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Oct. 30, 2020, 5:32 p.m. EDT

10-Q: ZENDESK, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 13, 2020. As discussed in the section titled "Special Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled "Risk Factors" included under Part II, Item 1A below. Overview We are a software development company that provides software as a service solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to product and platform solutions that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it's needed most. We believe in developing solutions that serve organizations of all sizes and across all industries. Our flagship product solution, Zendesk Support, provides organizations with the ability to track, prioritize, and solve customer support tickets across multiple channels, bringing customer information and interactions into one place. Our other widely available product solutions integrate with Support and include Zendesk Chat, Zendesk Talk, and Zendesk Guide. Chat is live chat software that provides a fast and responsive way for organizations to connect with their customers. Talk is cloud-based call center software that facilitates personal and productive phone support conversations between organizations and their customers. Guide is a self-service destination that organizations can use to provide articles, interactive forums, and a community that help an organization's customers help themselves. For an omnichannel solution which provides Support, Chat, Talk, and Guide together for a single price, we offer the Zendesk Support Suite. We additionally offer Zendesk Sell, sales customer relationship management software that complements our mission in delivering solutions that provide a better customer experience, the Zendesk Sell Suite, an omnichannel solution which provides Sell and Chat among other features and functionality together for a single price, Zendesk Gather, a product solution that enables companies to provide trusted and transparent support to customers through online community forums, Zendesk Sunshine, a customer relationship management platform which enables organizations to connect and integrate customer data generated through our product solutions, and Zendesk Sunshine Conversations, a messaging platform solution that allows businesses to integrate messaging through social channels and directly interact and transact with customers. We offer a range of subscription account plans for our solutions that vary in price based on functionality, type, and the amount of product support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions. For the three months ended September 30, 2020 and 2019, our revenue was $262 million and $210 million, respectively, representing a 24% growth rate. For the nine months ended September 30, 2020 and 2019, our revenue was $746 million and $587 million, respectively, representing a 27% growth rate. For the three months ended September 30, 2020 and 2019, we derived $125 million, or 48%, and $100 million, or 47%, respectively, of our revenue from customers located outside of the United States. For the nine months ended September 30, 2020 and 2019, we derived $355 million, or 48%, and $280 million, or 48%, respectively, of our revenue from customers located outside of the United States. We expect that the rate of growth in our revenue will decline as our business scales, even if our revenue continues to grow in absolute terms. For the three months ended September 30, 2020 and 2019, we generated net losses of $41 million and $34 million, respectively. For the nine months ended September 30, 2020 and 2019, we generated net losses of $148 million and $133 million, respectively. Table of Contents The growth of our business and our future success depend on many factors, including our ability to continue to innovate, further develop our product and platform solutions geared towards the entire customer experience, build brand recognition and scalable solutions for larger organizations, maintain our leadership in the small and midsized business market, add new customers, generate additional revenue from our existing customer base, and increase our global customer footprint. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results, including continuing uncertainties related to the COVID-19 pandemic. We anticipate that we will continue to invest in our operations. The expected expenditures that we anticipate will be necessary to manage our anticipated growth, including personnel costs, expenditures relating to hosting capabilities, leasehold improvements, and related fixed assets, will make it more difficult for us to achieve profitability in the near term. Many of these investments will occur in advance of us experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently. We have focused on rapidly growing our business and plan to continue to invest for long-term growth. We expect to continue to develop our hosting capabilities primarily through expenditures for third-party managed hosting services. The amount and timing of these expenditures will vary based on our estimates of projected growth and planned use of hosting resources. Over time, we anticipate that we will continue to gain economies of scale by efficiently utilizing our hosting and personnel resources to support the growth in our number of customers. In addition, we expect to incur amortization expense associated with acquired intangible assets and capitalized internal-use software. As a result, we expect our gross margin to improve in the long-term, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of such costs. We expect our operating expenses to continue to increase in absolute dollars in future periods. We have invested, and expect to continue to invest, in our software development efforts to broaden the functionality of our existing solutions, to further integrate these solutions and services, and to introduce new solutions. We plan to continue to invest in our sales and marketing organizations, particularly in connection with our efforts to expand our customer base and expand usage of our solutions. We also expect to continue to incur additional general and administrative costs in order to support the growth of our business and the infrastructure required to comply with our obligations as a public company.

