UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

	
 	
FORM 8-K

	
 	
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 24, 2019

	
 	
ZENDESK, INC.
(Exact name of Registrant as Specified in Its Charter)

	

	
					
Delaware	 	001-36456	 	26-4411091	
(State or Other Jurisdiction
of Incorporation)	 	(Commission
File Number)	 	(IRS Employer Identification No.)	

	
					
1019 Market Street	San Francisco,	California	 	94103	
(Address of Principal Executive Offices)	 	(Zip Code)	

Registrant’s Telephone Number, Including Area Code: (415) 418-7506
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

		
☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)	
☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)	
☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))	
☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))	

Securities registered pursuant to Section 12(b) of the Act

			
Title of each class	Trading symbol(s)	Name of each exchange on which registered	
Common Stock, par value $0.01 per share	ZEN	New York Stock Exchange	

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.    
Emerging growth company     ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Item 2.02. Results of Operations and Financial Condition.

On October 29, 2019, Zendesk, Inc. (the “Company”) issued a press release announcing its results for the quarter ended September 30, 2019. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference. The Company also issued a letter to its shareholders announcing its financial results for the quarter ended September 30, 2019 (the “Shareholder Letter”). The full text of the Shareholder Letter is attached as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated herein by reference. The information in this Item 2.02 (including Exhibits 99.1 and 99.2) shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, regardless of any general incorporation language in such filing.

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

Resignation of Director

On October 24, 2019, Caryn Marooney notified the Company's Board of Directors (the “Board”) of her intent to resign as a Class I director, and from her positions as a member of the Company's Nominating and Corporate Governance Committee and the Company's Compensation Committee, effective upon the conclusion of the Company's 2020 Annual Meeting of Stockholders. Ms. Marooney's decision to resign is not a result of any disagreement with the Company on any matter relating to the Company's operations, policies, or practices. Effective upon Ms. Marooney's resignation, the Board approved a decrease in the size of the Board from eight (8) to seven (7), and a decrease in the size of the Class I directors from three (3) to two (2).

Item 7.01. Regulation FD Disclosure.

On October 29, 2019, Mikkel Svane, Chief Executive Officer of the Company, made the graphic included with this Current Report on Form 8-K as Exhibit 99.3 available to the public. The graphic and the investor deck are also be available for viewing at the Company’s investor website, investor.zendesk.com, although the Company reserves the right to discontinue that availability at any time.

On October 29, 2019, the Company held an earnings conference call to discuss the Company's financial results for the quarter ended September 30, 2019 and certain other matters. A copy of the transcript of the conference call is attached as Exhibit 99.4.

The information in this Item 7.01 (including Exhibits 99.3 and 99.4) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act, or the Exchange Act, regardless of any general incorporation language in such filing.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits

99.1    Press Release issued by Zendesk, Inc., dated October 29, 2019.
99.2    Letter to Shareholders, dated October 29, 2019.
99.3    October 2019 Update, dated October 29, 2019.
99.4     Transcript of the Zendesk, Inc. earnings conference call held on October 29, 2019.

Exhibit Index

	
		
Exhibit No.	Description
	
99.1	Press Release issued by Zendesk, Inc., dated October 29, 2019.
	
99.2    	Letter to Shareholders, dated October 29, 2019.
	
99.3    	October 2019 Update, dated October 29, 2019.
	
99.4	Transcript of the Zendesk, Inc. earnings conference call held on October 29, 2019.	
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)	

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	
			
 	 	Zendesk, Inc.	
 	 	(Registrant)	
 	 	 	
 	By:	/s/ Elena Gomez	
 	 	Chief Financial Officer	
 	 	(Principal Financial Officer)	
October 30, 2019	 	 	

Exhibit 99.1
ZENDESK ANNOUNCES THIRD QUARTER 2019 RESULTS
 
Highlights

•	Third quarter revenue increased 36% year over year to $210.5 million	
		
•	Third quarter GAAP operating loss of $35.4 million and non-GAAP operating income of $10.6 million	

SAN FRANCISCO – October 29, 2019 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the third quarter ended September 30, 2019, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Third Quarter 2019
 
Revenue was $210.5 million for the quarter ended September 30, 2019, an increase of 36% over the prior year period. GAAP net loss for the quarter ended September 30, 2019 was $34.2 million, and GAAP net loss per share (basic and diluted) was $0.31. Non-GAAP net income was $14.0 million, and non-GAAP net income per share (basic) was $0.13, and non-GAAP net income per share (diluted) was $0.12. Non-GAAP net income excludes approximately $41.1 million in share-based compensation and related expenses (including $2.0 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $6.4 million of amortization of debt discount and issuance costs, $2.8 million of amortization of purchased intangibles, $2.2 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $4.1 million. GAAP net loss per share for the quarter ended September 30, 2019 was based on 111.3 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended September 30, 2019 was based on 111.3 million weighted average shares outstanding (basic) and 119.7 million weighted average shares outstanding (diluted).

Outlook

As of October 29, 2019, Zendesk provided guidance for the quarter ending December 31, 2019 and updated its guidance for the year ending December 31, 2019.
 
For the quarter ending December 31, 2019, Zendesk expects to report:
		
•	Revenue in the range of $226 - 228 million	
		
•	GAAP operating income (loss) in the range of $(37) - (35) million, which includes share-based compensation and related expenses of approximately $40 million, amortization of purchased intangibles of approximately $3 million, and acquisition-related expenses of approximately $2 million	
		
•	Non-GAAP operating income (loss) in the range of $8 - 10 million, which excludes share-based compensation and related expenses of approximately $40 million, amortization of purchased intangibles of approximately $3 million, and acquisition-related expenses of approximately $2 million	
		
•	Approximately 112 million weighted average shares outstanding (basic)	
		
•	Approximately 117 million weighted average shares outstanding (diluted)	

For the full year ending December 31, 2019, Zendesk expects to report:
		
•	Revenue in the range of $813 - 815 million	
		
•	GAAP operating income (loss) in the range of $(167) - (165) million, which includes share-based compensation and related expenses of approximately $168 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $12 million	
		
•	Non-GAAP operating income (loss) in the range of $23 - 25 million, which excludes share-based compensation and related expenses of approximately $168 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $12 million	
		
•	Approximately 111 million weighted average shares outstanding (basic)	
		
•	Approximately 119 million weighted average shares outstanding (diluted)	
		
•	Free cash flow in the range of $35 - 45 million	

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2019 because we do not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on our free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the full year 2019 is not available without unreasonable effort.

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

Shareholder Letter and Conference Call Information
 
The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a conference call to answer questions today, October 29, 2019, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live webcast of the conference call will be available at https://investor.zendesk.com. The conference call can also be accessed by dialing 833-287-0801, or +1 647-689-4460 (outside the U.S. and Canada). The conference ID is 3987256. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and Canada) and entering passcode 3987256. The dial-in replay will be available until the end of day November 1, 2019. The webcast replay will be available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk. Our customer service and engagement products are powerful and flexible, and scale to meet the needs of any business. Zendesk serves businesses across a multitude of industries, with more than 150,000 paid customer accounts offering service and support in over 30 languages. Zendesk is headquartered in San Francisco, and operates worldwide with 17 offices in North America, Europe, Asia, Australia, and South America. Learn more at www.zendesk.com.

Forward-Looking Statements

This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, and progress toward its long-term financial objectives. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) adverse changes in general economic or market conditions; (ii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iii) Zendesk’s ability to effectively expand its sales capabilities; (iv) Zendesk’s ability to effectively market and sell its products to larger enterprises; (v) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to generate sufficient revenues to achieve or sustain profitability; (vi) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (vii) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (viii) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (ix) Zendesk's ability to prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (x) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (xi) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xii) Zendesk's ability to comply with privacy and data security regulations; (xiii) the development of the market for software as a service business software applications; (xiv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xv) real or perceived errors, failures, or bugs in its products; (xvi) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xvii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services.

The forward-looking statements contained in this shareholder letter are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. 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, 2019.

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 shareholder letter to reflect events or circumstances after the date of this shareholder letter 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,	
 	 	2019	 	2018	 	2019	 	2018	
Revenue	 	$	210,477		 	$	154,828		 	$	586,545		 	$	426,501		
Cost of revenue	 	59,210		 	46,992		 	172,534		 	130,207		
Gross profit	 	151,267		 	107,836		 	414,011		 	296,294		
Operating expenses:	 	 	 	 	 	 	 	 	
Research and development	 	54,528		 	40,410		 	151,829		 	115,118		
Sales and marketing	 	99,303		 	74,270		 	285,750		 	208,778		
General and administrative	 	32,864		 	27,357		 	107,135		 	73,809		
Total operating expenses	 	186,695		 	142,037		 	544,714		 	397,705		
Operating loss	 	(35,428	)	 	(34,201	)	 	(130,703	)	 	(101,411	)	
Other income (expense), net	 	 	 	 	 	 	 	 	
Interest income	 	4,986		 	4,561		 	15,752		 	9,906		
Interest expense	 	(6,727	)	 	(6,375	)	 	(19,885	)	 	(13,427	)	
Other income (expense), net	 	2,581		 	(463	)	 	2,012		 	(194	)	
Total other income (expense), net	 	840		 	(2,277	)	 	(2,121	)	 	(3,715	)	
Loss before provision for (benefit from) income taxes	 	(34,588	)	 	(36,478	)	 	(132,824	)	 	(105,126	)	
Provision for (benefit from) income taxes	 	(364	)	 	(2,334	)	 	661		 	(7,291	)	
Net loss	 	$	(34,224	)	 	$	(34,144	)	 	$	(133,485	)	 	$	(97,835	)	
Net loss per share, basic and diluted	 	$	(0.31	)	 	$	(0.32	)	 	$	(1.21	)	 	$	(0.93	)	
Weighted-average shares used to compute net loss per share, basic and diluted	 	111,261		 	106,143		 	109,969		 	104,954		

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

	
								
 	September 30,
2019	 	December 31,
2018	
Assets	 	 	 	
Current assets:	 	 	 	
Cash and cash equivalents	$	190,892		 	$	126,518		
Marketable securities	243,846		 	300,213		
Accounts receivable, net of allowance for doubtful accounts of $2,715 and $2,571 as of September 30, 2019 and December 31, 2018, respectively	101,440		 	85,280		
Deferred costs	32,406		 	24,712		
Prepaid expenses and other current assets	48,124		 	35,873		
Total current assets	616,708		 	572,596		
Marketable securities, noncurrent	384,527		 	393,671		
Property and equipment, net	94,851		 	75,654		
Deferred costs, noncurrent	32,516		 	26,914		
Lease right-of-use assets	95,098		 	—		
Goodwill and intangible assets, net	209,516		 	146,327		
Other assets	26,242		 	22,717		
Total assets	$	1,459,458		 	$	1,237,879		
Liabilities and stockholders’ equity	 	 	 	
Current liabilities:	 	 	 	
Accounts payable	$	43,206		 	$	16,820		
Accrued liabilities	36,531		 	34,097		
Accrued compensation and related benefits	58,544		 	46,603		
Deferred revenue	290,285		 	245,243		
Lease liabilities	21,398		 	—		
Total current liabilities	449,964		 	342,763		
Convertible senior notes, net	477,007		 	458,176		
Deferred revenue, noncurrent	2,662		 	2,719		
Lease liabilities, noncurrent	87,926		 	—		
Other liabilities	4,710		 	17,300		
Total liabilities	1,022,269		 	820,958		
 	 	 	 	
