Zendesk Announces Second Quarter 2021 Results

Rhea-AI Summary

Zendesk reported Q2 2021 revenue of $318.2 million, reflecting a 29% increase year-over-year. The company faced a GAAP net loss of $58.4 million, equating to a $0.49 loss per share. Non-GAAP net income stood at $17.1 million, or $0.14 per share (basic). Guidance for Q3 2021 suggests revenue between $332 million and $337 million with expected GAAP losses between $(43) million and $(39) million. For the full year, revenue is projected between $1.310 billion and $1.318 billion.

Positive

• Q2 2021 revenue increased by 29% from the previous year, reaching $318.2 million.
• Non-GAAP net income for Q2 was $17.1 million, showing positive operational performance.

Negative

• GAAP net loss for Q2 was $58.4 million, indicating significant financial challenges.
• Projected GAAP operating loss for Q3 2021 between $43 million and $39 million raises concerns.

Zendesk, Inc. (NYSE: ZEN) today reported financial results for the second quarter ended June 30, 2021, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Second Quarter 2021

Revenue was $318.2 million for the quarter ended June 30, 2021, an increase of 29% over the prior year period. GAAP net loss for the quarter ended June 30, 2021 was $58.4 million, and GAAP net loss per share (basic and diluted) was $0.49. Non-GAAP net income was $17.1 million, and non-GAAP net income per share was $0.14 (basic) and $0.13 (diluted). Non-GAAP net income excludes approximately $61.0 million in share-based compensation and related expenses (including $3.9 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $12.7 million of amortization of debt discount and issuance costs, $1.8 million of amortization of purchased intangibles, $1.2 million of real estate impairments, $1.1 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $2.2 million. GAAP net loss per share for the quarter ended June 30, 2021 was based on 119.1 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2021 was based on 119.1 million weighted average shares outstanding (basic) and 127.5 million weighted average shares outstanding (diluted).

Outlook

As of July 29, 2021, Zendesk provided guidance for the quarter ending September 30, 2021 and the full year ending December 31, 2021.

For the quarter ending September 30, 2021, Zendesk expects to report:

• Revenue in the range of $332 - 337 million
• GAAP operating income (loss) in the range of $(43) - (39) million, which includes share-based compensation and related expenses of approximately $63 million and amortization of purchased intangibles of approximately $2 million
• Non-GAAP operating income (loss) in the range of $22 - 26 million, which excludes share-based compensation and related expenses of approximately $63 million and amortization of purchased intangibles of approximately $2 million
• Approximately 120 million weighted average shares outstanding (basic)
• Approximately 128 million weighted average shares outstanding (diluted)

For the full year ending December 31, 2021, Zendesk expects to report:

• Revenue in the range of $1.310 - 1.318 billion
• GAAP operating income (loss) in the range of $(164) - (159) million, which includes share-based compensation and related expenses of approximately $249 million, amortization of purchased intangibles of approximately $7 million, acquisition-related expenses of approximately $3 million, and real estate impairments of approximately $1 million
• Non-GAAP operating income (loss) in the range of $96 - 101 million, which excludes share-based compensation and related expenses of approximately $249 million, amortization of purchased intangibles of approximately $7 million, acquisition-related expenses of approximately $3 million, and real estate impairments of approximately $1 million
• Approximately 120 million weighted average shares outstanding (basic)
• Approximately 129 million weighted average shares outstanding (diluted)
• Free cash flow in the range of $120 - 130 million, which includes the impact of a lease termination payment of approximately $7 million paid in the second quarter of 2021 related to our real estate changes in San Francisco

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2021 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 2021 is not available without unreasonable effort.

