Zendesk Announces Third Quarter 2020 Results

October 29, 2020

Highlights

• Third quarter revenue increased 24% year over year to $261.9 million

• Third quarter GAAP operating loss of $28.3 million and non-GAAP operating income of $24.9 million

• Zendesk achieved a significant milestone by crossing a billion-dollar annual revenue run rate during the third quarter

SAN FRANCISCO – October 29, 2020 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the third quarter ended September 30, 2020, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Third Quarter 2020

Revenue was $261.9 million for the quarter ended September 30, 2020, an increase of 24% over the prior year period. GAAP net loss for the quarter ended September 30, 2020 was $40.7 million, and GAAP net loss per share (basic and diluted) was $0.35. Non-GAAP net income was $21.1 million, and non-GAAP net income was $0.18 per share (basic) and $0.17 per share (diluted). Non-GAAP net income excludes approximately $49.0 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), $12.2 million of amortization of debt discount and issuance costs, $2.2 million of amortization of purchased intangibles, $2.0 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $3.6 million. GAAP net loss per share for the quarter ended September 30, 2020 was based on 115.8 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2020 was based on 115.8 million weighted average shares outstanding (basic) and 121.4 million weighted average shares outstanding (diluted).

Outlook

As of October 29, 2020, Zendesk provided guidance for the quarter and full year ending December 31, 2020.

For the quarter ending December 31, 2020, Zendesk expects to report:

• Revenue in the range of $274 – 279 million

• GAAP operating income (loss) in the range of $(39) – (35) million, which includes share-based compensation and related expenses of approximately $51 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million. This guidance may be impacted by the real estate impairment discussed below, depending on the amount and timing of its determination, and such impact has not been included in this guidance.

• Non-GAAP operating income (loss) in the range of $16 – 20 million, which excludes share-based compensation and related expenses of approximately $51 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million. We may additionally exclude a portion or all of the real estate impairment discussed below, depending the amount and timing of its determination, and such exclusions have not been included in this guidance.

• Approximately 116 million weighted average shares outstanding (basic)

• Approximately 122 million weighted average shares outstanding (diluted)

For the full year ending December 31, 2020, Zendesk expects to report:

• Revenue in the range of $1.020 – 1.025 billion

• GAAP operating income (loss) in the range of $(139) – (135) million, which includes share-based compensation and related expenses of approximately $192 million, amortization of purchased intangibles of approximately $9 million, and acquisition-related expenses of approximately $7 million. This guidance may be impacted by the real estate impairment discussed below, depending on the amount and timing of its determination, and such impact has not been included in this guidance.

• Non-GAAP operating income (loss) in the range of $69 – 73 million, which excludes share-based compensation and related expenses of approximately $192 million, amortization of purchased intangibles of approximately $9 million, and acquisition-related expenses of approximately $7 million. We may additionally exclude a portion or all of the real estate impairment discussed below, depending the amount and timing of its determination, and such exclusions have not been included in this guidance.

• Approximately 115 million weighted average shares outstanding (basic)

• Approximately 121 million weighted average shares outstanding (diluted)

• Free cash flow to be approximately $15 million or higher, which could be impacted by the real estate changes discussed below, and such impact has not been included in this guidance.

In the fourth quarter of 2020, we concluded that we will no longer occupy two of our leased office buildings in San Francisco. As a result, we estimate that before March 31, 2021, we expect to record an impairment charge of approximately $13 – 17 million related to these lease assets, which will impact our GAAP operating income. Additionally, we estimate that before March 31, 2021, we may accelerate remaining contractual rent payments, which total approximately $12 million, plus additional operating costs. Such costs, depending on the amount and timing of their determination, will impact our cash flow results. The actual amount and timing of the impairments and the cash outflows will depend on the outcome of negotiations with landlords and potential subtenants, and the timing of completion of lease decommission activities.

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 which can and has resulted in higher levels of contraction than historical levels, 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.

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.

Annual revenue run rate was calculated by multiplying our revenue for the third quarter of 2020 by four. For more information about our revenue run rate, please see the “About Operating Metrics” section at the back of this press release.

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, October 29, 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 and industries; (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; (xviii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services; and (xix) the amount and timing of any determination of real estate impairments relating to expected lease abandonment matters.

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 June 30, 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 September 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.