Stockholders’ equity:	 	 	 	
Preferred stock, par value $0.01 per share	—		 	—		
Common stock, par value $0.01 per share	1,119		 	1,080		
Additional paid-in capital	1,099,730		 	950,693		
Accumulated other comprehensive loss	(1,047	)	 	(5,724	)	
Accumulated deficit	(662,613	)	 	(529,128	)	
Total stockholders’ equity	437,189		 	416,921		
Total liabilities and stockholders’ equity	$	1,459,458		 	$	1,237,879		

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

									
 	 	Three Months Ended September 30,	
 	 	2019	 	2018	
Cash flows from operating activities	 	 		 	 		
Net loss	 	$	(34,224	)	 	$	(34,144	)	
Adjustments to reconcile net loss to net cash provided by operating activities:	 	 	 	 	
Depreciation and amortization	 	10,091		 	8,530		
Share-based compensation	 	38,650		 	31,446		
Amortization of deferred costs	 	8,443		 	5,594		
Amortization of debt discount and issuance costs	 	6,366		 	6,015		
Other	 	112		 	566		
Changes in operating assets and liabilities:	 	 	 	 	
Accounts receivable	 	3,035		 	(12,825	)	
Prepaid expenses and other current assets	 	(1,843	)	 	(2,742	)	
Deferred costs	 	(10,944	)	 	(9,137	)	
Lease right-of-use assets	 	4,915		 	—		
Other assets and liabilities	 	(2,401	)	 	1,285		
Accounts payable	 	1,258		 	10,341		
Accrued liabilities	 	65		 	(4,503	)	
Accrued compensation and related benefits	 	(909	)	 	(1,633	)	
Deferred revenue	 	6,240		 	16,951		
Lease liabilities	 	(8,631	)	 	—		
Net cash provided by operating activities	 	20,223		 	15,744		
Cash flows from investing activities	 	 	 	 	
Purchases of property and equipment	 	(11,474	)	 	(7,096	)	
Internal-use software development costs	 	(2,041	)	 	(1,389	)	
Purchases of marketable securities	 	(103,883	)	 	(342,415	)	
Proceeds from maturities of marketable securities	 	45,875		 	37,239		
Proceeds from sales of marketable securities	 	57,520		 	31,927		
Cash paid for the acquisition of FutureSimple, net of cash acquired	 	—		 	(79,363	)	
Net cash used in investing activities	 	(14,003	)	 	(361,097	)	
Cash flows from financing activities	 	 	 	 	
Issuance costs related to convertible senior notes	 	—		 	(54	)	
Proceeds from exercises of employee stock options	 	8,767		 	3,507		
Proceeds from employee stock purchase plan	 	7,747		 	6,050		
Taxes paid related to net share settlement of share-based awards	 	(2,323	)	 	(1,620	)	
Other	 	—		 	1,675		
Net cash provided by financing activities	 	14,191		 	9,558		
Effect of exchange rate changes on cash, cash equivalents and restricted cash	 	19		 	(19	)	
Net increase (decrease) in cash, cash equivalents and restricted cash	 	20,430		 	(335,814	)	
Cash, cash equivalents and restricted cash at beginning of period	 	173,381		 	494,397		
Cash, cash equivalents and restricted cash at end of period	 	$	193,811		 	$	158,583		

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,	
 	2019	 	2018	 	2019	 	2018	
Reconciliation of gross profit and gross margin	 	 	 	 	 	 	 	
GAAP gross profit	$	151,267		 	$	107,836		 	$	414,011		 	$	296,294		
Plus: Share-based compensation	5,397		 	3,929		 	15,580		 	10,500		
Plus: Employer tax related to employee stock transactions	310		 	238		 	1,149		 	794		
Plus: Amortization of purchased intangibles	2,065		 	918		 	5,626		 	2,142		
Plus: Amortization of share-based compensation capitalized in internal-use software	438		 	366		 	1,272		 	1,084		
Plus: Acquisition-related expenses	185		 	38		 	$	459		 	$	38		
Non-GAAP gross profit	$	159,662		 	$	113,325		 	$	438,097		 	$	310,852		
GAAP gross margin	72	 %	 	70	 %	 	71	 %	 	69	 %	
Non-GAAP adjustments	4	 %	 	3	 %	 	4	 %	 	4	 %	
Non-GAAP gross margin	76	 %	 	73	 %	 	75	 %	 	73	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating expenses	 	 	 	 	 	 	 	
GAAP research and development	$	54,528		 	$	40,410		 	$	151,829		 	$	115,118		
Less: Share-based compensation	(12,169	)	 	(10,677	)	 	(35,717	)	 	(30,436	)	
Less: Employer tax related to employee stock transactions	(634	)	 	(673	)	 	(2,856	)	 	(2,057	)	
Less: Acquisition-related expenses	(973	)	 	(1,006	)	 	(2,404	)	 	(1,793	)	
Non-GAAP research and development	$	40,752		 	$	28,054		 	$	110,852		 	$	80,832		
GAAP research and development as percentage of revenue	26	 %	 	26	 %	 	26	 %	 	27	 %	
Non-GAAP research and development as percentage of revenue	19	 %	 	18	 %	 	19	 %	 	19	 %	
 	 	 	 	 	 	 	 	
GAAP sales and marketing	$	99,303		 	$	74,270		 	$	285,750		 	$	208,778		
Less: Share-based compensation	(13,839	)	 	(10,261	)	 	(39,813	)	 	(27,447	)	
Less: Employer tax related to employee stock transactions	(562	)	 	(561	)	 	(2,352	)	 	(1,635	)	
Less: Amortization of purchased intangibles	(699	)	 	(237	)	 	(1,934	)	 	(404	)	
Less: Acquisition-related expenses	(390	)	 	(307	)	 	(1,161	)	 	(870	)	
Non-GAAP sales and marketing	$	83,813		 	$	62,904		 	$	240,490		 	$	178,422		
GAAP sales and marketing as percentage of revenue	47	 %	 	48	 %	 	49	 %	 	49	 %	
Non-GAAP sales and marketing as percentage of revenue	40	 %	 	41	 %	 	41	 %	 	42	 %	
 	 	 	 	 	 	 	 	
GAAP general and administrative	$	32,864		 	$	27,357		 	$	107,135		 	$	73,809		
Less: Share-based compensation	(7,244	)	 	(6,579	)	 	(27,948	)	 	(18,198	)	
Less: Employer tax related to employee stock transactions	(470	)	 	(283	)	 	(1,788	)	 	(872	)	
Less: Acquisition-related expenses	(628	)	 	(1,908	)	 	(5,618	)	 	(1,908	)	
Non-GAAP general and administrative	$	24,522		 	$	18,587		 	$	71,781		 	$	52,831		
GAAP general and administrative as percentage of revenue	16	 %	 	18	 %	 	18	 %	 	17	 %	
Non-GAAP general and administrative as percentage of revenue	12	 %	 	12	 %	 	12	 %	 	12	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating income (loss) and operating margin	 	 	 	 	 	 	 	
GAAP operating loss	$	(35,428	)	 	$	(34,201	)	 	$	(130,703	)	 	$	(101,411	)	
Plus: Share-based compensation	38,649		 	31,446		 	119,058		 	86,581		
Plus: Employer tax related to employee stock transactions	1,976		 	1,755		 	8,145		 	5,358		
Plus: Amortization of purchased intangibles	2,764		 	1,155		 	7,560		 	2,546		
Plus: Acquisition-related expenses	2,176		 	3,259		 	9,642		 	4,609		

	
																
Plus: Amortization of share-based compensation capitalized in internal-use software	438		 	366		 	1,272		 	1,084		
Non-GAAP operating income (loss)	$	10,575		 	$	3,780		 	$	14,974		 	$	(1,233	)	
GAAP operating margin	(17	)%	 	(22	)%	 	(22	)%	 	(24	)%	
Non-GAAP adjustments	22	 %	 	24	 %	 	25	 %	 	24	 %	
Non-GAAP operating margin	5	 %	 	2	 %	 	3	 %	 	—	 %	

																
 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2019	 	2018	 	2019	 	2018	
Reconciliation of net income (loss)	 	 	 	 	 	 	 	
GAAP net loss	$	(34,224	)	 	$	(34,144	)	 	$	(133,485	)	 	$	(97,835	)	
Plus: Share-based compensation	38,649		 	31,446		 	119,058		 	86,581		
Plus: Employer tax related to employee stock transactions	1,976		 	1,755		 	8,145		 	5,358		
Plus: Amortization of purchased intangibles	2,764		 	1,155		 	7,560		 	2,546		
Plus: Acquisition-related expenses	2,176		 	3,259		 	9,642		 	4,609		
Plus: Amortization of share-based compensation capitalized in internal-use software	438		 	366		 	1,272		 	1,084		
Plus: Amortization of debt discount and issuance costs	6,366		 	6,015		 	18,831		 	12,665		
Less: Income tax effects and adjustments	(4,098	)	 	(3,913	)	 	(5,994	)	 	(5,890	)	
Non-GAAP net income	$	14,047		 	$	5,939		 	$	25,029		 	$	9,118		
 	 	 	 	 	 	 	 	
Reconciliation of net income (loss) per share, basic	 	 	 	 	 	 	 	
GAAP net loss per share, basic	$	(0.31	)	 	$	(0.32	)	 	$	(1.21	)	 	$	(0.93	)	
Non-GAAP adjustments to net loss	0.44		 	0.38		 	1.44		 	1.02		
Non-GAAP net income per share, basic	$	0.13		 	$	0.06		 	$	0.23		 	$	0.09		
 	 	 	 	 	 	 	 	
Reconciliation of net income (loss) per share, diluted	 	 	 	 	 	 	 	
GAAP net loss per share, diluted	$	(0.31	)	 	$	(0.32	)	 	$	(1.21	)	 	$	(0.93	)	
Non-GAAP adjustments to net loss	0.43		 	0.37		 	1.42		 	1.01		
Non-GAAP net income per share, diluted	$	0.12		 	$	0.05		 	$	0.21		 	$	0.08		
 	 	 	 	 	 	 	 	
Weighted-average shares used in GAAP per share calculation, basic and diluted	111,261		 	106,143		 	109,969		 	104,954		
 	 	 	 	 	 	 	 	
Weighted-average shares used in non-GAAP per share calculation	 	 	 	 	 	 	 	
Basic	111,261		 	106,143		 	109,969		 	104,954		
Diluted	119,689		 	113,752		 	118,750		 	111,413		
 	 	 	 	 	 	 	 	
Computation of free cash flow	 	 	 	 	 	 	 	
Net cash provided by operating activities	$	20,223		 	$	15,744		 	$	57,050		 	$	55,682		
Less: purchases of property and equipment	(11,474	)	 	(7,096	)	 	(25,628	)	 	(27,132	)	
Less: internal-use software development costs	(2,041	)	 	(1,389	)	 	(5,007	)	 	(5,550	)	
Free cash flow	$	6,708		 	$	7,259		 	$	26,415		 	$	23,000		
 	 	 	 	 	 	 	 	
Net cash provided by operating activities margin	10	 %	 	10	 %	 	10	 %	 	13	 %	
Non-GAAP adjustments	(7	)%	 	(5	)%	 	(5	)%	 	(8	)%	
Free cash flow margin	3	 %	 	5	 %	 	5	 %	 	5	 %	

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.

Amortization of Debt Discount and Issuance Costs: In March 2018, Zendesk issued $575 million of convertible senior notes due in 2023, which bear interest at an annual fixed rate of 0.25%. The imputed interest rate of the convertible senior notes was approximately 5.26%. This is a result of the debt discount recorded for the conversion feature that is required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense will provide for a more useful comparison of our operational performance in different periods.

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk's current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2019, 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 has not reconciled free cash flow guidance to net cash from operating activities for the year ending December 31, 2019 because Zendesk does not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the year ending December 31, 2019 is not available without unreasonable effort.

Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP operating margin for future periods beyond the current fiscal year because Zendesk does not provide guidance on the reconciling items between GAAP operating margin and non-GAAP operating margin for such periods, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP operating margin to non-GAAP operating margin guidance for such periods is not available without unreasonable effort.

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

Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross margin for future periods because Zendesk does not provide guidance on the reconciling items between GAAP gross margin and non-GAAP gross margin, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s non-GAAP gross margin and, accordingly, a reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not available without unreasonable effort.

Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management.

Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, and acquisition-related 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.

About Operating Metrics
 
Zendesk reviews a number of operating metrics to evaluate its business, measure performance, identify trends, formulate business plans, and make strategic decisions. These include the number of paid customer accounts on Zendesk Support, Zendesk Chat, and its other products, dollar-based net expansion rate, annual recurring revenue represented by its churned customers, and the percentage of its annual recurring revenue from Support originating from customers with 100 or more agents on Support.

Zendesk defines the number of paid customer accounts at the end of any particular period as the sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free trials, or other free services, (ii) the number of accounts using Chat, exclusive of free trials or other free services, and (iii) the number of accounts on all of its other products, exclusive of free trials and other free services, each as of the end of the period and as identified by a unique account identifier. In the quarter ended June 30, 2018, Zendesk began to offer an omnichannel subscription which provides access to multiple products through a single paid customer account, Zendesk Suite and in the quarter ended June 30, 2019, Zendesk began to offer a subscription which provides access to Sell and Support through a single paid customer account, Zendesk Duet. All of the Suite paid customer accounts are included in the number of accounts on all of Zendesk’s other products and are not included in the number of paid customer accounts using Support or Chat. All of the Duet paid customer accounts are included in the number of paid customer accounts using Support. Existing customers may also expand their utilization of Zendesk’s products by adding

new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s products to service separate subsidiaries, divisions, or work processes. Other than usage of Zendesk’s products through its omnichannel subscription offering, each of these accounts is also treated as a separate paid customer account. Zendesk does not currently include in our number of paid accounts the number of accounts on Sunshine Conversations, our Sunshine platform messaging product, Zendesk Gather, our community forum software, or our legacy Smooch product.

Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase revenue across its existing customer base through expansion of authorized agents associated with a paid customer account, upgrades in subscription plans, and the purchase of additional products as offset by churn, contraction in authorized agents associated with a paid customer account, and downgrades in subscription plans. Zendesk’s dollar-based net expansion rate is based upon annual recurring revenue for a set of paid customer accounts on its products. Zendesk determines the annual recurring revenue value of a contract by multiplying the monthly recurring revenue for such contract by twelve. Monthly recurring revenue for a paid customer account is a legal and contractual determination made by assessing the contractual terms of each paid customer account, as of the date of determination, as to the revenue Zendesk expects to generate in the next monthly period for that paid customer account, assuming no changes to the subscription and without taking into account any platform usage above the subscription base, if any, that may be applicable to such subscription. Beginning with the quarter ended June 30, 2019, we excluded the impact of revenue that we expect to generate from fixed-term contracts that are each associated with an existing account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring revenue. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other GAAP financial measure over any period. It is forward-looking and contractually derived as of the date of determination.

Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of contraction and churn by Zendesk’s base revenue. Zendesk defines its base revenue as the aggregate annual recurring revenue across its products for customers with paid customer accounts as of the date one year prior to the date of calculation. Zendesk defines the retained revenue net of contraction and churn as the aggregate annual recurring revenue across its products for the same customer base included in the measure of base revenue at the end of the annual period being measured. The dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that Zendesk identifies involving the consolidation of customer accounts or the split of a single paid customer account into multiple paid customer accounts. In addition, the dollar-based net expansion rate is adjusted to include paid customer accounts in the customer base used to determine retained revenue net of contraction and churn that share common corporate information with customers in the customer base that are used to determine the base revenue. Giving effect to this consolidation results in Zendesk’s dollar-based net expansion rate being calculated across approximately 105,400 customers, as compared to the approximately 153,700 total paid customer accounts as of September 30, 2019.

To the extent that Zendesk can determine that the underlying customers do not share common corporate information, Zendesk does not aggregate paid customer accounts associated with reseller and other similar channel arrangements for the purposes of determining its dollar-based net expansion rate. While not material, Zendesk believes the failure to account for these activities would otherwise skew the dollar-based net expansion metrics associated with customers that maintain multiple paid customer accounts across its products and paid customer accounts associated with reseller and other similar channel arrangements.

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

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

Zendesk’s percentage of annual recurring revenue from Support that is generated by customers with 100 or more agents on Support is determined by dividing the annual recurring revenue from Support for paid customer accounts with 100 or more agents on Support as of the measurement date by the annual recurring revenue from Support for all paid customer accounts on Support as of the measurement date. Zendesk determines the customers with 100 or more agents on Support as of the measurement date based on the number of activated agents on Support at the measurement date and includes adjustments to aggregate paid customer accounts that share common corporate information. For the purpose of determining this metric, Zendesk builds an estimation of the proportion of annual recurring revenue from Suite attributable to Support and includes such portion in the annual recurring revenue from Support.

Zendesk does not currently incorporate operating metrics associated with products other than Support into its measurement of the percentage of annual recurring revenue from Support that is generated by customers with 100 or more agents on Support.

Zendesk’s annual revenue run rate is based on its revenue for the three months ended September 30, 2019. Zendesk annualized such results to estimate its annual revenue run rate by multiplying the revenue for the three months ended September 30, 2019 by four. Zendesk’s annual revenue run rate is not a comprehensive statement of its financial results for this period and should not be viewed as a substitute for full annual or interim financial statements prepared in accordance with GAAP. In addition, Zendesk’s revenue for the three months ended September 30, 2019 or annual revenue run rate are not necessarily indicative of the results to be achieved in any future period.

Source: Zendesk, Inc.

Contact:
Zendesk, Inc.
Investor Contact:
Karen Sansot, +1 415-852-3877
ir@zendesk.com

or

Media Contact:
Tian Lee, +1 415-231-0847
press@zendesk.com

Zendesk Shareholder Letter Q3 2019 -

 

Introduction We surpassed two major milestones during the third quarter. Our annual revenue run rate* at the end of the quarter exceeded $800 million, and our number of paid customer accounts crossed 150,000. These two milestones speak to the important strategic partner Zendesk has become for organizations as they seek to provide the best customer experiences. As more and more organizations worldwide seek to transform their businesses around their customers, demand for our customer experience products increases. Since our last shareholder letter, we continued to For the third quarter, we delivered revenue of $210.5 advance our product and platform features, million, up 36% year-over-year. With customers in introduce new product innovation, and further build more than 160 countries and territories, our revenue our go-to-market initiatives. Zendesk Sunshine, our is broad-based across SMB, midsized, and enterprise open and ﬂexible CRM platform, has gained customers and grew in every region compared to the momentum with our current customers and we are same period last year. Revenue increased by 41% in seeing customers, partners, and developers in early the U.S., 29% in EMEA, 27% in APAC, and 45% in stages of exploration, design, and implementation. other regions, compared to a year ago. We are keenly We will continue to develop and deliver on our focused on sales and marketing execution as we Sunshine vision in 2020. At our Showcase San manage macroeconomic challenges in some regions Francisco event in October, we announced the of the world, particularly in EMEA and APAC. launch of Sunshine Conversations, an API developer platform that will enable organizations to deliver the Our growth was driven in large part by our future of conversational business, and Zendesk omnichannel solutions, including The Zendesk Suite, Gather, a new community product to provide trusted which is now in use by more than 5,000 customers. and transparent support at scale. We maintained solid growth in our SMB business and also continued our move upmarket with enterprise We are well on our way to achieving our objective customers. During the quarter, the percentage of our to deliver $1 billion in revenue in 2020. We believe annual recurring revenue from customers with 100 we are in a strong position to lead CRM innovation or more Zendesk Support agents was 42% versus and become a multibillion-dollar revenue company 40% a year ago. Our dollar-based net expansion rate over the long-term. remained healthy at 116%. *Annual revenue run rate was calculated by multiplying our Q3-19 revenue by four. For more information about our Zendesk Shareholder Letter Q3 2019 - 2 revenue run rate, please see the “About Operating Metrics” section at the back of this letter.

 

Summary financial table Q3 fiscal year 2019 (in thousands, except per share data) See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q3 2019 - 3

 

Investing for growth The customer experience industry is rapidly evolving. Customers are demanding convenient experiences and fast, easy service across an ever-widening spectrum of social and mobile channels. They expect businesses to be responsive, transparent, and to use data responsibly to improve the customer experience. Our products and platform help organizations do this by providing a broader view of the customer, measuring customer satisfaction, and enabling companies to be on the channels their customers want to be on. Zendesk helps customers architect their businesses around their customers so that they can keep up with evolving customer expectations. We estimate that over the past year, nearly 900 million requesters* engaged with businesses and organizations on our products and platform. Customer story We continue to make the investments in our products and platform that Ingram Micro we believe will set us up for continued leadership in CRM innovation, sustained high growth, and entry into new markets. These investments With its vast global infrastructure and focus on cloud, mobility, include the following: technology lifecycle, supply chain and technology solutions, ● powering every customer-facing conversation for our customers; Ingram Micro enables business partners to operate more ● extending our footprint in support and beyond; eﬃciently and successfully in the markets they serve. The ● leveraging smarter, faster technologies for better customer company will roll out Zendesk Support, Zendesk Explore, and experiences; Zendesk Collaboration to an initial 250 employees to simplify ● and redeﬁning customer experience through our CRM platform, complex internal and external communication streams. Ingram Zendesk Sunshine. Micro believes Zendesk’s integrated solution will enable the company to easily improve the email experience and response We have made great progress against these initiatives. Some times for its customers. highlights include implementing new use cases for Sunshine; expanding the Sunshine platform into conversational business and messaging with Sunshine Conversations; launching our communities product, Gather; and making app integrations available for Zendesk Sell on the same framework as Zendesk Support. We also expanded our partner network and launched the Zendesk Partner Program. *Nearly 900 million requesters from October 1, 2018 to September 30, 2019, which reﬂects the Zendesk Shareholder Letter Q3 2019 - 4 number of requester identiﬁcations within a customer account. These numbers have not been de-duped across multiple customer accounts.

