Highlights:
- First quarter revenue increased 30% year-over-year to $388.3
million
- First quarter GAAP operating loss of $60.6 million and non-GAAP
operating income of $20.2 million
Zendesk, Inc. (NYSE: ZEN) today reported financial results for
the first quarter ended March 31, 2022, and released a Shareholder
Letter on its investor relations website at
https://investor.zendesk.com.
Results for the First Quarter 2022
Revenue was $388.3 million for the quarter ended March 31, 2022,
an increase of 30% over the prior year period. GAAP net loss for
the quarter ended March 31, 2022 was $66.9 million, and GAAP net
loss per share (basic and diluted) was $0.55. Non-GAAP net income
was $15.1 million, and non-GAAP net income per share was $0.12
(basic and diluted). Non-GAAP net income excludes approximately
$67.5 million in share-based compensation and related expenses
(including $3.2 million of employer tax related to employee stock
transactions and $0.4 million of amortization of share-based
compensation capitalized in internal-use software), $11.4 million
of acquisition-related expenses, $1.8 million of amortization of
purchased intangibles, and $1.2 million of amortization of debt
issuance costs. GAAP net loss per share for the quarter ended March
31, 2022 was based on 122.0 million weighted average shares
outstanding (basic and diluted), and non-GAAP net income per share
for the quarter ended March 31, 2022 was based on 122.0 million
weighted average shares outstanding (basic) and 126.8 million
weighted average shares outstanding (diluted).
Outlook
As of April 28, 2022, Zendesk provided guidance for the quarter
ending June 30, 2022 and the full year ending December 31,
2022.
For the quarter ending June 30, 2022, Zendesk expects to
report:
- Revenue in the range of $402 - 408 million
- GAAP operating income (loss) in the range of $(65) - (59)
million, which includes share-based compensation and related
expenses of approximately $80 million, amortization of purchased
intangibles of approximately $2 million, and acquisition-related
expenses of approximately $1 million
- Non-GAAP operating income in the range of $18 - 24 million,
which excludes share-based compensation and related expenses of
approximately $80 million, amortization of purchased intangibles of
approximately $2 million, and acquisition-related expenses of
approximately $1 million
- Approximately 123 million weighted average shares outstanding
(basic)
- Approximately 138 million weighted average shares outstanding
(diluted)
For the full year ending December 31, 2022, Zendesk expects to
report:
- Revenue in the range of $1.685 - 1.710 billion
- GAAP operating income (loss) in the range of $(221) - (201)
million, which includes share-based compensation and related
expenses of approximately $316 million, acquisition-related
expenses of approximately $15 million, and amortization of
purchased intangibles of approximately $7 million
- Non-GAAP operating income in the range of $117 - 137 million,
which excludes share-based compensation and related expenses of
approximately $316 million, acquisition-related expenses of
approximately $15 million, and amortization of purchased
intangibles of approximately $7 million
- Approximately 124 million weighted average shares outstanding
(basic)
- Approximately 140 million weighted average shares outstanding
(diluted)
- Free cash flow in the range of $175 - 190 million
We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2022 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 2022 is not available without unreasonable
effort.
This guidance may be affected by strategic decisions related to
our corporate real estate. In the second quarter of 2022, our Board
of Directors approved a plan to cease use or sublease certain
leased premises across our real estate portfolio. As a result, we
expect to record impairment charges in the second quarter of 2022,
which could range up to $26 million. These impairments will be
excluded from non-GAAP operating income. Refer to Form 10-Q for the
quarter ended March 31, 2022 for additional information.
Zendesk’s estimates of share-based compensation and related
expenses, amortization of purchased intangibles,
acquisition-related expenses, real estate impairments, 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 live video
webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on
Thursday, April 28, 2022 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 started the customer experience revolution in 2007 by
enabling any business around the world to take their customer
service online. Today, Zendesk is the champion of great service
everywhere for everyone, and powers billions of conversations,
connecting more than 100,000 brands with hundreds of millions of
customers over telephony, chat, email, messaging, social channels,
communities, review sites and help centers. Zendesk products are
built with love to be loved. The company was conceived in
Copenhagen, Denmark, built and grown in California, taken public in
New York City, and today employs more than 6,000 people across the
world. Learn more at www.zendesk.com.
