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Zendesk Announces Third Quarter 2022 Results

Highlights:

  • Third quarter revenue increased 20% year-over-year to $416.9 million
  • Third quarter GAAP operating loss of $55.4 million and non-GAAP operating income of $48.9 million
  • GAAP operating loss includes restructuring expenses of $10.2 million and merger-related costs and other expenses of $6.6 million

Zendesk, Inc. ZEN today reported financial results for the third quarter ended September 30, 2022.

Results for the Third Quarter 2022

Revenue was $416.9 million for the quarter ended September 30, 2022, an increase of 20% over the prior year period. GAAP net loss for the quarter ended September 30, 2022 was $59.1 million, and GAAP net loss per share (basic and diluted) was $0.48. Non-GAAP net income was $39.4 million, and non-GAAP net income per share was $0.32 (basic) and $0.28 (diluted). Non-GAAP net income excludes approximately $81.7 million in share-based compensation and related expenses (including $1.3 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $10.2 million of restructuring expenses, $6.6 million of merger-related costs and other expenses, $2.8 million of real estate impairments, $1.8 million of amortization of purchased intangibles, $1.2 million of acquisition-related expenses, and $1.2 million of amortization of debt issuance costs, and includes non-GAAP income tax effects and adjustments of $7.0 million. GAAP net loss per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic) and 138.3 million weighted average shares outstanding (diluted).

Transaction with Private Equity Consortium

Due to Zendesk's pending acquisition by an investor group led by leading investment firms Hellman & Friedman Advisors LLC and Permira Advisers LLC that was announced on June 24, 2022, the Company will not be holding a conference call or live webcast to discuss Zendesk's financial results for the third quarter ended September 30, 2022, or providing a Shareholder Letter for such period. In addition, the Company is suspending its financial guidance for the year ending December 31, 2022 in light of the pending transaction.

About Zendesk

Zendesk started the customer experience revolution in 2007 by enabling any business around the world to take their customer service online. Today, Zendesk is the champion of great service everywhere for everyone, and powers billions of conversations, connecting more than 100,000 brands with hundreds of millions of customers over telephony, chat, email, messaging, social channels, communities, review sites and help centers. Zendesk products are built with love to be loved. The Company was conceived in Copenhagen, Denmark, built and grown in California, taken public in New York City, and today employs more than 6,000 people across the world. Learn more at www.zendesk.com.

References to Zendesk, the "Company," "our," or "we" in this press release refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.

Forward-Looking Statements

This press release contains forward-looking statements, including, among other things, statements regarding Zendesk's future financial performance, its continued investment to grow its business, progress toward its long-term financial objectives, and the proposed transaction. Words such as "may," "should," "will," "believe," "expect," "anticipate," "target," "project," and similar phrases that denote future expectation or intent regarding Zendesk's financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk's actual results, performance, or achievements to differ materially, including (i) Zendesk's ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (ii) the intensely competitive market in which Zendesk operates; (iii) the development of the market for software as a service business software applications; (iv) Zendesk's substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (v) Zendesk's ability to effectively market and sell its products to larger enterprises; (vi) Zendesk's ability to develop or acquire and market new products and to support its products on a unified, reliable shared services platform; (vii) Zendesk's reliance on third-party services, including services for hosting, email, and messaging; (viii) Zendesk's ability to retain key employees and attract qualified personnel, particularly in the primary regions Zendesk operates; (ix) Zendesk's ability to effectively manage its growth and organizational change, including its international expansion strategy; (x) Zendesk's expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (xi) Zendesk's ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xii) real or perceived errors, failures, or bugs in Zendesk's products; (xiii) potential service interruptions or performance problems associated with Zendesk's technology and infrastructure; (xiv) Zendesk's ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches; (xv) Zendesk's ability to comply with privacy and data security regulations; (xvi) Zendesk's ability to optimize the pricing for its solutions; (xvii) other adverse changes in general economic or market conditions; and (xviii) known and unknown risks, uncertainties, and other factors related to the proposed transaction, including: the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed transaction that could reduce anticipated benefits or cause the parties to abandon the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement entered into pursuant to the proposed transaction; the risk that the parties to the merger agreement may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all; risks related to disruption of management time from ongoing business operations due to the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Zendesk's common stock; the risk of any unexpected costs or expenses resulting from the proposed transaction; the risk of any litigation relating to the proposed transaction; the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Zendesk to retain customers and retain and hire key personnel and maintain relationships with customers, suppliers, employees, stockholders and other business relationships and on its operating results and business generally; and the risk the pending proposed transaction could distract management of Zendesk.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2021. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.

