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Zendesk (NYSE:ZEN) Reports Weak Q2


Full Report / July 29, 2021
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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.

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.

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.

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.

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 strong over the last year, growing from quarterly revenue of $246.6 million, to $318.2 million.

Zendesk Total Revenue

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.

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.

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. 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 a mixed quarter. The company is down 8.73% on the results and currently trades at $137.4 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 good business. Its revenue growth has been solid, and that growth rate is expected to increase in the short term! 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's price to sales ratio based on the next twelve months is 12.2, suggesting that the market is expecting more moderate growth, relative to the hottest tech stocks. There is definitely a lot of things to like about Zendesk and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.