Zendesk (NYSE:ZEN) Exceeds Q3 Expectations But Stock Drops 14.8%

Adam Hejl /
2021/10/28 6:31 pm EDT

Customer service software maker Zendesk (NYSE:ZEN) reported Q3 FY2021 results beating Wall St's expectations, with revenue up 32.4% year on year to $346.9 million. Guidance also exceeded expectations with next quarter revenues guided to $369 million, or 1.57% above analyst estimates. Zendesk made a GAAP loss of $54.4 million, down on its loss of $40.7 million, in the same quarter last year.

Is now the time to buy Zendesk? Access our full analysis of the earnings results here, it's free.

Zendesk (ZEN) Q3 FY2021 Highlights:

  • Revenue: $346.9 million vs analyst estimates of $335.3 million (3.47% beat)
  • EPS (non-GAAP): $0.17 vs analyst expectations of $0.17 (small miss)
  • Revenue guidance for Q4 2021 is $369 million at the midpoint, above analyst estimates of $363.2 million
  • Free cash flow of $65.4 million, up from $20.9 million in previous quarter
  • Gross Margin (GAAP): 79.7%, up from 76% same quarter last year
  • Zendesk announced it would buy the parent company of SurveyMonkey, an online questionnaire platform, in a stock deal valued at $4.13 billion

Founded in 2006 by three Danish friends who got tired of implementing complex old-school solutions, Zendesk (NYSE:ZEN) is a software as a service platform that makes it easier for companies to provide help and support to their customers.

As more of our commercial interactions take place over the internet, the need for online support is growing. Customers are expecting to be able to talk to brands on any channel, at any time and that drives the need for integrated sales and support platforms like Zendesk.

Sales Growth

As you can see below, Zendesk's revenue growth has been strong over the last year, growing from quarterly revenue of $261.9 million, to $346.9 million.

Zendesk Total Revenue

This was a standout quarter for Zendesk, with the quarterly revenue up an absolutely stunning 32.4% year on year, which is above average for the company. On top of that, revenue increased $28.7 million quarter on quarter, a very strong improvement on the $20.1 million increase in Q2 2021, and a sign of re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 25.1% over the next twelve months, although estimates are likely to change post earnings.

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What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Zendesk's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 79.7% in Q3.

Zendesk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year, this is a good gross margin that allows companies like Zendesk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Zendesk's Q3 Results

Sporting a market capitalization of $14.7 billion, more than $953.8 million in cash and with positive free cash flow over the last twelve months, we're confident that Zendesk has the resources it needs to pursue a high growth business strategy.

It was good to see Zendesk deliver strong revenue growth this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But the market didn't respond well to the acquisition news and the company is down 14.8% on the results and currently trades at $101.3 per share.

Should you invest in Zendesk right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.