Forward-looking statements represent Zendesk's management's beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Condensed Consolidated Statements of Operations

(In thousands, except per share data; unaudited)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2022

 

2021

 

2022

 

2021

Revenue

$

416,861

 

 

$

346,974

 

 

$

1,212,396

 

 

$

963,238

 

Cost of revenue

 

79,462

 

 

 

70,226

 

 

 

237,930

 

 

 

197,863

 

Gross profit

 

337,399

 

 

 

276,748

 

 

 

974,466

 

 

 

765,375

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

105,203

 

 

 

92,112

 

 

 

323,819

 

 

 

248,721

 

Sales and marketing

 

211,593

 

 

 

172,828

 

 

 

622,413

 

 

 

495,596

 

General and administrative

 

76,030

 

 

 

50,716

 

 

 

236,778

 

 

 

139,667

 

Total operating expenses

 

392,826

 

 

 

315,656

 

 

 

1,183,010

 

 

 

883,984

 

Operating loss

 

(55,427

)

 

 

(38,908

)

 

 

(208,544

)

 

 

(118,609

)

Other income (expense), net:

 

 

 

 

 

 

 

Interest expense

 

(3,131

)

 

 

(14,762

)

 

 

(9,373

)

 

 

(43,768

)

Interest and other income (expense), net

 

2,913

 

 

 

2,386

 

 

 

5,845

 

 

 

8,430

 

Total other income (expense), net

 

(218

)

 

 

(12,376

)

 

 

(3,528

)

 

 

(35,338

)

Loss before provision for income taxes

 

(55,645

)

 

 

(51,284

)

 

 

(212,072

)

 

 

(153,947

)

Provision for income taxes

 

3,448

 

 

 

3,133

 

 

 

9,049

 

 

 

7,842

 

Net loss

$

(59,093

)

 

$

(54,417

)

 

$

(221,121

)

 

$

(161,789

)

Net loss per share, basic and diluted

$

(0.48

)

 

$

(0.45

)

 

$

(1.80

)

 

$

(1.36

)

Weighted-average shares used to compute net loss per share, basic and diluted

 

123,576

 

 

 

120,164

 

 

 

122,799

 

 

 

119,050

 

Condensed Consolidated Balance Sheets

(In thousands, except par value; unaudited)

 

 

September 30,
2022

 

December 31,
2021

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$

707,047

 

 

$

476,103

 

Marketable securities

 

630,763

 

 

 

539,780

 

Accounts receivable, net of allowance for credit losses of $6,169 and $6,190 as of September 30, 2022 and December 31, 2021, respectively

 

217,831

 

 

 

273,898

 

Deferred costs

 

85,700

 

 

 

72,042

 

Prepaid expenses and other current assets

 

75,728

 

 

 

56,809

 

Total current assets

 

1,717,069

 

 

 

1,418,632

 

Marketable securities, noncurrent

 

322,946

 

 

 

559,652

 

Property and equipment, net

 

86,799

 

 

 

97,815

 

Deferred costs, noncurrent

 

76,414

 

 

 

72,553

 

Lease right-of-use assets

 

44,260

 

 

 

69,936

 

Goodwill and intangible assets, net

 

191,791

 

 

 

197,098

 

Other assets

 

36,880

 

 

 

35,593

 

Total assets

$

2,476,159

 

 

$

2,451,279

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$

42,553

 

 

$

49,213

 

Accrued liabilities

 

77,664

 

 

 

50,075

 

Accrued compensation and related benefits

 

114,633

 

 

 

138,127

 

Deferred revenue

 

532,889

 

 

 

512,933

 

Lease liabilities

 

19,965

 

 

 

21,253

 

Current portion of convertible senior notes, net

 

148,865

 

 

 

139,738

 

Total current liabilities

 

936,569

 

 

 

911,339

 

Convertible senior notes, net

 

1,138,472

 

 

 

979,350

 

Deferred revenue, noncurrent

 

5,558

 

 

 

4,277

 

Lease liabilities, noncurrent

 

45,902

 

 

 

63,212

 

Other liabilities

 

2,795

 

 

 

3,883

 

Total liabilities

 

2,129,296

 

 

 

1,962,061

 

 

 

 

 

Stockholders' equity:

 

 

 

Preferred stock, par value $0.01 per share

 

 

 

 

 

