Zendesk Announces Fourth Quarter and Full Fiscal Year 2018 Results

Highlights:

  • Fourth quarter revenue increased 41% year over year to $172.2 million
  • Fourth quarter GAAP operating loss of $36.5 million and non-GAAP
    operating income of $4.8 million
  • Full year 2018 revenue increased 39% year over year to $598.7 million
  • Full year 2018 GAAP operating loss of $137.9 million and non-GAAP
    operating income of $3.5 million
  • Thomas Szkutak, former Amazon.com chief financial officer, joins board
    of directors

SAN FRANCISCO–(BUSINESS WIRE)–Zendesk, Inc. (NYSE: ZEN) today reported financial results for the
fiscal quarter and full fiscal year ended December 31, 2018, and
announced the appointment of former Amazon.com chief financial officer
Thomas Szkutak to its board of directors.

A Shareholder Letter with more commentary on the results is available on
the Zendesk investor relations website at https://investor.zendesk.com.
All results and guidance are based on the revenue recognition standard
ASC 606.

Results for the Fourth Quarter 2018

Revenue was $172.2 million for the quarter ended December 31, 2018, an
increase of 41% over the prior year period. GAAP net loss for the
quarter ended December 31, 2018 was $33.3 million, and GAAP net loss per
share (basic and diluted) was $0.31. Non-GAAP net income was $11.2
million, and non-GAAP net income per share (basic) was $0.10, and
non-GAAP net income per share (diluted) was $0.10. Non-GAAP net income
excludes approximately $36.9 million in share-based compensation and
related expenses (including $3.6 million of employer tax related to
employee stock transactions and $0.4 million of amortization of
share-based compensation capitalized in internal-use software), $6.1
million of amortization of debt discount and issuance costs, $2.2
million of acquisition-related expenses, and $2.2 million of
amortization of purchased intangibles. GAAP net loss per share for the
quarter ended December 31, 2018 was based on 107.4 million weighted
average shares outstanding (basic and diluted), and non-GAAP net income
per share for the quarter ended December 31, 2018 was based on 107.4
million weighted average shares outstanding (basic) and 113.7 million
weighted average shares outstanding (diluted).

Results for the Full Fiscal Year 2018

Revenue was $598.7 million for the year ended December 31, 2018, an
increase of 39% over the prior year period. GAAP net loss for the year
ended December 31, 2018 was $131.1 million, and GAAP net loss per share
(basic and diluted) was $1.24. Non-GAAP net income was $23.0 million,
non-GAAP net income per share (basic) was $0.22, and non-GAAP net income
per share (diluted) was $0.21. Non-GAAP net income excludes
approximately $129.9 million in share-based compensation and related
expenses (including $8.9 million of employer tax related to employee
stock transactions and $1.5 million of amortization of share-based
compensation capitalized in internal-use software), $18.8 million of
amortization of debt discount and issuance costs, $6.8 million of
acquisition-related expenses, and $4.8 million of amortization of
purchased intangibles. GAAP net loss per share for the year ended
December 31, 2018 was based on 105.6 million weighted average shares
outstanding (basic and diluted), and non-GAAP net income per share for
the year ended December 31, 2018 was based on 105.6 million weighted
average shares outstanding (basic) and 111.7 million weighted average
shares outstanding (diluted).

Appointment of Thomas Szkutak to Board of Directors

Zendesk appointed Thomas Szkutak to its board of directors, effective
January 31, 2019. Tom was previously the senior vice president and chief
financial officer of Amazon.com, Inc. from October 2002 to June 2015. He
currently serves as a member of the board of directors of Intuit Inc.
and athenahealth, Inc. Szkutak also serves as an advisor and operating
partner of Advent International, a global private equity firm.

“Tom knows firsthand how to manage and scale a high-growth company,”
said Mikkel Svane, Zendesk chief executive officer, chairman and
founder. “Together with our diverse and talented board, he will use his
experience to help guide us to become a multibillion-dollar revenue
company over the long-term.”

“I’m proud to be joining at a time when Zendesk has major opportunities
ahead of it,” Szkutak said. “With the launch of its open and flexible
CRM platform, Zendesk is well-positioned to move upmarket and into the
broader customer experience and CRM market.”

Outlook

As of February 5, 2019, Zendesk provided guidance for the quarter ending
March 31, 2019 and for the year ending December 31, 2019.

