Zendesk Announces Fourth Quarter and Full Fiscal Year 2018 Results

February 5, 2019

Highlights

• Fourth quarter revenue increased 41% year over year to $172.2 million

• Fourth quarter GAAP operating loss of $36.5 million and non-GAAP operating income of $4.8 million

• Full year 2018 revenue increased 39% year over year to $598.7 million

• Full year 2018 GAAP operating loss of $137.9 million and non-GAAP operating income of $3.5 million

• Thomas Szkutak, former Amazon.com chief financial officer, joins board of directors

SAN FRANCISCO – February 5, 2019 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the fiscal quarter and full fiscal year ended December 31, 2018, and announced the appointment of former Amazon.com chief financial officer Thomas Szkutak to its board of directors.

A Shareholder Letter with more commentary on the results is available on the Zendesk investor relations website at https://investor.zendesk.com. All results and guidance are based on the revenue recognition standard ASC 606.

Results for the Fourth Quarter 2018

Revenue was $172.2 million for the quarter ended December 31, 2018, an increase of 41% over the prior year period. GAAP net loss for the quarter ended December 31, 2018 was $33.3 million, and GAAP net loss per share (basic and diluted) was $0.31. Non-GAAP net income was $11.2 million, and non-GAAP net income per share (basic) was $0.10, and non-GAAP net income per share (diluted) was $0.10 . Non-GAAP net income excludes approximately $36.9 million in share-based compensation and related expenses (including $3.6 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $6.1 million of amortization of debt discount and issuance costs, $2.2 million of acquisition-related expenses, and $2.2 million of amortization of purchased intangibles. GAAP net loss per share for the quarter ended December 31, 2018 was based on 107.4 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended December 31, 2018 was based on 107.4 million weighted average shares outstanding (basic) and 113.7 million weighted average shares outstanding (diluted).

Results for the Full Fiscal Year 2018

Revenue was $598.7 million for the year ended December 31, 2018, an increase of 39% over the prior year period. GAAP net loss for the year ended December 31, 2018 was $131.1 million, and GAAP net loss per share (basic and diluted) was $1.24. Non-GAAP net income was $23.0 million, non-GAAP net income per share (basic) was $0.22, and non-GAAP net income per share (diluted) was $0.21. Non-GAAP net income excludes approximately $129.9 million in share-based compensation and related expenses (including $8.9 million of employer tax related to employee stock transactions and $1.5 million of amortization of share-based compensation capitalized in internal-use software), $18.8 million of amortization of debt discount and issuance costs, $6.8 million of acquisition-related expenses, and $4.8 million of amortization of purchased intangibles. GAAP net loss per share for the year ended December 31, 2018 was based on 105.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the year ended December 31, 2018 was based on 105.6 million weighted average shares outstanding (basic) and 111.7 million weighted average shares outstanding (diluted).

Appointment of Thomas Szkutak to Board of Directors

Zendesk appointed Thomas Szkutak to its board of directors, effective January 31, 2019. Tom was previously the senior vice president and chief financial officer of Amazon.com, Inc. from October 2002 to June 2015. He currently serves as a member of the board of directors of Intuit Inc. and athenahealth, Inc. Szkutak also serves as an advisor and operating partner of Advent International, a global private equity firm.

“Tom knows firsthand how to manage and scale a high-growth company,” said Mikkel Svane, Zendesk chief executive officer, chairman and founder. “Together with our diverse and talented board, he will use his experience to help guide us to become a multibillion-dollar revenue company over the long-term.”

“I’m proud to be joining at a time when Zendesk has major opportunities ahead of it,” Szkutak said. “With the launch of its open and flexible CRM platform, Zendesk is well-positioned to move upmarket and into the broader customer experience and CRM market.”

Outlook

As of February 5, 2019, Zendesk provided guidance for the quarter ending March 31, 2019 and for the year ending December 31, 2019.

For the quarter ending March 31, 2019, Zendesk expects to report:

• Revenue in the range of $178.0 – 180.0 million

• GAAP operating income (loss) in the range of $(44.0) – (42.0) million, which includes share-based compensation and related expenses of approximately $38.2 million, amortization of purchased intangibles of approximately $2.2 million, and acquisition-related expenses of approximately $1.6 million

• Non-GAAP operating income (loss) of $(2.0) – 0.0 million, which excludes share-based compensation and related expenses of approximately $38.2 million, amortization of purchased intangibles of approximately $2.2 million, and acquisition-related expenses of approximately $1.6 million
  Approximately 108.7 million weighted average shares outstanding (basic)
  Approximately 117.2 million weighted average shares outstanding (diluted)

 
For the full year ending December 31, 2019, Zendesk expects to report:

 
We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2019 because we do not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on our free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the full year 2019 is not available without unreasonable effort.

Zendesk’s estimates of share-based compensation and related expenses, amortization of purchased intangibles, acquisition-related expenses, weighted average shares outstanding, and free cash flow in future periods assume, among other things, the occurrence of no additional acquisitions, investments or restructurings, and no further revisions to share-based compensation and related expenses.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a conference call to answer questions today, February 5, 2019, 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 833-287-0801, or +1 647-689-4460 (outside the U.S. and Canada). The conference ID is 2737549. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and Canada) and entering passcode 2737549. The dial-in replay will be available until the end of day February 7, 2019. The webcast replay will be available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk. Zendesk’s powerful and flexible customer service and engagement platform scales to meet the needs of any business, from startups and small businesses to growth companies and enterprises. Zendesk serves businesses across a multitude of industries, with more than 125,000 paid customer accounts offering service and support in more than 30 languages. Headquartered in San Francisco, Zendesk operates worldwide with 16 offices in North America, 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 continued investment to grow its business, and progress toward its long-term financial objectives. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s 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 Zendesk’s actual results, performance, or achievements to differ materially, including (i) adverse changes in general economic or market conditions; (ii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iii) Zendesk’s ability to effectively expand its sales capabilities; (iv) Zendesk’s ability to effectively market and sell its products to larger enterprises; (v) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (vi) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (vii) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (viii) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (ix) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (x) potential breaches in Zendesk’s security measures or unauthorized access to its customers’ data; (xi) Zendesk’s ability to comply with privacy and data security regulations; (xii) the development of the market for software as a service business software applications; (xiii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xiv) real or perceived errors, failures, or bugs in its products; (xv) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xvi) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2018. 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, including its Annual Report on Form 10-K for the year ended December 31, 2018.

Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes 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.

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