23,829   22,717  
Total assets $ 1,372,678   $ 1,237,879  
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 29,458 $ 16,820
Accrued liabilities 32,722 34,097
Accrued compensation and related benefits 50,389 46,603
Deferred revenue 257,731 245,243
Lease liabilities 19,402    
Total current liabilities 389,702 342,763
Convertible senior notes, net 464,364 458,176
Deferred revenue, noncurrent 1,865 2,719
Lease liabilities, noncurrent 94,943
Other liabilities 2,859   17,300  
Total liabilities 953,733   820,958  
 
Stockholders’ equity:
Preferred stock, par value $0.01 per share
Common stock, par value $0.01 per share 1,092 1,080
Additional paid-in capital 994,031 950,693
Accumulated other comprehensive loss (2,330 ) (5,724 )
Accumulated deficit (573,848 ) (529,128 )
Total stockholders’ equity 418,945   416,921  
Total liabilities and stockholders’ equity $ 1,372,678   $ 1,237,879  
 
 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 
Three Months Ended March 31,
2019   2018
Cash flows from operating activities
Net loss $ (44,720 ) $ (29,325 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 8,732 9,865
Share-based compensation 36,657 26,988
Amortization of deferred costs 6,918 4,510
Amortization of debt discount and issuance costs 6,188 720
Other 394 250
Changes in operating assets and liabilities:
Accounts receivable (6,966 ) 3,691
Prepaid expenses and other current assets (3,774 ) (3,364 )
Deferred costs (10,190 ) (7,043 )
Lease right-of-use assets 4,373
Other assets and liabilities (498 ) (12,027 )
Accounts payable 15,655 1,052
Accrued liabilities 2,512 10,986
Accrued compensation and related benefits (4,629 ) (971 )
Deferred revenue 12,149 10,910
Lease liabilities (3,832 )  
Net cash provided by operating activities 18,969 16,242
Cash flows from investing activities
Purchases of property and equipment (9,258 ) (6,808 )
Internal-use software development costs (1,213 ) (2,344 )
Purchases of marketable securities (145,142 ) (78,321 )
Proceeds from maturities of marketable securities 47,265 55,263
Proceeds from sales of marketable securities 91,562 6,982
Purchase of strategic investment (500 )  
Net cash used in investing activities (17,286 ) (25,228 )
Cash flows from financing activities
Proceeds from issuance of convertible notes, net of issuance costs
paid of $12,937
562,063
Purchase of capped call related to convertible senior notes (63,940 )
Proceeds from exercise of employee stock options 8,437 6,193
Proceeds from employee stock purchase plan 8,415 5,096
Taxes paid related to net share settlement of equity awards (2,416 ) (734 )
Net cash provided by financing activities 14,436   508,678  
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
33   (35 )
Net increase in cash, cash equivalents and restricted cash 16,152 499,657
Cash, cash equivalents and restricted cash at beginning of period 128,876   110,888  
Cash, cash equivalents and restricted cash at end of period $ 145,028   $ 610,545  
 
 

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 March 31,
2019   2018
Reconciliation of gross profit and gross margin
GAAP gross profit $ 125,830 $ 90,735
Plus: Share-based compensation 4,937 3,098
Plus: Employer tax related to employee stock transactions 450 260
Plus: Amortization of purchased intangibles 1,618 612
Plus: Amortization of share-based compensation capitalized in
internal-use software
420 362
Plus: Acquisition-related expenses 114    
Non-GAAP gross profit $ 133,369   $ 95,067  
GAAP gross margin 69 % 70 %
Non-GAAP adjustments 4 % 3 %
Non-GAAP gross margin 73 % 73 %
 
Reconciliation of operating expenses
GAAP research and development $ 46,791 $ 37,085
Less: Share-based compensation (11,636 ) (10,231 )
Less: Employer tax related to employee stock transactions (1,292 ) (742 )
Less: Acquisition-related expenses (568 ) (384 )
Non-GAAP research and development $ 33,295   $ 25,728  
GAAP research and development as percentage of revenue 26 % 29 %
Non-GAAP research and development as percentage of revenue 18 % 20 %
 
GAAP sales and marketing $ 91,700 $ 65,058
Less: Share-based compensation (12,399 ) (8,007 )
Less: Employer tax related to employee stock transactions (1,028 ) (575 )
Less: Amortization of purchased intangibles (577 ) (110 )
Less: Acquisition-related expenses (392 ) (281 )
Non-GAAP sales and marketing $ 77,304   $ 56,085  
GAAP sales and marketing as percentage of revenue 51 % 50 %
Non-GAAP sales and marketing as percentage of revenue 43 % 43 %
 