COVID-19 Update

In December 2019, a novel coronavirus and the resulting disease ("COVID-19") was reported, and in January 2020, the World Health Organization ("WHO") declared it a Public Health Emergency of International Concern. In February 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterized COVID-19 as a pandemic. We are continuing to ascertain the long-term impact of the COVID-19 pandemic on our business and the full effect on our results of operations in future quarters is uncertain, but in the near to intermediate term, we continue to expect our financial performance to be impacted by the economic crisis arising from COVID-19. We continue to focus on supporting our employees, customers, and community. Our business continuity plans have continued to focus on the health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers.

Since the advent of the COVID-19 pandemic, we continue to monitor and identify the major impacts of COVID-19, and as of the date of this filing, those impacts can generally be grouped in the following categories:

Changing customer needs. Many of our customers and their needs have been and continue to be impacted by the COVID-19 pandemic, and we are continuing to adapt to those needs.

As commercial, personal, and social spheres continue to increasingly rely on online interactions and experiences worldwide, some of our customers' businesses have seen increased activity or have begun to use our solutions in novel ways. Conversely, due to cash flow pressures on organizations worldwide, we expect to continue to see the COVID-19 pandemic impact our ability to attract and retain organizations of all sizes. Continued decreased demand for our customers' products and services may and has resulted in lower demand for usage of our solutions and we expect such contraction to continue to outpace historical trends. Further, potential and current customers may continue to choose to delay their decisions to purchase our solutions or expand their use of our solutions as organizations reassess their ability to pay for business software. Other customers have adapted to the new environment and have decided to proceed with previously delayed purchases of our solutions. The economic pressures affecting our customers and the resulting effects, including those noted above, have and will continue to have an effect on our operating results, including our cash flows.

We are continuing to understand the long-term net effect and anticipated future magnitude of the various factors introduced by COVID on our results for future periods and such forecasts are inherently uncertain.







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Employee health and safety. We have continued to require all of our employees globally to work remotely, in order to minimize the spread of COVID-19 among our employee base and to comply with local regulations within the United States and internationally. We have invested resources in supporting our employees in a shift to remote work, including providing supplemental home office hardware, increasing the cadence of company-wide communications, improving the frequency and effectiveness of employee feedback, and analyzing current and future real estate needs. Further, events which have highlighted systemic racial inequity worldwide have historically and will continue to negatively impact our employee well-being. We have and will continue to invest resources in improving our diversity, equity and inclusion initiatives for our employees and community, including programs designed to improve recruiting and retention and reduce attrition for employees from underrepresented groups and increasing engagement with community organizations.

While we have not observed significant impacts to the productivity of our workforce, we continue to have a limited history of remote working and the long-term impact on, and the resulting types of continuing investments necessary for, our employee base is uncertain.

Evolving our organizational focus. In light of the need for organizations worldwide to assess an increasing reliance on online interactions resulting from COVID-19, we believe that our product and platform solutions will continue to play an increasingly essential role in customer experience for both current and potential customers. As some of our customers demonstrate a greater need to deploy customer experience solutions quickly and for new use cases, we believe in continuing our focus on providing solutions that are easy to implement, use, and scale, and have a quick time to value. We will increase our focus on those core strengths by continuing to simplify the experience of buying our solutions and enable our customers to provide a seamless omnichannel experiences to their customers.

The broader implications of COVID-19 on our employees, our results of operations, and overall financial performance remain uncertain. We may continue to experience curtailed customer demand for our solutions that could materially adversely impact our business, results of operations, and overall financial performance in future periods. Because we primarily have a subscription-based business model which generally results in recognition of revenue in subsequent periods originating from customer contracts executed in prior periods, the effect of the COVID-19 pandemic may not be fully reflected in our results of operations until future periods. See the Risk Factors section for further discussion of the possible impact of the COVID-19 pandemic on our business.

We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.

We utilize third-party managed hosting facilities located in North America, Europe, Asia and Australia to host our services, support our infrastructure, and support certain research and development functions. In the first quarter of 2019, we completed the transition of our customers from self-managed colocation data centers to third-party managed hosting services.

Oct 30, 2020

COMTEX_373700301/2041/2020-10-30T17:32:17

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