 

Sunshine implementations Sunshine Conversations Zendesk Sunshine, our open and ﬂexible CRM platform, drives our We believe messaging and seamless, continuous conversations are longer-term strategy to move further upmarket and address a broader the future of communication between businesses and customers. set of customer engagement use cases, as well as to expand beyond Messaging has become far more than a communication channel; customer support into the wider CRM market. within a single interface on the web or mobile app, customers can both complete transactions and converse with an organization. The Built on the public cloud through Amazon Web Services, Sunshine introduction of Sunshine Conversations marks a key milestone in gives developers the freedom to build in their own way with open our journey to be at the forefront of this new era of conversational standards. Organizations can use Sunshine to connect and understand business — where through a single messaging stream, customers customer data and build and deploy apps. We want to redeﬁne have immediate access to what they need, when they need it, where customer experience through our open-standards platform that they are. provides organizations with greater context around customer actions, activities, and proﬁles. Since launch, we have seen customers use Behind the scenes, businesses need to tie these conversations back Sunshine to give support agents a broader view of the customer in to that same customer's interactions across other channels so that Zendesk Support, personalize the end-customer experience on their the entire business has a seamless view of all conversations, wherever websites and apps, and shift from reactive to proactive support with they occur. API-based connectivity to IoT-enabled devices. As an API-based developer platform, Sunshine Conversations allows We have seen early customer curiosity and reception around Sunshine, businesses to integrate messaging via today’s most popular social with many customers in the early design or implementation phases. To channels and mobile apps to directly connect, engage, and enable date, we are seeing use cases among consumer products, IoT-enabled sales transactions with customers. Developers can also use provided devices, entertainment, retail, the sharing economy, and software SDKs to build messaging into their own apps and services to ensure companies, among many others. As we navigate through 2020, we will that customers can interact with organizations over websites and work to develop monetization models for Sunshine. through private in-app messaging. Sunshine Conversations allows organizations to unify conversations across their entire business to ensure that key business functions such as sales, customer service, and marketing all gain the necessary context from a single, continuous conversation record to inform their next customer interaction. Zendesk Shareholder Letter Q3 2019 - 5

 

Zendesk Gather We announced the launch of Zendesk Gather at Showcase San Francisco in October. Gather is a powerful new product that enables companies to provide trusted and transparent support to customers through online community forums. Gather creates a space where customers can engage with each other and company experts to seek or share guidance and insight beyond what any single customer support agent might be able to oﬀer. Peer-provided support adds an extra layer of trust and comfort to customers when they are looking for help. Gather ensures that the most relevant information is surfaced by proactively involving customers in the creation, ranking, and maintenance of knowledge. Typically, companies can try to anticipate customer stumbling blocks or they can rely on ticket data to create help content after the fact. Gather allows customers to engage in real time, as speciﬁc questions arise that are relevant to the company’s unique line of business and customer needs. This customer-driven content can then be captured, analyzed, and shared back across the business to improve products, processes or policies, internal workﬂows, and more — giving businesses another tool to listen to their community and improve relationships and, ultimately, their experiences. Zendesk Shareholder Letter Q3 2019 - 6

 

Zendesk Sell Zendesk Sell, our sales force automation software, puts conversations at the center of the sales experience. Whether in the mobile app or on the web, all prior conversations with customers and prospects are easy to ﬁnd and pick up again. This summer, we introduced Zendesk Duet, which brings the Support and Sell products closer together, uniting customer service and sales teams. Beginning at Showcase San Francisco, the Zendesk App Framework also became available for Sell. This enables Sell to use the same framework for third-party apps as Support, making it easier to provide context into customer conversations across teams and systems. Customer story ChartMogul ChartMogul oﬀers a SaaS subscription analytics platform that consolidates and aggregates data from across connected billing systems, serving up the most valuable metrics and insights that subscription-based businesses need. The company switched from a competitor to Zendesk Support in 2016 to provide streamlined customer service across all channels, and to feed service data back to the engineering organization. Since then, ChartMogul has also adopted Zendesk Guide and Zendesk Sell. Zendesk has allowed ChartMogul to meet SLAs, scale support and volume in real time, and now to connect its service and sales teams in a single, secure CRM system that is supported by a mobile app and robust reporting functions. Zendesk Shareholder Letter Q3 2019 - 7

 

Zendesk Partner Program Partners also recognize the opportunity to help businesses transform and redesign their customer experiences using Zendesk's products. Our partner business continues to grow as we now have an ecosystem of more than 1,200 authorized partners, which is 60% more than a year ago. To support our expanding partner ecosystem, we recently launched a new Zendesk Partner Program. This program builds upon our prior initiatives and provides partners with the skills, tools, and assistance they need to enable their customers to deliver a better customer experience using Zendesk. The program is designed to help partners build an industry-leading customer experience practice and it rewards partners based on competencies and results through a comprehensive certiﬁcation program and other incentives. At the same time, the Zendesk Partner Program can be tailored to meet the needs of diﬀerent partners’ business models and is ﬂexible enough to support partners as their businesses evolve. Zendesk Shareholder Letter Q3 2019 - 8

 

Customer events Our customer-focused events allow us to meet and strengthen relationships with customers and prospects around the world. At each event we discuss best practices and innovations across the customer experience industry. These events provide attendees the opportunity to learn more about how to use our products, both from Zendesk employees and, more importantly, from other customers. We recently completed our global nine-city Showcase series with events held in Mexico City, Dallas, New York, London, Chicago, São Paulo, Melbourne, Singapore, and San Francisco. These events were intimate and localized for our customers and prospects in these key regions. They also complemented our product and platform strategies by allowing us to tie our newest product launches with customer experience trends. We discussed where our industry is headed, how customer expectations are rising higher and changing rapidly, and why every business must evolve to meet these expectations. The Showcase series allowed us to engage with approximately 7,000 attendees this year. In March 2020, we will kick oﬀ our customer event series with Relate, our annual global user conference, in Miami. We believe this will enable us to build opportunities with midsized and enterprise companies earlier in the year. Our ﬂagship event, Relate, is where we make big announcements and share with our customers how they can strategically use our products and platform to provide the best customer experiences. With more than 50 sessions and 300 speakers planned, Relate will provide three days of in-depth talks, workshops, panel discussions, and insights into the customer experience industry. At Relate, we will also host our annual investor event, where we will talk in more detail about our long-term vision and strategy to become a multibillion-dollar revenue company. Zendesk Shareholder Letter Q3 2019 - 9

 

Timeline Note: Timeline not to scale. *Annual revenue run rate was calculated by multiplying our revenue for the most recent applicable quarter by four. Zendesk Shareholder Letter Q3 2019 - 10 For more information about our revenue run rate, please see the “About Operating Metrics” section at the back of this letter.

 

Customers Among the customers to join or expand with us recently are: Advance Create CoreLogic A global property information, A Japan-based insurance agency big data, and technology solutions provider Bolt DeNA A Japan-based company that A European company oﬀering a develops and operates mobile and ride-hailing and scooter-sharing online services platform BrandMuscle Ingram Micro A U.S.-based company that A provider of global supply provides distributed marketing chain and technology services materials and services ChartMogul LeoVegas Gaming A Germany-based subscription A Sweden-based mobile business analytics provider gaming company Zendesk Shareholder Letter Q3 2019 - 11

 

Customers Social Finance (SoFi) Among the customers to join or expand with us recently are: A U.S.-based company that provides a range of ﬁnancial services Luna SonarMD A company that oﬀers care A language services provider coordination and therapeutic optimization solution for high-beta conditions The Melting Pot Structo A company that oﬀers fondue A dental 3D printing solutions provider dining experiences Netwealth Track & Field An Australia-based wealth A Brazil-based sportswear company management company P.C. Richard and Son TravelPerk A chain of private, family owned A business travel booking and electronics and appliances stores management company Zendesk Shareholder Letter Q3 2019 - 12

 

Customer story BrandMuscle BrandMuscle’s technology platform provides distributed marketing materials and services to more than 300 of the world’s top brands. The company launched The Zendesk Suite in early 2018 to bring together 60 brands, 6 global oﬃces, 80 support agents, and 75,000 end-users into a uniﬁed platform. BrandMuscle was looking to improve the customer experience by reducing response times and streamlining communication across its email, phone, and chat channels. BrandMuscle’s agents now have greater visibility into day-to-day operations and customer satisfaction, which they are measuring for the ﬁrst time. Zendesk Shareholder Letter Q3 2019 - 13

 

In September 2019, Zendesk was mentioned as a Customers' Choice in the Gartner Peer Insights “Voice of the Customer”: CRM Customer Engagement Center Disclaimer: Gartner Peer Insights Customers’ Choice constitute the subjective opinions of individual end-user reviews, ratings, and data applied against a documented methodology; they neither represent the views of, nor constitute an endorsement by, Gartner or its aﬃliates. The Gartner References described herein, (the “Gartner References”) represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”) and are not representations of fact. Each Gartner Reference speaks as of its original publication date (and not as of the date of this Shareholder Letter), and the opinions expressed in the Gartner References are subject to change without notice. Zendesk Shareholder Letter Q3 2019 - 14

 

Operating metrics Our dollar-based net expansion rate, which we use to quantify our annual expansion within existing customers, was 116% at the end of A key metric we use to gauge our penetration within larger the third quarter, compared to 117% at the end of the second quarter organizations is represented by the percentage of Support ARR of 2019. Our dollar-based net expansion rate was 118% at the end of generated by customers with 100 or more Support agents. That the third quarter of 2018. Consistent with expectations in prior percentage was approximately 42% at the end of the third quarter quarters, we believe a healthy dollar-based net expansion rate for of 2019, compared to 42% at the end of the second quarter of 2019 Zendesk is 110% - 120%. While we believe our net expansion rate has and 40% as reported at the end of the third quarter of 2018. been impacted in 2019 by macro challenges in APAC and EMEA, we continue to expect our overall net expansion rate to perform within the "healthy" range we have indicated. Dollar-based net expansion rate As we successfully move upmarket, we believe an indicator of our mid-market and enterprise execution is encompassed in the growth of remaining performance obligations (RPO). RPO represents future revenues that are under contract but have not yet been recognized. As we continue to move upmarket to serve enterprise customers and deliver more complex and strategic use cases, we have consistently entered into contracts with longer subscription terms. Remaining performance obligation (RPO) in millions % of total quarter-ending Support ARR Short-term RPO from paid customer accounts with 100+ Support agents Long-term RPO Zendesk Shareholder Letter Q3 2019 - 15

 

Social impact Social impact has long been a foundational element of Zendesk’s Some examples of recent volunteer eﬀorts by our employees culture and brand. Promoting empathy to solve complex social include working with our local communities to make technology issues is core to our values, as we believe it is an important way more accessible and easier to use. In San Francisco, we have for employees to engage with work, our customers, and our partnered with Curry Senior Center to take seniors on virtual communities around the globe. reality tours. In Madison, we work with the Goodman Community Center to provide trainings to help seniors learn computer skills Our goals for social impact fall into three core areas: being a good and connect digitally. In Singapore, our teams work with neighbor, which focuses on the employee experience of investing Movement for the Intellectually Disabled of Singapore to design in their communities by volunteering; standing up for equality, digital books for adults with intellectual disabilities to read where we will make key investments and strive to support and alongside volunteers and their families. nurture diverse workplaces and communities; and democratizing technology, where we aim to bring technology to organizations committed to social change. As part of these goals, Zendesk employees have committed to giving six hours of their time volunteering in their communities each year. In the ﬁrst nine months of 2019, Zendesk employees volunteered more than 15,500 hours in their local communities. Zendesk Shareholder Letter Q3 2019 - 16

 

Select financial measures (in millions, except per share data) Quarter-over-quarter comparisons (q/q) are for the three months ended September 30, 2019, compared to the three months ended June 30, 2019. Year-over-year comparisons (y/y) are for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q3 2019 - 17

 

Guidance ● Approximately 111 million weighted average shares outstanding (basic) For the quarter ending December 31, 2019, ● Approximately 119 million weighted average shares we expect to report: outstanding (diluted) ● Free cash ﬂow in the range of $35 - 45 million ● Revenue in the range of $226 - 228 million ● GAAP operating income (loss) in the range of $(37) - (35) We have not reconciled free cash ﬂow guidance to net cash from million, which includes share-based compensation and related operating activities for the full year 2019 because we do not provide expenses of approximately $40 million, amortization of guidance on the reconciling items between net cash from operating purchased intangibles of approximately $3 million, and activities and free cash ﬂow, as a result of the uncertainty regarding, acquisition-related expenses of approximately $2 million and the potential variability of, these items. The actual amount of such ● Non-GAAP operating income (loss) in the range of $8 - 10 reconciling items will have a signiﬁcant impact on our free cash ﬂow million, which excludes share-based compensation and and, accordingly, a reconciliation of net cash from operating activities related expenses of approximately $40 million, amortization of to free cash ﬂow for the full year 2019 is not available without purchased intangibles of approximately $3 million, and unreasonable eﬀort. acquisition-related expenses of approximately $2 million ● Approximately 112 million weighted average shares Zendesk’s estimates of share-based compensation and related outstanding (basic) expenses, amortization of purchased intangibles, acquisition-related ● Approximately 117 million weighted average shares expenses, weighted average shares outstanding, and free cash ﬂow in outstanding (diluted) future periods assume, among other things, the occurrence of no additional acquisitions, investments, or restructurings and no further For the full year ending December 31, 2019, we expect to report: revisions to share-based compensation and related expenses. ● Revenue in the range of $813 - 815 million ● GAAP operating income (loss) in the range of $(167) - (165) million, which includes share-based compensation and related expenses of approximately $168 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $12 million ● Non-GAAP operating income (loss) in the range of $23 - 25 million, which excludes share-based compensation and related expenses of approximately $168 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $12 million Zendesk Shareholder Letter Q3 2019 - 18

