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Zendesk (NYSE:ZEN) Reports Sales Below Analyst Estimates In Q3 Earnings


Adam Hejl /
2022/10/27 4:24 pm EDT
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Customer service software maker Zendesk (NYSE:ZEN) fell short of analyst expectations in Q3 FY2022 quarter, with revenue up 20.1% year on year to $416.8 million. Zendesk made a GAAP loss of $59 million, down on its loss of $54.4 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 FY2022 Highlights:

  • Revenue: $416.8 million vs analyst estimates of $425.4 million (2% miss)
  • EPS (non-GAAP): $0.28 vs analyst estimates of $0.21 (30.3% beat)
  • Free cash flow of $25.4 million, down 37.5% from previous quarter
  • Gross Margin (GAAP): 80.9%, up from 79.7% same quarter last year
  • Zendesk will be acquired by a consortium led by Hellman & Friedman and Permira for $77.50 per share in cash

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.

Companies need to be able to interact with and sell to their customers as efficiently as possible. This reality, coupled with the ongoing migration of enterprises to the cloud drives demand for cloud-based customer relationship management (CRM) software that integrate data analytics with sales and marketing functions.

Sales Growth

As you can see below, Zendesk's revenue growth has been strong over the last two years, growing from quarterly revenue of $261.9 million in Q3 FY2020, to $416.8 million.

Zendesk Total Revenue

Even though Zendesk fell short of revenue estimates, its quarterly revenue growth was still up a very solid 20.1% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $9.65 million in Q3, compared to $18.8 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 21.4% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

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, licenses, technical support and other necessary running expenses was at 80.9% in Q3.

Zendesk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a great 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

With a market capitalization of $9.41 billion Zendesk is among smaller companies, but its more than $1.33 billion in cash and positive free cash flow over the last twelve months give us confidence that Zendesk has the resources it needs to pursue a high growth business strategy.

It was nice that Zendesk improved their gross margin, even if just slightly. 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. Overall, this quarter's results were not the best we've seen from Zendesk. 

Zendesk will be acquired by a consortium led by Hellman & Friedman and Permira for $77.50 per share in cash

Zendesk may have had a tough quarter, but does that actually create an opportunity to invest 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.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

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