Zendesk’s estimates of share-based compensation and related expenses, amortization of purchased intangibles, acquisition-related expenses, real estate impairments, 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, July 29, 2021 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) Zendesk’s ability to effectively expand its sales capabilities; (iii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (iv) the development of the market for software as a service business software applications; (v) Zendesk's substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) our ability to optimize the pricing for our solutions; (vii) Zendesk's ability to effectively market and sell its products to larger enterprises; (viii) Zendesk’s ability to introduce and market new products and to support its products on a unified, reliable shared services platform; (ix) Zendesk's ability to maintain and develop its strategic relationships with third parties; (x) real or perceived errors, failures, or bugs in its products; (xi) Zendesk's reliance on third party services, including services for hosting, email, and messaging; (xii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services; (xiii) 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; (xiv) Zendesk's ability to effectively manage its growth and organizational change, including its international expansion strategy; (xv) Zendesk's ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xvi) Zendesk's ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches; (xvii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xviii) Zendesk's ability to comply with privacy and data security regulations; (xix) the effect of uncertainties related to the COVID-19 pandemic on U.S. and global markets, Zendesk's business, operations, revenue results, cash flow, operating expenses, hiring, demand for its solutions, sales cycles, customer retention, and its customers' businesses and industries; and (xx) 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 Annual Report on Form 10-K for the year ended December 31, 2020. 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 June 30, 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 June 30,								Six Months Ended June 30,
		2021				2020				2021				2020
Revenue		$	318,216			$	246,664			$	616,264			$	484,140
Cost of revenue		66,743				61,515				127,637				121,217
Gross profit		251,473				185,149				488,627				362,923
Operating expenses:
Research and development		82,826				59,003				156,609				119,424
Sales and marketing		165,250				121,397				322,768				245,707
General and administrative		45,818				36,247				88,951				70,573
Total operating expenses		293,894				216,647				568,328				435,704
Operating loss		(42,421		)		(31,498		)		(79,701		)		(72,781		)
Other income (expense), net:
Interest expense		(14,591		)		(8,086		)		(29,006		)		(14,973		)
Loss on early extinguishment of debt		—				(25,950		)		—				(25,950		)
Interest and other income (expense), net		960				2,166				6,044				9,068
Total other income (expense), net		(13,631		)		(31,870		)		(22,962		)		(31,855		)
Loss before provision for income taxes		(56,052		)		(63,368		)		(102,663		)		(104,636		)
Provision for income taxes		2,355				1,288				4,709				2,804
Net loss		$	(58,407	)		$	(64,656	)		$	(107,372	)		$	(107,440	)
Net loss per share, basic and diluted		$	(0.49	)		$	(0.56	)		$	(0.91	)		$	(0.94	)
Weighted-average shares used to compute net loss per share, basic and diluted		119,050				114,600				118,484				114,069

Condensed Consolidated Balance Sheets
(In thousands, except par value; unaudited)
		June 30, 2021				December 31, 2020
Assets
Current assets:
Cash and cash equivalents		$	422,810			$	405,430
Marketable securities		515,562				565,593
Accounts receivable, net of allowance for credit losses of $6,015 and $5,787 as of June 30, 2021 and December 31, 2020, respectively		205,784				199,243
Deferred costs		62,642				51,878
Prepaid expenses and other current assets		49,096				53,829
Total current assets		1,255,894				1,275,973
Marketable securities, noncurrent		540,294				428,678
Property and equipment, net		93,640				94,208
Deferred costs, noncurrent		65,605				52,731
Lease right-of-use assets		75,791				84,013
Goodwill and intangible assets, net		192,579				196,218
Other assets		25,259				25,458
Total assets		$	2,249,062			$	2,157,279
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	21,007			$	15,428
Accrued liabilities		36,264				38,921
Accrued compensation and related benefits		95,965				103,437
Deferred revenue		438,779				378,935
Lease liabilities		20,302				23,533
Current portion of convertible senior notes, net		136,011				132,388
Total current liabilities		748,328				692,642
Convertible senior notes, net		957,172				935,576
Deferred revenue, noncurrent		3,684				4,423
Lease liabilities, noncurrent		70,120				85,275
Other liabilities		5,631				7,532
Total liabilities		1,784,935				1,725,448
Stockholders’ equity:
Preferred stock, par value $0.01 per share		—				—
Common stock, par value $0.01 per share		1,197				1,174
Additional paid-in capital		1,492,117				1,344,337
Accumulated other comprehensive (loss) income		(5,216		)		3,203
Accumulated deficit		(1,023,971		)		(916,883		)
Total stockholders’ equity		464,127				431,831
Total liabilities and stockholders’ equity		$	2,249,062			$	2,157,279