 

Condensed consolidated statements of operations (in thousands, except per share data; unaudited) Zendesk Shareholder Letter Q3 2019 - 19

 

Condensed consolidated balance sheets (in thousands, except per share data; unaudited) Zendesk Shareholder Letter Q3 2019 - 20

 

Condensed consolidated statements of cash flows (in thousands; unaudited) Zendesk Shareholder Letter Q3 2019 - 21

 

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 letter. Zendesk Shareholder Letter Q3 2019 - 22

 

Non-GAAP results (continued) (in thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this letter. Zendesk Shareholder Letter Q3 2019 - 23

 

About Zendesk with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2019. The best customer experiences are built with Zendesk. Our customer service and engagement Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only products are powerful and ﬂexible, and scale to meet the needs of any business. Zendesk serves as of the date such statements are made. Zendesk undertakes no obligation to update any businesses across a multitude of industries, with more than 150,000 paid customer accounts forward-looking statements made in this shareholder letter to reﬂect events or circumstances oﬀering service and support in over 30 languages. Zendesk is headquartered in San Francisco, after the date of this shareholder letter or to reﬂect new information or the occurrence of and operates worldwide with 17 oﬃces in North America, Europe, Asia, Australia, and South unanticipated events, except as required by law. America. Learn more at www.zendesk.com. About non-GAAP financial measures Forward-looking statements To provide investors and others with additional information regarding Zendesk’s results, the This shareholder letter contains forward-looking statements, including, among other things, following non-GAAP ﬁnancial measures were disclosed: non-GAAP gross proﬁt and gross margin, statements regarding Zendesk’s future ﬁnancial performance, its continued investment to grow its non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, business, and progress toward its long-term ﬁnancial objectives. Words such as “may,” “should,” non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future ﬂow, and free cash ﬂow margin. 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 Speciﬁcally, Zendesk excludes the following from its historical and prospective non-GAAP statements as predictions of future events. ﬁnancial measures, as applicable: The outcome of the events described in these forward-looking statements is subject to known Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, Internal-use Software: Zendesk utilizes share-based compensation to attract and retain performance, or achievements to diﬀer materially, including (i) adverse changes in general employees. It is principally aimed at aligning their interests with those of its stockholders and at economic or market conditions; (ii) Zendesk’s ability to adapt its products to changing market long-term retention, rather than to address operational performance for any particular period. dynamics and customer preferences or achieve increased market acceptance of its products; (iii) As a result, share-based compensation expenses vary for reasons that are generally unrelated Zendesk’s ability to eﬀectively expand its sales capabilities; (iv) Zendesk’s ability to eﬀectively to ﬁnancial and operational performance in any particular period. market and sell its products to larger enterprises; (v) Zendesk’s expectation that the future growth rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer generate suﬃcient revenues to achieve or sustain proﬁtability; (vi) the intensely competitive taxes related to its employee stock transactions as an expense that is dependent on its stock market in which Zendesk operates and the diﬃculty that Zendesk may have in competing price, employee exercise and other award disposition activity, and other factors that are eﬀectively; (vii) Zendesk’s ability to introduce and market new products and to support its beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions products on a shared services platform; (viii) Zendesk’s ability to maintain and develop its vary for reasons that are generally unrelated to ﬁnancial and operational performance in any strategic relationships with third parties; (ix) Zendesk’s ability to prevent, mitigate, and respond particular period. eﬀectively to both historical and future data breaches and to securely maintain customer data; (x) Zendesk’s ability to eﬀectively manage its growth and organizational change, including its Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible international expansion strategy; (xi) Zendesk’s ability to integrate acquired businesses and assets, including the amortization of the cost associated with an acquired entity’s developed technologies successfully or achieve the expected beneﬁts of such acquisitions; (xii) Zendesk's technology, as items arising from pre-acquisition activities determined at the time of an ability to comply with privacy and data security regulations; (xiii) the development of the market acquisition. While these intangible assets are evaluated for impairment regularly, amortization of for software as a service business software applications; (xiv) potential service interruptions or the cost of purchased intangibles is an expense that is not typically aﬀected by operations during performance problems associated with Zendesk’s technology and infrastructure; (xv) real or any particular period. perceived errors, failures, or bugs in its products; (xvi) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xvii) Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services. costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, The forward-looking statements contained in this shareholder letter are also subject to additional as events that are not necessarily reﬂective of operational performance during a period. In risks, uncertainties, and factors, including those more fully described in Zendesk’s ﬁlings with the particular, Zendesk believes the consideration of measures that exclude such expenses can assist Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter in the comparison of operational performance in diﬀerent periods which may or may not include ended June 30, 2019. Further information on potential risks that could aﬀect actual results will be such expenses. included in the subsequent periodic and current reports and other ﬁlings that Zendesk makes Zendesk Shareholder Letter Q3 2019 - 24

 

Amortization of Debt Discount and Issuance Costs: In March 2018, Zendesk issued $575 million compensation and related expenses in Zendesk’s cost of revenue, amortization of purchased of convertible senior notes due in 2023, which bear interest at an annual ﬁxed rate of 0.25%. The intangibles primarily related to developed technology, and acquisition-related expenses. The imputed interest rate of the convertible senior notes was approximately 5.26%. This is a result of share-based compensation and related expenses excluded due to such adjustments are primarily the debt discount recorded for the conversion feature that is required to be separately accounted comprised of the share-based compensation and related expenses for employees associated for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt with Zendesk’s infrastructure and customer experience organization. instrument. The debt discount is amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross non-cash item, and we believe the exclusion of this interest expense will provide for a more useful margin for future periods because Zendesk does not provide guidance on the reconciling items comparison of our operational performance in diﬀerent periods. between GAAP gross margin and non-GAAP gross margin, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling Income Tax Eﬀects: Zendesk utilizes a ﬁxed long-term projected tax rate in its computation items will have a signiﬁcant impact on Zendesk’s non-GAAP gross margin and, accordingly, a of non-GAAP income tax eﬀects to provide better consistency across interim reporting periods. In reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not projecting this long-term non-GAAP tax rate, Zendesk utilizes a ﬁnancial projection that excludes available without unreasonable eﬀort. 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 Zendesk uses non-GAAP ﬁnancial information to evaluate its ongoing operations and for internal legislation in major jurisdictions where Zendesk operates. For the year ending December 31, planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest 2019, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will that investors should, consider such non-GAAP ﬁnancial measures in isolation from, or as a periodically re-evaluate this tax rate, as necessary, for signiﬁcant events, based on relevant tax substitute for, ﬁnancial information prepared in accordance with GAAP. Zendesk presents such law changes, material changes in the forecasted geographic earnings mix, and any signiﬁcant non-GAAP ﬁnancial measures in reporting its ﬁnancial results to provide investors with an acquisitions. 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 Zendesk provides disclosures regarding its free cash ﬂow, which is deﬁned as net cash from metrics used by management in its ﬁnancial and operational decision-making. This allows operating activities, less purchases of property and equipment and internal-use software investors and others to better understand and evaluate Zendesk’s operating results and future development costs. Free cash ﬂow margin is calculated as free cash ﬂow as a percentage of total prospects in the same manner as management. 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 Zendesk’s management believes it is useful for itself and investors to review, as applicable, both expenditures and capitalized software development costs. Zendesk believes that information GAAP information that may include items such as share-based compensation and related regarding free cash ﬂow and free cash ﬂow margin provides investors with an important expenses, amortization of debt discount and issuance costs, amortization of purchased perspective on the cash available to fund ongoing operations. intangibles, and acquisition-related expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and Zendesk has not reconciled free cash ﬂow guidance to net cash from operating activities for the forecasting in subsequent periods. When Zendesk uses such a non-GAAP ﬁnancial measure with year ending December 31, 2019 because Zendesk does not provide guidance on the reconciling respect to historical periods, it provides a reconciliation of the non-GAAP ﬁnancial measure to the items between net cash from operating activities and free cash ﬂow, as a result of the uncertainty most closely comparable GAAP ﬁnancial measure. When Zendesk uses such a non-GAAP regarding, and the potential variability of, these items. The actual amount of such reconciling ﬁnancial measure in a forward-looking manner for future periods, and a reconciliation is not items will have a signiﬁcant impact on Zendesk’s free cash ﬂow and, accordingly, a reconciliation determinable without unreasonable eﬀort, Zendesk provides the reconciling information that is of net cash from operating activities to free cash ﬂow for the year ending December 31, 2019 is determinable without unreasonable eﬀort and identiﬁes the information that would need to be not available without unreasonable eﬀort. 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 Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP reconciliation of these non-GAAP ﬁnancial measures to their most directly comparable GAAP operating margin for future periods beyond the current ﬁscal year because Zendesk does not ﬁnancial measure as detailed above. provide guidance on the reconciling items between GAAP operating margin and non-GAAP operating margin for such periods, as a result of the uncertainty regarding, and the potential Non-GAAP gross margin for the second quarter of 2019 excludes $6.1 million in share-based variability of, these items. The actual amount of such reconciling items will have a signiﬁcant compensation and related expenses (including $0.4 million of amortization of share-based impact on Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP compensation capitalized in internal-use software and $0.4 million of employer tax related to operating margin to non-GAAP operating margin guidance for such periods is not available employee stock transactions), $1.9 million of amortization of purchased intangibles, and $0.2 without unreasonable eﬀort. million of acquisition-related expenses. Non-GAAP operating loss and non-GAAP operating margin for the second quarter of 2019 exclude $46.8 million in share-based compensation and Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include related expenses (including $2.7 million of employer tax related to employee stock transactions adjustments to its expectations for its GAAP gross margin that exclude share-based Zendesk Shareholder Letter Q3 2019 - 25

