Zendesk Announces Second Quarter 2022 Results

Rhea-AI Summary

Zendesk reported a 28% increase in revenue for Q2 2022, totaling $407.2 million. Despite this growth, the company faced a GAAP operating loss of $92.5 million, primarily due to $24.9 million in real estate impairments and $12.2 million in merger-related costs. The GAAP net loss was $95.1 million, or $0.77 per share, while non-GAAP net income was $18.8 million, equating to $0.15 per share. Following an acquisition announcement on June 24, 2022, Zendesk will not provide further financial guidance.

Positive

• Revenue increased 28% year-over-year to $407.2 million.
• Non-GAAP net income of $18.8 million demonstrates operational profitability.

Negative

• GAAP operating loss of $92.5 million indicates significant financial strain.
• GAAP net loss of $95.1 million raises concerns about profitability.

Highlights:

• Second quarter revenue increased 28% year-over-year to $407.2 million

• Second quarter GAAP operating loss of $92.5 million and non-GAAP operating income of $23.6 million

• GAAP operating loss includes real estate impairments of $24.9 million and merger-related costs and other expenses of $12.2 million

SAN FRANCISCO--(BUSINESS WIRE)-- Zendesk, Inc. (NYSE: ZEN) today reported financial results for the second quarter ended June 30, 2022.

Results for the Second Quarter 2022

Revenue was $407.2 million for the quarter ended June 30, 2022, an increase of 28% over the prior year period. GAAP net loss for the quarter ended June 30, 2022 was $95.1 million, and GAAP net loss per share (basic and diluted) was $0.77. Non-GAAP net income was $18.8 million, and non-GAAP net income per share was $0.15 (basic) and $0.14 (diluted). Non-GAAP net income excludes approximately $75.7 million in share-based compensation and related expenses (including $1.9 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $24.9 million of real estate impairments, $12.2 million of merger-related costs and other expenses, $1.8 million of amortization of purchased intangibles, $1.4 million of acquisition-related expenses, $1.2 million of amortization of debt issuance costs, and includes non-GAAP income tax effects and adjustments of $3.4 million. GAAP net loss per share for the quarter ended June 30, 2022 was based on 122.8 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2022 was based on 122.8 million weighted average shares outstanding (basic) and 138.0 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 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 second quarter ended June 30, 2022, or provide a Shareholder Letter for such period. In addition, the Company will not be providing financial guidance for the quarter ending September 30, 2022 and 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 possibility that Zendesk stockholders may not approve 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 June 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.

Additional Information and Where to Find It

This communication relates to the proposed transaction involving Zendesk, Inc. (“Zendesk”). In connection with the proposed transaction, Zendesk has filed with the U.S. Securities and Exchange Commission (the “SEC”) a preliminary proxy statement on Schedule 14A. The definitive proxy statement (the “Proxy Statement”) will be mailed to Zendesk’s stockholders when available. This communication is not a substitute for the Proxy Statement or for any other document that Zendesk may file with the SEC and send to its stockholders in connection with the proposed transaction. The proposed transaction will be submitted to Zendesk’s stockholders for their consideration. Before making any voting decision, Zendesk’s stockholders are urged to read all relevant documents filed or to be filed with the SEC, including the Proxy Statement, as well as any amendments or supplements to those documents, when they become available because they will contain important information about the proposed transaction.

Zendesk’s stockholders will be able to obtain a free copy of the Proxy Statement, as well as other filings containing information about Zendesk, without charge, at the SEC’s website (www.sec.gov). Copies of the Proxy Statement and the filings with the SEC that will be incorporated by reference therein can also be obtained, without charge, by directing a request to Zendesk, Inc., 989 Market Street, San Francisco, CA 94103, Attention: Investor Relations, email: ir@zendesk.com, or from Zendesk’s website www.zendesk.com.

Participants in the Solicitation

Zendesk and certain of its directors, executive officers and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding Zendesk’s directors and executive officers is available in Zendesk’s proxy statement on Schedule 14A for the 2022 annual meeting of stockholders, which was filed with the SEC on July 11, 2022. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the Proxy Statement and other relevant materials to be filed with the SEC in connection with the proposed transaction when they become available. Free copies of the Proxy Statement and such other materials may be obtained as described in the preceding paragraph.