Common stock, par value $0.01 per share

 

1,238

 

 

 

1,215

 

Additional paid-in capital

 

1,651,518

 

 

 

1,637,157

 

Accumulated other comprehensive loss

 

(25,643

)

 

 

(8,911

)

Accumulated deficit

 

(1,280,250

)

 

 

(1,140,243

)

Total stockholders' equity

 

346,863

 

 

 

489,218

 

Total liabilities and stockholders' equity

$

2,476,159

 

 

$

2,451,279

 

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

 

 

Three Months Ended September 30,

 

2022

 

2021

Cash flows from operating activities

 

 

 

Net loss

$

(59,093

)

 

$

(54,417

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

Depreciation and amortization

 

9,072

 

 

 

9,330

 

Share-based compensation

 

79,959

 

 

 

59,533

 

Amortization of deferred costs

 

22,980

 

 

 

17,797

 

Amortization of debt discount and issuance costs

 

1,227

 

 

 

12,866

 

Real estate impairments

 

3,455

 

 

 

 

Allowance for credit losses on accounts receivable

 

2,664

 

 

 

1,704

 

Other, net

 

148

 

 

 

1,118

 

Changes in operating assets and liabilities:

 

 

 

Accounts receivable

 

36,836

 

 

 

15,231

 

Prepaid expenses and other current assets

 

2,028

 

 

 

(7,646

)

Deferred costs

 

(23,796

)

 

 

(22,595

)

Lease right-of-use assets

 

3,497

 

 

 

4,058

 

Other assets and liabilities

 

(244

)

 

 

(2,038

)

Accounts payable

 

(27,925

)

 

 

12,927

 

Accrued liabilities

 

14,992

 

 

 

3,910

 

Accrued compensation and related benefits

 

4,138

 

 

 

22,020

 

Deferred revenue

 

(33,367

)

 

 

5,571

 

Lease liabilities

 

(6,633

)

 

 

(5,559

)

Net cash provided by operating activities

 

29,938

 

 

 

73,810

 

Cash flows from investing activities

 

 

 

Purchases of property and equipment

 

(2,164

)

 

 

(5,073

)

Internal-use software development costs

 

(2,334

)

 

 

(3,299

)

Purchases of marketable securities

 

(33,731

)

 

 

(213,786

)

Proceeds from maturities of marketable securities

 

99,616

 

 

 

209,980

 

Proceeds from sales of marketable securities

 

40,410

 

 

 

44,934

 

Business combinations, net of cash acquired

 

 

 

 

(7,811

)

Purchases of strategic investments

 

(500

)

 

 

(1,000

)

Proceeds from sales of strategic investments

 

 

 

 

1,008

 

Net cash provided by investing activities

 

101,297

 

 

 

24,953

 

Cash flows from financing activities

 

 

 

Proceeds from exercises of employee stock options

 

3,273

 

 

 

3,754

 

Proceeds from employee stock purchase plan

 

6,650

 

 

 

10,358

 

Taxes paid related to net share settlement of share-based awards

 

(1,552

)

 

 

(2,638

)

Net cash provided by financing activities

 

8,371

 

 

 

11,474

 

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

(104

)

 

 

(14

)

Net increase in cash, cash equivalents and restricted cash

 

139,502

 

 

 

110,223

 

Cash, cash equivalents and restricted cash at beginning of period

 

569,694

 

 

 

423,248

 

Cash, cash equivalents and restricted cash at end of period

$

709,196

 

 

$

533,471

 

Non-GAAP Results

(In thousands, except per share data)

The following table shows Zendesk's GAAP results reconciled to non-GAAP results included in this release.

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2022

 

2021

 

2022

 

2021

Reconciliation of gross profit and gross margin

 

 

 

 

 

 

 

GAAP gross profit

$

337,399

 

 

$

276,748

 

 

$

974,466

 

 

$

765,375

 

Plus: Share-based compensation

 

7,053

 

 

 

5,343

 

 

 

20,212

 

 

 

15,047

 

Plus: Employer tax related to employee stock transactions

 

104

 

 

 

187

 

 

 

490

 

 

 

967

 

Plus: Amortization of purchased intangibles

 

1,178

 

 

 

1,095

 

 

 

3,533

 

 

 

3,450

 

Plus: Acquisition-related expenses

 

 

 

 

37

 

 

 

 

 

 

161

 

Plus: Amortization of share-based compensation capitalized in internal-use software

 

415

 

 

 

373

 

 