 

and $0.4 million of amortization of share-based compensation capitalized in internal-use to the subscription and without taking into account any platform usage above the subscription software), $5.8 million of acquisition-related expenses, and $2.6 million of amortization of base, if any, that may be applicable to such subscription. Beginning with the quarter ended purchased intangibles. Free cash ﬂow for the second quarter of 2019 includes cash used for June 30, 2019, we excluded the impact of revenue that we expect to generate from ﬁxed-term purchases of property and equipment of $4.9 million and internal-use software development contracts that are each associated with an existing account, are solely for additional temporary costs of $1.8 million. agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring revenue. Monthly recurring revenue is not About operating metrics determined by reference to historical revenue, deferred revenue, or any other GAAP ﬁnancial measure over any period. It is forward-looking and contractually derived as of the date Zendesk reviews a number of operating metrics to evaluate its business, measure performance, of determination. identify trends, formulate business plans, and make strategic decisions. These include the number of paid customer accounts on Zendesk Support, Zendesk Chat, and its other products, Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of dollar-based net expansion rate, annual recurring revenue represented by its churned customers, contraction and churn by Zendesk’s base revenue. Zendesk deﬁnes its base revenue as the and the percentage of its annual recurring revenue from Support originating from customers with aggregate annual recurring revenue across its products for customers with paid customer 100 or more agents on Support. accounts as of the date one year prior to the date of calculation. Zendesk deﬁnes the retained revenue net of contraction and churn as the aggregate annual recurring revenue across its Zendesk deﬁnes the number of paid customer accounts at the end of any particular period products for the same customer base included in the measure of base revenue at the end of the as the sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free trials, annual period being measured. The dollar-based net expansion rate is also adjusted to eliminate or other free services, (ii) the number of accounts using Chat, exclusive of free trials or other free the eﬀect of certain activities that Zendesk identiﬁes involving the consolidation of customer services, and (iii) the number of accounts on all of its other products, exclusive of free trials and accounts or the split of a single paid customer account into multiple paid customer accounts. In other free services, each as of the end of the period and as identiﬁed by a unique account addition, the dollar-based net expansion rate is adjusted to include paid customer accounts in identiﬁer. In the quarter ended June 30, 2018, Zendesk began to oﬀer an omnichannel the customer base used to determine retained revenue net of contraction and churn that share subscription which provides access to multiple products through a single paid customer account, common corporate information with customers in the customer base that are used to determine Zendesk Suite and in the quarter ended June 30, 2019, Zendesk began to oﬀer a subscription the base revenue. Giving eﬀect to this consolidation results in Zendesk’s dollar-based net which provides access to Sell and Support through a single paid customer account, Zendesk expansion rate being calculated across approximately 105,400 customers, as compared to the Duet. All of the Suite paid customer accounts are included in the number of accounts on all approximately 153,700 total paid customer accounts as of September 30, 2019. of Zendesk’s other products and are not included in the number of paid customer accounts using Support or Chat. All of the Duet paid customer accounts are included in the number To the extent that Zendesk can determine that the underlying customers do not share common of paid customer accounts using Support. Existing customers may also expand their utilization corporate information, Zendesk does not aggregate paid customer accounts associated with of Zendesk’s products by adding new accounts and a single consolidated organization or reseller and other similar channel arrangements for the purposes of determining its dollar-based customer may have multiple accounts across each of Zendesk’s products to service separate net expansion rate. While not material, Zendesk believes the failure to account for these subsidiaries, divisions, or work processes. Other than usage of Zendesk’s products through activities would otherwise skew the dollar-based net expansion metrics associated with its omnichannel subscription oﬀering, each of these accounts is also treated as a separate paid customers that maintain multiple paid customer accounts across its products and paid customer customer account. Zendesk does not currently include in its number of paid accounts the number accounts associated with reseller and other similar channel arrangements. of accounts on Sunshine Conversations, our Sunshine platform messaging product, Zendesk Gather, our community forum software, or our legacy Smooch product. Zendesk does not currently incorporate operating metrics associated with its legacy analytics product, its legacy Outbound product, Sell, its legacy Starter plan,Sunshine Conversations, Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase Gather, our legacy Smooch product, free trials, or other free services into its measurement of revenue across its existing customer base through expansion of authorized agents associated dollar-based net expansion rate. with a paid customer account, upgrades in subscription plans, and the purchase of additional products as oﬀset by churn, contraction in authorized agents associated with a paid customer For a more detailed description of how Zendesk calculates its dollar-based net expansion rate, account, and downgrades in subscription plans. Zendesk’s dollar-based net expansion rate please refer to Zendesk’s periodic reports ﬁled with the Securities and Exchange Commission. is based upon annual recurring revenue for a set of paid customer accounts on its products. Zendesk determines the annual recurring revenue value of a contract by multiplying the monthly Zendesk’s percentage of annual recurring revenue from Support that is generated by customers recurring revenue for such contract by twelve. Monthly recurring revenue for a paid customer with 100 or more agents on Support is determined by dividing the annual recurring revenue from account is a legal and contractual determination made by assessing the contractual terms of each Support for paid customer accounts with 100 or more agents on Support as of the measurement paid customer account, as of the date of determination, as to the revenue Zendesk expects to date by the annual recurring revenue from Support for all paid customer accounts on Support as generate in the next monthly period for that paid customer account, assuming no changes of the measurement date. Zendesk determines the customers with 100 or more agents Zendesk Shareholder Letter Q3 2019 - 26

 

on Support as of the measurement date based on the number of activated agents on Support at the measurement date and includes adjustments to aggregate paid customer accounts that share common corporate information. For the purpose of determining this metric, Zendesk builds an estimation of the proportion of annual recurring revenue from Suite attributable to Support and includes such portion in the annual recurring revenue from Support. Zendesk does not currently incorporate operating metrics associated with products other than Support into its measurement of the percentage of annual recurring revenue from Support that is generated by customers with 100 or more agents on Support. Zendesk’s annual revenue run rate is based on its revenue for the three months ended September 30, 2019. Zendesk annualized such results to estimate its annual revenue run rate by multiplying the revenue for the three months ended September 30, 2019 by four. Zendesk’s annual revenue run rate is not a comprehensive statement of its ﬁnancial results for this period and should not be viewed as a substitute for full annual or interim ﬁnancial statements prepared in accordance with GAAP. In addition, Zendesk’s revenue for the three months ended September 30, 2019 or annual revenue run rate are not necessarily indicative of the results to be achieved in any future period. Zendesk Shareholder Letter Q3 2019 - 27

 

Customer metrics *May not add up to total due to rounding Geographic information Revenue mix by geography Contact Investor contact Karen Sansot +1 415-852-3877 ir@zendesk.com Media contact 8.3% Tian Lee +1 415-231-0847 press@zendesk.com Source: Zendesk, Inc. Zendesk Shareholder Letter Q3 2019 - 28

 

 

 

Here’s the 411 on all things Zendesk in Q3.

 

 

We def brought home the cheddar— 36% Y/Y actually—bringing the Q3 revenue to $210.5M.

 

Cha-ching.

 

 

We had a tubular time at our final Showcase event in San Francisco. Nine cities. Nine months.

 

BOOYAH.

 

 

Speaking of Showcase, we took things to the max with the launch of our newest product, Zendesk Gather.

 

It’s all that and a bag of chips.

 

 

We’re amped about making new friends, thanks to our Zendesk Partners program.

 

 

Oh snap, we're all about doin’ it bigtime...

 

...we now have 3,500 employees worldwide (who’ve volunteered 15,500 hours total.)

 

 

Now that’s what you call a slammin’ quarter.

 

We bouncin’. Peace out.

 

 

Exhibit 99.4

ZEN - Q3 2019 Zendesk, Inc. Earnings Call

Company Participants
		
•	Marc Cabi, Vice President, Strategy and Head of Investor Relations	
		
•	Mikkel Svane, CEO, Founder and Chair	
		
•	Elena Gomez, Chief Financial Officer	

Other Participants
		
•	Philip Winslow, Analyst, Wells Fargo Securities LLC	
		
•	Kirk Materne, Analyst, Evercore ISI	
		
•	Samad Samana, Analyst, Jefferies LLC	
		
•	Alex Zukin, Analyst, RBC Capital Markets LLC	
		
•	Arjun Bhatia, Analyst, William Blair & Co. LLC	
		
•	Chris Merwin, Analyst, Goldman Sachs & Co. LLC	
		
•	Stan Zlotsky, Analyst, Morgan Stanley & Co. LLC	
		
•	Pat Walravens, Analyst, JMP Securities LLC	
		
•	Derrick Wood, Analyst, Cowen and Company	
		
•	Jeffrey Parker Lane, Analyst, Stifel, Nicolaus & Co., Inc.	
		
•	Koji Ikeda, Analyst, Oppenheimer & Co., Inc.	
		
•	Brad Sills, Analyst, Bank of America Merrill Lynch	
		
•	Steve Koenig, Analyst, Wedbush Securities, Inc.	
		
•	Jeff Van Rhee, Analyst, Craig-Hallum Capital Group LLC	
		
•	Jennifer Lowe, Analyst, UBS Securities LLC	

Presentation

Operator
Ladies and gentlemen, thank you for standing by and welcome to the Zendesk Q3 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session you need to press star-1 on your telephone. I must advise you that the conference is being recorded today. If you require any further assistance, please press star-0.

I would now like to hand the conference over to your speaker for today, Mr. Marc Cabi. Please go ahead.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Thank you, Kavita. This is Marc Cabi. Welcome to our third-quarter 2019 earnings call. We're pleased to report our quarterly results. Joining me on the call today are Mikkel Svane, Founder, CEO and Chair of the Board; and Elena Gomez, our Chief Financial Officer.

During the course of today's call, we may make forward-looking statements such as statements regarding our future financial performance, product development, growth prospects, ability to attract and retain customers and ability to compete effectively. The assumptions, risks and factors that could affect our actual results are contained in our earnings press release and in the Risk Factors section of our prior and subsequent filings with the Securities and Exchange Commission, including our quarterly report on 10-Q for the quarter ended June 30, 2019 and our upcoming quarterly report on 10-Q for the quarter ended September 30, 2019. We undertake no obligation to update these statements after today's presentation, or to conform these statements to actual results or to changes in our expectations, except as required by law. Please refer to today's earnings release for more information regarding forward-looking statements.

During this call, we will present both GAAP and non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from our GAAP financial information. You can find additional disclosures regarding these non-GAAP financial measures, including reconciliations with the comparable GAAP financial measures, in today's earnings press release and shareholder letter and for certain non-GAAP financial measures for prior periods in the earnings press releases for such prior periods, all of which are available on our investor website.

With that introduction, I'd like to turn the call over to Mikkel.

Mikkel Svane, CEO, Founder and Chair
Excellent. Thank you so much, Marc, and good afternoon everyone. While we are, of course, excited to share our strong results for the quarter, I want to first acknowledge the terrible wildfires just north of our San Francisco headquarters and in Southern California that are affecting so many of our colleagues, our friends, our families, partners and even our customers. The wildfires, the consequences are casting a sobering shade on life in California these days and our thoughts are with everyone impacted.

Now going back to Q3, Zendesk, we crossed two important milestones in the quarter that demonstrate our strong momentum: we exceeded $800 million in annual revenue, in annual revenue run rate and we surpassed 150,000 paid customer accounts. Demand for our products continues to be strong as companies of all sizes seek to improve the customer experiences. We delivered another quarter of high-growth, revenue increased 36% year-over-year in Q3 to $210.5 million and growth was broad-based. While we continue to see regional unevenness in parts of the world with macroeconomic challenges too, we feel we are on a good path to improve our execution and manage those challenges moving forward. A strong Q3 result gives us confidence that we will reach our billion-dollar revenue goal in 2020 and be a multibillion-dollar revenue company over the long-term. I'm particularly excited about the opportunities ahead of us as we prepare for 2020 and our annual user conference, Zendesk Relate, that we are having in Miami in March of next year. It's where we kind of set the stage for the year, unveil our new product announcements and

road map to our customers and to our community and I hope that all of you guys can be there too. So before I turn the call over to Elena, I want to acknowledge the great team that we have here in Zendesk. We now have 3,500 employees and they are all working very hard executing as we near the end of the year and get ready for 2020. So, thank you all, thank all of them for making these great results possible. And I think with that, Elena, I want to turn it over to you for the financial results.

Elena Gomez, Chief Financial Officer
Great, thank you, Mikkel. Now let's dive into the highlights for the quarter. We delivered strong revenue growth of 36% in the third quarter, our annual revenue run rate exceeding $800 million, and we are well on our way to achieving a billion of revenue for 2020.