Condensed Consolidated Statements of Operations (In thousands, except per share data; unaudited)
	Three Months Ended June 30,								Six Months Ended June 30,
	2022				2021				2022				2021
Revenue	$	407,208			$	318,216			$	795,535			$	616,264
Cost of revenue		82,790				66,743				158,468				127,637
Gross profit		324,418				251,473				637,067				488,627
Operating expenses:
Research and development		110,539				82,826				218,616				156,609
Sales and marketing		209,160				165,250				410,820				322,768
General and administrative		97,210				45,818				160,748				88,951
Total operating expenses		416,909				293,894				790,184				568,328
Operating loss		(92,491	)			(42,421	)			(153,117	)			(79,701	)
Other income (expense), net:
Interest expense		(3,121	)			(14,591	)			(6,242	)			(29,006	)
Interest and other income (expense), net		2,094				960				2,932				6,044
Total other income (expense), net		(1,027	)			(13,631	)			(3,310	)			(22,962	)
Loss before provision for income taxes		(93,518	)			(56,052	)			(156,427	)			(102,663	)
Provision for income taxes		1,564				2,355				5,601				4,709
Net loss	$	(95,082	)		$	(58,407	)		$	(162,028	)		$	(107,372	)
Net loss per share, basic and diluted	$	(0.77	)		$	(0.49	)		$	(1.32	)		$	(0.91	)
Weighted-average shares used to compute net loss per share, basic and diluted		122,841				119,050				122,404				118,484

Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited)
	June 30, 2022				December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	567,980			$	476,103
Marketable securities		590,263				539,780
Accounts receivable, net of allowance for credit losses of $5,742 and $6,190 as of June 30, 2022 and December 31, 2021, respectively		258,127				273,898
Deferred costs		82,497				72,042
Prepaid expenses and other current assets		71,514				56,809
Total current assets		1,570,381				1,418,632
Marketable securities, noncurrent		473,949				559,652
Property and equipment, net		90,955				97,815
Deferred costs, noncurrent		78,266				72,553
Lease right-of-use assets		48,259				69,936
Goodwill and intangible assets, net		193,610				197,098
Other assets		36,689				35,593
Total assets	$	2,492,109			$	2,451,279
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	70,682			$	49,213
Accrued liabilities		56,562				50,075
Accrued compensation and related benefits		105,297				138,127
Deferred revenue		563,873				512,933
Lease liabilities		21,977				21,253
Current portion of convertible senior notes, net		148,687				139,738
Total current liabilities		967,078				911,339
Convertible senior notes, net		1,137,424				979,350
Deferred revenue, noncurrent		6,326				4,277
Lease liabilities, noncurrent		51,727				63,212
Other liabilities		2,733				3,883
Total liabilities		2,165,288				1,962,061
Stockholders’ equity:
Preferred stock, par value $0.01 per share		—				—
Common stock, par value $0.01 per share		1,232				1,215
Additional paid-in capital		1,568,922				1,637,157
Accumulated other comprehensive loss		(22,176	)			(8,911	)
Accumulated deficit		(1,221,157	)			(1,140,243	)
Total stockholders’ equity		326,821				489,218
Total liabilities and stockholders’ equity	$	2,492,109			$	2,451,279

Condensed Consolidated Statements of Cash Flows (In thousands; unaudited)
	Three Months Ended June 30,
	2022				2021
Cash flows from operating activities
Net loss	$	(95,082	)		$	(58,407	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		9,340				9,108
Share-based compensation		73,359				56,694
Amortization of deferred costs		21,719				16,185
Amortization of debt discount and issuance costs		1,225				12,694
Real estate impairments		24,908				—
Allowance for credit losses on accounts receivable		1,668				1,327
Other, net		1,750				1,088
Changes in operating assets and liabilities:
Accounts receivable		(39,312	)			(27,868	)
Prepaid expenses and other current assets		3,576				(1,272	)
Deferred costs		(30,087	)			(32,267	)
Lease right-of-use assets		3,956				4,354
Other assets and liabilities		(491	)			(2,166	)
Accounts payable		39,961				(420	)
Accrued liabilities		(2,352	)			(483	)
Accrued compensation and related benefits		(6,320	)			14,152
Deferred revenue		44,351				45,720
Lease liabilities		(3,144	)			(11,561	)
Net cash provided by operating activities		49,025				26,878
Cash flows from investing activities
Purchases of property and equipment		(5,412	)			(2,896	)
Internal-use software development costs		(2,880	)			(3,070	)
Purchases of marketable securities		(198,582	)			(199,540	)
Proceeds from maturities of marketable securities		147,330				182,044
Proceeds from sales of marketable securities		74,847				20,462
Purchases of strategic investments		(1,000	)			—
Net cash provided by (used in) investing activities		14,303				(3,000	)
Cash flows from financing activities
Proceeds from exercises of employee stock options		1,414				11,204
Proceeds from employee stock purchase plan		10,209				11,594
Taxes paid related to net share settlement of share-based awards		(2,263	)			(3,502	)
Net cash provided by financing activities		9,360				19,296
Effect of exchange rate changes on cash, cash equivalents and restricted cash		77				(11	)
Net increase in cash, cash equivalents and restricted cash		72,765				43,163
Cash, cash equivalents and restricted cash at beginning of period		496,929				380,085
Cash, cash equivalents and restricted cash at end of period	$	569,694			$	423,248