 

1,252

 

 

 

1,144

 

Non-GAAP gross profit

$

346,149

 

 

$

283,783

 

 

$

999,953

 

 

$

786,144

 

GAAP gross margin

 

81

%

 

 

80

%

 

 

80

%

 

 

79

%

Non-GAAP adjustments

 

2

%

 

 

2

%

 

 

2

%

 

 

3

%

Non-GAAP gross margin

 

83

%

 

 

82

%

 

 

82

%

 

 

82

%

 

 

 

 

 

 

 

 

Reconciliation of operating expenses

 

 

 

 

 

 

 

GAAP research and development

$

105,203

 

 

$

92,112

 

 

$

323,819

 

 

$

248,721

 

Less: Share-based compensation

 

(22,885

)

 

 

(17,189

)

 

 

(62,654

)

 

 

(49,886

)

Less: Employer tax related to employee stock transactions

 

(410

)

 

 

(617

)

 

 

(1,945

)

 

 

(3,126

)

Less: Acquisition-related expenses

 

(1,004

)

 

 

(1,297

)

 

 

(3,641

)

 

 

(3,076

)

Less: Amortization of share-based compensation capitalized in internal-use software

 

(17

)

 

 

(17

)

 

 

(51

)

 

 

(51

)

Non-GAAP research and development

$

80,887

 

 

$

72,992

 

 

$

255,528

 

 

$

192,582

 

GAAP research and development as percentage of revenue

 

25

%

 

 

27

%

 

 

27

%

 

 

26

%

Non-GAAP research and development as percentage of revenue

 

19

%

 

 

21

%

 

 

21

%

 

 

20

%

 

 

 

 

 

 

 

 

GAAP sales and marketing

$

211,593

 

 

$

172,828

 

 

$

622,413

 

 

$

495,596

 

Less: Share-based compensation

 

(35,014

)

 

 

(24,915

)

 

 

(92,934

)

 

 

(72,648

)

Less: Employer tax related to employee stock transactions

 

(655

)

 

 

(739

)

 

 

(2,843

)

 

 

(4,193

)

Less: Amortization of purchased intangibles

 

(642

)

 

 

(642

)

 

 

(1,926

)

 

 

(1,926

)

Less: Acquisition-related expenses

 

(1

)

 

 

(262

)

 

 

(375

)

 

 

(374

)

Non-GAAP sales and marketing

$

175,281

 

 

$

146,270

 

 

$

524,335

 

 

$

416,455

 

GAAP sales and marketing as percentage of revenue

 

51

%

 

 

50

%

 

 

51

%

 

 

51

%

Non-GAAP sales and marketing as percentage of revenue

 

42

%

 

 

42

%

 

 

43

%

 

 

43

%

 

 

 

 

 

 

 

 

GAAP general and administrative

$

76,030

 

 

$

50,716

 

 

$

236,778

 

 

$

139,667

 

Less: Share-based compensation

 

(15,007

)

 

 

(12,086

)

 

 

(41,456

)

 

 

(31,020

)

Less: Employer tax related to employee stock transactions

 

(164

)

 

 

(510

)

 

 

(1,144

)

 

 

(2,798

)

Less: Acquisition-related expenses

 

(157

)

 

 

(636

)

 

 

(10,003

)

 

 

(1,099

)

Less: Amortization of share-based compensation capitalized in internal-use software

 

(7

)

 

 

 

 

 

(7

)

 

 

 

Less: Real estate impairments

 

(2,763

)

 

 

65

 

 

 

(27,671

)

 

 

(1,111

)

Less: Merger-related costs and other expenses

 

(6,620

)

 

 

 

 

 

(18,833

)

 

 

 

Less: Restructuring expenses

 

(10,184

)

 

 

 

 

 

(10,184

)

 

 

 

Non-GAAP general and administrative

$

41,128

 

 

$

37,549

 

 

$

127,480

 

 

$

103,639

 

GAAP general and administrative as percentage of revenue

 

18

%

 

 

15

%

 

 

20

%

 

 

14

%

Non-GAAP general and administrative as percentage of revenue

 

10

%

 

 

11

%

 

 

11

%

 

 

11

%

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

2022

 

2021

2022

 

2021

Reconciliation of operating income (loss) and operating margin

 

 

 

 

 

 

 

GAAP operating loss

$

(55,427

)

 

$

(38,908

)

 

$

(208,544

)

 

$

(118,609

)

Plus: Share-based compensation

 

79,959

 