For the quarter ending March 31, 2019, Zendesk expects to report:

  • Revenue in the range of $178.0 – 180.0 million
  • GAAP operating income (loss) in the range of $(44.0) – (42.0) million,
    which includes share-based compensation and related expenses of
    approximately $38.2 million, amortization of purchased intangibles of
    approximately $2.2 million, and acquisition-related expenses of
    approximately $1.6 million
  • Non-GAAP operating income (loss) of $(2.0) – 0.0 million, which
    excludes share-based compensation and related expenses of
    approximately $38.2 million, amortization of purchased intangibles of
    approximately $2.2 million, and acquisition-related expenses of
    approximately $1.6 million
  • Approximately 108.7 million weighted average shares outstanding (basic)
  • Approximately 117.2 million weighted average shares outstanding
    (diluted)

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

  • Revenue in the range of $795.0 – 805.0 million
  • GAAP operating income (loss) in the range of $(154.0) – (149.0)
    million, which includes share-based compensation and related expenses
    of approximately $154.2 million, amortization of purchased intangibles
    of approximately $8.8 million, and acquisition-related expenses of
    approximately $4.0 million
  • Non-GAAP operating income of $13.0 – 18.0 million, which excludes
    share-based compensation and related expenses of approximately $154.2
    million, amortization of purchased intangibles of approximately $8.8
    million, and acquisition-related expenses of approximately $4.0 million
  • Approximately 110.7 million weighted average shares outstanding (basic)
  • Approximately 119.3 million weighted average shares outstanding
    (diluted)
  • Free cash flow in the range of $55.0 – 65.0 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.

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,
February 5, 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
2737549. 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 2737549. The dial-in replay will be
available until the end of day February 7, 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 Quarterly Report on Form 10-Q for the
quarter ended September 30, 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
Annual Report on Form 10-K for the year ended December 31, 2018.

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
December 31,

Year Ended December 31,

2018   2017 2018   2017
*As adjusted *As adjusted
Revenue $ 172,245 $ 121,916 $ 598,746 $ 430,165
Cost of revenue 51,048   34,958   181,255   127,422  
Gross profit 121,197 86,958 417,491 302,743
Operating expenses:
Research and development 45,142 30,779 160,260 115,291
Sales and marketing 82,890 60,854 291,668 211,918
General and administrative 29,682   22,177   103,491   81,680  
Total operating expenses 157,714   113,810   555,419   408,889  
Operating loss (36,517 ) (26,852 ) (137,928 ) (106,146 )
Other income (expense), net:
Interest income 5,181 1,079 15,086 3,542
Interest expense (6,455 ) (19,882 )
Other income (expense), net (275 ) 63   (467 ) (1,055 )
Total other income (expense), net (1,549 ) 1,142   (5,263 ) 2,487  
Loss before benefit from income taxes (38,066 ) (25,710 ) (143,191 ) (103,659 )
Benefit from income taxes (4,816 ) (732 ) (12,107 ) (1,518 )
Net loss $ (33,250 ) $ (24,978 ) $ (131,084 ) $ (102,141 )
Net loss per share, basic and diluted $ (0.31 ) $ (0.24 ) $ (1.24 ) $ (1.02 )
Weighted-average shares used to compute net loss per share, basic
and diluted
107,387   102,044   105,567   99,918  
 

*Adjusted to reflect the adoption of ASC 606.

 
   

Condensed Consolidated Balance Sheets
(In thousands,
except par value; unaudited)

 

December 31,
2018

December 31,
2017

*As adjusted
Assets
Current assets:
Cash and cash equivalents $ 126,518 $ 109,370
Marketable securities 300,213 137,576
Accounts receivable, net of allowance for doubtful accounts of
$2,571 and $1,252 as of December 31, 2018 and 2017, respectively
85,280 57,096
Deferred costs 24,712 15,771
Prepaid expenses and other current assets 35,873   24,165  
Total current assets 572,596 343,978
Marketable securities, noncurrent 393,671 97,447
Property and equipment, net 75,654 59,157
Deferred costs, noncurrent 26,914 15,395
Goodwill and intangible assets, net 146,327 67,034
Other assets 22,717   8,359  
Total assets $ 1,237,879   $ 591,370  
 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 16,820 $ 5,307
Accrued liabilities 34,097 21,876
Accrued compensation and related benefits 46,603 29,017
Deferred revenue 245,243   173,147  
Total current liabilities 342,763 229,347
Convertible senior notes, net 458,176
Deferred revenue, noncurrent 2,719 1,213
Other liabilities 17,300   6,626  
Total liabilities 820,958   237,186  
Stockholders’ equity:
Preferred stock, par value $0.01 per share
Common stock, par value $0.01 per share 1,080 1,031
Additional paid-in capital 950,693 753,568
Accumulated other comprehensive loss (5,724 ) (2,372 )
Accumulated deficit (529,128 ) (398,043 )
Total stockholders’ equity 416,921   354,184  
Total liabilities and stockholders’ equity $ 1,237,879   $ 591,370  
 

*Adjusted to reflect the adoption of ASC 606.

