Software-as-a-service provider Zendesk (NYSE:ZEN) reported its second-quarter results after market close on Aug. 4, beating analyst estimates for both revenue and earnings. Zendesk reported quarterly revenue of $48.2 million, up 63% year over year and about $2 million higher than analysts were expecting. A non-GAAP loss of $0.08 per share was an improvement compared with the second quarter of 2014, when the company lost $0.16 per share, and it was $0.03 better than the average analyst estimate.
Rapid growth continues
At the end of the second quarter, the number of paid customer accounts rose above 60,000, up from around 57,000 at the end of the previous quarter and about 46,000 one year ago. Growth in paid customer accounts is slowing down; 30% year-over-year growth during the second quarter is slower than the 40% growth posted during the second quarter of 2014.
But gaining new customers isn't the only way Zendesk can grow, as CEO Mikkel Svane explained:
We delivered impressive growth this quarter as our land-and-expand strategy gained momentum. We saw strong expansions from key customers and broad-based growth across geographies and industries. Our product advancements and expanded business partnerships have given us more reach into larger organizations.
The high cost of acquiring new customers led to big losses, both on a GAAP and non-GAAP basis, during the quarter. On $48.2 million of revenue, the company reported a GAAP operating loss of $20.9 million, about the same compared with the second quarter of 2014. On a non-GAAP basis, which excludes stock-based compensation, Zendesk reported an operating loss of $6.5 million, an improvement compared with the $9.6 million loss during the second quarter of 2014.
However, while revenue grew by 63% year over year, operating expenses rose by just 35%. Sales and marketing spending increased by just 34% year over year, a good sign that customers are sticking around. Over time, as Zendesk continues to grow, operating expenses as a percentage of revenue should continue to shrink. During the second quarter, operating expenses were still higher than revenue, but it won't be long before the situation reverses.
Zendesk's deferred revenue balance has grown by 66.6% since the second quarter of 2014, to $64.2 million. Growth in deferred revenue is often a decent indicator of future revenue growth, and with Zendesk's deferred revenue growing at roughly the same rate as revenue, investors can expect rapid growth to continue.
In addition to reporting earnings, Zendesk provided guidance for the third quarter and the full year. The company expects third-quarter revenue between $51 million and $53 million, representing 53% year-over-year growth at the midpoint of that range. On a GAAP basis, Zendesk expects to report an operating loss between $21.9 million and $22.9 million during the third quarter, with a non-GAAP operating loss between $7 million and $8 million.
For the full year, the company expects revenue to come in between $198 million and $201 million, a 57% growth rate at the midpoint of that range. GAAP operating loss is expected to be between $84.7 million and $86.7 million, while non-GAAP operating loss is expected to be between $28 million and $30 million.
It was a strong quarter for Zendesk, with growth coming in above analyst estimates and revenue guidance above analyst expectations. The company continues to spend heavily to acquire new customers, but revenue grew far faster than expenses during the second quarter. Zendesk is still expecting big losses this year, bigger than 2014, but we may see losses begin to decrease over the coming years if the current trends continue.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Zendesk. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.