Customer service software maker Zendesk (NYSE:ZEN) reported results in line with analyst expectations in Q2 FY2021 quarter, with revenue up 29% year on year to $318.2 million. Zendesk made a GAAP loss of $58.4 million, improving on its loss of $64.6 million, in the same quarter last year.
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Zendesk (ZEN) Q2 FY2021 Highlights:
- Revenue: $318.2 million vs analyst estimates of $320.5 million (0.72% miss)
- EPS (non-GAAP): $0.13 vs analyst expectations of $0.16 (19.7% miss)
- Revenue guidance for Q3 2021 is $334.5 million at the midpoint, below analyst estimates of $335.8 million
- The company reconfirmed revenue guidance for the full year, at $1.31 billion at the midpoint
- Free cash flow of $20.9 million, down 19.7% from previous quarter
- Gross Margin (GAAP): 79%, in line with previous quarter
Founded in 2006 by three Danish friends who got tired of implementing complex old-school solutions, Zendesk 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 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 $246.6 million, to $318.2 million.
This quarter, Zendesk's quarterly revenue was once again up a very solid 29% year on year. On top of that, revenue increased $20.1 million quarter on quarter, a very strong improvement on the $14.5 million increase in Q1 2021, which shows acceleration of growth, and is great to see.
Analysts covering the company are expecting the revenues to grow 26.9% over the next twelve months, although we would expect them to review their estimates once they get to read these results.
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Profitability
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% in Q2.
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 Q2 Results
With market capitalisation of $17.8 billion, more than $938.3 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see Zendesk deliver strong revenue growth this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that Zendesk missed analysts' revenue expectations and the revenue guidance for the next quarter missed analysts' expectations. Zooming out, we think this was mixed quarter. The company is down 7.01% on the results and currently trades at $140 per share.
When considering Zendesk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Is now the right time to invest? Are there better opportunities? Get access to our full analysis here, it's free.
The author has no position in any of the stocks mentioned.