Zendesk's Momentum Continues in 2019

Customer service software provider Zendesk (ZEN) reported its first-quarter results after the market closed on April 30. Revenue grew by nearly 40%, but Zendesk moved further away from profitability on a GAAP basis. New products like its Sunshine CRM offering, as well as efforts to bundle software and to win larger customers, should keep revenue growing at a quick pace.

Zendesk results: The raw numbers

Data source: Zendesk.

What happened with Zendesk this quarter?

• Zendesk's paid customer accounts totaled 145,600 at the end of the first quarter, up from 136,600 at the end of 2018 and up from 125,500 one year ago.
• Zendesk Support now has 75,600 paid customer accounts, up 2,000 in the first quarter; Zendesk Chat has 45,300 paid customer accounts, down 800; and other Zendesk products have 24,700 paid customer accounts, up 7,800.
• The U.S. accounted for 52.3% of revenue in the first quarter; Europe, the Middle East, and Africa accounted for 28.7%; the Asia-Pacific region accounted for 10.7%; and other geographies accounted for 8.3%.
• About 40% of Zendesk's Support annual recurring revenue came from customers with 100 or more Support agents, up from 38% one year ago. This increase reflects Zendesk's efforts to win larger customers.
• Zendesk completed its migration to Amazon Web Services, and it plans to decommission its co-located data centers. The company expects a 1-percentage-point improvement to gross margin due to the move.
• The company's dollar-based net expansion rate, which measures annual expansion for existing customers, was 118% at the end of the quarter, down from 119% at the end of 2018.
• Zendesk's remaining performance obligation, which represents future revenues that are under contract but have not yet been recognized, totaled $441 million at the end of the first quarter, up from $407 million at the end of 2018. The company uses this metric to measure its mid-market and enterprise execution.

Image source: Zendesk.

What management had to say

Zendesk CEO Mikkel Svane talked about the company's success bundling multiple products during the earnings call: "The Suite now has more than 3,500 paid customers as of the end of the quarter. It's a joy for customers who increasingly want omnichannel solutions and they, of course, helps us drive bigger average deal size by combining multiple products into the Suite."

Svane also talked about Sunshine, the company's new CRM offering: "It's still early days of Sunshine, but we are encouraged by the very positive reception and the many initial customer projects we're working on. We believe Sunshine clearly sets us apart because it's built in the public cloud on AWS."

CFO Elena Gomez explained why remaining performance obligation, or RPO, is a useful indicator of the company's success winning enterprise customers:

So just as a reminder, we still have a lion share of our book of business in monthly terms with us. So, just keep that in mind. They are not really reflected in our RPO. So, that's an important distinction there. I think the drivers of RPO really have to do with a focus on building longer-term commitments with our customers and that's really a high priority for the sales org and that's an important way to continue to grow our enterprise customers.

Looking forward

Zendesk provided the following guidance for the second quarter:

• Revenue between $191 million and $193 million.
• GAAP operating loss between $42 million and $44 million and non-GAAP operating income between breakeven and $2 million.

Zendesk also updated its outlook for the full year:

• Revenue now expected between $802 million and $810 million, up from a previous range of $795 million to $805 million.
• GAAP operating loss between $160 million and $164 million, down from a previous range of $149 million to $154 million.
• Non-GAAP operating income between $14 million and $18 million, up from a previous range of $13 million to $18 million.
• Free cash flow between $55 million and $65 million, unchanged from the previous outlook.

On a GAAP basis, the already-negative bottom line is sinking further as Zendesk invests in new products like Sunshine and focuses on winning larger enterprise customers. Those efforts are driving robust revenue growth, and the company expects to keep growing fast throughout 2019.