Condensed Consolidated Statements of Cash Flows
(In thousands; unaudited)
		Three Months Ended June 30,
		2021				2020
Cash flows from operating activities
Net loss		$	(58,407	)		$	(64,656	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		9,108				10,749
Share-based compensation		56,694				43,712
Amortization of deferred costs		16,185				10,765
Amortization of debt discount and issuance costs		12,694				7,487
Loss on early extinguishment of debt		—				25,950
Repayment of convertible senior notes attributable to debt discount		—				(38,637		)
Allowance for credit losses on accounts receivable		1,327				3,349
Other, net		1,088				(259		)
Changes in operating assets and liabilities:
Accounts receivable		(27,868		)		(46,666		)
Prepaid expenses and other current assets		(1,272		)		(4,959		)
Deferred costs		(32,267		)		(14,867		)
Lease right-of-use assets		4,354				5,272
Other assets and liabilities		(2,166		)		(308		)
Accounts payable		(420		)		(12,692		)
Accrued liabilities		(483		)		1,638
Accrued compensation and related benefits		14,152				13,329
Deferred revenue		45,720				13,616
Lease liabilities		(11,561		)		(3,534		)
Net cash provided by (used in) operating activities		26,878				(50,711		)
Cash flows from investing activities
Purchases of property and equipment		(2,896		)		(5,622		)
Internal-use software development costs		(3,070		)		(3,225		)
Purchases of marketable securities		(199,540		)		(111,906		)
Proceeds from maturities of marketable securities		182,044				117,752
Proceeds from sales of marketable securities		20,462				39,814
Net cash (used in) provided by investing activities		(3,000		)		36,813
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $20,400		—				1,129,600
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		11,204				5,101
Proceeds from employee stock purchase plan		11,594				8,802
Taxes paid related to net share settlement of share-based awards		(3,502		)		(2,241		)
Net cash provided by financing activities		19,296				515,379
Effect of exchange rate changes on cash, cash equivalents and restricted cash		(11		)		15
Net increase in cash, cash equivalents and restricted cash		43,163				501,496
Cash, cash equivalents and restricted cash at beginning of period		380,085				202,620
Cash, cash equivalents and restricted cash at end of period		$	423,248			$	704,116

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 June 30,								Six Months Ended June 30,
		2021				2020				2021				2020
Reconciliation of gross profit and gross margin
GAAP gross profit		$	251,473			$	185,149			$	488,627			$	362,923
Plus: Share-based compensation			5,218				5,187				9,704				10,246
Plus: Employer tax related to employee stock transactions			327				292				780				717
Plus: Amortization of purchased intangibles			1,136				1,617				2,355				3,724
Plus: Acquisition-related expenses			55				66				124				207
Plus: Amortization of share-based compensation capitalized in internal-use software			387				464				771				914
Non-GAAP gross profit		$	258,596			$	192,775			$	502,361			$	378,731
GAAP gross margin			79	%			75	%			79	%			75	%
Non-GAAP adjustments			2	%			3	%			3	%			3	%
Non-GAAP gross margin			81	%			78	%			82	%			78	%
Reconciliation of operating expenses
GAAP research and development		$	82,826			$	59,003			$	156,609			$	119,424
Less: Share-based compensation			(17,024	)			(12,529	)			(32,697	)			(25,155	)
Less: Employer tax related to employee stock transactions			(1,082	)			(700	)			(2,509	)			(1,587	)
Less: Acquisition-related expenses			(811	)			(1,167	)			(1,779	)			(2,178	)
Less: Amortization of share-based compensation capitalized in internal-use software			(17	)			—				(34	)			—
Non-GAAP research and development		$	63,892			$	44,607			$	119,590			$	90,504
GAAP research and development as percentage of revenue			26	%			24	%			25	%			25	%
Non-GAAP research and development as percentage of revenue			20	%			18	%			19	%			19	%
GAAP sales and marketing		$	165,250			$	121,397			$	322,768			$	245,707
Less: Share-based compensation			(24,501	)			(17,573	)			(47,733	)			(34,132	)
Less: Employer tax related to employee stock transactions			(1,385	)			(890	)			(3,454	)			(2,064	)
Less: Amortization of purchased intangibles			(642	)			(671	)			(1,284	)			(1,370	)
Less: Acquisition-related expenses			(64	)			(470	)			(112	)			(1,091	)
Non-GAAP sales and marketing		$	138,658			$	101,793			$	270,185			$	207,050
GAAP sales and marketing as percentage of revenue			52	%			49	%			52	%			51	%
Non-GAAP sales and marketing as percentage of revenue			44	%			41	%			44	%			43	%
GAAP general and administrative		$	45,818			$	36,247			$	88,951			$	70,573
Less: Share-based compensation			(9,951	)			(8,423	)			(18,934	)			(16,261	)
Less: Employer tax related to employee stock transactions			(1,124	)			(462	)			(2,288	)			(1,225	)
Less: Acquisition-related expenses			(141	)			(134	)			(463	)			(238	)
Less: Real estate impairments			(1,176	)			—				(1,176	)			—
Non-GAAP general and administrative		$	33,426			$	27,228			$	66,090			$	52,849
GAAP general and administrative as percentage of revenue			14	%			15	%			14	%			15	%
Non-GAAP general and administrative as percentage of revenue			11	%			11	%			11	%			11	%
Reconciliation of operating income (loss) and operating margin
GAAP operating loss		$	(42,421	)		$	(31,498	)		$	(79,701	)		$	(72,781	)
Plus: Share-based compensation			56,694				43,712				109,068				85,794
Plus: Employer tax related to employee stock transactions			3,918				2,344				9,031				5,593
Plus: Amortization of purchased intangibles			1,778				2,288				3,639				5,094
Plus: Acquisition-related expenses			1,071				1,837				2,478				3,714
Plus: Amortization of share-based compensation capitalized in internal-use software			404				464				805				914
Plus: Real estate impairments			1,176				—				1,176				—
Non-GAAP operating income		$	22,620			$	19,147			$	46,496			$	28,328
GAAP operating margin			(13	)%			(13	)%			(13	)%			(15	)%
Non-GAAP adjustments			20	%			21	%			21	%			21	%
Non-GAAP operating margin			7	%			8	%			8	%			6	%