GAAP general and administrative $ 31,253 $ 22,207
Less: Share-based compensation (7,685 ) (5,652 )
Less: Employer tax related to employee stock transactions (750 ) (307 )
Less: Acquisition-related expenses (631 )  
Non-GAAP general and administrative $ 22,187   $ 16,248  
GAAP general and administrative as percentage of revenue 17 % 17 %
Non-GAAP general and administrative as percentage of revenue 12 % 13 %
 
Reconciliation of operating income (loss) and operating margin
GAAP operating loss $ (43,914 ) $ (33,615 )
Plus: Share-based compensation 36,657 26,988
Plus: Employer tax related to employee stock transactions 3,520 1,884
Plus: Amortization of purchased intangibles 2,195 722
Plus: Acquisition-related expenses 1,705 665
Plus: Amortization of share-based compensation capitalized in
internal-use software
420   362  
Non-GAAP operating income (loss) $ 583   $ (2,994 )
GAAP operating margin (24 )% (26

)%

Non-GAAP adjustments 24 % 24 %
Non-GAAP operating margin % (2 )%
 
  Three Months Ended March 31,
2019   2018
Reconciliation of net income (loss)
GAAP net loss $ (44,720 ) $ (29,325 )
Plus: Share-based compensation 36,657 26,988
Plus: Employer tax related to employee stock transactions 3,520 1,884
Plus: Amortization of purchased intangibles 2,195 722
Plus: Acquisition-related expenses 1,705 665
Plus: Amortization of share-based compensation capitalized in
internal-use software
420 362
Plus: Amortization of debt discount and issuance costs 6,188 720
Less: Income tax effects and adjustments (911 )  
Non-GAAP net income $ 5,054   $ 2,016  
 
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic $ (0.41 ) $ (0.28 )
Non-GAAP adjustments to net loss 0.46   0.30  
Non-GAAP net income per share, basic $ 0.05   $ 0.02  
 
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted $ (0.41 ) $ (0.28 )
Non-GAAP adjustments to net loss 0.45   0.30  
Non-GAAP net income per share, diluted $ 0.04   $ 0.02  
 
Weighted-average shares used in GAAP per share calculation, basic
and diluted
108,630 103,692
 
Weighted-average shares used in non-GAAP per share calculation
Basic 108,630 103,692
Diluted 116,985 108,923
 
Computation of free cash flow
Net cash provided by operating activities $ 18,969 $ 16,242
Less: purchases of property and equipment (9,258 ) (6,808 )
Less: internal-use software development costs (1,213 ) (2,344 )
Free cash flow $ 8,498   $ 7,090  
 
Net cash provided by operating activities margin 10 % 13 %
Non-GAAP adjustments (5 )% (8 )%
Free cash flow margin 5 % 5 %
   
Three Months Ended Year Ended
June 30, 2018   September 30, 2018   December 31, 2018 December 31, 2018
Reconciliation of net income (loss)
GAAP net loss $ (34,366 ) $ (34,144 ) $ (33,250 ) $ (131,084 )
Plus: Share-based compensation 28,148 31,446 32,903 119,484
Plus: Employer tax related to employee stock transactions 1,720 1,755 3,556 8,915
Plus: Amortization of purchased intangibles 669 1,155 2,217 4,764
Plus: Acquisition-related expenses 685 3,259 2,210 6,819
Plus: Amortization of share-based compensation capitalized in
internal-use software
356 366 403 1,487
Plus: Amortization of debt discount and issuance costs 5,930 6,015 6,101 18,766
Less: Income tax effects and adjustments (1,977 ) (3,913 ) (6,774 ) (12,664 )
Non-GAAP net income(1) $ 1,165   $ 5,939   $ 7,366   $ 16,486  
 
Non-GAAP net income per share
Non-GAAP net income per share, basic $ 0.01   $ 0.06   $ 0.07   $ 0.16  
Non-GAAP net income per share, diluted $ 0.01   $ 0.05   $ 0.06   $ 0.15  
 
(1)   We previously reported non-GAAP net income of $3.1 million, $9.9
million, $11.2 million, and $23.0 million, for the three months
ended June 30, 2018, September 30, 2018, and December 31, 2018, and
for the year ended December 31, 2018, respectively.
 

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.

Contacts

Zendesk, Inc.
Investor Contact:
Karen Sansot, +1
415-852-3877
[email protected]
or
Media
Contact:

Tian Lee, +1 415-231-0847
[email protected]

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