Recent Quotes View Full List My Watchlist Create Watchlist Indicators DJI Nasdaq Composite SPX Gold Crude Oil Hydroworld Market Index Markets Stocks ETFs Tools Overview News Currencies International Treasuries Zendesk Announces Third Quarter 2022 Results By: Zendesk, Inc. via Business Wire October 27, 2022 at 16:10 PM EDT Highlights: Third quarter revenue increased 20% year-over-year to $416.9 million Third quarter GAAP operating loss of $55.4 million and non-GAAP operating income of $48.9 million GAAP operating loss includes restructuring expenses of $10.2 million and merger-related costs and other expenses of $6.6 million Zendesk, Inc. (NYSE: ZEN) today reported financial results for the third quarter ended September 30, 2022. Results for the Third Quarter 2022 Revenue was $416.9 million for the quarter ended September 30, 2022, an increase of 20% over the prior year period. GAAP net loss for the quarter ended September 30, 2022 was $59.1 million, and GAAP net loss per share (basic and diluted) was $0.48. Non-GAAP net income was $39.4 million, and non-GAAP net income per share was $0.32 (basic) and $0.28 (diluted). Non-GAAP net income excludes approximately $81.7 million in share-based compensation and related expenses (including $1.3 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $10.2 million of restructuring expenses, $6.6 million of merger-related costs and other expenses, $2.8 million of real estate impairments, $1.8 million of amortization of purchased intangibles, $1.2 million of acquisition-related expenses, and $1.2 million of amortization of debt issuance costs, and includes non-GAAP income tax effects and adjustments of $7.0 million. GAAP net loss per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic) and 138.3 million weighted average shares outstanding (diluted). Transaction with Private Equity Consortium Due to Zendesk’s pending acquisition by an investor group led by leading investment firms Hellman & Friedman Advisors LLC and Permira Advisers LLC that was announced on June 24, 2022, the Company will not be holding a conference call or live webcast to discuss Zendesk’s financial results for the third quarter ended September 30, 2022, or providing a Shareholder Letter for such period. In addition, the Company is suspending its financial guidance for the year ending December 31, 2022 in light of the pending transaction. About Zendesk Zendesk started the customer experience revolution in 2007 by enabling any business around the world to take their customer service online. Today, Zendesk is the champion of great service everywhere for everyone, and powers billions of conversations, connecting more than 100,000 brands with hundreds of millions of customers over telephony, chat, email, messaging, social channels, communities, review sites and help centers. Zendesk products are built with love to be loved. The Company was conceived in Copenhagen, Denmark, built and grown in California, taken public in New York City, and today employs more than 6,000 people across the world. Learn more at www.zendesk.com. References to Zendesk, the “Company,” “our,” or “we” in this press release refer to Zendesk, Inc. and its subsidiaries on a consolidated basis. Forward-Looking Statements This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, progress toward its long-term financial objectives, and the proposed transaction. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (ii) the intensely competitive market in which Zendesk operates; (iii) the development of the market for software as a service business software applications; (iv) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (v) Zendesk’s ability to effectively market and sell its products to larger enterprises; (vi) Zendesk’s ability to develop or acquire and market new products and to support its products on a unified, reliable shared services platform; (vii) Zendesk’s reliance on third-party services, including services for hosting, email, and messaging; (viii) Zendesk’s ability to retain key employees and attract qualified personnel, particularly in the primary regions Zendesk operates; (ix) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (x) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (xi) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xii) real or perceived errors, failures, or bugs in Zendesk’s products; (xiii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xiv) Zendesk’s ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches; (xv) Zendesk’s ability to comply with privacy and data security regulations; (xvi) Zendesk’s ability to optimize the pricing for its solutions; (xvii) other adverse changes in general economic or market conditions; and (xviii) known and unknown risks, uncertainties, and other factors related to the proposed transaction, including: the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed transaction that could reduce anticipated benefits or cause the parties to abandon the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement entered into pursuant to the proposed transaction; the risk that the parties to the merger agreement may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all; risks related to disruption of management time from ongoing business operations due to the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Zendesk’s common stock; the risk of any unexpected costs or expenses resulting from the proposed transaction; the risk of any litigation relating to the proposed transaction; the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Zendesk to retain customers and retain and hire key personnel and maintain relationships with customers, suppliers, employees, stockholders and other business relationships and on its operating results and business generally; and the risk the pending proposed transaction could distract management of Zendesk. The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2021. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. Condensed Consolidated Statements of Operations (In thousands, except per share data; unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 416,861 $ 346,974 $ 1,212,396 $ 963,238 Cost of revenue 79,462 70,226 237,930 197,863 Gross profit 337,399 276,748 974,466 765,375 Operating expenses: Research and development 105,203 92,112 323,819 248,721 Sales and marketing 211,593 172,828 622,413 495,596 General and administrative 76,030 50,716 236,778 139,667 Total operating expenses 392,826 315,656 1,183,010 883,984 Operating loss (55,427 ) (38,908 ) (208,544 ) (118,609 ) Other income (expense), net: Interest expense (3,131 ) (14,762 ) (9,373 ) (43,768 ) Interest and other income (expense), net 2,913 2,386 5,845 8,430 Total other income (expense), net (218 ) (12,376 ) (3,528 ) (35,338 ) Loss before provision for income taxes (55,645 ) (51,284 ) (212,072 ) (153,947 ) Provision for income taxes 3,448 3,133 9,049 7,842 Net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Net loss per share, basic and diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Weighted-average shares used to compute net loss per share, basic and diluted 123,576 120,164 122,799 119,050 Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 707,047 $ 476,103 Marketable securities 630,763 539,780 Accounts receivable, net of allowance for credit losses of $6,169 and $6,190 as of September 30, 2022 and December 31, 2021, respectively 217,831 273,898 Deferred costs 85,700 72,042 Prepaid expenses and other current assets 75,728 56,809 Total current assets 1,717,069 1,418,632 Marketable securities, noncurrent 322,946 559,652 Property and equipment, net 86,799 97,815 Deferred costs, noncurrent 76,414 72,553 Lease right-of-use assets 44,260 69,936 Goodwill and intangible assets, net 191,791 197,098 Other assets 36,880 35,593 Total assets $ 2,476,159 $ 2,451,279 