		Three Months Ended June 30,								Six Months Ended June 30,
		2021				2020				2021				2020
Reconciliation of net income (loss)
GAAP net loss		$	(58,407	)		$	(64,656	)		$	(107,372	)		$	(107,440	)
Plus: Share-based compensation			56,694				43,712				109,068				85,794
Plus: Employer tax related to employee stock transactions			3,918				2,344				9,031				5,593
Plus: Amortization of purchased intangibles			1,778				2,288				3,639				5,094
Plus: Acquisition-related expenses			1,071				1,837				2,478				3,714
Plus: Amortization of share-based compensation capitalized in internal-use software			404				464				805				914
Plus: Real estate impairments			1,176				—				1,176				—
Plus: Amortization of debt discount and issuance costs			12,695				7,487				25,220				14,036
Plus: Loss on early extinguishment of debt			—				25,950				—				25,950
Less: Income tax effects and adjustments			(2,198	)			(3,063	)			(5,529	)			(4,854	)
Non-GAAP net income		$	17,131			$	16,363			$	38,516			$	28,801
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic		$	(0.49	)		$	(0.56	)		$	(0.91	)		$	(0.94	)
Non-GAAP adjustments to net loss			0.63				0.70				1.24				1.19
Non-GAAP net income per share, basic		$	0.14			$	0.14			$	0.33			$	0.25
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted		$	(0.49	)		$	(0.56	)		$	(0.91	)		$	(0.94	)
Non-GAAP adjustments to net loss			0.62				0.70				1.21				1.18
Non-GAAP net income per share, diluted		$	0.13			$	0.14			$	0.30			$	0.24
Weighted-average shares used in GAAP per share calculation, basic and diluted			119,050				114,600				118,484				114,069
Weighted-average shares used in non-GAAP per share calculation
Basic			119,050				114,600				118,484				114,069
Diluted			127,515				120,397				127,384				120,309
Computation of free cash flow
Net cash provided by (used in) operating activities		$	26,878			$	(50,711	)		$	60,473			$	(53,320	)
Plus: Repayment of convertible senior notes attributable to debt discount			—				38,637				—				38,637
Less: Purchases of property and equipment			(2,896	)			(5,622	)			(5,957	)			(15,560	)
Less: Internal-use software development costs			(3,070	)			(3,225	)			(7,538	)			(6,283	)
Free cash flow		$	20,912			$	(20,921	)		$	46,978			$	(36,526	)
Net cash provided by (used in) operating activities margin			8	%			(21	)%			10	%			(11	)%
Non-GAAP adjustments			(1	)%			13	%			(2	)%			3	%
Free cash flow margin			7	%			(8	)%			8	%			(8	)%

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.