 

 

59,533

 

 

 

217,256

 

 

 

168,601

 

Plus: Employer tax related to employee stock transactions

 

1,333

 

 

 

2,053

 

 

 

6,422

 

 

 

11,084

 

Plus: Amortization of purchased intangibles

 

1,820

 

 

 

1,737

 

 

 

5,459

 

 

 

5,376

 

Plus: Acquisition-related expenses

 

1,162

 

 

 

2,232

 

 

 

14,019

 

 

 

4,710

 

Plus: Amortization of share-based compensation capitalized in internal-use software

 

439

 

 

 

390

 

 

 

1,310

 

 

 

1,195

 

Plus: Real estate impairments

 

2,763

 

 

 

(65

)

 

 

27,671

 

 

 

1,111

 

Plus: Merger-related costs and other expenses

 

6,620

 

 

 

 

 

 

18,833

 

 

 

 

Plus: Restructuring expenses

 

10,184

 

 

 

 

 

 

10,184

 

 

 

 

Non-GAAP operating income

$

48,853

 

 

$

26,972

 

 

$

92,610

 

 

$

73,468

 

GAAP operating margin

 

(13

) %

 

 

(11

) %

 

 

(17

) %

 

 

(12

) %

Non-GAAP adjustments

 

25

%

 

 

19

%

 

 

25

%

 

 

20

%

Non-GAAP operating margin

 

12

%

 

 

8

%

 

 

8

%

 

 

8

%

Reconciliation of net income (loss)

 

 

 

 

 

 

 

GAAP net loss

$

(59,093

)

 

$

(54,417

)

 

$

(221,121

)

 

$

(161,789

)

Plus: Share-based compensation

 

79,959

 

 

 

59,533

 

 

 

217,256

 

 

 

168,601

 

Plus: Employer tax related to employee stock transactions

 

1,333

 

 

 

2,053

 

 

 

6,422

 

 

 

11,084

 

Plus: Amortization of purchased intangibles

 

1,820

 

 

 

1,737

 

 

 

5,459

 

 

 

5,376

 

Plus: Acquisition-related expenses

 

1,162

 

 

 

2,232

 

 

 

14,019

 

 

 

4,710

 

Plus: Amortization of share-based compensation capitalized in internal-use software

 

439

 

 

 

390

 

 

 

1,310

 

 

 

1,195

 

Plus: Real estate impairments

 

2,763

 

 

 

(65

)

 

 

27,671

 

 

 

1,111

 

Plus: Merger-related costs and other expenses

 

6,620

 

 

 

 

 

 

18,833

 

 

 

 

Plus: Restructuring expenses

 

10,184

 

 

 

 

 

 

10,184

 

 

 

 

Plus: Amortization of debt discount and issuance costs

 

1,227

 

 

 

12,865

 

 

 

3,673

 

 

 

38,085

 

Less: Income tax effects and adjustments

 

(7,024

)

 

 

(2,634

)

 

 

(10,430

)

 

 

(8,163

)

Non-GAAP net income

$

39,390

 

 

$

21,694

 

 

$

73,276

 

 

$

60,210

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, basic

 

 

 

 

 

 

 

GAAP net loss per share, basic

$

(0.48

)

 

$

(0.45

)

 

$

(1.80

)

 

$

(1.36

)

Non-GAAP adjustments to net loss

 

0.80

 

 

 

0.63

 

 

 

2.40

 

 

 

1.87

 

Non-GAAP net income per share, basic

$

0.32

 

 

$

0.18

 

 

$

0.60

 

 

$

0.51

 

 

 

 

 

 

 

 

 

Reconciliation of net income (loss) per share, diluted

 

 

 

 

 

 

 

GAAP net loss per share, diluted

$

(0.48

)

 

$

(0.45

)

 

$

(1.80

)

 

$

(1.36

)

Non-GAAP adjustments to net loss

 

0.76

 

 

 

0.62

 

 

 

2.33

 

 

 

1.83

 

Non-GAAP net income per share, diluted

$

0.28

 

 

$

0.17

 

 

$

0.53

 

 

$

0.47

 

 

 

 

 

 

 

 

 

Weighted-average shares used in GAAP per share calculation, basic and diluted

 

123,576

 

 

 

120,164

 

 

 

122,799

 

 

 

119,050

 

 

 

 

 

 

 

 

 

Weighted-average shares used in non-GAAP per share calculation

 

 

 

 

 

 

 

Basic

 

123,576

 

 

 