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 42,553 $ 49,213 Accrued liabilities 77,664 50,075 Accrued compensation and related benefits 114,633 138,127 Deferred revenue 532,889 512,933 Lease liabilities 19,965 21,253 Current portion of convertible senior notes, net 148,865 139,738 Total current liabilities 936,569 911,339 Convertible senior notes, net 1,138,472 979,350 Deferred revenue, noncurrent 5,558 4,277 Lease liabilities, noncurrent 45,902 63,212 Other liabilities 2,795 3,883 Total liabilities 2,129,296 1,962,061 Stockholders’ equity: Preferred stock, par value $0.01 per share — — Common stock, par value $0.01 per share 1,238 1,215 Additional paid-in capital 1,651,518 1,637,157 Accumulated other comprehensive loss (25,643 ) (8,911 ) Accumulated deficit (1,280,250 ) (1,140,243 ) Total stockholders’ equity 346,863 489,218 Total liabilities and stockholders’ equity $ 2,476,159 $ 2,451,279 Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Three Months Ended September 30, 2022 2021 Cash flows from operating activities Net loss $ (59,093 ) $ (54,417 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,072 9,330 Share-based compensation 79,959 59,533 Amortization of deferred costs 22,980 17,797 Amortization of debt discount and issuance costs 1,227 12,866 Real estate impairments 3,455 — Allowance for credit losses on accounts receivable 2,664 1,704 Other, net 148 1,118 Changes in operating assets and liabilities: Accounts receivable 36,836 15,231 Prepaid expenses and other current assets 2,028 (7,646 ) Deferred costs (23,796 ) (22,595 ) Lease right-of-use assets 3,497 4,058 Other assets and liabilities (244 ) (2,038 ) Accounts payable (27,925 ) 12,927 Accrued liabilities 14,992 3,910 Accrued compensation and related benefits 4,138 22,020 Deferred revenue (33,367 ) 5,571 Lease liabilities (6,633 ) (5,559 ) Net cash provided by operating activities 29,938 73,810 Cash flows from investing activities Purchases of property and equipment (2,164 ) (5,073 ) Internal-use software development costs (2,334 ) (3,299 ) Purchases of marketable securities (33,731 ) (213,786 ) Proceeds from maturities of marketable securities 99,616 209,980 Proceeds from sales of marketable securities 40,410 44,934 Business combinations, net of cash acquired — (7,811 ) Purchases of strategic investments (500 ) (1,000 ) Proceeds from sales of strategic investments — 1,008 Net cash provided by investing activities 101,297 24,953 Cash flows from financing activities Proceeds from exercises of employee stock options 3,273 3,754 Proceeds from employee stock purchase plan 6,650 10,358 Taxes paid related to net share settlement of share-based awards (1,552 ) (2,638 ) Net cash provided by financing activities 8,371 11,474 Effect of exchange rate changes on cash, cash equivalents and restricted cash (104 ) (14 ) Net increase in cash, cash equivalents and restricted cash 139,502 110,223 Cash, cash equivalents and restricted cash at beginning of period 569,694 423,248 Cash, cash equivalents and restricted cash at end of period $ 709,196 $ 533,471 Non-GAAP Results (In thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this release. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of gross profit and gross margin GAAP gross profit $ 337,399 $ 276,748 $ 974,466 $ 765,375 Plus: Share-based compensation 7,053 5,343 20,212 15,047 Plus: Employer tax related to employee stock transactions 104 187 490 967 Plus: Amortization of purchased intangibles 1,178 1,095 3,533 3,450 Plus: Acquisition-related expenses — 37 — 161 Plus: Amortization of share-based compensation capitalized in internal-use software 415 373 1,252 1,144 Non-GAAP gross profit $ 346,149 $ 283,783 $ 999,953 $ 786,144 GAAP gross margin 81 % 80 % 80 % 79 % Non-GAAP adjustments 2 % 2 % 2 % 3 % Non-GAAP gross margin 83 % 82 % 82 % 82 % Reconciliation of operating expenses GAAP research and development $ 105,203 $ 92,112 $ 323,819 $ 248,721 Less: Share-based compensation (22,885 ) (17,189 ) (62,654 ) (49,886 ) Less: Employer tax related to employee stock transactions (410 ) (617 ) (1,945 ) (3,126 ) Less: Acquisition-related expenses (1,004 ) (1,297 ) (3,641 ) (3,076 ) Less: Amortization of share-based compensation capitalized in internal-use software (17 ) (17 ) (51 ) (51 ) Non-GAAP research and development $ 80,887 $ 72,992 $ 255,528 $ 192,582 GAAP research and development as percentage of revenue 25 % 27 % 27 % 26 % Non-GAAP research and development as percentage of revenue 19 % 21 % 21 % 20 % GAAP sales and marketing $ 211,593 $ 172,828 $ 622,413 $ 495,596 Less: Share-based compensation (35,014 ) (24,915 ) (92,934 ) (72,648 ) Less: Employer tax related to employee stock transactions (655 ) (739 ) (2,843 ) (4,193 ) Less: Amortization of purchased intangibles (642 ) (642 ) (1,926 ) (1,926 ) Less: Acquisition-related expenses (1 ) (262 ) (375 ) (374 ) Non-GAAP sales and marketing $ 175,281 $ 146,270 $ 524,335 $ 416,455 GAAP sales and marketing as percentage of revenue 51 % 50 % 51 % 51 % Non-GAAP sales and marketing as percentage of revenue 42 % 42 % 43 % 43 % GAAP general and administrative $ 76,030 $ 50,716 $ 236,778 $ 139,667 Less: Share-based compensation (15,007 ) (12,086 ) (41,456 ) (31,020 ) Less: Employer tax related to employee stock transactions (164 ) (510 ) (1,144 ) (2,798 ) Less: Acquisition-related expenses (157 ) (636 ) (10,003 ) (1,099 ) Less: Amortization of share-based compensation capitalized in internal-use software (7 ) — (7 ) — Less: Real estate impairments (2,763 ) 65 (27,671 ) (1,111 ) Less: Merger-related costs and other expenses (6,620 ) — (18,833 ) — Less: Restructuring expenses (10,184 ) — (10,184 ) — Non-GAAP general and administrative $ 41,128 $ 37,549 $ 127,480 $ 103,639 GAAP general and administrative as percentage of revenue 18 % 15 % 20 % 14 % Non-GAAP general and administrative as percentage of revenue 10 % 11 % 11 % 11 % Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of operating income (loss) and operating margin GAAP operating loss $ (55,427 ) $ (38,908 ) $ (208,544 ) $ (118,609 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Non-GAAP operating income $ 48,853 $ 26,972 $ 92,610 $ 73,468 GAAP operating margin (13 ) % (11 ) % (17 ) % (12 ) % Non-GAAP adjustments 25 % 19 % 25 % 20 % Non-GAAP operating margin 12 % 8 % 8 % 8 % Reconciliation of net income (loss) GAAP net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Plus: Amortization of debt discount and issuance costs 1,227 12,865 3,673 38,085 Less: Income tax effects and adjustments (7,024 ) (2,634 ) (10,430 ) (8,163 ) Non-GAAP net income $ 39,390 $ 21,694 $ 73,276 $ 60,210 Reconciliation of net income (loss) per share, basic GAAP net loss per share, basic $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.80 0.63 2.40 1.87 Non-GAAP net income per share, basic $ 0.32 $ 0.18 $ 0.60 $ 0.51 Reconciliation of net income (loss) per share, diluted GAAP net loss per share, diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.76 0.62 2.33 1.83 Non-GAAP net income per share, diluted $ 0.28 $ 0.17 $ 0.53 $ 0.47 Weighted-average shares used in GAAP per share calculation, basic and diluted 123,576 120,164 122,799 119,050 Weighted-average shares used in non-GAAP per share calculation Basic 123,576 120,164 122,799 119,050 Diluted (1) 138,334 126,887 137,912 127,234 Computation of free cash flow Net cash provided by operating activities $ 29,938 $ 73,810 $ 90,175 $ 134,283 Less: Purchases of property and equipment (2,164 ) (5,073 ) (15,014 ) (11,030 ) Less: Internal-use software development costs (2,334 ) (3,299 ) (8,230 ) (10,837 ) Free cash flow $ 25,440 $ 65,438 $ 66,931 $ 112,416 Net cash provided by operating activities margin 7 % 21 % 7 % 14 % Non-GAAP adjustments (1 ) % (2 ) % (1 ) % (2 ) % Free cash flow margin 6 % 19 % 6 % 12 % (1) In the first quarter of 2022, we adopted ASU 2020-06, which simplifies the accounting for convertible debt. Under the new standard, companies are required to use the if-converted method for calculating diluted EPS instead of the treasury stock method. For the three and nine months ended September 30, 2022, approximately 13 million shares related to our convertible notes were included in the diluted share amount using the if-converted method. About Non-GAAP Financial Measures To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin. Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable: Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in Internal-Use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period. Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period. Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period. Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Real Estate Impairments: To support an increased percentage of remote teams, Zendesk records impairments for certain assets associated with leased properties, or portions thereof, that it ceases to occupy. Any losses and gains associated with these activities are generally unrelated to financial and operational performance in any particular period and Zendesk believes the exclusion of such losses and gains provides for a more useful comparison of operational performance in comparative periods that may or may not include such losses and gains. Merger-Related Costs and Other Expenses: Zendesk views fees related to its pending acquisition, including transaction costs, as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses provides meaningful supplemental information regarding operational performance. Other expenses include non-recurring fees paid for third-party advisory and professional services related to shareholder activism and the strategic review. Restructuring Expenses: Zendesk views restructuring expenses, such as employee severance-related costs, professional fees, and other costs associated with significant changes to its operations as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Amortization of Debt Discount and Issuance Costs: On January 1, 2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which simplifies the accounting for convertible debt. Prior to the adoption of ASU 2020-06, the imputed interest rates of our 2023 convertible notes and our 2025 notes were approximately 5.26% and 5.00%, respectively. This was a result of the debt discounts recorded for the conversion features of the notes that were required to be separately accounted for as equity, and debt issuance costs, which reduced the carrying value of the convertible debt instruments. The debt discounts were amortized as interest expense together with the issuance costs of the debt. Upon adoption of the new standard, the liability and equity components of each instrument were recombined into a single liability instrument measured at amortized cost. As a result, from the date of adoption, no debt discount remains and no interest expense related to debt discount amortization will be recorded. Interest expense related to the amortization of debt issuance costs will continue to be recorded over the term of the notes. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this expense will provide for a more useful comparison of our operational performance in different periods. Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2022, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions. Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations. Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management. Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, acquisition-related expenses, real estate impairments, merger-related costs and other expenses, and restructuring expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which amends the calculation of diluted earnings per share for certain convertible debt instruments, among other changes. Under the new standard, Zendesk is required to use the “if-converted” method to calculate diluted earnings per share for its convertible debt, which assumes conversion of its convertible debt instruments at the beginning of the reporting period, with settlement entirely in shares of common stock, unless the result would be anti-dilutive. Historically, Zendesk calculated diluted earnings per share for its convertible debt using the “treasury stock” method, which assumes that the principal amount of convertible debt instruments is settled in cash. Accordingly, our diluted shares outstanding are generally expected to increase under the new standard. We adopted this standard in the first quarter of 2022. The total amount of shares underlying the convertible notes is approximately 13 million. Refer to Form 10-Q for the quarter ended September 30, 2022 for further information. Source: Zendesk, Inc. View source version on businesswire.com: https://www.businesswire.com/news/home/20221027005994/en/Contacts 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 Data & News supplied by www.cloudquote.io Stock quotes supplied by Barchart Quotes delayed at least 20 minutes. By accessing this page, you agree to the following Privacy Policy and Terms and Conditions.
Zendesk Announces Third Quarter 2022 Results By: Zendesk, Inc. via Business Wire October 27, 2022 at 16:10 PM EDT Highlights: Third quarter revenue increased 20% year-over-year to $416.9 million Third quarter GAAP operating loss of $55.4 million and non-GAAP operating income of $48.9 million GAAP operating loss includes restructuring expenses of $10.2 million and merger-related costs and other expenses of $6.6 million Zendesk, Inc. (NYSE: ZEN) today reported financial results for the third quarter ended September 30, 2022. Results for the Third Quarter 2022 Revenue was $416.9 million for the quarter ended September 30, 2022, an increase of 20% over the prior year period. GAAP net loss for the quarter ended September 30, 2022 was $59.1 million, and GAAP net loss per share (basic and diluted) was $0.48. Non-GAAP net income was $39.4 million, and non-GAAP net income per share was $0.32 (basic) and $0.28 (diluted). Non-GAAP net income excludes approximately $81.7 million in share-based compensation and related expenses (including $1.3 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $10.2 million of restructuring expenses, $6.6 million of merger-related costs and other expenses, $2.8 million of real estate impairments, $1.8 million of amortization of purchased intangibles, $1.2 million of acquisition-related expenses, and $1.2 million of amortization of debt issuance costs, and includes non-GAAP income tax effects and adjustments of $7.0 million. GAAP net loss per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic) and 138.3 million weighted average shares outstanding (diluted). Transaction with Private Equity Consortium Due to Zendesk’s pending acquisition by an investor group led by leading investment firms Hellman & Friedman Advisors LLC and Permira Advisers LLC that was announced on June 24, 2022, the Company will not be holding a conference call or live webcast to discuss Zendesk’s financial results for the third quarter ended September 30, 2022, or providing a Shareholder Letter for such period. In addition, the Company is suspending its financial guidance for the year ending December 31, 2022 in light of the pending transaction. About Zendesk Zendesk started the customer experience revolution in 2007 by enabling any business around the world to take their customer service online. Today, Zendesk is the champion of great service everywhere for everyone, and powers billions of conversations, connecting more than 100,000 brands with hundreds of millions of customers over telephony, chat, email, messaging, social channels, communities, review sites and help centers. Zendesk products are built with love to be loved. The Company was conceived in Copenhagen, Denmark, built and grown in California, taken public in New York City, and today employs more than 6,000 people across the world. Learn more at www.zendesk.com. References to Zendesk, the “Company,” “our,” or “we” in this press release refer to Zendesk, Inc. and its subsidiaries on a consolidated basis. Forward-Looking Statements This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, progress toward its long-term financial objectives, and the proposed transaction. