Anyone familiar with Zendesk (ZEN)? I did a quick search on this board and NPI. There were a few stock performance posts grouping ZEN with some other SaaS stocks, but I couldn’t find any in-depth discussions on the company itself other than an NPI thread a few messages long in March, 2017. I apologize in advance if I’m rehashing a company that’s previously been discarded.
Zendesk is a SaaS company founded in 2007 that provides tools to optimize customer support. It lets businesses track, prioritize and solve customer service interactions across phone, chat, email, social media or any other channel. Interactions can be integrated and tracked across all channels regardless of communication format. There is a central dashboard that lets the client manage it all in one place. Gartner has classified Zendesk as a Leader in Customer Engagement three years in a row, although it trails some considerable competition in this category (Oracle, Microsoft, Salesforce, Atlassian). Some notable customers include airbnb, slack, OpenTable, Uber and Shopify. It appears they have several different products depending on how companies interact with their clients. The software is purchased through monthly or annual subscriptions per agent. These are the basic software modules:
Support - Track, prioritize and solve support tickets.
Guide - Manage self-service answers to customers and agents.
Chat - Customer service chat and messaging platform.
Talk - Personalized phone support.
In May 2018 Zendesk released an all-encompassing product named Suite that can integrate some or all of these modules into a customized platform. The company says they are very pleased with the response thus far. They also have the following add-on products:
Connect (also released 5/18)– Lets companies create proactive campaigns that automate customer communications based on history or actions. This can include marketing info as well as anticipating potential customer service issues.
Explore - Analytics for agent performance and customer usage.
Side Conversations – A module that allows customer service agents to directly talk to other departments or even company partners to help solve issues.
Adjusted Revs Q1 Q2 Q3 Q4 YR 2016 $68.46 $74.20 $80.72 $88.62 $312.00 2017 $93.89 $102.10 $112.79 $123.43 $430.49 2018 $129.79 $141.88 $151.00 $161.33 $584.00 Rev % Q1 Q2 Q3 Q4 YR 2016 2017 37.1% 37.6% 39.7% 39.3% 38.0% 2018 38.2% 39.0% 33.9% 30.7% 35.7%
The Q3/Q4 numbers are from the company’s forward estimates. While it appears they are predicting slowing growth, ZEN has traditionally sandbagged estimates with consistent beats and raises. At this point I don’t have any reason to think that won’t be the case going forward. It looks like they should beat the ongoing 35% revenue growth cited in the Knowledgebase as potential candidates for this board.
- Zendesk is FCF positive the last 7 Q’s.
- EPS is trending the right way. FY16 was -$.22. FY17 was -$.13. So far in 2018, they are $.05 (Q1 $.02; Q2 $.03).
Notes from their most recent quarter (Q218):
- $494.4M in cash. It appears they issued $446M in convertible senior notes this Q (if I’m reading that right).
- 130,300 customers (+5,200 sequentially and +22,900 YoY).
- The number of $50K+ customers is up 60% YoY from Q217.
- 119% revenue retention. Zendesk has ranged from 114-120% the last nine Q’s.
One negative is GAAP gross margins fell from 70.0% to 68.9% YoY in Q2. Their non-GAAP rates have slid from 75% to 73% to 72% over the last three quarters as well. The company says gross margins will see ongoing pressure as their services are transferred from data-centers to cloud. They anticipate this being done by year end.
Competition does appear to be a concern. There are some large players in this market (Salesforce, Oracle, Microsoft and Atlassian). Some of them have stronger Gartner ratings as well. Zendesk’s advantage seems to be their smaller size with a chance to make larger marginal gains with any increase in market share.
Last week Zendesk appeared to take another growth step when it acquired FutureSimple, the company behind Base software. Press release here:
Base software is designed to help salespeople manage info and close sales. Zendesk and FutureSimple had already partnered on a sales and customer support integration product prior to this acquisition. Gartner lists Base as Visionary in their July '18 Magic Quadrant for Sales Force Automation. It appears Base’s management team is coming along with the company. Zendesk touted adding 5,000 customers in the release. Base says it currently has 7,000 customers on its website. I’m not sure why there is a discrepancy unless they share a couple thousand customers, which is definitely possible. The acquisition does seem to be a good fit though, especially considering the companies had already partnered on a viable product.
Unfortunately, terms of the deal were not disclosed. Base’s site notes it has raised $53M across 3 funding rounds, but I did not see any company valuation or financial figures. ZEN says the acquisition will have no significant impact on '18 revenues. However, it’s expected to be dilutive to Operating Margin and EPS. Further details on the '18 impact are expected when ZEN releases financial results after the Q3 close on 9/30.
Is anyone else familiar with this company? I’m guessing many of you have at least given it a glance.
I’d also gladly take any feedback on the above breakdown. This is my first bite at one of these apples and I want to make sure it fits the spirit of the board.