Customer service software maker Zendesk (NYSE:ZEN) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 27.9% year on year to $407.2 million. Zendesk made a GAAP loss of $95 million, down on its loss of $58.4 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) Q2 FY2022 Highlights:
- Revenue: $407.2 million vs analyst estimates of $404.6 million (small beat)
- EPS (non-GAAP): $0.14 vs analyst estimates of $0.12 (13.6% beat)
- Free cash flow of $40.7 million, up from $758 thousand in previous quarter
- Gross Margin (GAAP): 79.6%, in line with same quarter last year
- Zendesk has agreed to be acquired by a group of buyout firms led by Hellman & Friedman and Permira in an all-cash transaction that values Zendesk at approximately $10.2 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.
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 very strong over the last year, growing from quarterly revenue of $318.2 million, to $407.2 million.
This quarter, Zendesk's quarterly revenue was once again up a very solid 27.9% year on year. On top of that, revenue increased $18.8 million quarter on quarter, a very strong improvement on the $12.9 million increase in Q1 2022, which shows acceleration of growth, and is great to see.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 24.1% 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 79.6% 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. Despite the recent drop, this is still 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 a market capitalization of $9.23 billion Zendesk is among smaller companies, but its more than $1.15 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 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, there was a deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is flat on the results and currently trades at $75.11 per share.
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.