Zendesk Announces Fourth Quarter and Full Fiscal Year 2018 Results

Highlights:

• Fourth quarter revenue increased 41% year over year to $172.2 million
• Fourth quarter GAAP operating loss of $36.5 million and non-GAAP
  operating income of $4.8 million
• Full year 2018 revenue increased 39% year over year to $598.7 million
• Full year 2018 GAAP operating loss of $137.9 million and non-GAAP
  operating income of $3.5 million
• Thomas Szkutak, former Amazon.com chief financial officer, joins board
  of directors

SAN FRANCISCO–(BUSINESS WIRE)–Zendesk, Inc. (NYSE: ZEN) today reported financial results for the
fiscal quarter and full fiscal year ended December 31, 2018, and
announced the appointment of former Amazon.com chief financial officer
Thomas Szkutak to its board of directors.

A Shareholder Letter with more commentary on the results is available on
the Zendesk investor relations website at https://investor.zendesk.com.
All results and guidance are based on the revenue recognition standard
ASC 606.

Results for the Fourth Quarter 2018

Revenue was $172.2 million for the quarter ended December 31, 2018, an
increase of 41% over the prior year period. GAAP net loss for the
quarter ended December 31, 2018 was $33.3 million, and GAAP net loss per
share (basic and diluted) was $0.31. Non-GAAP net income was $11.2
million, and non-GAAP net income per share (basic) was $0.10, and
non-GAAP net income per share (diluted) was $0.10. Non-GAAP net income
excludes approximately $36.9 million in share-based compensation and
related expenses (including $3.6 million of employer tax related to
employee stock transactions and $0.4 million of amortization of
share-based compensation capitalized in internal-use software), $6.1
million of amortization of debt discount and issuance costs, $2.2
million of acquisition-related expenses, and $2.2 million of
amortization of purchased intangibles. GAAP net loss per share for the
quarter ended December 31, 2018 was based on 107.4 million weighted
average shares outstanding (basic and diluted), and non-GAAP net income
per share for the quarter ended December 31, 2018 was based on 107.4
million weighted average shares outstanding (basic) and 113.7 million
weighted average shares outstanding (diluted).

Results for the Full Fiscal Year 2018

Revenue was $598.7 million for the year ended December 31, 2018, an
increase of 39% over the prior year period. GAAP net loss for the year
ended December 31, 2018 was $131.1 million, and GAAP net loss per share
(basic and diluted) was $1.24. Non-GAAP net income was $23.0 million,
non-GAAP net income per share (basic) was $0.22, and non-GAAP net income
per share (diluted) was $0.21. Non-GAAP net income excludes
approximately $129.9 million in share-based compensation and related
expenses (including $8.9 million of employer tax related to employee
stock transactions and $1.5 million of amortization of share-based
compensation capitalized in internal-use software), $18.8 million of
amortization of debt discount and issuance costs, $6.8 million of
acquisition-related expenses, and $4.8 million of amortization of
purchased intangibles. GAAP net loss per share for the year ended
December 31, 2018 was based on 105.6 million weighted average shares
outstanding (basic and diluted), and non-GAAP net income per share for
the year ended December 31, 2018 was based on 105.6 million weighted
average shares outstanding (basic) and 111.7 million weighted average
shares outstanding (diluted).

Appointment of Thomas Szkutak to Board of Directors

Zendesk appointed Thomas Szkutak to its board of directors, effective
January 31, 2019. Tom was previously the senior vice president and chief
financial officer of Amazon.com, Inc. from October 2002 to June 2015. He
currently serves as a member of the board of directors of Intuit Inc.
and athenahealth, Inc. Szkutak also serves as an advisor and operating
partner of Advent International, a global private equity firm.

“Tom knows firsthand how to manage and scale a high-growth company,”
said Mikkel Svane, Zendesk chief executive officer, chairman and
founder. “Together with our diverse and talented board, he will use his
experience to help guide us to become a multibillion-dollar revenue
company over the long-term.”

“I’m proud to be joining at a time when Zendesk has major opportunities
ahead of it,” Szkutak said. “With the launch of its open and flexible
CRM platform, Zendesk is well-positioned to move upmarket and into the
broader customer experience and CRM market.”

Outlook

As of February 5, 2019, Zendesk provided guidance for the quarter ending
March 31, 2019 and for the year ending December 31, 2019.