References to Zendesk, the “Company,” “our,” or “we” in this
press release refer to Zendesk, Inc. and its subsidiaries on a
consolidated basis.
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)
Zendesk’s ability to adapt its products to changing market dynamics
and customer preferences or achieve increased market acceptance of
its products; (ii) the intensely competitive market in which
Zendesk operates; (iii) the development of the market for software
as a service business software applications; (iv) Zendesk’s
substantial reliance on its customers renewing their subscriptions
and purchasing additional subscriptions; (v) Zendesk’s ability to
effectively market and sell its products to larger enterprises;
(vi) Zendesk’s ability to develop or acquire and market new
products and to support its products on a unified, reliable shared
services platform; (vii) Zendesk’s reliance on third-party
services, including services for hosting, email, and messaging;
(viii) Zendesk’s ability to retain key employees and attract
qualified personnel, particularly in the primary regions Zendesk
operates; (ix) Zendesk’s ability to effectively manage its growth
and organizational change, including its international expansion
strategy; (x) 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; (xi) Zendesk’s ability to integrate acquired
businesses and technologies successfully or achieve the expected
benefits of such acquisitions; (xii) real or perceived errors,
failures, or bugs in Zendesk’s products; (xiii) potential service
interruptions or performance problems associated with Zendesk’s
technology and infrastructure; (xiv) Zendesk’s ability to securely
maintain customer data and prevent, mitigate, and respond
effectively to both historical and future data breaches; (xv)
Zendesk’s ability to comply with privacy and data security
regulations; (xvi) Zendesk’s ability to optimize the pricing for
its solutions; and (xvii) other adverse changes in general economic
or market conditions.
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, 2021. 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, 2022.
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,
2022
2021
Revenue
$
388,327
$
298,048
Cost of revenue
75,678
60,894
Gross profit
312,649
237,154
Operating expenses:
Research and development
108,077
73,783
Sales and marketing
201,660
157,518
General and administrative
63,538
43,133
Total operating expenses
373,275
274,434
Operating loss
(60,626
)
(37,280
)
Other income (expense), net:
Interest expense
(3,121
)
(14,415
)
Interest and other income (expense),
net
838
5,084
Total other income (expense), net
(2,283
)
(9,331
)
Loss before provision for income taxes
(62,909
)
(46,611
)
Provision for income taxes
4,037
2,354
Net loss
$
(66,946
)
$
(48,965
)
Net loss per share, basic and diluted
$
(0.55
)
$
(0.42
)
Weighted-average shares used to compute
net loss per share, basic and diluted
121,962
117,912
Condensed Consolidated Balance
Sheets
(In thousands, except par value;
unaudited)
March 31, 2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents
$
496,039
$
476,103
Marketable securities
602,591
539,780
Accounts receivable, net of allowance for
credit losses of $6,923 and $6,190 as of March 31, 2022 and
December 31, 2021, respectively
224,146
273,898
Deferred costs
76,818
72,042
Prepaid expenses and other current
assets
73,455
56,809
Total current assets
1,473,049
1,418,632
Marketable securities, noncurrent
491,682
559,652
Property and equipment, net
99,556
97,815
Deferred costs, noncurrent
74,895
72,553
Lease right-of-use assets
67,671
69,936
Goodwill and intangible assets, net
195,279
197,098
Other assets
35,595
35,593
Total assets
$
2,437,727
$
2,451,279
Liabilities and stockholders’
equity
