Zendesk's Growth Accelerates to Cap Off a Record Year

Customer service software provider Zendesk (ZEN) reported its fourth-quarter results after the market closed on Feb. 5. Revenue surged by more than 40% as the company grew the size of large contracts it signed during the quarter. GAAP losses continued to grow, but adjusted earnings moved in the right direction. Here's what investors need to know.

Zendesk results: The raw numbers

Data source: Zendesk. *Q4 2017 numbers adjusted for ASC 606.

What happened with Zendesk this quarter?

• Zendesk's paid customer accounts reached 136,600 at the end of the fourth quarter, up from 133,700 at the end of the third quarter, and up from 118,900 one year ago.
• Zendesk Support now has 73,600 paid customer accounts, up 1,500 during the fourth quarter; Zendesk Chat has 46,100 paid customer accounts, down 700; and other Zendesk products have 16,900 paid customer accounts, up 2,100.
• About 40% of Zendesk's Support monthly recurring revenue came from customers with 100 or more Support agents, flat from the third quarter and up from 38% one year ago.
• The number of contracts with annual values of $50,000 or more jumped 6% year over year, and the average contract value rose 60%.
• The company's dollar-based net expansion rate, which measures annual expansion for existing customers, was 119%, up from 118% in the third quarter.
• Zendesk's remaining performance obligation, which represents future revenues that are under contract but have not yet been recognized, totaled $407 million at the end of the fourth quarter. That's up from $360 million at the end of the third quarter. The company believes this metric is useful for measuring its mid-market and enterprise execution.
• Zendesk generated $13.3 million of free cash flow in the fourth quarter, up from $12 million in the prior-year period.

Check out the latest Zendesk earnings call transcript. 

Image source: Zendesk.

What management had to say

CEO Mikkel Svane discussed the launch of the company's new customer relationship management (CRM) platform during the earnings call:

My personal highlight of the quarter was the launch of our new CRM platform Zendesk Sunshine at our annual Relate user conference. Sunshine represents an entirely new approach to CRM platforms. We built it on top of AWS in the public cloud and made it incredibly open and flexible so companies can build new customer apps quickly and developers can use the tools they already know and love.

Sunshine is a direct competitor to salesforce.com, which dominates the market for CRM software.

CFO Elena Gomez commented on the acceleration in revenue growth the company enjoyed in the fourth quarter:

It's really a combination of the sales force executing and productivity up all around, strength in our Americas business particularly with bigger deals this quarter. There's a healthy demand environment overall we're seeing. We're not seeing our pipeline slip in any way.

Looking forward

Zendesk expects to continue growing at a strong double-digit rate in 2019. For the first quarter, the company expects:

• Revenue between $178 million and $180 million, up 37.9% year over year at the midpoint.
• A GAAP operating loss between $42 million and $44 million, and a non-GAAP operating loss between $0 million and $2 million.

For the full year, Zendesk expects:

• Revenue between $795 million and $805 million, up 33.6% from 2018.
• GAAP operating loss between $149 million and $154 million, and non-GAAP operating income between $13 million and $18 million.
• Free cash flow between $55 million and $65 million.

Zendesk is getting less profitable on a GAAP basis, but non-GAAP operating profit and free cash flow are moving in the right direction. As long as the growth rate mostly holds up in the next couple of years, annual revenue should surpass $1 billion in 2020.