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,
	2022				2021				2022				2021
Reconciliation of gross profit and gross margin
GAAP gross profit	$	324,418			$	251,473			$	637,067			$	488,627
Plus: Share-based compensation		6,982				5,218				13,159				9,704
Plus: Employer tax related to employee stock transactions		139				327				386				780
Plus: Amortization of purchased intangibles		1,177				1,136				2,355				2,355
Plus: Acquisition-related expenses		—				55				—				124
Plus: Amortization of share-based compensation capitalized in internal-use software		413				387				837				771
Non-GAAP gross profit	$	333,129			$	258,596			$	653,804			$	502,361
GAAP gross margin		80	%			79	%			80	%			79	%
Non-GAAP adjustments		2	%			2	%			2	%			3	%
Non-GAAP gross margin		82	%			81	%			82	%			82	%
Reconciliation of operating expenses
GAAP research and development	$	110,539			$	82,826			$	218,616			$	156,609
Less: Share-based compensation		(20,482	)			(17,024	)			(39,769	)			(32,697	)
Less: Employer tax related to employee stock transactions		(653	)			(1,082	)			(1,535	)			(2,509	)
Less: Acquisition-related expenses		(1,299	)			(811	)			(2,637	)			(1,779	)
Less: Amortization of share-based compensation capitalized in internal-use software		(17	)			(17	)			(34	)			(34	)
Non-GAAP research and development	$	88,088			$	63,892			$	174,641			$	119,590
GAAP research and development as percentage of revenue		27	%			26	%			27	%			25	%
Non-GAAP research and development as percentage of revenue		22	%			20	%			22	%			19	%
GAAP sales and marketing	$	209,160			$	165,250			$	410,820			$	322,768
Less: Share-based compensation		(31,120	)			(24,501	)			(57,920	)			(47,733	)
Less: Employer tax related to employee stock transactions		(992	)			(1,385	)			(2,188	)			(3,454	)
Less: Amortization of purchased intangibles		(642	)			(642	)			(1,284	)			(1,284	)
Less: Acquisition-related expenses		(1	)			(64	)			(374	)			(112	)
Non-GAAP sales and marketing	$	176,405			$	138,658			$	349,054			$	270,185
GAAP sales and marketing as percentage of revenue		51	%			52	%			52	%			52	%
Non-GAAP sales and marketing as percentage of revenue		43	%			44	%			44	%			44	%
GAAP general and administrative	$	97,210			$	45,818			$	160,748			$	88,951
Less: Share-based compensation		(14,775	)			(9,951	)			(26,449	)			(18,934	)
Less: Employer tax related to employee stock transactions		(135	)			(1,124	)			(980	)			(2,288	)
Less: Acquisition-related expenses		(122	)			(141	)			(9,846	)			(463	)
Less: Real estate impairments		(24,908	)			(1,176	)			(24,908	)			(1,176	)
Less: Merger-related costs and other expenses		(12,213	)			—				(12,213	)			—
Non-GAAP general and administrative	$	45,057			$	33,426			$	86,352			$	66,090
GAAP general and administrative as percentage of revenue		24	%			14	%			20	%			14	%
Non-GAAP general and administrative as percentage of revenue		11	%			11	%			11	%			11	%
Reconciliation of operating income (loss) and operating margin
GAAP operating loss	$	(92,491	)		$	(42,421	)		$	(153,117	)		$	(79,701	)
Plus: Share-based compensation		73,359				56,694				137,297				109,068
Plus: Employer tax related to employee stock transactions		1,919				3,918				5,089				9,031
Plus: Amortization of purchased intangibles		1,819				1,778				3,639				3,639
Plus: Acquisition-related expenses		1,422				1,071				12,857				2,478
Plus: Amortization of share-based compensation capitalized in internal-use software		430				404				871				805
Plus: Real estate impairments		24,908				1,176				24,908				1,176
Plus: Merger-related costs and other expenses		12,213				—				12,213				—
Non-GAAP operating income	$	23,579			$	22,620			$	43,757			$	46,496
GAAP operating margin		(23	) %			(13	) %			(19	) %			(13	) %
Non-GAAP adjustments		29	%			20	%			25	%			21	%
Non-GAAP operating margin		6	%			7	%			6	%			8	%