Current liabilities:
Accounts payable
$
31,185
$
49,213
Accrued liabilities
51,521
50,075
Accrued compensation and related
benefits
133,368
138,127
Deferred revenue
522,532
512,933
Lease liabilities
20,503
21,253
Current portion of convertible senior
notes, net
148,508
139,738
Total current liabilities
907,617
911,339
Convertible senior notes, net
1,136,378
979,350
Deferred revenue, noncurrent
3,988
4,277
Lease liabilities, noncurrent
59,180
63,212
Other liabilities
3,464
3,883
Total liabilities
2,110,627
1,962,061
Stockholders’ equity:
Preferred stock, par value $0.01 per
share
—
—
Common stock, par value $0.01 per
share
1,223
1,215
Additional paid-in capital
1,465,489
1,637,157
Accumulated other comprehensive loss
(13,537
)
(8,911
)
Accumulated deficit
(1,126,075
)
(1,140,243
)
Total stockholders’ equity
327,100
489,218
Total liabilities and stockholders’
equity
$
2,437,727
$
2,451,279
Condensed Consolidated Statements of
Cash Flows
(In thousands; unaudited)
Three Months Ended March
31,
2022
2021
Cash flows from operating
activities
Net loss
$
(66,946
)
$
(48,965
)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization
10,317
9,515
Share-based compensation
63,938
52,374
Amortization of deferred costs
20,325
14,757
Amortization of debt discount and issuance
costs
1,221
12,525
Allowance for credit losses on accounts
receivable
2,309
3,168
Other, net
2,815
(965
)
Changes in operating assets and
liabilities:
Accounts receivable
47,992
16,370
Prepaid expenses and other current
assets
(12,574
)
(467
)
Deferred costs
(26,876
)
(20,984
)
Lease right-of-use assets
4,632
4,464
Other assets and liabilities
(488
)
316
Accounts payable
(17,805
)
5,797
Accrued liabilities
3,679
(2,078
)
Accrued compensation and related
benefits
(22,585
)
(20,113
)
Deferred revenue
7,832
13,419
Lease liabilities
(6,574
)
(5,538
)
Net cash provided by operating
activities
11,212
33,595
Cash flows from investing
activities
Purchases of property and equipment
(7,438
)
(3,061
)
Internal-use software development
costs
(3,016
)
(4,468
)
Purchases of marketable securities
(166,206
)
(305,310
)
Proceeds from maturities of marketable
securities
118,329
198,564
Proceeds from sales of marketable
securities
39,763
36,599
Net cash used in investing
activities
(18,568
)
(77,676
)
Cash flows from financing
activities
Proceeds from exercises of employee stock
options
10,817
3,931
Proceeds from employee stock purchase
plan
17,826
15,184
Taxes paid related to net share settlement
of share-based awards
(1,694
)
(2,800
)
Net cash provided by financing
activities
26,949
16,315
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
(14
)
(8
)
Net increase (decrease) in cash, cash
equivalents and restricted cash
19,579
(27,774
)
Cash, cash equivalents and restricted cash
at beginning of period
477,350
407,859
Cash, cash equivalents and restricted
cash at end of period
$
496,929
$
380,085
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,
2022
2021
Reconciliation of gross profit and
gross margin
GAAP gross profit
$
312,649
$
237,154
Plus: Share-based compensation
6,177
4,486
Plus: Employer tax related to employee
stock transactions
247
453
Plus: Amortization of purchased
intangibles
1,178
1,219
Plus: Acquisition-related expenses
—
69
Plus: Amortization of share-based
compensation capitalized in internal-use software
424
384
Non-GAAP gross profit
$
320,675
$
243,765
GAAP gross margin
81
%
80
%
Non-GAAP adjustments
2
%
2
%
Non-GAAP gross margin
83
%
82
%
Reconciliation of operating
expenses
GAAP research and development
$
108,077
$
73,783
Less: Share-based compensation
(19,287
)
(15,673
)
Less: Employer tax related to employee
stock transactions
(882
)
(1,427
)
Less: Acquisition-related expenses
(1,338
)
(968
)
Less: Amortization of share-based