Loss on Early Extinguishment of Debt: In March 2018, Zendesk issued $575 million aggregate principal amount of 0.25% convertible senior notes due in 2023 (the “2023 Notes”). In June 2020, Zendesk issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due in 2025 (the “2025 Notes”). In connection with the offering of the 2025 Notes, Zendesk used $618 million of the net proceeds from the offering of the 2025 Notes to repurchase $426 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions (the “2023 Notes Partial Repurchase”). Of the $618 million consideration, $393 million and $225 million were allocated to the debt and equity components, respectively. As of the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Notes Partial Repurchase, net of unamortized debt discount and issuance costs, was $367 million. The 2023 Notes Partial Repurchase resulted in a $26 million loss on early debt extinguishment. As of June 30, 2021, $149 million of principal remains outstanding on the 2023 Notes. The loss on early extinguishment of debt 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.

Amortization of Debt Discount and Issuance Costs: The imputed interest rates of the 2023 Notes and the 2025 Notes were approximately 5.26% and 5.00%, respectively. This is a result of the debt discounts recorded for the conversion features of the Notes that are required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instruments. The debt discounts are amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest 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, 2021, 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, plus repayment of convertible senior notes attributable to debt discount, 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 has not reconciled free cash flow guidance to net cash from operating activities for the year ending December 31, 2021 because Zendesk does 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 Zendesk’s free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the year ending December 31, 2021 is not available without unreasonable effort.

Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP operating margin for future periods beyond the current fiscal year because Zendesk does not provide guidance on the reconciling items between GAAP operating margin and non-GAAP operating margin for such periods, 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 Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP operating margin to non-GAAP operating margin guidance for such periods is not available without unreasonable effort.

Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include adjustments to its expectations for its GAAP gross margin that exclude share-based compensation and related expenses in Zendesk’s cost of revenue, amortization of purchased intangibles primarily related to developed technology, and acquisition-related expenses. The share-based compensation and related expenses excluded due to such adjustments are primarily comprised of the share-based compensation and related expenses for employees associated with Zendesk’s infrastructure and customer experience organization.

Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross margin for future periods because Zendesk does not provide guidance on the reconciling items between GAAP gross margin and non-GAAP gross margin, 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 Zendesk’s non-GAAP gross margin and, accordingly, a reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not available without unreasonable effort.

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, loss on early extinguishment of debt, and real estate impairments, 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.

About Operating Metrics

Zendesk reviews a number of operating metrics to evaluate its business, measure performance, identify trends, formulate business plans, and make strategic decisions. These include the number of logos, annual recurring revenue and the percentage of its annual recurring revenue from customers with more than $250,000 in annual recurring revenue.

Zendesk's number of logos is a consolidation of paid customer accounts across our solutions, exclusive of Zendesk's legacy Starter plan, free trials, or other free services, as of the end of the period. A paid customer account is one individual billing relationship for subscription to our services. Zendesk calculates its logo number by consolidating paid customer accounts that share common corporate information as a single organization or customer may have multiple paid customer accounts across its solutions to service separate subsidiaries, divisions, or work processes. As of June 30, 2021, Zendesk had approximately 112,300 logos. Zendesk does not currently include in its logo metric logos associated with its legacy analytics product, its legacy Outbound product, its legacy Starter plan, its legacy Sell product, legacy Sunshine Conversations, its legacy Smooch product, free trials, or other free services. We may from time to time refer to "customers" or "brands" in our publicly-available disclosures, each of which refers to our number of logos.

