Customer service software provider Zendesk (NYSE:ZEN) reported its first-quarter results after the market closed on May 1. Revenue continued to grow at a near-40% rate, and the adjusted bottom line swung into positive territory while GAAP (generally accepted accounting principles) earnings slumped deeper into the red. The company is having some success winning larger deals, a key ingredient in its plan to reach $1 billion of revenue by 2020. Here's what investors need to know about Zendesk's first-quarter report.

Zendesk results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

$129.8 million

$93.9 million

38.2%

Net income

($29.3 million)

($25.0 million)

N/A

Non-GAAP earnings per share

$0.02

($0.03)

N/A

Data source: Zendesk.

What happened with Zendesk this quarter?

  • Zendesk reached a $500 million annual revenue run rate during the first quarter.
  • Paid customer accounts totaled 125,000, up from 118,300 at the end of 2017 and 100,000 at the end of the first quarter of 2017.
  • Zendesk Support reached 67,800 paid customer accounts; Zendesk Chat reached 47,700 paid customer accounts; and other Zendesk products reached 10,000 paid customer accounts
  • Of Support monthly recurring revenue, 38% was derived from paid customer accounts with 100 or more support agents -- flat compared to the fourth quarter, but up from 34% in the first quarter of 2017.
  • The number of contracts signed with an annual value of $50,000 or more jumped 60% year over year, and the average value of those large contracts increased.
  • Zendesk's dollar-based net expansion rate was 120% during the first quarter, up from 119% in the fourth quarter of 2017. The company continues to expect this metric to range from 110% to 120% going forward.
  • Major customers joining or expanding with Zendesk during the first quarter include Grab, Peet's Coffee, Stanley Black & Decker, and Trivago.
  • Free cash flow was $7.1 million, up from $0.6 million in the prior-year period.

Zendesk provided the following guidance for the second quarter and for the full year:

  • For the second quarter, Zendesk expects revenue of between $136 million and $138 million, GAAP operating loss between $32 million and $34 million, and non-GAAP operating loss of up to $2 million.
  • For the full year, Zendesk expects revenue to be between $565 million and $572 million, GAAP operating loss between $127 million and $132 million, and non-GAAP operating income of up to $5 million.
  • Full-year free cash flow is expected to be between $25 million and $30 million.
A Zendesk sign outside a building

Image source: Zendesk.

What management had to say

In Zendesk's quarterly letter to shareholders, management talked about the company's strategy for winning enterprise customers:

A big part of our go-to-market investments remains focused on hiring sales expertise to pursue new opportunities with larger enterprises. In addition, we already serve a large population of enterprise companies in which we can expand into new use cases. With a new SVP [senior vice president] of worldwide sales in place and focus on sales team stability as we grow, we have seen positive results both in sales execution and productivity.

The company also gave an update on its transition to cloud infrastructure:

Throughout 2017, we made investments to ensure each of our customers has a successful outcome as they are transitioned to cloud infrastructure. As of the end of the first quarter of 2018, we have moved nearly 75% of our customers to Amazon Web Services. We anticipate completing the full transition by the end of the fourth quarter of this year.

Looking forward

Zendesk's full-year revenue guidance represents an increase from its previous guidance, adding $7 million to the high end of its revenue range. Guidance for non-GAAP operating income was unchanged, but the company now expects a larger GAAP operating loss.

The company continues to make progress winning larger customers, recording a 60% increase in bigger contracts during the first quarter. Based on Zendesk expecting its GAAP operating loss to be larger than expected this year, sales and marketing costs will likely march higher. They grew by 40.6% in the first quarter, faster than revenue, and that trend may not reverse anytime soon.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool recommends Trivago and Zendesk. The Motley Fool has a disclosure policy.