Zendesk Announces Second Quarter 2020 Results

July 30, 2020

Highlights

• Second quarter revenue increased 27% year over year to $246.7 million

• Second quarter GAAP operating loss of $31.5 million and non-GAAP operating income of $19.1 million

• Archana Agrawal, Chief Marketing Officer of Airtable, joins board of directors

SAN FRANCISCO – July 30, 2020 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the second quarter ended June 30, 2020, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Second Quarter 2020

Revenue was $246.7 million for the quarter ended June 30, 2020, an increase of 27% over the prior year period. GAAP net loss for the quarter ended June 30, 2020 was $64.7 million, and GAAP net loss per share (basic and diluted) was $0.56. Non-GAAP net income was $16.4 million, non-GAAP net income per share (basic and diluted) was $0.14. Non-GAAP net income excludes approximately $46.5 million in share-based compensation and related expenses (including $2.3 million of employer tax related to employee stock transactions and $0.5 million of amortization of share-based compensation capitalized in internal-use software), a $26.0 million loss on early extinguishment of debt, $7.5 million of amortization of debt discount and issuance costs, $2.3 million of amortization of purchased intangibles, $1.8 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $3.1 million. GAAP net loss per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic) and 120.4 million weighted average shares outstanding (diluted).

Appointment of Archana Agrawal to Board of Directors

Zendesk appointed Archana Agrawal to its board of directors, effective July 27, 2020. Archana is a seasoned technology executive with nearly two decades of experience in the software industry. She has served as the Chief Marketing Officer of Airtable, a low-code app development platform, since March 2020 and as a member of the board of directors of MongoDB, Inc., since August 2019. Previously, Archana served as the Head of Enterprise and Cloud Marketing at Atlassian, an enterprise software company, from May 2016 to March 2020. Archana joined Atlassian in 2013 as Head of Data Science and Growth Marketing. Prior to that, Archana was at Ladders, Inc. from 2007 until 2013, where she led corporate-wide analytics. She began her career at the IBM Almaden Research Center. She holds an M.B.A. from Harvard Business School and received her M.S. in computer science from the University of Illinois at Urbana-Champaign.

“Archana has a unique background in applying data science to enterprise marketing and customer acquisition,” said Mikkel Svane, Zendesk chief executive officer. “Her experience across fast-growing software companies will serve us well as we continue to expand our reach in the enterprise.”

“Zendesk has led the way in changing how organizations buy enterprise software and in making customer experience a critical differentiator for businesses,” Agrawal said. “I’m thrilled to be joining the board at a time when Zendesk has become so critical to companies of every size as they rapidly adapt to new customer and business realities.”

Outlook

We believe our financial performance will continue to be impacted by uncertain and highly disrupted global economic conditions. Many customers continue to face end-market demand challenges and we are seeing higher levels of contraction compared to historical trends. We continue to partner with customers who are undergoing business challenges to help them with modified invoicing and subscription terms. These conditions and actions have impacted and will continue to impact our near-term net expansion rate and overall financial performance, and have played a role in impacting our free cash flow generation. We are being disciplined and prudent in how we manage our business.

Longer term, with improved macroeconomic conditions, we continue to believe the fundamentals of our business model will drive meaningful revenue growth. In particular, we believe that our customer experience solutions will continue to lead in innovation and be more compelling relative to traditional larger enterprise competitors. We will continue to innovate and improve our product offering and how we operate and engage with consumers. These initiatives give us confidence in our plan to deliver high revenue growth and operating leverage.

As of July 30, 2020, Zendesk provided guidance for the quarter ending September 30, 2020.

For the quarter ending September 30, 2020, Zendesk expects to report:

• Revenue in the range of $250 – 255 million

• GAAP operating income (loss) in the range of $(42) – (38) million, which includes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million

• Non-GAAP operating income (loss) in the range of $10 – 14 million, which excludes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million

• Approximately 116 million weighted average shares outstanding (basic)

• Approximately 122 million weighted average shares outstanding (diluted)

There are many factors that can affect our actual results which are discussed below and in the risk factors in our filings with the Securities and Exchange Commission. Some of the key risk factors include global macroeconomic conditions, the impact of the COVID-19 pandemic on our business, business conditions of customers in challenged industries, the effect on demand for our products from customers, and the ability of our customers to manage the current severe economic downturn.

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2020 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 2020 is not available without unreasonable effort.

Additionally, 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.

COVID-19 Update

Over the last several months, we have continued to focus on supporting our employees, customers, and community as we navigate the COVID-19 pandemic. Our business continuity plans continue to ensure that we take care of health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. Additional information regarding these efforts and the expected impact on our business can be found in our Shareholder Letter for the quarter ended June 30, 2020, as well as our quarterly report on Form 10-Q for the quarter ended June 30, 2020 to be filed with the Securities and Exchange Commission.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a live video webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on Thursday, July 30, 2020 to discuss the results. The live video webcast can be accessed through Zendesk’s investor relations website at https://investor.zendesk.com. A replay of the webcast will be available for 12 months.

About Zendesk

Zendesk is a service-first CRM company that builds support, sales, and customer engagement software designed to foster better customer relationships. From large enterprises to startups, we believe that powerful, innovative customer experiences should be within reach for every company, no matter the size, industry or ambition. Zendesk serves more than 160,000 customers across a multitude of industries in over 30 languages. Zendesk is headquartered in San Francisco, and operates offices worldwide. 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) the effect of uncertainties related to the COVID-19 pandemic on U.S. and global markets, Zendesk’s business, operations, revenue results, cash flow, operating expenses, hiring, demand for its solutions, sales cycles, customer retention, and its customers’ businesses; (ii) other adverse changes in general economic or market conditions; (iii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iv) Zendesk’s ability to effectively expand its sales capabilities; (v) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) 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; (vii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (viii) Zendesk’s ability to effectively market and sell its products to larger enterprises; (ix) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (x) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (xi) Zendesk’s ability to prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (xii) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (xiii) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xiv) Zendesk’s ability to comply with privacy and data security regulations; (xv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xvi) the development of the market for software as a service business software applications; (xvii) real or perceived errors, failures, or bugs in its products; and (xviii) 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 March 31, 2020. 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

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.