As Mikkel said, our paid customer accounts surpassed 150,000 customers, our net expansion rate was 116% and our enterprise business increased two percentage points year-over-year as a percentage of our ARR. The Zendesk Suite, our omnichannel bundle, now has more than 5,000 customers. Our proserve business continues to perform well, delivering north of 40% growth year-on-year as we did more large strategic implementations with our mid-market and enterprise customers. Additionally, our partner business expanded to include more than 1,200 partners, which is more than 60% one year ago. Our RPO continued to have strong growth as we sign, larger, longer-term contracts with RPO up 55% year-on-year, current RPO up 39%, and long-term RPO up over 100% year-over-year. Demand fundamentals continue to be robust across all regions. We delivered very strong growth in the US and LATAM, which grew 41% and 45%, respectively, year-over-year. Despite uneven performance in some countries, EMEA and APAC also delivered good revenue growth in the quarter of 29% and 20%, 27%, respectively.

Last we delivered non-GAAP gross margin expansion of 270 basis points and non-GAAP operating margin expansion of 260 basis points. We're committed to driving high revenue growth and operating margin expansion. Our revenue guidance for the full year 2019 is raised to $813 to $815 million, which represents 36% year-over-year growth at the midpoint. Our non-GAAP operating income guidance for the full year is raised to $8 to $10 million. Thank you, and operator, we'd now like to open up the call for questions.

Questions and Answers

Operator
At this time, if you’d like to ask a question, please press star-1 on your telephone keypad, and again that’s star-1 to ask a question. And our first question comes from Phil Winslow with Wells Fargo.

Phil Winslow, Analyst, Wells Fargo Securities LLC
Hey, guys, thanks guys for taking my question. I just wanted to double-click on one of the comments you made in the, in the shareholder letter about just APAC and Europe, obviously you made some commentary, you know, on the last quarter's call about some of the, of the trends you were seeing there. Wonder if you could provide us an update on sort of what you saw in Q3, kind of relative to Q2 and how you're thinking about, you know, Q4?

Elena Gomez, Chief Financial Officer
Sure. I think, you know, I think one thing that's really important is as a whole the regions are performing well but we are seeing some pockets in some countries that are not doing well, but I think one thing that's really important is to make sure that we focus on our own execution. And so that's something that we can control, right. We can't control for the macro climate so we're not going to try to do that, but we are going to focus on making sure we have the right leadership in place, that we're hiring on time, that we're religious about making sure we're hiring quickly and ahead if we can, and more importantly to make sure that we have leaders in all of our regions. Given the size that we're becoming and given that, as a reminder, international regions represent almost 50% of our business.

Operator
And our next question comes from Kirk Materne with Evercore ISI.

Kirk Materne, Analyst, Evercore ISI
Yeah, thanks very much. Elena, I was wondering if you could just talk a little bit about sort of the RPO numbers. Obviously really strong results for you all and I think sort of helps demonstrate some of your traction in the enterprise market. And could you just maybe also touch upon, you know, how we should think about those numbers relative to sort of the calculated billings numbers that people put up and how maybe, you know, you all would think about that because obviously our RPO numbers were really strong whereas calculated billings were perhaps a little bit softer than some would have expected? So could you maybe just I guess just touch on that subject, it might be helpful? Thanks.

Elena Gomez, Chief Financial Officer
Yeah, no definitely, it's a good question. Fair question. So at the highest level we definitely look at RPO as a proxy for the growth of our enterprise business and one thing that you guys should remember is we still have a considerable amount of our business in monthly terms but don't lose sight of that. The other thing is we did have certain billings, the timing of those billings closed in Q4 and so we're paying very close attention to make sure that we don't lose sight of those billings that we thought would come in in Q3 that actually closed now in Q4. And then of course we've been dealing with tough compares all year and Q3 was no different.

Kirk Materne, Analyst, Evercore ISI
Okay. And then if I could just ask one, actually one follow-up on the financial side, just margins obviously a nice pop on a year-over-year basis. Did, I guess was that in sort of in line with what you're thinking or was any of your spending plans pushed out? I was just kind of curious, if there is anything surprising to you on the op margin line? Thanks.

Elena Gomez, Chief Financial Officer

Yeah, no surprise, I mean I think for us one of the things that we've been really religious and focused on is scaling our infrastructure operations we committed to. As you know, when we migrated off of data centers into 100% cloud environment, we are continuously looking at that to make sure that we're doing everything we can to just focus on our cost structure there and scale as we grow and kudos to the engineering team who is really focused on this at a new level. I would say, in terms of looking at budgets across the entire engineering organization, changing the DNA of how we think there, and that's really starting to pay off.

Kirk Materne, Analyst, Evercore ISI
Thank you.

Operator
And our next question comes from Samad Samana with Jefferies.

Samad Samana, Analyst, Jefferies LLC
Hi, good afternoon and thanks for taking my questions. Maybe, first one on the US, it looks like growth accelerated to 41% from the prior quarter, so a nice little uptick. Maybe if you could help us understand what in particular drove your uptick in that region, and maybe what is standing out in terms of strength? And then I have a follow-up question.

Elena Gomez, Chief Financial Officer
You know, the Americas region has consistently performed. We're seeing good demand for our products, like I said, the Suite has been doing incredibly well. So there's, there’s nothing unique, we've stuck to our playbook. We did hire NAMs a year, over a year ago it feels like, and those are continuing to do well. So we're seeing strength in that market and, and we're not seeing what we're seeing in some of the other markets where you have a few countries having an uneven performance.

Samad Samana, Analyst, Jefferies LLC
Great. And then maybe just for the, to, to follow up to Kirk's question around some of the deals that, that you said might have closed in 4Q versus 3Q. Were there any similar characteristics, i.e., were they on the larger end of the spectrum? Maybe you could give us more clarity on kind of what countries, specifically, you were seeing those deals slip in? And, and I guess have all of the deals that, that moved from 3Q into 4Q closed at this point or is there still some concern around whether those will close or not?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
I don't think we can give you all the details, you just asked for a lot, but we did see some deals in Q3 that closed in very early Q4. So there, as we noted, some timing issues there, but, you know, for us, they were of larger size in nature and some of them were expansion deals, some were new accounts, so there was a mix of both. You know, sometimes things outside of the deal decision get in the way of closing, you know, by the end of the quarter. So it's hard to characterize it other than, we're very satisfied those deals closed in October.

Samad Samana, Analyst, Jefferies LLC
Great, I appreciate you taking my questions and I'll hop back in the queue.

Operator
And our next question comes from Alex Zukin with RBC Capital Markets.

Alex Zukin, Analyst, RBC Capital Markets LLC
Hey guys, thanks for taking the question. So maybe just sticking with the theme of, of deferred revenue. Is it, or do these deals, did the billing slip or did the actual signing of the deal slip? The reason I ask is if I look at your current RPO, this sequential add of $14 million for the third quarter is pretty meaningfully below this time last year where it was $24 million. So just trying to understand it and maybe if you can just help quantify a little bit of the just seasonal tailwinds for 4Q deferred and how that flows through?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
So, Alex. The same, since these were deals of larger variety, the same impact on billings also showed up in current RPO, which you just talked about. So those deals are closing in October, most of them have, and so that's kind of what I can say at this point. As far as seasonality, you know, Q4 is a heavy, large-deal quarter in terms of both mid-market and enterprise customers and we'll continue to try to execute against that mandate.

Alex Zukin, Analyst, RBC Capital Markets LLC
Perfect. And then maybe just in terms of the, of those deals, I guess is there anything, you know, were sales cycles lengthening, was that the inclusion of more products or any, any trend that you can highlight that, you know, you're confident that, that it's temporary trend or you've worked past that or you've identified something? Just any help there would be helpful.

Marc Cabi, Vice President, Strategy and Head of Investor Relations

So new customers is generally something to do with terms and conditions and, you know, making sure that all of the, those are tackled before a customer closes and is invoiced. With expansions, you know, I think those are just, you know, natural timing that happens from time to time, you know. And I don't have any common theme to cite here.

Alex Zukin, Analyst, RBC Capital Markets LLC
Got it. Thank you.

Operator

And our next question comes from Arjun Bhatia with William Blair.

Arjun Bhatia, Analyst, William Blair & Co. LLC
Hey guys, thanks for taking my questions. I maybe just wanted to start off with the partner channel and the partner strategy. I saw you announced a more formal partner program this quarter. Just, as you're thinking of building out the, the partner channel, you know, how are you thinking about maybe prioritizing the breadth of the channel in terms of getting as many partners signed on as possible versus maybe going deeper with a, with a handful of, a handful of partners and maybe even at the larger SI level?

Elena Gomez, Chief Financial Officer
So I'll start and you guys jump in. But I think you're absolutely right, it's not just about the number of partners but making sure that we understand the quality of the partners. So that's very much top of mind for Norm and Ricardo who run that business. We have already had experience with partners, as you know, implementation partners in the regions as well as a little bit of BPO. We are thinking bigger than that and obviously want to think about larger system integrators. But as you guys all know, with the partner ecosystem, it's a journey, it's not something, you know, that you can move the needle on in a couple of quarters, we're talking a couple of years, but there is definitely a strategy around not only what partners are bringing to us in terms of value, but then also how we treat partners. We have a tiered system, which was announced at our Relate conference or at our Showcase in San Francisco. So that's incredibly important and making sure we understand also the economics on both sides.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Operator, before we take the next question, I do want to just, I think when we read out the guidance, I just want to make sure it's clear. Our revenue guidance for the full year 2019 was raised to $813 to $815 million, which represents a 36% year-over-year growth. Our non-GAAP operating income for the full year - I think we gave you the quarterly number - is raised to $23 to $25 million, the quarter is $8 to $10 million, so apologies for that misstatement.

Operator
And our next question comes from Chris Merwin with Goldman Sachs.

Chris Merwin, Analyst, Goldman Sachs & Co. LLC
Okay, great, thanks very much. So maybe just a follow-up on that question about the partner program. I think you talked about 60% year-on-year growth - is that something, I mean, that can actually help with the international business to a degree? And, you know, I guess maybe more broadly, like what do you see some of the main catalysts that could actually spur a recovery in growth for that region? And I just have a follow-up. Thanks.

Elena Gomez, Chief Financial Officer
Yeah. Partners are already part of our regions and have been and I don't view that as only a regional thing. It's really a global investment including in the Americas. So I do believe that they will begin to have more meaningful impact over the next couple of years and that's the focus, and we've been making sure our investment supports that. So it's good healthy growth and I'm encouraged by the fact that partners are reaching out to us as well. So positive, all the way around.

Chris Merwin, Analyst, Goldman Sachs & Co. LLC
Yeah. And then maybe just one on Sunshine, you know, I think you mentioned in this shareholder letter that it's getting some, continues to get some really positive feedback from customers, but, you know, is there anything you can share about milestones for this product, you know, from either from customer count or I know you talked about potentially monetizing in 2020? But what are some of the main things you’re looking to see before you decide to pull that monetization lever? Thanks.

Mikkel Svane, CEO, Founder and Chair
So I think we launched an important extension of the Sunshine platform at our Showcase event in San Francisco with Sunshine Conversations, which is this whole API-first platform for developer conversational business and it's really, really exciting what you can do with that. And we really being at the forefront of customer experience this year. So it was important step for us and really getting that as part of the Sunshine story and getting it integrated well. You know, but beyond that, I just want to say Relate 2020 in Miami in March going to talk a lot about Sunshine and we're going to have a lot of interesting stuff to share.

Chris Merwin, Analyst, Goldman Sachs & Co. LLC
Okay, thank you.

Operator
And our next question comes from Stan Zlotsky with Morgan Stanley.