For the quarter ending March 31, 2019, Zendesk expects to report:

• Revenue in the range of $178.0 – 180.0 million
• GAAP operating income (loss) in the range of $(44.0) – (42.0) million,
  which includes share-based compensation and related expenses of
  approximately $38.2 million, amortization of purchased intangibles of
  approximately $2.2 million, and acquisition-related expenses of
  approximately $1.6 million
• Non-GAAP operating income (loss) of $(2.0) – 0.0 million, which
  excludes share-based compensation and related expenses of
  approximately $38.2 million, amortization of purchased intangibles of
  approximately $2.2 million, and acquisition-related expenses of
  approximately $1.6 million
• Approximately 108.7 million weighted average shares outstanding (basic)
• Approximately 117.2 million weighted average shares outstanding
  (diluted)

For the full year ending December 31, 2019, Zendesk expects to report:

• Revenue in the range of $795.0 – 805.0 million
• GAAP operating income (loss) in the range of $(154.0) – (149.0)
  million, which includes share-based compensation and related expenses
  of approximately $154.2 million, amortization of purchased intangibles
  of approximately $8.8 million, and acquisition-related expenses of
  approximately $4.0 million
• Non-GAAP operating income of $13.0 – 18.0 million, which excludes
  share-based compensation and related expenses of approximately $154.2
  million, amortization of purchased intangibles of approximately $8.8
  million, and acquisition-related expenses of approximately $4.0 million
• Approximately 110.7 million weighted average shares outstanding (basic)
• Approximately 119.3 million weighted average shares outstanding
  (diluted)
• Free cash flow in the range of $55.0 – 65.0 million

We have not reconciled free cash flow guidance to net cash from
operating activities for the full year 2019 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 2019 is not available without
unreasonable effort.

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 conference call to answer questions today,
February 5, 2019, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A
live webcast of the conference call will be available at https://investor.zendesk.com.
The conference call can also be accessed by dialing 833-287-0801, or +1
647-689-4460 (outside the U.S. and Canada). The conference ID is
2737549. A replay of the call via webcast will be available at https://investor.zendesk.com
or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and
Canada) and entering passcode 2737549. The dial-in replay will be
available until the end of day February 7, 2019. The webcast replay will
be available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk. Zendesk’s powerful
and flexible customer service and engagement platform scales to meet the
needs of any business, from startups and small businesses to growth
companies and enterprises. Zendesk serves businesses across a multitude
of industries, with more than 125,000 paid customer accounts offering
service and support in more than 30 languages. Headquartered in San
Francisco, Zendesk operates worldwide with 16 offices in North America,
Europe, Asia, Australia, and South America. Learn more at www.zendesk.com.

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) adverse changes in general economic or
market conditions; (ii) Zendesk’s ability to adapt its products to
changing market dynamics and customer preferences or achieve increased
market acceptance of its products; (iii) Zendesk’s ability to
effectively expand its sales capabilities; (iv) Zendesk’s ability to
effectively market and sell its products to larger enterprises; (v)
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; (vi)
the intensely competitive market in which Zendesk operates and the
difficulty that Zendesk may have in competing effectively; (vii)
Zendesk’s ability to introduce and market new products and to support
its products on a shared services platform; (viii) Zendesk’s ability to
integrate acquired businesses and technologies successfully or achieve
the expected benefits of such acquisitions; (ix) Zendesk’s ability to
effectively manage its growth and organizational change, including its
international expansion strategy; (x) potential breaches in Zendesk’s
security measures or unauthorized access to its customers’ data; (xi)
Zendesk’s ability to comply with privacy and data security regulations;
(xii) the development of the market for software as a service business
software applications; (xiii) potential service interruptions or
performance problems associated with Zendesk’s technology and
infrastructure; (xiv) real or perceived errors, failures, or bugs in its
products; (xv) Zendesk’s substantial reliance on its customers renewing
their subscriptions and purchasing additional subscriptions; and (xvi)
Zendesk’s ability to accurately forecast expenditures on third-party
managed hosting services.

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, 2018. 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, 2018.

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.

About Non

Contacts

Zendesk, Inc.
Investor Contact:
Marc Cabi, +1
415-852-3877
[email protected]

or

Media Contact:
Tian Lee, +1 415-231-0847
[email protected]

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