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Zendesk Announces Fourth Quarter and Fiscal Year 2021 Results

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·17 min read
In this article:
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Highlights:

  • Fourth quarter revenue increased 32% year-over-year to $375.4 million

  • Fourth quarter GAAP operating loss of $48.1 million and non-GAAP operating income of $27.2 million

  • Full year 2021 revenue increased 30% year-over-year to $1.339 billion

  • Full year 2021 GAAP operating loss of $166.7 million and non-GAAP operating income of $100.7 million

SAN FRANCISCO, February 10, 2022--(BUSINESS WIRE)--Zendesk, Inc. (NYSE: ZEN) today reported financial results for the quarter and fiscal year ended December 31, 2021, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Fourth Quarter 2021

Revenue was $375.4 million for the quarter ended December 31, 2021, an increase of 32% over the prior year period. GAAP net loss for the quarter ended December 31, 2021 was $61.9 million, and GAAP net loss per share (basic and diluted) was $0.51. Non-GAAP net income was $20.1 million, and non-GAAP net income per share was $0.17 (basic) and $0.16 (diluted). Non-GAAP net income excludes approximately $64.0 million in share-based compensation and related expenses (including $2.0 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $13.0 million of amortization of debt discount and issuance costs, $9.2 million of acquisition-related expenses, $1.8 million of amortization of purchased intangibles, $0.2 million of real estate impairments, and non-GAAP income tax effects and adjustments of $6.3 million. GAAP net loss per share for the quarter ended December 31, 2021 was based on 121.1 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended December 31, 2021 was based on 121.1 million weighted average shares outstanding (basic) and 124.9 million weighted average shares outstanding (diluted).

Results for the Full Fiscal Year 2021

Revenue was $1.339 billion for the year ended December 31, 2021, an increase of 30% over the prior year period. GAAP net loss for the year ended December 31, 2021 was $223.6 million, and GAAP net loss per share (basic and diluted) was $1.87. Non-GAAP net income was $80.3 million, and non-GAAP net income per share was $0.67 (basic) and $0.63 (diluted). Non-GAAP net income excludes approximately $244.9 million in share-based compensation and related expenses (including $13.1 million of employer tax related to employee stock transactions and $1.6 million of amortization of share-based compensation capitalized in internal-use software), $51.1 million of amortization of debt discount and issuance costs, $13.9 million of acquisition-related expenses, $7.2 million of amortization of purchased intangibles, $1.3 million of real estate impairments, and non-GAAP income tax effects and adjustments of $14.5 million. GAAP net loss per share for the year ended December 31, 2021 was based on 119.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the year ended December 31, 2021 was based on 119.6 million weighted average shares outstanding (basic) and 126.8 million weighted average shares outstanding (diluted).

Outlook

As of February 10, 2022, Zendesk provided guidance for the quarter ending March 31, 2022 and for the year ending December 31, 2022.

For the quarter ending March 31, 2022, Zendesk expects to report:

  • Revenue in the range of $381 - 387 million

  • GAAP operating income (loss) in the range of $(65) - (59) million, which includes share-based compensation and related expenses of approximately $72 million, acquisition-related expenses of approximately $11 million, and amortization of purchased intangibles of approximately $2 million

  • Non-GAAP operating income in the range of $20 - 26 million, which excludes share-based compensation and related expenses of approximately $72 million, acquisition-related expenses of approximately $11 million, and amortization of purchased intangibles of approximately $2 million

  • Approximately 122 million weighted average shares outstanding (basic)

  • Approximately 135 million weighted average shares outstanding (diluted), which is impacted by the adoption of a new accounting standard related to the treatment of convertible debt

For the full year ending December 31, 2022, Zendesk expects to report:

  • Revenue in the range of $1.675 - 1.705 billion

  • GAAP operating income (loss) in the range of $(221) - (201) million, which includes share-based compensation and related expenses of approximately $317 million, acquisition-related expenses of approximately $14 million, and amortization of purchased intangibles of approximately $7 million

  • Non-GAAP operating income in the range of $117 - 137 million, which excludes share-based compensation and related expenses of approximately $317 million, acquisition-related expenses of approximately $14 million, and amortization of purchased intangibles of approximately $7 million

  • Approximately 124 million weighted average shares outstanding (basic)

  • Approximately 137 million weighted average shares outstanding (diluted), which is impacted by the adoption of a new accounting standard related to the treatment of convertible debt

  • Free cash flow in the range of $165 - 195 million

This free cash flow guidance includes expected transaction costs of $14 - 17 million related to the proposed merger with Momentive Global Inc. ("Momentive"). We expect to incur additional transaction costs if the proposed merger closes, which would reduce the free cash flow and GAAP operating income (loss) guidance provided above.

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2022 because we do not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on our free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the full year 2022 is not available without unreasonable effort.