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (ii) the intensely competitive market in which Zendesk operates; (iii) the development of the market for software as a service business software applications; (iv) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (v) Zendesk’s ability to effectively market and sell its products to larger enterprises; (vi) Zendesk’s ability to develop or acquire and market new products and to support its products on a unified, reliable shared services platform; (vii) Zendesk’s reliance on third-party services, including services for hosting, email, and messaging; (viii) Zendesk’s ability to retain key employees and attract qualified personnel, particularly in the primary regions Zendesk operates; (ix) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (x) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (xi) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xii) real or perceived errors, failures, or bugs in Zendesk’s products; (xiii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xiv) Zendesk’s ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches; (xv) Zendesk’s ability to comply with privacy and data security regulations; (xvi) Zendesk’s ability to optimize the pricing for its solutions; (xvii) other adverse changes in general economic or market conditions; and (xviii) known and unknown risks, uncertainties, and other factors related to the proposed transaction, including: the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed transaction that could reduce anticipated benefits or cause the parties to abandon the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement entered into pursuant to the proposed transaction; the risk that the parties to the merger agreement may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all; risks related to disruption of management time from ongoing business operations due to the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Zendesk’s common stock; the risk of any unexpected costs or expenses resulting from the proposed transaction; the risk of any litigation relating to the proposed transaction; the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Zendesk to retain customers and retain and hire key personnel and maintain relationships with customers, suppliers, employees, stockholders and other business relationships and on its operating results and business generally; and the risk the pending proposed transaction could distract management of Zendesk. The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2021. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. Condensed Consolidated Statements of Operations (In thousands, except per share data; unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 416,861 $ 346,974 $ 1,212,396 $ 963,238 Cost of revenue 79,462 70,226 237,930 197,863 Gross profit 337,399 276,748 974,466 765,375 Operating expenses: Research and development 105,203 92,112 323,819 248,721 Sales and marketing 211,593 172,828 622,413 495,596 General and administrative 76,030 50,716 236,778 139,667 Total operating expenses 392,826 315,656 1,183,010 883,984 Operating loss (55,427 ) (38,908 ) (208,544 ) (118,609 ) Other income (expense), net: Interest expense (3,131 ) (14,762 ) (9,373 ) (43,768 ) Interest and other income (expense), net 2,913 2,386 5,845 8,430 Total other income (expense), net (218 ) (12,376 ) (3,528 ) (35,338 ) Loss before provision for income taxes (55,645 ) (51,284 ) (212,072 ) (153,947 ) Provision for income taxes 3,448 3,133 9,049 7,842 Net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Net loss per share, basic and diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Weighted-average shares used to compute net loss per share, basic and diluted 123,576 120,164 122,799 119,050 Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 707,047 $ 476,103 Marketable securities 630,763 539,780 Accounts receivable, net of allowance for credit losses of $6,169 and $6,190 as of September 30, 2022 and December 31, 2021, respectively 217,831 273,898 Deferred costs 85,700 72,042 Prepaid expenses and other current assets 75,728 56,809 Total current assets 1,717,069 1,418,632 Marketable securities, noncurrent 322,946 559,652 Property and equipment, net 86,799 97,815 Deferred costs, noncurrent 76,414 72,553 Lease right-of-use assets 44,260 69,936 Goodwill and intangible assets, net 191,791 197,098 Other assets 36,880 35,593 Total assets $ 2,476,159 $ 2,451,279 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 42,553 $ 49,213 Accrued liabilities 77,664 50,075 Accrued compensation and related benefits 114,633 138,127 Deferred revenue 532,889 512,933 Lease liabilities 19,965 21,253 Current portion of convertible senior notes, net 148,865 139,738 Total current liabilities 936,569 911,339 Convertible senior notes, net 1,138,472 979,350 Deferred revenue, noncurrent 5,558 4,277 Lease liabilities, noncurrent 45,902 63,212 Other liabilities 2,795 3,883 Total liabilities 2,129,296 1,962,061 Stockholders’ equity: Preferred stock, par value $0.01 per share — — Common stock, par value $0.01 per share 1,238 1,215 Additional paid-in capital 1,651,518 1,637,157 Accumulated other comprehensive loss (25,643 ) (8,911 ) Accumulated deficit (1,280,250 ) (1,140,243 ) Total stockholders’ equity 346,863 489,218 Total liabilities and stockholders’ equity $ 2,476,159 $ 2,451,279 Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Three Months Ended September 30, 2022 2021 Cash flows from operating activities Net loss $ (59,093 ) $ (54,417 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,072 9,330 Share-based compensation 79,959 59,533 Amortization of deferred costs 22,980 17,797 Amortization of debt discount and issuance costs 1,227 12,866 Real estate impairments 3,455 — Allowance for credit losses on accounts receivable 2,664 1,704 Other, net 148 1,118 Changes in operating assets and liabilities: Accounts receivable 36,836 15,231 Prepaid expenses and other current assets 2,028 (7,646 ) Deferred costs (23,796 ) (22,595 ) Lease right-of-use assets 3,497 4,058 Other assets and liabilities (244 ) (2,038 ) Accounts payable (27,925 ) 12,927 Accrued liabilities 14,992 3,910 Accrued compensation and related benefits 4,138 22,020 Deferred revenue (33,367 ) 5,571 Lease liabilities (6,633 ) (5,559 ) Net cash provided by operating activities 29,938 73,810 Cash flows from investing activities Purchases of property and equipment (2,164 ) (5,073 ) Internal-use software development costs (2,334 ) (3,299 ) Purchases of marketable securities (33,731 ) (213,786 ) Proceeds from maturities of marketable securities 99,616 209,980 Proceeds from sales of marketable securities 40,410 44,934 Business combinations, net of cash acquired — (7,811 ) Purchases of strategic investments (500 ) (1,000 ) Proceeds from sales of strategic investments — 1,008 Net cash provided by investing activities 101,297 24,953 Cash flows from financing activities Proceeds from exercises of employee stock options 3,273 3,754 Proceeds from employee stock purchase plan 6,650 10,358 Taxes paid related to net share settlement of share-based awards (1,552 ) (2,638 ) Net cash provided by financing activities 8,371 11,474 Effect of exchange rate changes on cash, cash equivalents and restricted cash (104 ) (14 ) Net increase in cash, cash equivalents and restricted cash 139,502 110,223 Cash, cash equivalents and restricted cash at beginning of period 569,694 423,248 Cash, cash equivalents and restricted cash at end of period $ 709,196 $ 533,471 Non-GAAP Results (In thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this release. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of gross profit and gross margin GAAP gross profit $ 337,399 $ 276,748 $ 974,466 $ 765,375 Plus: Share-based compensation 7,053 5,343 20,212 15,047 Plus: Employer tax related to employee stock transactions 104 187 490 967 Plus: Amortization of purchased intangibles 1,178 1,095 3,533 3,450 Plus: Acquisition-related expenses — 37 — 161 Plus: Amortization of share-based compensation capitalized in internal-use software 415 373 1,252 1,144 Non-GAAP gross profit $ 346,149 $ 283,783 $ 999,953 $ 786,144 GAAP gross margin 81 % 80 % 80 % 79 % Non-GAAP adjustments 2 % 2 % 2 % 3 % Non-GAAP gross margin 83 % 82 % 82 % 82 % Reconciliation of operating expenses GAAP research and development $ 105,203 $ 92,112 $ 323,819 $ 248,721 Less: Share-based compensation (22,885 ) (17,189 ) (62,654 ) (49,886 ) Less: Employer tax related to employee stock transactions (410 ) (617 ) (1,945 ) (3,126 ) Less: Acquisition-related expenses (1,004 ) (1,297 ) (3,641 ) (3,076 ) Less: Amortization of share-based compensation capitalized in internal-use software (17 ) (17 ) (51 ) (51 ) Non-GAAP research and development $ 80,887 $ 72,992 $ 255,528 $ 192,582 GAAP research and development as percentage of revenue 25 % 27 % 27 % 26 % Non-GAAP research and development as percentage of revenue 19 % 21 % 21 % 20 % GAAP sales and marketing $ 211,593 $ 172,828 $ 622,413 $ 495,596 Less: Share-based compensation (35,014 ) (24,915 ) (92,934 ) (72,648 ) Less: Employer tax related to employee stock transactions (655 ) (739 ) (2,843 ) (4,193 ) Less: Amortization of purchased intangibles (642 ) (642 ) (1,926 ) (1,926 ) Less: Acquisition-related expenses (1 ) (262 ) (375 ) (374 ) Non-GAAP sales and marketing $ 175,281 $ 146,270 $ 524,335 $ 416,455 GAAP sales and marketing as percentage of revenue 51 % 50 % 51 % 51 % Non-GAAP sales and marketing as percentage of revenue 42 % 42 % 43 % 43 % GAAP general and administrative $ 76,030 $ 50,716 $ 236,778 $ 139,667 Less: Share-based compensation (15,007 ) (12,086 ) (41,456 ) (31,020 ) Less: Employer tax related to employee stock transactions (164 ) (510 ) (1,144 ) (2,798 ) Less: Acquisition-related expenses (157 ) (636 ) (10,003 ) (1,099 ) Less: Amortization of share-based compensation capitalized in internal-use software (7 ) — (7 ) — Less: Real estate impairments (2,763 ) 65 (27,671 ) (1,111 ) Less: Merger-related costs and other expenses (6,620 ) — (18,833 ) — Less: Restructuring expenses (10,184 ) — (10,184 ) — Non-GAAP general and administrative $ 41,128 $ 37,549 $ 127,480 $ 103,639 GAAP general and administrative as percentage of revenue 18 % 15 % 20 % 14 % Non-GAAP general and administrative as percentage of revenue 10 % 11 % 11 % 11 % Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of operating income (loss) and operating margin GAAP operating loss $ (55,427 ) $ (38,908 ) $ (208,544 ) $ (118,609 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Non-GAAP operating income $ 48,853 $ 26,972 $ 92,610 $ 73,468 GAAP operating margin (13 ) % (11 ) % (17 ) % (12 ) % Non-GAAP adjustments 25 % 19 % 25 % 20 % Non-GAAP operating margin 12 % 8 % 8 % 8 % Reconciliation of net income (loss) GAAP net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Plus: Amortization of debt discount and issuance costs 1,227 12,865 3,673 38,085 Less: Income tax effects and adjustments (7,024 ) (2,634 ) (10,430 ) (8,163 ) Non-GAAP net income $ 39,390 $ 21,694 $ 73,276 $ 60,210 Reconciliation of net income (loss) per share, basic GAAP net loss per share, basic $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.80 0.63 2.40 1.87 Non-GAAP net income per share, basic $ 0.32 $ 0.18 $ 0.60 $ 0.51 Reconciliation of net income (loss) per share, diluted GAAP net loss per share, diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.76 0.62 2.33 1.83 Non-GAAP net income per share, diluted $ 0.28 $ 0.17 $ 0.53 $ 0.47 Weighted-average shares used in GAAP per share calculation, basic and diluted 123,576 120,164 122,799 119,050 Weighted-average shares used in non-GAAP per share calculation Basic 123,576 120,164 122,799 119,050 Diluted (1) 138,334 126,887 137,912 127,234 Computation of free cash flow Net cash provided by operating activities $ 29,938 $ 73,810 $ 90,175 $ 134,283 Less: Purchases of property and equipment (2,164 ) (5,073 ) (15,014 ) (11,030 ) Less: Internal-use software development costs (2,334 ) (3,299 ) (8,230 ) (10,837 ) Free cash flow $ 25,440 $ 65,438 $ 66,931 $ 112,416 Net cash provided by operating activities margin 7 % 21 % 7 % 14 % Non-GAAP adjustments (1 ) % (2 ) % (1 ) % (2 ) % Free cash flow margin 6 % 19 % 6 % 12 % (1) In the first quarter of 2022, we adopted ASU 2020-06, which simplifies the accounting for convertible debt. Under the new standard, companies are required to use the if-converted method for calculating diluted EPS instead of the treasury stock method. For the three and nine months ended September 30, 2022, approximately 13 million shares related to our convertible notes were included in the diluted share amount using the if-converted method. About Non-GAAP Financial Measures To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin. Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable: Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in Internal-Use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period. Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period. Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period. Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Real Estate Impairments: To support an increased percentage of remote teams, Zendesk records impairments for certain assets associated with leased properties, or portions thereof, that it ceases to occupy. Any losses and gains associated with these activities are generally unrelated to financial and operational performance in any particular period and Zendesk believes the exclusion of such losses and gains provides for a more useful comparison of operational performance in comparative periods that may or may not include such losses and gains. Merger-Related Costs and Other Expenses: Zendesk views fees related to its pending acquisition, including transaction costs, as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses provides meaningful supplemental information regarding operational performance. Other expenses include non-recurring fees paid for third-party advisory and professional services related to shareholder activism and the strategic review. Restructuring Expenses: Zendesk views restructuring expenses, such as employee severance-related costs, professional fees, and other costs associated with significant changes to its operations as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Amortization of Debt Discount and Issuance Costs: On January 1, 2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which simplifies the accounting for convertible debt. Prior to the adoption of ASU 2020-06, the imputed interest rates of our 2023 convertible notes and our 2025 notes were approximately 5.26% and 5.00%, respectively. This was a result of the debt discounts recorded for the conversion features of the notes that were required to be separately accounted for as equity, and debt issuance costs, which reduced the carrying value of the convertible debt instruments. The debt discounts were amortized as interest expense together with the issuance costs of the debt. Upon adoption of the new standard, the liability and equity components of each instrument were recombined into a single liability instrument measured at amortized cost. As a result, from the date of adoption, no debt discount remains and no interest expense related to debt discount amortization will be recorded. Interest expense related to the amortization of debt issuance costs will continue to be recorded over the term of the notes. