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

SAN FRANCISCO–(BUSINESS WIRE)–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.

Contacts

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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