This guidance for diluted shares outstanding reflects the adoption of a new accounting standard in Q1 2022, which will increase the amount of diluted shares related to our convertible debt. Please refer to "About Non-GAAP Financial Measures" below for further details.

Zendesk’s estimates of share-based compensation and related expenses, amortization of purchased intangibles, acquisition-related expenses, weighted average shares outstanding, and free cash flow in future periods assume, among other things, the occurrence of no additional acquisitions, investments or restructurings, and no further revisions to share-based compensation and related expenses.

Shareholder Letter and Conference Call Information

The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a live video webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on Thursday, February 10, 2022 to discuss the results. The live video webcast can be accessed through Zendesk’s investor relations website at https://investor.zendesk.com. A replay of the webcast will be available for 12 months.

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 5,000 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, and progress toward its long-term financial objectives. 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) the risk that uncertainty about the proposed transaction with Momentive may adversely affect relationships with Zendesk’s customers, partners, suppliers, and employees, whether or not the transaction is completed; (xviii) the effect of the announcement of the proposed transaction on the ability of Zendesk to retain and hire key personnel; (xix) the risk that disruptions from the proposed transaction will harm Zendesk’s business, including current plans and operations; (xx) the risk of a potentially adverse reaction by Zendesk stockholders that oppose the proposed transaction; (xxi) potential litigation related to the proposed transaction and the resulting expense or delay; (xxii) the occurrence of any event, change or other circumstances that could give rise to the right to terminate the proposed transaction; (xxiii) the diversion of the attention of the management teams of Zendesk from their ongoing business operations; (xxiv) risks relating to the market value of Zendesk’s common stock to be issued in the proposed transaction; (xxv) the effect of uncertainties related to the COVID-19 pandemic on U.S. and global markets, Zendesk’s business, operations, revenue, cash flow, operating expenses, hiring, demand for their respective solutions, sales cycles, customer retention, and their respective customers’ businesses and industries; (xxvi) the failure to obtain stockholder or regulatory approvals in a timely manner or otherwise; (xxvii) the ability of Zendesk to successfully integrate Momentive’s operations and technologies; (xxviii) the ability of Zendesk to implement its plans, forecasts and other expectations with respect to its business after the completion of the transaction and realize expected synergies; (xxix) the ability to complete the proposed transaction within the time frame anticipated or at all; (xxx) the failure to realize the anticipated benefits of the proposed transaction or those benefits taking longer than anticipated to be realized; and (xxxi) other adverse changes in general economic or market conditions.

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 Quarterly Report on Form 10-Q for the quarter ended September 30, 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 Annual Report on Form 10-K for the year ended December 31, 2021.

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
December 31,

Year Ended
December 31,

2021

2020

2021

2020

Revenue

$

375,365

$

283,498

$

1,338,603

$

1,029,564

Cost of revenue

77,020

67,219

274,883

251,255

Gross profit

298,345

216,279

1,063,720

778,309

Operating expenses:

Research and development

103,328

71,134

352,049

255,400

Sales and marketing

184,205

142,897

679,801

512,339

General and administrative

58,887

57,041

198,554

166,469

Total operating expenses

346,420

271,072

1,230,404

934,208

Operating loss

(48,075

)

(54,793

)

(166,684

)

(155,899

)

Other income (expense), net:

Interest expense

(14,953

)

(14,258

)

(58,721

)

(43,319

)

Loss on early extinguishment of debt

(25,950

)

Interest and other income (expense), net

207

(1

)

8,637

12,751

Total other income (expense), net

(14,746

)

(14,259

)

(50,084

)

(56,518

)

Loss before (benefit from) provision for income taxes

(62,821

)

(69,052

)

(216,768

)

(212,417

)

(Benefit from) provision for income taxes

(966

)

984

6,876

5,761

Net loss

$

(61,855

)

$

(70,036

)

$

(223,644

)

$

(218,178

)

Net loss per share, basic and diluted

$

(0.51

)

$

(0.60

)

$

(1.87

)

$

(1.89

)

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

121,124

116,986

119,573

115,240

Condensed Consolidated Balance Sheets
(In thousands, except par value; unaudited)

December 31,
2021

December 31,
2020

Assets

Current assets:

Cash and cash equivalents

$

476,103

$

405,430

Marketable securities

539,780

565,593

Accounts receivable, net of allowance for credit losses of $6,190 and $5,787 as of December 31, 2021
and 2020, respectively