compensation capitalized in internal-use software
(17
)
(17
)
Non-GAAP research and development
$
86,553
$
55,698
GAAP research and development as
percentage of revenue
28
%
25
%
Non-GAAP research and development as
percentage of revenue
22
%
19
%
GAAP sales and marketing
$
201,660
$
157,518
Less: Share-based compensation
(26,800
)
(23,232
)
Less: Employer tax related to employee
stock transactions
(1,196
)
(2,069
)
Less: Amortization of purchased
intangibles
(642
)
(642
)
Less: Acquisition-related expenses
(373
)
(48
)
Non-GAAP sales and marketing
$
172,649
$
131,527
GAAP sales and marketing as percentage of
revenue
52
%
53
%
Non-GAAP sales and marketing as percentage
of revenue
44
%
44
%
GAAP general and administrative
$
63,538
$
43,133
Less: Share-based compensation
(11,674
)
(8,983
)
Less: Employer tax related to employee
stock transactions
(845
)
(1,164
)
Less: Acquisition-related expenses
(9,724
)
(322
)
Non-GAAP general and administrative
$
41,295
$
32,664
GAAP general and administrative as
percentage of revenue
16
%
14
%
Non-GAAP general and administrative as
percentage of revenue
11
%
11
%
Reconciliation of operating income
(loss) and operating margin
GAAP operating loss
$
(60,626
)
$
(37,280
)
Plus: Share-based compensation
63,938
52,374
Plus: Employer tax related to employee
stock transactions
3,170
5,113
Plus: Amortization of purchased
intangibles
1,820
1,861
Plus: Acquisition-related expenses
11,435
1,407
Plus: Amortization of share-based
compensation capitalized in internal-use software
441
401
Non-GAAP operating income
$
20,178
$
23,876
GAAP operating margin
(16
)%
(13
)%
Non-GAAP adjustments
21
%
21
%
Non-GAAP operating margin
5
%
8
%
Three Months Ended March
31,
2022
2021
Reconciliation of net income
(loss)
GAAP net loss
$
(66,946
)
$
(48,965
)
Plus: Share-based compensation
63,938
52,374
Plus: Employer tax related to employee
stock transactions
3,170
5,113
Plus: Amortization of purchased
intangibles
1,820
1,861
Plus: Acquisition-related expenses
11,435
1,407
Plus: Amortization of share-based
compensation capitalized in internal-use software
441
401
Plus: Amortization of debt discount and
issuance costs
1,221
12,525
Less: Income tax effects and
adjustments
23
(3,331
)
Non-GAAP net income
$
15,102
$
21,385
Reconciliation of net income (loss) per
share, basic
GAAP net loss per share, basic
$
(0.55
)
$
(0.42
)
Non-GAAP adjustments to net loss
0.67
0.60
Non-GAAP net income per share, basic
$
0.12
$
0.18
Reconciliation of net income (loss) per
share, diluted
GAAP net loss per share, diluted
$
(0.55
)
$
(0.42
)
Non-GAAP adjustments to net loss
0.67
0.59
Non-GAAP net income per share, diluted
$
0.12
$
0.17
Weighted-average shares used in GAAP per
share calculation, basic and diluted
121,962
117,912
Weighted-average shares used in non-GAAP
per share calculation
Basic
121,962
117,912
Diluted (1)
126,814
127,230
Computation of free cash flow
Net cash provided by operating
activities
$
11,212
$
33,595
Less: Purchases of property and
equipment
(7,438
)
(3,061
)
Less: Internal-use software development
costs
(3,016
)
(4,468
)
Free cash flow
$
758
$
26,066
Net cash provided by operating activities
margin
3
%
11
%
Non-GAAP adjustments
(3
)%
(2
)%
Free cash flow margin
—
%
9
%
(1) In the first quarter of 2022, we
adopted ASU 2020-06, which simplifies the accounting for
convertible debt. Under the new standard, companies are required to
use the if-converted method for calculating diluted EPS instead of
the treasury stock method. For the three months ended March 31,
2022, approximately 11 million shares related to our 2025
convertible notes were excluded from the non-GAAP diluted share
amount, as the inclusion of these shares using the if-converted
method would have been anti-dilutive.
