Zendesk Surpasses 100,000 Paying Customers

By Timothy Green Markets Fool.com

Software-as-a-service provider Zendesk (NYSE: ZEN) posted its first-quarter results after the market closed on May 4. The company's paying customer base now exceeds 100,000, and revenue continues to grow at a double-digit pace. Losses persist, but Zendesk expects to be free-cash-flow positive this year. Here's what investors need to know about Zendesk's first-quarter report.

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Zendesk results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Growth

Revenue

$93.0 million

$68.5 million

35.9%

Net income

($27.0 million)

($27.2 million)

N/A

Non-GAAP earnings per share

($0.05)

($0.08)

N/A

Data source: Zendesk.

Image source: Zendesk.

What happened with Zendesk this quarter?

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Zendesk hit a customer milestone, and completed its acquisition of Outbound.

  • Paid customer accounts worldwidesurpassed 100,000, up from 94,000 at the end of 2016.
  • 34% of monthly recurring revenue came from customer accounts with 100 or more support agents, flat compared to the fourth quarter.
  • The number of contracts signed with an annual value of $50,000 or greater surged 35% year over year.
  • Zendesk's dollar-based net expansion rate was 115% at the end of the quarter, flat compared to the end of 2016.
  • Notable customers that joined or expanded during the quarter include Udemy, Ebates, and the University of Wisconsin-Madison Department of Medicine.
  • The acquisition of Outbound is complete, but it is not expected to have a material impact on its 2017 revenue or non-GAAP operating loss.

Zendesk provided the following guidance:

  • For the second quarter, it expects revenue between $98 million and $100 million and non-GAAP operating loss between $5 million and $7 million. GAAP operating loss is not yet determinable due to the acquisition.
  • For the full year, revenue should land between $417 million and $425 million and non-GAAP operating loss between $16 million and $20 million.
  • Zendesk still expects net cash from operating activities and free cash flow to be positive in 2017.

What management had to say

CEO Mikkel Svane commented on reaching 100,000 customers and the Outbound acquisition: "We're honored that so many organizations of all sizes trust us with their customer relationships at a time when those relationships have never been more important. With the Outbound team now joiningZendesk, we will be able to more rapidly build out our product family and accelerate our promise to deliver a single, seamless customer experience."

In the company's shareholder letter, management discussed a new product launched in May: "Along with strong account growth, we started 2017 by aggressively pursuing our long-term growth opportunities, setting ourselves up to meet our financial goals and targets for the year. In early May, we launched Zendesk Guide, our new and improved knowledge base product that gives us additional monetization opportunities in self-service."

Looking forward

The company didn't mention its previously stated goal of reaching $1 billion in revenue by 2020, so it's unclear whether that's still the target. Revenue would need to grow about as fast as it did during the first quarter through 2020 for it to reach $1 billion, so there's little room for a slowdown. Maintaining this pace will become more difficult as Zendesk grows.

Zendesk is still expecting to produce positive free cash flow during 2017, an important step on its way to profitability. Non-GAAP earnings will remain soundly negative, but no longer burning cash as it grows will be a critical milestone.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Zendesk. The Motley Fool has a disclosure policy.