Software-as-a-service provider Zendesk (NYSE:ZEN) reported its third-quarter results after the market close on Tuesday, Nov. 3. The company grew revenue at a blistering pace, and while Zendesk is still posting major losses, non-GAAP profitability is beginning to improve. Zendesk's guidance for the fourth quarter was also strong, calling for continued rapid revenue growth and further improvements in profitability.

Zendesk results: The raw numbers

 

Q3 2015

Q3 2014

Growth (YOY)

Sales

$55.7 million

$33.9 million

64%

Net income

($18.9 million)

($17.9 million)

(5.6%)

Non-GAAP EPS

($0.05)

($0.09)

44.4%

Source: Zendesk Q3 earnings release. 

What happened with Zendesk this quarter?
Zendesk continued to grow revenue rapidly during the third quarter, and profitability showed signs of improvement.

  • Deferred revenue has increased by 47% since the beginning of 2015.
  • More than 30% of Zendesk's recurring revenue is now comprised of customers with greater than 100 agents on Zendesk's customer service platform.
  • GAAP operating expenses rose by 43% year-over-year, substantially slower than revenue growth.
  • Zen acquired We Are Cloud SAS, the company behind BIME Analytics, in October for $45 million.

Zendesk also provided its outlook for the fourth quarter.

  • Revenue is expected to be between $59 million and $61 million, a 54% year-over-year increase at the midpoint of that range.
  • Zendesk expects a non-GAAP operating loss between $6 million and $7 million, compared with a loss of $7.7 million during the fourth quarter of 2014.

For the full year:

  • Revenue is expected to be between $205.1 million and $207.1 million, a 62% increase compared with 2014.
  • Zendesk expects a non-GAAP operating loss between $24.1 million and $25.1 million, compared with a loss of $30.9 million during 2014.

What management had to say
CEO Mikkel Svane pointed to a strong performance during the quarter and talked up the acquisition of the team behind BIME analytics. "We had an outstanding quarter of financial results and company achievements," Svane said. "We made major strides in our enterprise business globally, while delivering on our vision for more data-driven customer service and engagement. The recent addition of the BIME Analytics team will allow us to build deeper data analytics into more of our products and give organizations a better understanding of their customers."

Looking forward
Zendesk continued to grow revenue rapidly during the third quarter, and while the company is still producing losses on both a GAAP and non-GAAP basis, the numbers are trending in the right direction. Non-GAAP operating losses are expected to decline year-over-year during both the fourth quarter and the full year, a reversal compared with 2014, when the non-GAAP operating loss nearly doubled compared to 2013.

Going forward, investors should expect to see profitability continue to improve as Zendesk grows. It's hard to say how long it will be before Zendesk reaches profitability, but the company is making progress.

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.