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.
Real Estate Impairments: To support an increased percentage of
remote teams, Zendesk records impairments for certain assets
associated with leased properties, or portions thereof, that it
ceases to occupy. Any losses and gains associated with these
activities are generally unrelated to financial and operational
performance in any particular period and Zendesk believes the
exclusion of such losses and gains provides for a more useful
comparison of operational performance in comparative periods that
may or may not include such losses and gains.
Amortization of Debt Discount and Issuance Costs: On January 1,
2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC
Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which
simplifies the accounting for convertible debt. Prior to the
adoption of ASU 2020-06, the imputed interest rates of the 2023
Notes and the 2025 Notes were approximately 5.26% and 5.00%,
respectively. This was a result of the debt discounts recorded for
the conversion features of the Notes that were required to be
separately accounted for as equity, and debt issuance costs, which
reduced the carrying value of the convertible debt instruments. The
debt discounts were amortized as interest expense together with the
issuance costs of the debt. Upon adoption of the new standard, the
liability and equity components of each instrument were recombined
into a single liability instrument measured at amortized cost. As a
result, from the date of adoption, no debt discount remains and no
interest expense related to debt discount amortization will be
recorded. Interest expense related to the amortization of debt
issuance costs will continue to be recorded over the term of the
notes. The expense for the amortization of debt discount and debt
issuance costs 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.
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, 2022, 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 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, 2022
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, 2022 is not
available without unreasonable effort.
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 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, acquisition-related
expenses, and real estate impairments, 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.
In August 2020, the Financial Accounting Standards Board issued
ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815
“Derivatives and Hedging,” which amends the calculation of diluted
earnings per share for certain convertible debt instruments, among
other changes. Under the new standard, Zendesk is required to use
the “if-converted” method to calculate diluted earnings per share
for its convertible debt, which assumes conversion of its
convertible debt instruments at the beginning of the reporting
period, with settlement entirely in shares of common stock, unless
the result would be anti-dilutive. Historically, Zendesk calculated
diluted earnings per share for its convertible debt using the
“treasury stock” method, which assumes that the principal amount of
convertible debt instruments is settled in cash. Accordingly, our
diluted shares outstanding are generally expected to increase under
the new standard. We adopted this standard in the first quarter of
2022. The total amount of shares underlying the convertible notes
is approximately 13 million. Refer to Form 10-Q for the quarter
ended March 31, 2022 for further information.
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
logos, annual recurring revenue, dollar-based net expansion rate,
the percentage of its annual recurring revenue from customer
accounts with more than $250,000 in annual recurring revenue and
customers with more than $1,000 in annual recurring revenue.
Zendesk's number of logos is a consolidation of paid customer
accounts across our solutions, exclusive of Zendesk's legacy
Starter plan, free trials, or other free services, as of the end of
the period. A paid customer account is one individual billing
relationship for subscription to our services. Zendesk calculates
its logo number by consolidating paid customer accounts that share
common corporate information as a single organization or customer
may have multiple paid customer accounts across its solutions to
service separate subsidiaries, divisions, or work processes. As of
March 31, 2022, Zendesk had approximately 110,300 logos. Zendesk
does not currently include in its logo metric logos associated with
its legacy analytics product, its legacy Outbound product, its
legacy Starter plan, its Sell product, Sunshine Conversations, its
legacy Smooch product, free trials, or other free services. We may
from time to time refer to "customers" or "brands" in our
publicly-available disclosures, each of which refers to our number
of logos.