Zendesk’s dollar-based net expansion rate provides a measurement of our ability to increase revenue across our existing customer base through expansion of authorized agents associated with a logo, upgrades in subscription plans, and the purchase of additional products as offset by contraction and churn in authorized agents associated with a logo, and downgrades in subscription plans. Zendesk does not currently incorporate operating metrics associated with its legacy analytics product, its legacy Outbound product, its legacy Starter plan, its legacy Sell product, legacy Sunshine Conversations, its legacy Smooch product, free trials, or other free services into its measurement of dollar-based net expansion rate. Dollar-based net expansion rate is based upon our annual recurring revenue for a set of logos on Zendesk's products. Annual recurring revenue is determined by multiplying monthly recurring revenue by twelve. Monthly recurring revenue is a legal and contractual determination made by assessing contractual terms, as of the date of determination, as to the revenue we expect to generate in the next monthly period, assuming no changes to the subscription and without taking into account any usage above the subscription base, if any, that may be applicable to such subscription. Zendesk excludes the impact of revenue that it expects to generate from fixed-term contracts that are each associated with an existing account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from its determination of monthly recurring revenue. Zendesk additionally excludes the impact of accounts that are free-trial accounts that did not result in paid subscriptions, and temporary coupons, such as short-term discounts that were applied to customer accounts due to the COVID-19 pandemic, from its annual recurring revenue. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other United States generally accepted accounting principles, or GAAP, financial measure over any period.

Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of contraction and churn by Zendesk’s base revenue. Zendesk defines its base revenue as the aggregate annual recurring revenue across its products from logos as of the date one year prior to the date of calculation. Zendesk defines the retained revenue net of contraction and churn as the aggregate annual recurring revenue across its products for the same customer base included in the measure of base revenue at the end of the annual period being measured.

Zendesk does not currently incorporate operating metrics associated with its legacy analytics product, its legacy Outbound product, its legacy Starter plan, Sell, Sunshine Conversations, its legacy Smooch product, free trials, or other free services into its measurement of dollar-based net expansion rate.

For a more detailed description of how Zendesk calculates its dollar-based net expansion rate, please refer to Zendesk’s periodic reports filed with the Securities and Exchange Commission.

Zendesk’s percentage of annual recurring revenue that is generated by customer accounts with more than $250,000 in annual recurring revenue is determined by dividing the total annual recurring revenue from customer accounts with more than $250,000 in annual recurring revenue from our products other than Sell and Sunshine Conversations as of the measurement date by the total annual recurring revenue for all customer accounts from our products other than Sell and Sunshine Conversations as of the measurement date. Zendesk determines the customer accounts with $250,000 in annual recurring revenue as of the measurement date based on the annual recurring revenue of a customer account at the measurement date. A "customer account" is based on an identifier tracked in our internal sales system as a separate and distinct buying entity.

Zendesk determines its bookings as the incremental additional annual recurring revenue from contracts that were entered into during the referenced fiscal quarter. Zendesk determines its net bookings as bookings less any annual recurring revenue lost from contracts which have not been renewed or a decrease in the level of paid services with our solutions over the referenced fiscal quarter.

Zendesk’s annual revenue run rate is based on its revenue for the most recent applicable quarter. Zendesk annualizes such results to estimate its annual revenue run rate by multiplying the revenue for its most recent applicable quarter by four. Zendesk’s annual revenue run rate is not a comprehensive statement of its financial results for such period and should not be viewed as a substitute for full annual or interim financial statements prepared in accordance with GAAP. In addition, Zendesk’s revenue for the most recent applicable quarter or annual revenue run rate are not necessarily indicative of the results to be achieved in any future period.

Zendesk determines its average deal size by dividing the annual recurring revenue from bookings for our products other than Sell and Sunshine Conversations in a quarter by the number of deals that were entered into during that quarter.

Source: Zendesk, Inc.

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FAQ

What was Zendesk's revenue for Q2 2021?

Zendesk reported revenue of $318.2 million for Q2 2021.

What is the GAAP net loss for Zendesk in Q2 2021?

The GAAP net loss for Q2 2021 was $58.4 million.

What guidance did Zendesk provide for Q3 2021?

Zendesk expects Q3 2021 revenue between $332 million and $337 million.

What is the non-GAAP net income for Zendesk in Q2 2021?

The non-GAAP net income for Q2 2021 was $17.1 million.

What are the projected full year revenues for Zendesk for 2021?

For 2021, Zendesk projects revenues between $1.310 billion and $1.318 billion.