273,898

199,243

Deferred costs

72,042

51,878

Prepaid expenses and other current assets

56,809

53,829

Total current assets

1,418,632

1,275,973

Marketable securities, noncurrent

559,652

428,678

Property and equipment, net

97,815

94,208

Deferred costs, noncurrent

72,553

52,731

Lease right-of-use assets

69,936

84,013

Goodwill and intangible assets, net

197,098

196,218

Other assets

35,593

25,458

Total assets

$

2,451,279

$

2,157,279

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

49,213

$

15,428

Accrued liabilities

50,075

38,921

Accrued compensation and related benefits

138,127

103,437

Deferred revenue

512,933

378,935

Lease liabilities

21,253

23,533

Current portion of convertible senior notes, net

139,738

132,388

Total current liabilities

911,339

692,642

Convertible senior notes, net

979,350

935,576

Deferred revenue, noncurrent

4,277

4,423

Lease liabilities, noncurrent

63,212

85,275

Other liabilities

3,883

7,532

Total liabilities

1,962,061

1,725,448

Stockholders’ equity:

Preferred stock, par value $0.01 per share

Common stock, par value $0.01 per share

1,215

1,174

Additional paid-in capital

1,637,157

1,344,337

Accumulated other comprehensive (loss) income

(8,911

)

3,203

Accumulated deficit

(1,140,243

)

(916,883

)

Total stockholders’ equity

489,218

431,831

Total liabilities and stockholders’ equity

$

2,451,279

$

2,157,279

Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)

Three Months Ended
December 31,

Year Ended
December 31,

2021

2020

2021

2020

Cash flows from operating activities

Net loss

$

(61,855

)

$

(70,036

)

$

(223,644

)

$

(218,178

)

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

Depreciation and amortization

9,657

9,645

37,610

42,247

Share-based compensation

61,584

50,147

230,185

182,204

Amortization of deferred costs

18,997

13,036

67,736

45,426

Amortization of debt discount and issuance costs

13,039

12,358

51,124

38,588

Loss on early extinguishment of debt

25,950

Real estate impairment

14,975

14,975

Allowance for credit losses on accounts receivable

659

1,686

6,858

10,136

Repayment of convertible senior notes attributable to debt discount

(38,637

)

Other, net

3,440

7,909

4,681

5,602

Changes in operating assets and liabilities:

Accounts receivable

(91,205

)

(47,910

)

(87,472

)

(80,945

)

Prepaid expenses and other current assets

7,586

1,207

(1,799

)

(1,909

)

Deferred costs

(29,327

)

(30,088

)

(105,173

)

(77,380

)

Lease right-of-use assets

4,548

4,900

17,424

20,372

Other assets and liabilities

(5,613

)

1,821

(9,501

)

799

Accounts payable

14,399

5,404

32,703

(20,804

)

Accrued liabilities

4,078

3,231

5,427

4,800

Accrued compensation and related benefits

18,396

20,206

34,455

38,458

Deferred revenue

71,754

55,028

136,464

59,397

Lease liabilities

(4,658

)

(7,170

)

(27,316

)

(24,673

)

Net cash provided by operating activities

35,479

46,349

169,762

26,428

Cash flows from investing activities

Purchases of property and equipment

(4,117

)

(3,388

)

(15,147

)

(22,877

)

Internal-use software development costs

(3,088

)

(4,745

)

(13,925

)

(15,646

)

Purchases of marketable securities

(244,986

)

(148,289

)

(963,622

)

(849,656

)

Proceeds from maturities of marketable securities

126,850

94,210

717,438

375,686

Proceeds from sales of marketable securities

25,612

24,581

127,607

130,087

Business combinations, net of cash acquired

(7,811

)

Purchases of strategic investments

(4,000

)

(5,000

)

(1,500

)

Proceeds from sales of strategic investments

1,008

1,577

Net cash used in investing activities

(103,729

)

(37,631

)

(159,452

)

(382,329

)

Cash flows from financing activities

Proceeds from issuance of 2025 convertible senior notes, net of issuance
costs paid of $21,030

(20

)

1,128,970

Purchase of capped calls related to 2025 convertible senior notes

(129,950

)

Payments for 2023 convertible senior notes partial repurchase

(578,973

)

Proceeds from capped calls related to 2023 convertible senior notes

83,040

Proceeds from exercises of employee stock options

3,169

4,532

22,058

29,123

Proceeds from employee stock purchase plan

11,373

11,541

48,509

40,454

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

(2,402

)

(2,720

)

(11,342

)

(8,847

)

Net cash provided by financing activities

12,140

13,333

59,225

563,817

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

(11

)

(191

)

(44

)

46

Net (decrease) increase in cash, cash equivalents and restricted cash

(56,121

)

21,860

69,491

207,962

Cash, cash equivalents and restricted cash at beginning of period

533,471

385,999

407,859

199,897

Cash, cash equivalents and restricted cash at end of period

$

477,350

$

407,859

$

477,350

$

407,859

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
December 31,

Year Ended
December 31,

2021

2020

2021

2020

Reconciliation of gross profit and gross margin

GAAP gross profit

$

298,345

$

216,279

$

1,063,720

$

778,309

Plus: Share-based compensation

5,957

4,990

21,004

20,068

Plus: Employer tax related to employee stock transactions

...