Zendesk Announces 2014 Second Quarter Results

August 5, 2014

Highlights

• Revenue increased 80% year-over-year to $29.5 million

• Customer accounts expanded to 45,740, up over 40% year-over-year

• Second quarter GAAP operating loss $21.4 million and non-GAAP operating loss $9.8 million

SAN FRANCISCO, CA —August 5, 2014— Zendesk, Inc. (NYSE: ZEN) today reported financial results for its second quarter ended June 30, 2014.

“We had a strong first quarter as a public company,” said Mikkel Svane, Founder, Chairman and CEO of Zendesk. “We steadily increased our revenue and our number of customer accounts, and showed improvement in our operating metrics. We attracted more enterprise customers, while also strengthening our core business with small- and medium-sized organizations.”

Results for the Second Quarter 2014

Revenue was $29.5 million for the quarter ended June 30, 2014, an increase of 80% over the prior year period and an increase of 18% from the quarter ended March 31, 2014.

GAAP net loss for the quarter ended June 30, 2014 was $21.7 million, and GAAP net loss per share was $0.48, based on 45.8 million weighted-average shares outstanding. Non-GAAP net loss was $10.1 million, and non-GAAP net loss per share was $0.16, which excludes approximately $11.1 million in share-based compensation related expenses (including $0.1 million of amortized share-based compensation capitalized in internal-use software), and $0.5 million of amortization of purchased intangibles. Non-GAAP net loss per share is based on 64.2 million non-GAAP weighted-average shares outstanding¹.

Cash and cash equivalents were approximately $120.1 million as of June 30, 2014, including $106.1 million of net proceeds from our initial public offering and reflecting the repayment of a $20.0 million line of credit during the second quarter.

Outlook

“As of August 5, 2014, Zendesk is initiating revenue and operating loss guidance for our third quarter of 2014 and revenue and operating loss guidance for calendar year 2014,” said Alan Black, Senior Vice President and CFO. “Our financial results for the second quarter of 2014 were ahead of our expectations. Looking forward, we intend to continue to reinvest to grow our business while remaining mindful of the need to balance our pace of reinvestment and our progress toward increased efficiency in our business model.”

For the third quarter of 2014, Zendesk expects to report:

• Revenue in the range of $30.0 – 32.0 million.

• GAAP operating loss of $19.5 – 20.5 million, which includes share-based compensation expense of approximately $8.0 million and amortization of intangibles of approximately $0.5 million.

• Non-GAAP operating loss of $11.0 – 12.0 million, which excludes share-based compensation expense of approximately $8.0 million and amortization of intangibles of approximately $0.5 million.

For the full year 2014, the company expects to report:

• Revenue in the range of $118.0 – 122.0 million.

• GAAP operating loss of $72.0 – 74.0 million, which includes share-based compensation expense of approximately $30.0 million and amortization of intangibles of approximately $2.0 million.

• Non-GAAP operating loss of $40.0 – 42.0 million, which excludes share-based compensation expense of approximately $30.0 million and amortization of intangibles of approximately $2.0 million.

Management Appointments

Zendesk is also pleased to announce the promotion of two senior managers, Anne Raimondi to Senior Vice President, Operations and Matt Price to Senior Vice President, Global Marketing.  Zendesk also announced that William Macaitis had departed the company effective August 1, 2014. “I am proud of our accomplishments to date and feel really good about the breadth and depth of our bench going forward,” said Mikkel Svane.

Conference Call Information

Zendesk will host a conference call today, August 5, 2014, to discuss financial results at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live webcast of the conference call will be available at https://investor.zendesk.com. The conference call can also be accessed by dialing 877-201-0168, or +1 647-788-4901 (outside the U.S. and Canada). The conference ID is 73888745. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 855-859-2056 or +1 404-537-3406 (outside the U.S. and Canada) and entering passcode 73888745. The dial-in replay will be available until the end of day August 7, 2014. The webcast replay will be available for 12 months.

About Zendesk

Zendesk provides a customer service platform designed to bring organizations and their customers closer together. With more than 45,000 customer accounts, Zendesk is used by organizations in 140 countries to provide support in more than 40 languages. Founded in 2007 and headquartered in San Francisco, Zendesk has operations in the United States, Europe, Asia, Australia and South America. Learn more at www.zendesk.com

Forward-Looking Statements

This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its re-investment to grow its business, progress towards its long-term financial objectives, and its current leadership team. The words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding our financial results, operations and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to differ materially, including (i) adverse changes in general economic or market conditions; (ii) our ability to adapt our customer service platform to changing market dynamics and customer preferences or achieve increased market acceptance of our platform; (iii) our expectation that the future growth rate of our revenues will decline, and that as our costs increase, we may not be able to generate sufficient revenues to achieve or sustain profitability; (iv) our limited operating history, which makes it difficult to evaluate our prospects and future operating results; (v) our ability to effectively manage our growth and organizational change; (vi) our ability to compete effectively in the intensely competitive market in which we participate; (vii) the development of the market for software as a service business software applications; (viii) our ability to sell our live chat software as a standalone service and more fully integrate our live chat software with our customer service platform; (ix) breaches in our security measures or unauthorized access to our customers’ data; (x) service interruptions or performance problems associated with our technology and infrastructure; (xi) real or perceived errors, failures, or bugs in our products; (xii) our substantial reliance on our customers renewing their subscriptions and purchasing additional subscriptions from us; and (xiii) our ability to effectively expand our sales capabilities.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in our filings with the Securities and Exchange Commission, including our final prospectus filed with the Securities and Exchange Commission on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time.

Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating loss and operating margin, non-GAAP net loss attributable to common stockholders, non-GAAP net loss per share attributable to common stockholders, basic and diluted, and non-GAAP weighted-average shares.

Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable:

Share-based Compensation and Amortization of Share-based Compensation Capitalized in Internal-use Software:  Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period.  As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Amortization of Purchased Intangibles and Acquisition Related Expenses: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.  Zendesk views acquisition related expenses as events that are not necessarily reflective of operational performance during a period.  In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods, which may or may not include such expenses.

Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate operating results and future prospects in the same manner as management.

Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation expense, amortization of share based compensation capitalized in internal-use software, amortization of purchased intangibles, transaction costs related to acquisitions, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. Whenever Zendesk uses such a non-GAAP financial measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

¹ The non-GAAP weighted-average shares outstanding used to compute non-GAAP net loss per share assumes that the conversion of our redeemable convertible preferred stock that occurred in connection with our initial public offering occurred at the beginning of the relevant period.

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