Zendesk Falls Short in Some International Markets

Customer service software provider Zendesk (ZEN) reported its second-quarter results after the market closed on July 30. Growth in some international markets was below the company's expectations, and Zendesk is taking a cautious approach to its full-year guidance as a result. Zendesk boosted its 2019 revenue guidance slightly, but it lowered its free cash flow guidance.

Zendesk results: The raw numbers

Data source: Zendesk.

What happened with Zendesk this quarter?

• Zendesk's paid customer accounts reached 149,000 at the end of the second quarter, up from 145,600 at the end of the first quarter.
• Zendesk Support has 77,100 paid customer accounts, up 1,500 in the second quarter; Zendesk Chat has 44,300 paid customer accounts, down 1,000; and other Zendesk products have 27,500 paid customer accounts, up 2,800.
• The U.S. accounted for 51.9% of revenue in the second quarter; Europe, the Middle East, and Africa (EMEA) accounted for 28.5% of revenue; the Asia-Pacific (APAC) region accounted for 10.9% of revenue; and other geographies accounted for 8.7% of revenue.
• At the end of the quarter, 42% of Zendesk's Support annual recurring revenue came from customers with 100 or more Support agents, up from 40% at the end of the first quarter.
• Zendesk's dollar-based net expansion rate was 117%, down from 118% in the first quarter.
• Zendesk's remaining performance obligation, which represents future revenues that are under contract but have not yet been recognized, was $526 million at the end of second quarter. That's up from $441 million at the end of the first quarter.

Image source: Getty Images.

What management had to say

During the earnings call, Zendesk CEO Mikkel Svane laid out where the company is running into issues: "Growth in EMEA and APAC, although still solid, didn't quite live up to our own expectations and lagging other regions. Similar to last quarter, we are of course monitoring the macroeconomic factors and will also take steps to manage for the best possible execution in those regions."

Svane also talked about the company's focus for the rest of the year: "For the rest of this year, we're very focused on investing in tighter integration of our new products and platform and further building our go-to-market efforts around them. We believe we continue to lead CRM innovation and that our investments will give us an even larger opportunity in the broader CRM and customer experience market."

Zendesk launched Sunshine, its customer relationship management product, in late 2018.

CFO Elena Gomez struck a cautious tone regarding the company's full-year outlook: "We are maintaining a prudent view on the year as we gain a better understanding of the dynamics internal and external in EMEA and APAC."

Looking forward

Zendesk provided the following guidance for the third quarter:

• Revenue between $206 million and $208 million, up 33.7% year over year at the midpoint.
• Non-GAAP operating income between $2 million and $4 million, and a GAAP operating loss between $44 million and $46 million.

For the full year, Zendesk raised its revenue guidance and lowered its free cash flow guidance:

• Revenue between $807 million and $811 million, up from a previous guidance range of $802 million to $810 million, and up 35% from 2018 at the midpoint.
• Non-GAAP operating income between $16 million and $19 million, and GAAP operating loss between $175 million and $178 million.
• Free cash flow between $35 million and $45 million, down a from previous guidance range of $55 million to $65 million. The company blamed refinements in its forecasting process, acquisition-related expenses, prepayment of some large vendor deals, and additional capex related to real estate utilization.

While Zendesk is facing some challenges in certain international markets, the company continues to grow revenue at a blistering pace. Barring a substantial slowdown, Zendesk should surpass $1 billion of annual revenue in 2020.