120,164

 

 

 

122,799

 

 

 

119,050

 

Diluted (1)

 

138,334

 

 

 

126,887

 

 

 

137,912

 

 

 

127,234

 

 

 

 

 

 

 

 

 

Computation of free cash flow

 

 

 

 

 

 

 

Net cash provided by operating activities

$

29,938

 

 

$

73,810

 

 

$

90,175

 

 

$

134,283

 

Less: Purchases of property and equipment

 

(2,164

)

 

 

(5,073

)

 

 

(15,014

)

 

 

(11,030

)

Less: Internal-use software development costs

 

(2,334

)

 

 

(3,299

)

 

 

(8,230

)

 

 

(10,837

)

Free cash flow

$

25,440

 

 

$

65,438

 

 

$

66,931

 

 

$

112,416

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities margin

 

7

%

 

 

21

%

 

 

7

%

 

 

14

%

Non-GAAP adjustments

 

(1

) %

 

 

(2

) %

 

 

(1

) %

 

 

(2

) %

Free cash flow margin

 

6

%

 

 

19

%

 

 

6

%

 

 

12

%

(1) In the first quarter of 2022, we adopted ASU 2020-06, which simplifies the accounting for convertible debt. Under the new standard, companies are required to use the if-converted method for calculating diluted EPS instead of the treasury stock method. For the three and nine months ended September 30, 2022, approximately 13 million shares related to our convertible notes were included in the diluted share amount using the if-converted method.

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Zendesk's results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin.

Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable:

Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in Internal-Use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk's control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity's developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.

Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.

Real Estate Impairments: To support an increased percentage of remote teams, Zendesk records impairments for certain assets associated with leased properties, or portions thereof, that it ceases to occupy. Any losses and gains associated with these activities are generally unrelated to financial and operational performance in any particular period and Zendesk believes the exclusion of such losses and gains provides for a more useful comparison of operational performance in comparative periods that may or may not include such losses and gains.

Merger-Related Costs and Other Expenses: Zendesk views fees related to its pending acquisition, including transaction costs, as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses provides meaningful supplemental information regarding operational performance. Other expenses include non-recurring fees paid for third-party advisory and professional services related to shareholder activism and the strategic review.

Restructuring Expenses: Zendesk views restructuring expenses, such as employee severance-related costs, professional fees, and other costs associated with significant changes to its operations as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.

Amortization of Debt Discount and Issuance Costs: On January 1, 2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC Topic 470 "Debt" and ASC Topic 815 "Derivatives and Hedging," which simplifies the accounting for convertible debt. Prior to the adoption of ASU 2020-06, the imputed interest rates of our 2023 convertible notes and our 2025 notes were approximately 5.26% and 5.00%, respectively. This was a result of the debt discounts recorded for the conversion features of the notes that were required to be separately accounted for as equity, and debt issuance costs, which reduced the carrying value of the convertible debt instruments. The debt discounts were amortized as interest expense together with the issuance costs of the debt. Upon adoption of the new standard, the liability and equity components of each instrument were recombined into a single liability instrument measured at amortized cost. As a result, from the date of adoption, no debt discount remains and no interest expense related to debt discount amortization will be recorded. Interest expense related to the amortization of debt issuance costs will continue to be recorded over the term of the notes. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this expense will provide for a more useful comparison of our operational performance in different periods.

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk's current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2022, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations.

Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk's management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk's operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk's operating results and future prospects in the same manner as management.

Zendesk's management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, acquisition-related expenses, real estate impairments, merger-related costs and other expenses, and restructuring expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk's business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, regarding ASC Topic 470 "Debt" and ASC Topic 815 "Derivatives and Hedging," which amends the calculation of diluted earnings per share for certain convertible debt instruments, among other changes. Under the new standard, Zendesk is required to use the "if-converted" method to calculate diluted earnings per share for its convertible debt, which assumes conversion of its convertible debt instruments at the beginning of the reporting period, with settlement entirely in shares of common stock, unless the result would be anti-dilutive. Historically, Zendesk calculated diluted earnings per share for its convertible debt using the "treasury stock" method, which assumes that the principal amount of convertible debt instruments is settled in cash. Accordingly, our diluted shares outstanding are generally expected to increase under the new standard. We adopted this standard in the first quarter of 2022. The total amount of shares underlying the convertible notes is approximately 13 million. Refer to Form 10-Q for the quarter ended September 30, 2022 for further information.

Source: Zendesk, Inc.

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