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Zendesk Reports Solid Growth and Rising Costs

By Timothy Green – Feb 16, 2016 at 6:54PM

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The cloud software company continued to grow revenue at a brisk pace during the fourth quarter, although losses are growing as well.

Software-as-a-service company Zendesk (ZEN -0.31%) reported its fourth-quarter results after the market closed on Feb. 16. The company continued to grow rapidly, with both sales and deferred revenue growing by more than 60% year over year. Non-GAAP profitability improved, but on a GAAP basis, rising costs led to a big decline in operating profit. Here's what investors need to know about Zendesk's fourth-quarter results.

Zendesk results: The raw numbers

 Metric

Q4 2015

Q4 2014

Growth (YOY)

Sales

$63.6 million

$38.5 million

62.5%

Net income

($24.5 million)

($17.5 million)

(40%)

Non-GAAP EPS

($0.07)

($0.11)

36.4%

Source: Zendesk Q4 earnings release.

What happened with Zendesk this quarter
It was another quarter of rapid growth for Zendesk.

  • Deferred revenue increased by 65.5% during 2015.
  • GAAP operating expenses grew by 60% year over year, slightly slower than revenue.

For the full year:

  • Revenue of $208.8 million was up 64% compared with 2014.
  • The GAAP net loss was $84.1 million, down from a loss of $67.4 million during 2014.
  • The non-GAAP loss was $0.30 per share, an improvement over a loss of $0.48 per share reported during 2014.

Zendesk also provided guidance for the first quarter and the full year.

  • First-quarter revenue is expected in the range of $65 million to $67 million, up 57.1% year over year at the midpoint of that range.
  • First-quarter GAAP operating loss is expected in the range of $28 million to $29 million, down from a loss of $19 million during the prior-year period.
  • Full-year revenue is expected in the range of $290 million to $300 million, good for growth between 40% and 45%.
  • Full-year GAAP operating losses are expected in the range of $120 million to $122 million, down from $83 million during 2015.

What management had to say
Zendesk CEO Mikkel Svane laid out an ambitious plan for the company:

2015 was a breakout year for the growth of our enterprise business and solidified our leadership with emerging and small businesses. Building on strong momentum across our business, we've set an ambitious goal to reach $1 billion in revenue in 2020. We are aggressively developing products and markets that move us beyond our core in customer support and into emerging opportunities around customer relationships.

Zendesk also announced that Carl Bass, CEO of Autodesk, was appointed to the Zendesk board of directors.

"I'm honored to be joining the board at a time when Zendesk is charting an ambitious future to be a multi-product company serving a wider market," Bass said.

Looking forward
Zendesk's fourth-quarter results and its guidance point toward continued rapid growth for the company. One thing that investors should be concerned about: GAAP operating costs are now growing nearly as fast as revenue, something that wasn't true during the third quarter. The non-GAAP figures improved during the fourth quarter, but on a GAAP basis, Zendesk's losses are getting bigger.

The goal of reaching $1 billion of annual revenue in 2020 is ambitious, requiring Zendesk to grow revenue at a compound annual growth rate of about 37% over the next five years. That's a lot slower than the company grew in 2015, but as the numbers get bigger, the growth rate will probably slow. Zendesk expects revenue growth in 2016 that's barely higher than this required rate, so this goal may prove to be overly optimistic.

Overall, Zendesk had a solid quarter, delivering the rapid growth that the company has become known for.

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.

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