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this expense will provide for a more useful comparison of our operational performance in different periods. Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2022, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions. Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations. Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management. Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, acquisition-related expenses, real estate impairments, merger-related costs and other expenses, and restructuring expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which amends the calculation of diluted earnings per share for certain convertible debt instruments, among other changes. Under the new standard, Zendesk is required to use the “if-converted” method to calculate diluted earnings per share for its convertible debt, which assumes conversion of its convertible debt instruments at the beginning of the reporting period, with settlement entirely in shares of common stock, unless the result would be anti-dilutive. Historically, Zendesk calculated diluted earnings per share for its convertible debt using the “treasury stock” method, which assumes that the principal amount of convertible debt instruments is settled in cash. Accordingly, our diluted shares outstanding are generally expected to increase under the new standard. We adopted this standard in the first quarter of 2022. The total amount of shares underlying the convertible notes is approximately 13 million. Refer to Form 10-Q for the quarter ended September 30, 2022 for further information. Source: Zendesk, Inc. View source version on businesswire.com: https://www.businesswire.com/news/home/20221027005994/en/Contacts 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
Highlights: Third quarter revenue increased 20% year-over-year to $416.9 million Third quarter GAAP operating loss of $55.4 million and non-GAAP operating income of $48.9 million GAAP operating loss includes restructuring expenses of $10.2 million and merger-related costs and other expenses of $6.6 million
Zendesk, Inc. (NYSE: ZEN) today reported financial results for the third quarter ended September 30, 2022. Results for the Third Quarter 2022 Revenue was $416.9 million for the quarter ended September 30, 2022, an increase of 20% over the prior year period. GAAP net loss for the quarter ended September 30, 2022 was $59.1 million, and GAAP net loss per share (basic and diluted) was $0.48. Non-GAAP net income was $39.4 million, and non-GAAP net income per share was $0.32 (basic) and $0.28 (diluted). Non-GAAP net income excludes approximately $81.7 million in share-based compensation and related expenses (including $1.3 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $10.2 million of restructuring expenses, $6.6 million of merger-related costs and other expenses, $2.8 million of real estate impairments, $1.8 million of amortization of purchased intangibles, $1.2 million of acquisition-related expenses, and $1.2 million of amortization of debt issuance costs, and includes non-GAAP income tax effects and adjustments of $7.0 million. GAAP net loss per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2022 was based on 123.6 million weighted average shares outstanding (basic) and 138.3 million weighted average shares outstanding (diluted). Transaction with Private Equity Consortium Due to Zendesk’s pending acquisition by an investor group led by leading investment firms Hellman & Friedman Advisors LLC and Permira Advisers LLC that was announced on June 24, 2022, the Company will not be holding a conference call or live webcast to discuss Zendesk’s financial results for the third quarter ended September 30, 2022, or providing a Shareholder Letter for such period. In addition, the Company is suspending its financial guidance for the year ending December 31, 2022 in light of the pending transaction. About Zendesk Zendesk started the customer experience revolution in 2007 by enabling any business around the world to take their customer service online. Today, Zendesk is the champion of great service everywhere for everyone, and powers billions of conversations, connecting more than 100,000 brands with hundreds of millions of customers over telephony, chat, email, messaging, social channels, communities, review sites and help centers. Zendesk products are built with love to be loved. The Company was conceived in Copenhagen, Denmark, built and grown in California, taken public in New York City, and today employs more than 6,000 people across the world. Learn more at www.zendesk.com. References to Zendesk, the “Company,” “our,” or “we” in this press release refer to Zendesk, Inc. and its subsidiaries on a consolidated basis. Forward-Looking Statements This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, progress toward its long-term financial objectives, and the proposed transaction. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (ii) the intensely competitive market in which Zendesk operates; (iii) the development of the market for software as a service business software applications; (iv) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (v) Zendesk’s ability to effectively market and sell its products to larger enterprises; (vi) Zendesk’s ability to develop or acquire and market new products and to support its products on a unified, reliable shared services platform; (vii) Zendesk’s reliance on third-party services, including services for hosting, email, and messaging; (viii) Zendesk’s ability to retain key employees and attract qualified personnel, particularly in the primary regions Zendesk operates; (ix) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (x) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (xi) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xii) real or perceived errors, failures, or bugs in Zendesk’s products; (xiii) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xiv) Zendesk’s ability to securely maintain customer data and prevent, mitigate, and respond effectively to both historical and future data breaches; (xv) Zendesk’s ability to comply with privacy and data security regulations; (xvi) Zendesk’s ability to optimize the pricing for its solutions; (xvii) other adverse changes in general economic or market conditions; and (xviii) known and unknown risks, uncertainties, and other factors related to the proposed transaction, including: the timing, receipt and terms and conditions of any required governmental and regulatory approvals of the proposed transaction that could reduce anticipated benefits or cause the parties to abandon the proposed transaction; the occurrence of any event, change or other circumstances that could give rise to the termination of the merger agreement entered into pursuant to the proposed transaction; the risk that the parties to the merger agreement may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all; risks related to disruption of management time from ongoing business operations due to the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price of Zendesk’s common stock; the risk of any unexpected costs or expenses resulting from the proposed transaction; the risk of any litigation relating to the proposed transaction; the risk that the proposed transaction and its announcement could have an adverse effect on the ability of Zendesk to retain customers and retain and hire key personnel and maintain relationships with customers, suppliers, employees, stockholders and other business relationships and on its operating results and business generally; and the risk the pending proposed transaction could distract management of Zendesk. The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2021. