Strong Growth Continues at Zendesk

By Markets Fool.com

Image source: Zendesk.

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Software-as-a-service provider Zendesk (NYSE: ZEN) reported its second-quarter results after the market closed on Aug. 2. Revenue increased by more than 50%, as the company continues to add thousands of new customers every quarter. Non-GAAP profitability improved, but GAAP losses grew compared with the second quarter of 2015. Here's what investors need to know about Zendesk's second-quarter results.

Zendesk results: The raw numbers

Metric

Q2 2016

Q2 2015

Growth (YOY)

Revenue

$74.2 million

$48.2 million

54%

Net income

($26.3 million)

($21.5 million)

(22%)

Non-GAAP EPS

($0.06)

($0.08)

25%

Data source: Zendesk Q2 earnings report.

What happened with Zendesk this quarter?

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Zendesk continued adding customers and growing revenue during the second quarter.

  • Paid customer accounts surpassed 81,000, up from 69,000 at the end of 2015.
  • Of Zendesk's monthly recurring revenue, 33% was generated by customers with 100 or more agents, flat compared with the first quarter and up from 27% during the second quarter of 2015.
  • The number of deals with an annualized value of at least $50,000 increased by 11% year over year.

In addition to reporting its results, Zendesk provided guidance for the third quarter and for the full year.

  • Third-quarter revenue is expected to be between $78 million and $80 million, up 41% year over year at the midpoint.
  • Third-quarter non-GAAP operating loss is expected to be between $5.5 million and $6.5 million, compared with a loss of $4.1 during the third quarter of 2015.
  • Full-year revenue is expected to be between $307 million and $311 million, up 47.8% at the midpoint.
  • Full-year non-GAAP operating loss is expected to be between $21 million and $23 million, compared with a loss of $24.7 million in 2015.

What management had to say

Management summed up the second quarter in the company's letter to shareholders:

"The strong second quarter results Zendesk reports today reflect solid revenue growth, year-over-year improvement in operating margins, and neutral cash flow from operating activities -- all while growing a broader customer base of more than 81,000 paid customer accounts. During the quarter, we also announced several new products, features, and capabilities important to our long-term strategy to have a bigger impact in business initiatives beyond customer support."

Zendesk also discussed the various accolades the company received during the quarter:

Our movement up market into the mid-market and enterprise space has garnered increased attention from industry analysts. Zendesk was positioned in the Leaders quadrant in Gartner's May 2016 Magic Quadrant for the CRM Customer Engagement Center. We were also the fastest-growing among the top 20 CRM vendors, based on Gartner's 2015 CRM software revenue worldwide for respective players in its May 2016 Market Share Analysis: Customer Relationship Management Software, Worldwide, 2015 report.

Looking forward

Zendesk continued to post impressive revenue growth during the second quarter. The company remains unprofitable on both a GAAP and non-GAAP basis, but Zendesk does expect to be free-cash-flow-positive in 2017.

Going forward, Zendesk will need to continue growing revenue at a breakneck pace. The stock trades for roughly 12 times 2015 revenue, a valuation that prices in years of rapid growth. So far, Zendesk hasn't had much trouble winning new customers and growing revenue. But as the company gets bigger, growth rates are bound to slow down.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Zendesk. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.