Customer service software maker Zendesk (NYSE:ZEN) reported results in line with analyst expectations in Q1 FY2022 quarter, with revenue up 30.2% year on year to $388.3 million. The company expects that next quarter's revenue would be around $405 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Zendesk made a GAAP loss of $66.9 million, down on its loss of $48.9 million, in the same quarter last year.
Zendesk (ZEN) Q1 FY2022 Highlights:
- Revenue: $388.3 million vs analyst estimates of $384.6 million (0.96% beat)
- EPS (non-GAAP): $0.12 vs analyst expectations of $0.15 (17.5% miss)
- Revenue guidance for Q2 2022 is $405 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed revenue guidance for the full year, at $1.69 billion at the midpoint
- Free cash flow of $758 thousand, down 97.3% from previous quarter
- Gross Margin (GAAP): 80.5%, up from 79.5% same quarter last year
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 very strong over the last year, growing from quarterly revenue of $298 million, to $388.3 million.
And unsurprisingly, this was another great quarter for Zendesk with revenue up 30.2% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $12.9 million in Q1, compared to $28.3 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Zendesk is expecting revenue to grow 27.2% year on year to $405 million, in line with the 29% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 25.4% 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 80.5% in Q1.
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 $758 thousand in Q1, down 97% year on year.
Zendesk has generated $115.3 million in free cash flow over the last twelve months, a decent 8.07% 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 Q1 Results
Sporting a market capitalization of $15 billion, more than $1.09 billion in cash and with positive free cash flow over the last twelve months, we're confident 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. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a decent quarter, showing the company is staying on target. The company currently trades at $74 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's price to sales ratio based on the next twelve months is 8.2x, suggesting that the market is expecting more steady growth, relative to the hottest tech stocks. There are definitely things to like about Zendesk and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.The Wall St analysts covering the company had a one year price target of $140.8 per share right before these results, implying that they saw upside in buying Zendesk even in the short term.
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