 
   

Condensed Consolidated Statements of Cash Flows
(In
thousands; unaudited)

 

Three Months Ended
December 31,

Year Ended December 31,
2018   2017 2018   2017
*As adjusted *As adjusted
Cash flows from operating activities
Net loss $ (33,250 ) $ (24,978 ) $ (131,084 ) $ (102,141 )
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 9,327 7,668 36,520 31,931
Share-based compensation 32,902 22,128 119,483 84,553
Amortization of deferred costs 6,180 4,102 21,304 14,434
Amortization of debt discount and issuance costs 6,101 18,766
Income tax benefit related to convertible senior notes (5,731 ) (13,784 )
Other (16 ) 222 2,848 603
Changes in operating assets and liabilities:
Accounts receivable (3,286 ) (6,162 ) (30,007 ) (21,201 )
Prepaid expenses and other current assets (453 ) 4 (10,620 ) (5,112 )
Deferred costs (14,182 ) (7,167 ) (40,898 ) (22,762 )
Other assets and liabilities 6,608 (442 ) 6,635 (5,765 )
Accounts payable (13,073 ) (5,398 ) 7,534 1,839
Accrued liabilities (3,229 ) 76 3,844 6,919
Accrued compensation and related benefits 12,539 5,896 15,026 7,399
Deferred revenue 22,501   21,357   73,053   51,531  
Net cash provided by operating activities 22,938 17,306 78,620 42,228
Cash flows from investing activities
Purchases of property and equipment (8,191 ) (3,062 ) (35,323 ) (16,396 )
Internal-use software development costs (1,455 ) (2,284 ) (7,005 ) (7,521 )
Purchases of marketable securities (108,800 ) (42,030 ) (700,226 ) (177,309 )
Proceeds from maturities of marketable securities 39,063 27,775 170,882 116,735
Proceeds from sales of marketable securities 30,584 2,946 71,359 31,090
Cash paid for acquisitions, net of cash acquired (79,363 ) (16,470 )
Purchase of strategic investment (10,000 )   (10,000 )  
Net cash used in investing activities (58,799 ) (16,655 ) (589,676 ) (69,871 )
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance
costs paid of $13,561
561,439
Purchase of capped call related to convertible senior notes (63,940 )
Proceeds from exercise of employee stock options 2,896 13,332 16,150 31,882
Proceeds from employee stock purchase plan 5,441 3,268 21,440 14,248
Taxes paid related to net share settlement of share-based awards (1,447 ) (574 ) (5,213 ) (2,989 )
Other (772 )   (813 )  
Net cash provided by financing activities 6,118   16,026   529,063   43,141  
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
36   40   (19 ) 328  
Net increase (decrease) in cash, cash equivalents and restricted cash (29,707 ) 16,717 17,988 15,826
Cash, cash equivalents and restricted cash at beginning of period 158,583   94,171   110,888   95,062  
Cash, cash equivalents and restricted cash at end of period $ 128,876   $ 110,888   $ 128,876   $ 110,888  
 

*Adjusted to reflect the adoption of ASC 606 and ASU 2016-18.

 
   

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 release.

 

Three Months Ended
December 31,

Year Ended December 31,
2018   2017 2018   2017
*As adjusted *As adjusted
Reconciliation of gross profit and gross margin
GAAP gross profit $ 121,197 $ 86,958 $ 417,491 $ 302,743
Plus: Share-based compensation 4,335 2,372 14,835 9,040
Plus: Employer tax related to employee stock transactions 242 129 1,036 530
Plus: Amortization of purchased intangibles 1,647 612 3,789 3,209
Plus: Amortization of share-based compensation capitalized in
internal-use software
403 417 1,487 1,774
Plus: Acquisition-related expenses 114     152    
Non-GAAP gross profit $ 127,938   $ 90,488   $ 438,790   $ 317,296  
GAAP gross margin 70 % 71 % 70 % 70 %
Non-GAAP adjustments 4 % 3 % 3 % 4 %
Non-GAAP gross margin 74 % 74 % 73 % 74 %
 
Reconciliation of operating expenses
GAAP research and development $ 45,142 $ 30,779 $ 160,260 $ 115,291
Less: Share-based compensation (10,929 ) (7,697 ) (41,365 ) (29,970 )
Less: Employer tax related to employee stock transactions (1,826 ) (816 ) (3,884 ) (1,971 )
Less: Acquisition-related expenses (542 ) (406 ) (2,335 ) (843 )
Non-GAAP research and development $ 31,845   $ 21,860   $ 112,676   $ 82,507  
GAAP research and development as percentage of revenue 26 % 25 % 27 % 27 %
Non-GAAP research and development as percentage of revenue 18 % 18 % 19 % 19 %
 