Zendesk determines the number of customers with more than $1,000
in annual recurring revenue as of the measurement date based on the
annual recurring revenue of a logo at the measurement date. The net
quarterly change in customers with more than $1,000 in annual
recurring revenue is calculated by taking the difference between
(i) the number of customers with more than $1,000 in annual
recurring revenue as of the measurement date (based on the annual
recurring revenue of a logo at the measurement date) and (ii) the
number of customers with more than $1,000 in annual recurring
revenue as of the date that is the last day of the fiscal quarter
immediately prior to the measurement date (based on the annual
recurring revenue of a logo at the date that is the last day of the
fiscal quarter immediately prior to the measurement date). As of
March 31, 2022, this operating metric better aligns with the
strategic direction of Zendesk’s business and reduces the
volatility in logo count associated with the discontinuation of
certain low-priced products in 2021 that generated minimal annual
recurring revenue. Annual recurring revenue, which we may refer to
as “ARR,” is determined by multiplying monthly recurring revenue by
12.
Zendesk’s dollar-based net expansion rate provides a measurement
of our ability to increase revenue across our existing customer
base through expansion of authorized agents associated with a logo,
upgrades in subscription plans, and the purchase of additional
products as offset by contraction and churn in authorized agents
associated with a logo, and downgrades in subscription plans.
Zendesk does not currently incorporate operating metrics associated
with its legacy analytics product, its legacy Outbound product, its
legacy Starter plan, its Sell product, Sunshine Conversations, its
legacy Smooch product, free trials, or other free services into its
measurement of dollar-based net expansion rate. Dollar-based net
expansion rate is based upon our annual recurring revenue for a set
of logos on Zendesk's products.
Monthly recurring revenue is a legal and contractual
determination made by assessing the contractual terms, as of the
date of determination, as to the revenue we expect to generate in
the next monthly period, assuming no changes to the subscription
and without taking into account any usage above the subscription
base, if any, that may be applicable to such subscription. Zendesk
excludes the impact of revenue that it expects 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 its determination of monthly recurring
revenue. Zendesk additionally excludes the impact of accounts that
are free-trial accounts that did not result in paid subscriptions,
and temporary coupons, such as short-term discounts that were
applied to certain accounts due to the COVID-19 pandemic, from its
annual recurring revenue. Monthly recurring revenue is not
determined by reference to historical revenue, deferred revenue, or
any other United States generally accepted accounting principles,
or GAAP, financial measure over any period.
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 from logos
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.
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 that is
generated by customer accounts with more than $250,000 in annual
recurring revenue is determined by dividing the total annual
recurring revenue from customer accounts with more than $250,000 in
annual recurring revenue from our products other than Sell and
Sunshine Conversations as of the measurement date by the total
annual recurring revenue for all customer accounts from our
products other than Sell and Sunshine Conversations as of the
measurement date. Zendesk determines the customer accounts with
$250,000 in annual recurring revenue as of the measurement date
based on the annual recurring revenue of a customer account at the
measurement date. A "customer account" is based on an identifier
tracked in our internal sales system as a separate and distinct
buying entity.
Zendesk determines the number of customer accounts with more
than $1 million in annual recurring revenue as of the measurement
date based on the annual recurring revenue of a customer account
(as defined above) at the measurement date.
Zendesk determines its bookings as the incremental additional
annual recurring revenue from contracts that were entered into
during the referenced fiscal quarter. Zendesk determines its net
bookings as bookings less any annual recurring revenue lost from
contracts which have not been renewed or a decrease in the level of
paid services with our solutions over the referenced fiscal
quarter.
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.
Zendesk determines its average deal size by dividing the annual
recurring revenue from bookings for our products other than Sell
and Sunshine Conversations in a quarter by the number of deals that
were entered into during that quarter.
Source: Zendesk, Inc.
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version on businesswire.com: https://www.businesswire.com/news/home/20220428006186/en/
Zendesk, Inc. Investor Contact: Jason Tsai, +1
415-997-8882 ir@zendesk.com
or
Media Contact: Stephanie Barnes, +1 415-722-0883
press@zendesk.com
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