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. Condensed Consolidated Statements of Operations (In thousands, except per share data; unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue $ 416,861 $ 346,974 $ 1,212,396 $ 963,238 Cost of revenue 79,462 70,226 237,930 197,863 Gross profit 337,399 276,748 974,466 765,375 Operating expenses: Research and development 105,203 92,112 323,819 248,721 Sales and marketing 211,593 172,828 622,413 495,596 General and administrative 76,030 50,716 236,778 139,667 Total operating expenses 392,826 315,656 1,183,010 883,984 Operating loss (55,427 ) (38,908 ) (208,544 ) (118,609 ) Other income (expense), net: Interest expense (3,131 ) (14,762 ) (9,373 ) (43,768 ) Interest and other income (expense), net 2,913 2,386 5,845 8,430 Total other income (expense), net (218 ) (12,376 ) (3,528 ) (35,338 ) Loss before provision for income taxes (55,645 ) (51,284 ) (212,072 ) (153,947 ) Provision for income taxes 3,448 3,133 9,049 7,842 Net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Net loss per share, basic and diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Weighted-average shares used to compute net loss per share, basic and diluted 123,576 120,164 122,799 119,050 Condensed Consolidated Balance Sheets (In thousands, except par value; unaudited) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 707,047 $ 476,103 Marketable securities 630,763 539,780 Accounts receivable, net of allowance for credit losses of $6,169 and $6,190 as of September 30, 2022 and December 31, 2021, respectively 217,831 273,898 Deferred costs 85,700 72,042 Prepaid expenses and other current assets 75,728 56,809 Total current assets 1,717,069 1,418,632 Marketable securities, noncurrent 322,946 559,652 Property and equipment, net 86,799 97,815 Deferred costs, noncurrent 76,414 72,553 Lease right-of-use assets 44,260 69,936 Goodwill and intangible assets, net 191,791 197,098 Other assets 36,880 35,593 Total assets $ 2,476,159 $ 2,451,279 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 42,553 $ 49,213 Accrued liabilities 77,664 50,075 Accrued compensation and related benefits 114,633 138,127 Deferred revenue 532,889 512,933 Lease liabilities 19,965 21,253 Current portion of convertible senior notes, net 148,865 139,738 Total current liabilities 936,569 911,339 Convertible senior notes, net 1,138,472 979,350 Deferred revenue, noncurrent 5,558 4,277 Lease liabilities, noncurrent 45,902 63,212 Other liabilities 2,795 3,883 Total liabilities 2,129,296 1,962,061 Stockholders’ equity: Preferred stock, par value $0.01 per share — — Common stock, par value $0.01 per share 1,238 1,215 Additional paid-in capital 1,651,518 1,637,157 Accumulated other comprehensive loss (25,643 ) (8,911 ) Accumulated deficit (1,280,250 ) (1,140,243 ) Total stockholders’ equity 346,863 489,218 Total liabilities and stockholders’ equity $ 2,476,159 $ 2,451,279 Condensed Consolidated Statements of Cash Flows (In thousands; unaudited) Three Months Ended September 30, 2022 2021 Cash flows from operating activities Net loss $ (59,093 ) $ (54,417 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,072 9,330 Share-based compensation 79,959 59,533 Amortization of deferred costs 22,980 17,797 Amortization of debt discount and issuance costs 1,227 12,866 Real estate impairments 3,455 — Allowance for credit losses on accounts receivable 2,664 1,704 Other, net 148 1,118 Changes in operating assets and liabilities: Accounts receivable 36,836 15,231 Prepaid expenses and other current assets 2,028 (7,646 ) Deferred costs (23,796 ) (22,595 ) Lease right-of-use assets 3,497 4,058 Other assets and liabilities (244 ) (2,038 ) Accounts payable (27,925 ) 12,927 Accrued liabilities 14,992 3,910 Accrued compensation and related benefits 4,138 22,020 Deferred revenue (33,367 ) 5,571 Lease liabilities (6,633 ) (5,559 ) Net cash provided by operating activities 29,938 73,810 Cash flows from investing activities Purchases of property and equipment (2,164 ) (5,073 ) Internal-use software development costs (2,334 ) (3,299 ) Purchases of marketable securities (33,731 ) (213,786 ) Proceeds from maturities of marketable securities 99,616 209,980 Proceeds from sales of marketable securities 40,410 44,934 Business combinations, net of cash acquired — (7,811 ) Purchases of strategic investments (500 ) (1,000 ) Proceeds from sales of strategic investments — 1,008 Net cash provided by investing activities 101,297 24,953 Cash flows from financing activities Proceeds from exercises of employee stock options 3,273 3,754 Proceeds from employee stock purchase plan 6,650 10,358 Taxes paid related to net share settlement of share-based awards (1,552 ) (2,638 ) Net cash provided by financing activities 8,371 11,474 Effect of exchange rate changes on cash, cash equivalents and restricted cash (104 ) (14 ) Net increase in cash, cash equivalents and restricted cash 139,502 110,223 Cash, cash equivalents and restricted cash at beginning of period 569,694 423,248 Cash, cash equivalents and restricted cash at end of period $ 709,196 $ 533,471 Non-GAAP Results (In thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this release. Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of gross profit and gross margin GAAP gross profit $ 337,399 $ 276,748 $ 974,466 $ 765,375 Plus: Share-based compensation 7,053 5,343 20,212 15,047 Plus: Employer tax related to employee stock transactions 104 187 490 967 Plus: Amortization of purchased intangibles 1,178 1,095 3,533 3,450 Plus: Acquisition-related expenses — 37 — 161 Plus: Amortization of share-based compensation capitalized in internal-use software 415 373 1,252 1,144 Non-GAAP gross profit $ 346,149 $ 283,783 $ 999,953 $ 786,144 GAAP gross margin 81 % 80 % 80 % 79 % Non-GAAP adjustments 2 % 2 % 2 % 3 % Non-GAAP gross margin 83 % 82 % 82 % 82 % Reconciliation of operating expenses GAAP research and development $ 105,203 $ 92,112 $ 323,819 $ 248,721 Less: Share-based compensation (22,885 ) (17,189 ) (62,654 ) (49,886 ) Less: Employer tax related to employee stock transactions (410 ) (617 ) (1,945 ) (3,126 ) Less: Acquisition-related expenses (1,004 ) (1,297 ) (3,641 ) (3,076 ) Less: Amortization of share-based compensation capitalized in internal-use software (17 ) (17 ) (51 ) (51 ) Non-GAAP research and development $ 80,887 $ 72,992 $ 255,528 $ 192,582 GAAP research and development as percentage of revenue 25 % 27 % 27 % 26 % Non-GAAP research and development as percentage of revenue 19 % 21 % 21 % 20 % GAAP sales and marketing $ 211,593 $ 172,828 $ 622,413 $ 495,596 Less: Share-based compensation (35,014 ) (24,915 ) (92,934 ) (72,648 ) Less: Employer tax related to employee stock transactions (655 ) (739 ) (2,843 ) (4,193 ) Less: Amortization of purchased intangibles (642 ) (642 ) (1,926 ) (1,926 ) Less: Acquisition-related expenses (1 ) (262 ) (375 ) (374 ) Non-GAAP sales and marketing $ 175,281 $ 146,270 $ 524,335 $ 416,455 GAAP sales and marketing as percentage of revenue 51 % 50 % 51 % 51 % Non-GAAP sales and marketing as percentage of revenue 42 % 42 % 43 % 43 % GAAP general and administrative $ 76,030 $ 50,716 $ 236,778 $ 139,667 Less: Share-based compensation (15,007 ) (12,086 ) (41,456 ) (31,020 ) Less: Employer tax related to employee stock transactions (164 ) (510 ) (1,144 ) (2,798 ) Less: Acquisition-related expenses (157 ) (636 ) (10,003 ) (1,099 ) Less: Amortization of share-based compensation capitalized in internal-use software (7 ) — (7 ) — Less: Real estate impairments (2,763 ) 65 (27,671 ) (1,111 ) Less: Merger-related costs and other expenses (6,620 ) — (18,833 ) — Less: Restructuring expenses (10,184 ) — (10,184 ) — Non-GAAP