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.
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.
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.
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.
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.
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.
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.
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 $25.4 million in Q3, down 61.1% year on year.
Zendesk has generated $95.2 million in free cash flow over the last twelve months, a decent 5.99% of revenues. This FCF margin is a result of Zendesk asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.
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 put it in a very strong position to invest in growth.
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.
Is Now The Time?
Zendesk may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Zendesk is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last two years. 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 will be acquired by a consortium led by Hellman & Friedman and Permira for $77.50 per share in cash
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