	Three Months Ended June 30,								Six Months Ended June 30,
	2022				2021				2022				2021
Reconciliation of net income (loss)
GAAP net loss	$	(95,082	)		$	(58,407	)		$	(162,028	)		$	(107,372	)
Plus: Share-based compensation		73,359				56,694				137,297				109,068
Plus: Employer tax related to employee stock transactions		1,919				3,918				5,089				9,031
Plus: Amortization of purchased intangibles		1,819				1,778				3,639				3,639
Plus: Acquisition-related expenses		1,422				1,071				12,857				2,478
Plus: Amortization of share-based compensation capitalized in internal-use software		430				404				871				805
Plus: Real estate impairments		24,908				1,176				24,908				1,176
Plus: Merger-related costs and other expenses		12,213				—				12,213				—
Plus: Amortization of debt discount and issuance costs		1,225				12,695				2,446				25,220
Less: Income tax effects and adjustments		(3,429	)			(2,198	)			(3,406	)			(5,529	)
Non-GAAP net income	$	18,784			$	17,131			$	33,886			$	38,516
Reconciliation of net income (loss) per share, basic
GAAP net loss per share, basic	$	(0.77	)		$	(0.49	)		$	(1.32	)		$	(0.91	)
Non-GAAP adjustments to net loss		0.92				0.63				1.60				1.24
Non-GAAP net income per share, basic	$	0.15			$	0.14			$	0.28			$	0.33
Reconciliation of net income (loss) per share, diluted
GAAP net loss per share, diluted	$	(0.77	)		$	(0.49	)		$	(1.32	)		$	(0.91	)
Non-GAAP adjustments to net loss		0.91				0.62				1.59				1.21
Non-GAAP net income per share, diluted	$	0.14			$	0.13			$	0.27			$	0.30
Weighted-average shares used in GAAP per share calculation, basic and diluted		122,841				119,050				122,404				118,484
Weighted-average shares used in non-GAAP per share calculation
Basic		122,841				119,050				122,404				118,484
Diluted (1)		137,969				127,515				127,100				127,384
Computation of free cash flow
Net cash provided by operating activities	$	49,025			$	26,878			$	60,237			$	60,473
Less: Purchases of property and equipment		(5,412	)			(2,896	)			(12,850	)			(5,957	)
Less: Internal-use software development costs		(2,880	)			(3,070	)			(5,896	)			(7,538	)
Free cash flow	$	40,733			$	20,912			$	41,491			$	46,978
Net cash provided by operating activities margin		12	%			8	%			8	%			10	%
Non-GAAP adjustments		(2	) %			(1	) %			(3	) %			(2	) %
Free cash flow margin		10	%			7	%			5	%			8	%

(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 six months ended June 30, 2022, approximately 11 million shares related to our 2025 convertible notes were excluded from the non-GAAP diluted share amount, as the inclusion of these shares using the if-converted method would have been anti-dilutive.

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.

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, and merger-related costs and other 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 June 30, 2022 for further information.

View source version on businesswire.com: https://www.businesswire.com/news/home/20220728005970/en/

Zendesk, Inc.

Investor Contact:

Jason Tsai, +1 415-997-8882

ir@zendesk.com

or

Media Contact:

Marissa Tree, +1 415-609-4510

press@zendesk.com

Source: Zendesk, Inc.

FAQ

What were Zendesk's second quarter financial results for 2022?

Zendesk reported a 28% increase in revenue to $407.2 million, with a GAAP net loss of $95.1 million for Q2 2022.

What is the GAAP operating loss for Zendesk in Q2 2022?

Zendesk recorded a GAAP operating loss of $92.5 million in the second quarter of 2022.

Will Zendesk provide financial guidance for Q3 2022?

No, Zendesk has suspended its financial guidance for Q3 2022 due to a pending acquisition.

What caused Zendesk's loss in the second quarter of 2022?

The loss was driven by real estate impairments of $24.9 million and merger-related costs of $12.2 million.

What is Zendesk's non-GAAP net income for Q2 2022?

Zendesk's non-GAAP net income for the second quarter of 2022 was $18.8 million.