general and administrative $ 41,128 $ 37,549 $ 127,480 $ 103,639 GAAP general and administrative as percentage of revenue 18 % 15 % 20 % 14 % Non-GAAP general and administrative as percentage of revenue 10 % 11 % 11 % 11 % Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Reconciliation of operating income (loss) and operating margin GAAP operating loss $ (55,427 ) $ (38,908 ) $ (208,544 ) $ (118,609 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Non-GAAP operating income $ 48,853 $ 26,972 $ 92,610 $ 73,468 GAAP operating margin (13 ) % (11 ) % (17 ) % (12 ) % Non-GAAP adjustments 25 % 19 % 25 % 20 % Non-GAAP operating margin 12 % 8 % 8 % 8 % Reconciliation of net income (loss) GAAP net loss $ (59,093 ) $ (54,417 ) $ (221,121 ) $ (161,789 ) Plus: Share-based compensation 79,959 59,533 217,256 168,601 Plus: Employer tax related to employee stock transactions 1,333 2,053 6,422 11,084 Plus: Amortization of purchased intangibles 1,820 1,737 5,459 5,376 Plus: Acquisition-related expenses 1,162 2,232 14,019 4,710 Plus: Amortization of share-based compensation capitalized in internal-use software 439 390 1,310 1,195 Plus: Real estate impairments 2,763 (65 ) 27,671 1,111 Plus: Merger-related costs and other expenses 6,620 — 18,833 — Plus: Restructuring expenses 10,184 — 10,184 — Plus: Amortization of debt discount and issuance costs 1,227 12,865 3,673 38,085 Less: Income tax effects and adjustments (7,024 ) (2,634 ) (10,430 ) (8,163 ) Non-GAAP net income $ 39,390 $ 21,694 $ 73,276 $ 60,210 Reconciliation of net income (loss) per share, basic GAAP net loss per share, basic $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.80 0.63 2.40 1.87 Non-GAAP net income per share, basic $ 0.32 $ 0.18 $ 0.60 $ 0.51 Reconciliation of net income (loss) per share, diluted GAAP net loss per share, diluted $ (0.48 ) $ (0.45 ) $ (1.80 ) $ (1.36 ) Non-GAAP adjustments to net loss 0.76 0.62 2.33 1.83 Non-GAAP net income per share, diluted $ 0.28 $ 0.17 $ 0.53 $ 0.47 Weighted-average shares used in GAAP per share calculation, basic and diluted 123,576 120,164 122,799 119,050 Weighted-average shares used in non-GAAP per share calculation Basic 123,576 120,164 122,799 119,050 Diluted (1) 138,334 126,887 137,912 127,234 Computation of free cash flow Net cash provided by operating activities $ 29,938 $ 73,810 $ 90,175 $ 134,283 Less: Purchases of property and equipment (2,164 ) (5,073 ) (15,014 ) (11,030 ) Less: Internal-use software development costs (2,334 ) (3,299 ) (8,230 ) (10,837 ) Free cash flow $ 25,440 $ 65,438 $ 66,931 $ 112,416 Net cash provided by operating activities margin 7 % 21 % 7 % 14 % Non-GAAP adjustments (1 ) % (2 ) % (1 ) % (2 ) % Free cash flow margin 6 % 19 % 6 % 12 % (1) In the first quarter of 2022, we adopted ASU 2020-06, which simplifies the accounting for convertible debt. Under the new standard, companies are required to use the if-converted method for calculating diluted EPS instead of the treasury stock method. For the three and nine months ended September 30, 2022, approximately 13 million shares related to our convertible notes were included in the diluted share amount using the if-converted method. About Non-GAAP Financial Measures To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin. Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable: Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in Internal-Use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period. Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period. Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period. Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Real Estate Impairments: To support an increased percentage of remote teams, Zendesk records impairments for certain assets associated with leased properties, or portions thereof, that it ceases to occupy. Any losses and gains associated with these activities are generally unrelated to financial and operational performance in any particular period and Zendesk believes the exclusion of such losses and gains provides for a more useful comparison of operational performance in comparative periods that may or may not include such losses and gains. Merger-Related Costs and Other Expenses: Zendesk views fees related to its pending acquisition, including transaction costs, as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses provides meaningful supplemental information regarding operational performance. Other expenses include non-recurring fees paid for third-party advisory and professional services related to shareholder activism and the strategic review. Restructuring Expenses: Zendesk views restructuring expenses, such as employee severance-related costs, professional fees, and other costs associated with significant changes to its operations as events that are not necessarily reflective of operational performance during a period. Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses. Amortization of Debt Discount and Issuance Costs: On January 1, 2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which simplifies the accounting for convertible debt. Prior to the adoption of ASU 2020-06, the imputed interest rates of our 2023 convertible notes and our 2025 notes were approximately 5.26% and 5.00%, respectively. This was a result of the debt discounts recorded for the conversion features of the notes that were required to be separately accounted for as equity, and debt issuance costs, which reduced the carrying value of the convertible debt instruments. The debt discounts were amortized as interest expense together with the issuance costs of the debt. Upon adoption of the new standard, the liability and equity components of each instrument were recombined into a single liability instrument measured at amortized cost. As a result, from the date of adoption, no debt discount remains and no interest expense related to debt discount amortization will be recorded. Interest expense related to the amortization of debt issuance costs will continue to be recorded over the term of the notes. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this expense will provide for a more useful comparison of our operational performance in different periods. Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2022, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions. Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations. Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management. Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, acquisition-related expenses, real estate impairments, merger-related costs and other expenses, and restructuring expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above. In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which amends the calculation of diluted earnings per share for certain convertible debt instruments, among other changes. Under the new standard, Zendesk is required to use the “if-converted” method to calculate diluted earnings per share for its convertible debt, which assumes conversion of its convertible debt instruments at the beginning of the reporting period, with settlement entirely in shares of common stock, unless the result would be anti-dilutive. Historically, Zendesk calculated diluted earnings per share for its convertible debt using the “treasury stock” method, which assumes that the principal amount of convertible debt instruments is settled in cash. Accordingly, our diluted shares outstanding are generally expected to increase under the new standard. We adopted this standard in the first quarter of 2022. The total amount of shares underlying the convertible notes is approximately 13 million. Refer to Form 10-Q for the quarter ended September 30, 2022 for further information. Source: Zendesk, Inc. 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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