GAAP sales and marketing $ 82,890 $ 60,854 $ 291,668 $ 211,918
Less: Share-based compensation (10,436 ) (6,298 ) (37,882 ) (24,279 )
Less: Employer tax related to employee stock transactions (523 ) (356 ) (2,158 ) (1,164 )
Less: Amortization of purchased intangibles (570 ) (135 ) (975 ) (495 )
Less: Acquisition-related expenses (389 ) (281 ) (1,259 ) (750 )
Non-GAAP sales and marketing $ 70,972   $ 53,784   $ 249,394   $ 185,230  
GAAP sales and marketing as percentage of revenue 48 % 50 % 49 % 49 %
Non-GAAP sales and marketing as percentage of revenue 41 % 44 % 42 % 43 %
 
GAAP general and administrative $ 29,682 $ 22,177 $ 103,491 $ 81,680
Less: Share-based compensation (7,203 ) (5,761 ) (25,401 ) (21,263 )
Less: Employer tax related to employee stock transactions (965 ) (671 ) (1,837 ) (1,184 )
Less: Acquisition-related expenses (1,165 ) (45 ) (3,073 ) (566 )
Non-GAAP general and administrative $ 20,349   $ 15,700   $ 73,180   $ 58,667  
GAAP general and administrative as percentage of revenue 17 % 18 % 17 % 19 %
Non-GAAP general and administrative as percentage of revenue 12 % 13 % 12 % 14 %
 
Reconciliation of operating income (loss) and operating margin
GAAP operating loss $ (36,517 ) $ (26,852 ) $ (137,928 ) $ (106,146 )
Plus: Share-based compensation 32,903 22,128 119,483 84,552
Plus: Employer tax related to employee stock transactions 3,556 1,972 8,915 4,849
Plus: Amortization of purchased intangibles 2,217 747 4,764 3,704
Plus: Acquisition-related expenses 2,210 732 6,819 2,159
Plus: Amortization of share-based compensation capitalized in
internal-use software
403   417   1,487   1,774  
Non-GAAP operating income (loss) $ 4,772   $ (856 ) $ 3,540   $ (9,108 )
GAAP operating margin (21 )% (22 )% (23 )% (25 )%
Non-GAAP adjustments 24 % 21 % 24 % 23 %
Non-GAAP operating margin 3 % (1 )% 1 % (2 )%
 

Three Months Ended
December 31,

  Year Ended December 31,
2018   2017 2018   2017
*As adjusted *As adjusted
Reconciliation of net income (loss)
GAAP net loss $ (33,250 ) $ (24,978 ) $ (131,084 ) $ (102,141 )
Plus: Share-based compensation 32,903 22,128 119,483 84,552
Plus: Employer tax related to employee stock transactions 3,556 1,972 8,915 4,849
Plus: Amortization of purchased intangibles 2,217 747 4,764 3,704
Plus: Acquisition-related expenses 2,210 732 6,819 2,159
Plus: Amortization of share-based compensation capitalized in
internal-use software
403 417 1,487 1,774
Plus: Amortization of debt discount and issuance costs 6,101 18,766
Less: Income tax effects and adjustments (2,969 ) (214 ) (6,122 )  
Non-GAAP net income (loss) $ 11,171   $ 804   $ 23,028   $ (5,103 )
 
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic $ (0.31 ) $ (0.24 ) $ (1.24 ) $ (1.02 )
Non-GAAP adjustments to net loss 0.41   0.25   1.46   0.97  
Non-GAAP net income (loss) per share, basic $ 0.10   $ 0.01   $ 0.22   $ (0.05 )
 
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted $ (0.31 ) $ (0.24 ) $ (1.24 ) $ (1.02 )
Non-GAAP adjustments to net loss 0.41   0.25   1.45   0.97  
Non-GAAP net income (loss) per share, diluted $ 0.10   $ 0.01   $ 0.21   $ (0.05 )
 
Weighted-average shares used in GAAP per share calculation,

basic

107,387 102,044 105,567 99,918
 
Weighted-average shares used in non-GAAP per share calculation
Basic 107,387 102,044 105,567 99,918
Diluted 113,687 106,376 111,733 99,918
 
Computation of free cash flow
Net cash provided by operating activities $ 22,938 $ 17,306 $ 78,620 $ 42,228
Less: purchases of property and equipment (8,191 ) (3,062 ) (35,323 ) (16,396 )
Less: internal-use software development costs (1,455 ) (2,284 ) (7,005 ) (7,521 )
Free cash flow $ 13,292   $ 11,960   $ 36,292   $ 18,311  
 
Net cash provided by operating activities margin 13 % 14 % 13 % 10 %
Non-GAAP adjustments (5 )% (4 )% (7 )% (6 )%
Free cash flow margin 8 % 10 % 6 % 4 %
 

*Adjusted to reflect the adoption of ASC 606 and ASU 2016-18.

 

About Non

Contacts

Zendesk, Inc.
Investor Contact:
Marc Cabi, +1
415-852-3877
ir@zendesk.com

or

Media Contact:
Tian Lee, +1 415-231-0847
press@zendesk.com

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