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Zendesk (NYSE:ZEN) Reports Q2 In Line With Expectations


Full Report / September 20, 2022
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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.

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.

It offers a cloud-based help desk which enables customers to reach out for help through various channels like live chat or email and provides companies with a unified interface to track, prioritize, and respond to customers requests. By centralising data about customer requests the software makes support teams more efficient, and enables support agents to have full context about the customer.

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.

Zendesk has a number of competitors in this space, from public companies like Hubspot (NYSE:HUBS) and Salesforce (NYSE:CRM) to private companies like Intercom.

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.

Zendesk Total Revenue

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.

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.

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. 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.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Zendesk's free cash flow came in at $40.7 million in Q2, up 94.7% year on year.

Zendesk Free Cash Flow

Zendesk has generated $135.2 million in free cash flow over the last twelve months, a solid 8.9% of revenues. This strong FCF margin is a result of Zendesk asset lite business model and provides it plenty of cash to invest in the business.

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 currently trades at $75.11 per share.

Is Now The Time?

When considering Zendesk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Zendesk is a solid business. Its revenue growth has been strong. On top of that, its impressive gross margins are indicative of excellent business economics, and its strong free cash flow generation gives it re-investment options.

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.


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