Customer service software maker Zendesk (NYSE:ZEN) reported strong growth in the Q3 FY2021 earnings announcement, with revenue up 32.4% year on year to $346.9 million. Guidance also exceeded expectations with next quarter revenues guided to $369 million, or 1.57% above analyst estimates. Zendesk made a GAAP loss of $54.4 million, down on its loss of $40.7 million, in the same quarter last year.
Zendesk (ZEN) Q3 FY2021 Highlights:
- Revenue: $346.9 million vs analyst estimates of $335.3 million (3.47% beat)
- EPS (non-GAAP): $0.17 vs analyst expectations of $0.17 (small miss)
- Revenue guidance for Q4 2021 is $369 million at the midpoint, above analyst estimates of $363.2 million
- Free cash flow of $65.4 million, up from $20.9 million in previous quarter
- Gross Margin (GAAP): 79.7%, up from 76% same quarter last year
- Zendesk announced it would buy the parent company of SurveyMonkey, an online questionnaire platform, in a stock deal valued at $4.13 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.
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 sales and 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.
As you can see below, Zendesk's revenue growth has been strong over the last year, growing from quarterly revenue of $261.9 million, to $346.9 million.
This was a standout quarter for Zendesk, with the quarterly revenue up an absolutely stunning 32.4% year on year, which is above average for the company. On top of that, revenue increased $28.7 million quarter on quarter, a very strong improvement on the $20.1 million increase in Q2 2021, and a sign of re-acceleration of growth.
Analysts covering the company are expecting the revenues to grow 25.1% over the next twelve months, although estimates are likely to change post earnings.
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 79.7% in Q3.
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 Q3 Results
Sporting a market capitalization of $14.7 billion, more than $953.8 million 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 excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. But the market didn't respond to the acquisition news positively and the company is down 15.1% on the results and currently trades at $101 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 solid. 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 9.2, 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 $177.1 per share right before these results, implying that they saw upside in buying Zendesk even in the short term.
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