Stan Zlotsky, Analyst, Morgan Stanley & Co. LLC
Hi perfect, thank you so much guys for taking my question. Going back to the, to the numbers. If we look at your full-year guidance, the high end of your revenue guidance was bumped up by $4 million versus after Q2 you only bumped it up by $1 million, and I'm talking about specifically the high end of the revenue guidance range, which to me signifies that you're, you’re feeling pretty good about the full year and how Q4 is looking, because, you know, when you increase by just $1 million after Q2 versus $4 million now, those, those numbers matter, right? What gives you the confidence to bump up full-year guidance by that amount versus if we just look at just very pure billings which ticked down to about 25%-ish? What gives you the confidence for that, you know, raising your guidance by so much for the full year? And then I have a quick follow-up. Thank you.

Marc Cabi, Vice President, Strategy and Head of Investor Relations

I think there are three things, Stan. First, as Elena stated earlier, we had, you know, we managed through some of the things that we wanted to manage through in Q2 that we referred to around uneven performance. We're not done, there's more to be done there, but we have better visibility around the things we need to do. We're up leveling some of the positions that are coming open, like in EMEA with a sales leader and so forth. Second thing is, we have again closed some deals in early Q4 that would have been traditionally a Q3 deal. So we have obvious visibility there. And then, you know, we feel good about our opportunities both for this year and into 2020 around customer demand for our general product offering.

Stan Zlotsky, Analyst, Morgan Stanley & Co. LLC
Okay, very helpful. Thank you. And just going back to EMEA, and APAC, last quarter you mentioned that specifically within those geographies the weakness was around UK and Australia. Is that still where you are seeing some of those unevenness or has it maybe spread out beyond that or is it still kind of contained to those two countries? Thank you. That's it for me.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Yeah. Those are the two major countries we pointed out. And then after this quarter, we're probably not going to go country by country that much. But that said, we saw a nice recovery in Australia, one quarter does not make a trend, the UK stabilized. So what we want to do is continue to work internally to do and execute through any type of macroeconomic conditions presented to us.

Stan Zlotsky, Analyst, Morgan Stanley & Co. LLC
Got it. Thank you.

Operator
And our next question comes from Pat Walravens with JPMorgan.

Pat Walravens, Analyst, JMP Securities LLC
Oh, thank you. It’s JMP. Yeah, I know. Alright, so here's my question, Mikkel. So you talk about all the things we are doing to move upmarket. And my question is can you compete as effectively upmarket as you do in the SMB and don't you run into Salesforce a lot more upmarket and isn't, that isn't that a bad thing? So I'd love to understand how you think about it.

Mikkel Svane, CEO, Founder and Chair
So I don't think anything materially has changed about, like, how we compete, how well we are doing and who we're meeting in the market. We do see an overall trend that the values and the qualities that Zendesk is all about, the ease of use, the quickly up and running, the agility of the platform, the quick time to resolve. All of these things cater for a wider, wider audience that are increasingly, you know, urgent in keeping up with customer expectations. They know they need agility from their platforms. And that is exactly what we provide them with and the Sunshine platform is even, you know, stressing that concept even more because it's so familiar for a lot of our customers that they feel very comfortable about the agility of that platform. So we are very confident about both our current and especially our future competitive muscles in the enterprise region.

Pat Walravens, Analyst, JMP Securities LLC
Alright, great, thank you.

Operator
And our next question comes from Derrick Wood with Cowen and Company.

Derrick Wood, Analyst, Cowen and Company
Great, thanks. So, you touched on it a little bit, but just, you know, last quarter you talked about macro and kind of internal execution and what I'm hearing this quarter on the macro is, it is what it is, internal execution, there's things that you can do to improve it. And I'm just trying to get a sense for, you know it sounds like maybe there is new leadership and is there any other color you can give in terms of what initiatives you're trying to do and, and lifting up the execution and maybe just a sense for, you know, how long you think that will take to have an impact on the business? And then I have a follow-up.

Elena Gomez, Chief Financial Officer
Yeah, I mean I think the key for us is, is getting in the right leadership and in terms of operationally, I think we need to make sure we're on top of our hiring. And at times in markets hiring cannot be as fast as you want it, but at the highest level, I think we need to focus on it. And we have been and have had really good results with that, so, but hiring and bringing in new leadership does take time so I don't want to assume that that's going to have an impact right away. Is it a quarter or two? You know, that’s what we're going to figure out, but our hope is that we begin to see some traction in those countries where we have uneven performance as early as Q4 and into Q1 and our focus right now frankly is to start strong, in 2020.

Derrick Wood, Analyst, Cowen and Company
Okay. And then I guess on the macro side, now that you've had a little bit more time to digest, I mean any other detail to give in terms of what behavioral changes you're seeing internationally and whether it's more just about, kind of, longer sales cycles for expansion or, you know, if anything’s going to change competitively? Thank you.

Elena Gomez, Chief Financial Officer
Yeah, I mean it's hard to put a specific theme on any of this because, you know, we're, we’re focused a lot on our internal execution. That said, you know, is the tone of 2019 different than the tone of 2018? Absolutely, but it's not going to preclude us from focusing on strong execution regardless of the macro around us. And so...

Operator
And our next question comes from Tom Roderick with Stifel.

Jeffrey Parker Lane, Analyst, Stifel, Nicolaus & Co., Inc.
Hi, it's actually Parker Lane in for Tom. Thanks for taking my question. I was wondering if you could give us a stronger sense in the composition of the 5,000 plus Suite customers you have in the fold today. Just in terms of what percentage of those customers have come from the existing base so far versus net new customers that have just started at Zendesk?

Operator
Okay, one moment. Tom, just one moment.

(Technical Difficulty)

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Operator, can you hear us now?

Operator
Yes, we can hear you now.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Sorry for the difficulty, we are dropping our line. So, Derrick, I'm not sure how much of that answer you heard from Elena. But just quickly, just to recap, I am not sure where we dropped off but it's very difficult to kind of have one single answer for your, for your question, but we're working very hard to kind of go through Q4 and continue to improve on execution and have a strong start in 2020.

Operator, we'll take the next question.

Operator
Okay. And our next question comes from Tom Roderick with Stifel.

Jeffrey Parker Lane, Analyst, Stifel, Nicolaus & Co., Inc.
Hi, it's actually Parker Lane in for Tom. So I was wondering if you could give us a sense of the 5,000 Suite customers you have today. What percentage of those came from the existing installed base versus net new customers that have been attracted Zendesk from the combined offering? Thanks.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
I need you to re-ask that question, please. I was distracted for a second. Sorry.

Mikkel Svane, CEO, Founder and Chair
So the question is how many of the Suite customers came from current customers versus new customers.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
We have a higher mix of new customers in Suite than our traditional business does. You know, generally we're kind of at a 25%, 30% new customers and Suite actually has a higher new customer rate in its mix.

Jeffrey Parker Lane, Analyst, Stifel, Nicolaus & Co., Inc.
Got it. And in terms of the Gather products you just offered, how much of that is a play at the lower end, the velocity part of the business today versus the enterprise portion of the business and what is the initial demand just look like right now?

Mikkel Svane, CEO, Founder and Chair
So we know that there is a lot of, like, empowering your community to help each other, empowering your users and your customers to help each other without necessarily having to reach out to you as a brand is a, is a bigger and bigger and more and more important part of companies’ strategies today. Like, if you look at your own behavior that's typically how you find solutions to your most common problem is to ask fellow users, fellow customers out there. That's how I use the Internet a lot. So it’s part, it’s becoming more and more part of the part of the ingredients in managing your, your customer base and their questions. Like, there’s feature-wise, we can definitely go deeper on some of the more advanced kind of enterprise stuff with the current version and you will see more of that stuff coming along, but, like, the product as it is right now caters for, I would say, a relatively big part of this segment, we are in right now. Did that answer your question?

Jeffrey Parker Lane, Analyst, Stifel, Nicolaus & Co., Inc.
Yeah, that did. Thank you.

Mikkel Svane, CEO, Founder and Chair
Thank you.

Operator
And our next question comes from Koji Ikeda with Oppenheimer.

Koji Ikeda, Analyst, Oppenheimer & Co., Inc.
Thanks for taking my question guys. I have two questions on the Sunshine platform. It sounds like there's a lot of early interest and traction from customers and prospects, which is really great and I guess the question is, has the introduction of Conversations earlier this month helped increase the momentum out there for the Sunshine platform? And then the second question is around profiles and events. I believe those two products are still in early access. So what is the right way to think about how profiles and events are progressing and maybe if you could, could you talk about the roles and process for customers for past products from beta and early access to generally available to get a better understanding on how the rollout for profiles and events could shape out? Thank you.

Mikkel Svane, CEO, Founder and Chair
Sure. So as I said before, you're going to hear a lot more about Sunshine at our event under the sun in Miami in March next year. We are very excited to talk about that. Like, Sunshine Conversations is one of the elements that we bring to the platform that just like, that broadens the scope and how you can think about the platform and the types of needs it can solve for you. So it, it has definitely put more attention on the platform and is solidifying the story about it so that we can build much more comfort with our customers around it. We do like, those of our customers that are working with some of the elements in the Sunshine platform that are still developing are typically customers that understand that premise very well and understand that things are still moving. We are working very closely with them and they appreciate kind of how they get access to a lot of these things very early on and can do some really interesting stuff. They're really interested in kind of the advantage and the time to market that that gives them. For other customers, of course, like, they're not super-duper comfortable about moving or working on stuff that is progressing quickly, but we kind of make that trade-off very visible to all our customers. And again, like Sunshine, like we first announced Sunshine like a year ago. We are very excited about it and can talk much more about it in in March next year under the sun in Miami.

Koji Ikeda, Analyst, Oppenheimer & Co., Inc.
Great, thank you for that. And if I could, one follow-up. I did notice a blog post about a security breach a month ago. I mean is there any update on that? Was that resolved? And I guess the real question is what does that have any negative impact on selling or customer retention? Thank you for taking my questions.

Mikkel Svane, CEO, Founder and Chair
I think Marc has some details around kind of the customer communications here. We have been in touch with all the customers that were directly affected about it and have presented them with all the findings along the way as we have also been working with the relevant authorities as part of this bigger investigation that it is. Like, we feel terrible for these things. They happen. And, you know, our commitment to our customers is that they understand that we take full ownership for this and, like, are doing everything we possibly can to turn every stone and give them the fullest possible picture. It is something that happened, you know, more than three years ago.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Correct.

Mikkel Svane, CEO, Founder and Chair
It's of course something that happened when Zendesk was in a very different state of security than we are today. And also have been working with our key customers about walking them through just the development that has happened inside of the company and with our security profile over those three years have been a big important part of it. And we really appreciate, kind of the trust our customers have shown in us and have, you know, come together, also, to share their practices and a lot of them, we have learned from the same way that a lot of them have learned from us.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
And I’ll say is that from a blog point of view, the blog is the best location. That is a live blog. So as we do get updates through this process, we will be updating that blog site around this, but we do believe that we have communicated with every customer that had potential impact. And again, transparency has been very important to us through this process.

Mikkel Svane, CEO, Founder and Chair
Yeah. Yep.

Koji Ikeda, Analyst, Oppenheimer & Co., Inc.
Thanks for taking my questions.

Operator
And our next question comes from Brad Sills with Bank of America Merrill Lynch.

Brad Sills, Analyst, Bank of America Merrill Lynch
Oh great, thanks guys. Wanted to ask one also on the global SI channel. I know it's early, but, you know, any color you can provide on what you're working with, Accenture, Wipro and some of these global SIs on in developing, you know, the pipeline? Is this more around Sunshine or is it some of these bigger expansion deals? I'm sure, you know, it's that plus new, all the above, but any color on that and when you might expect that to contribute?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
So I think, you know, the partner development around the GSI's is still what I consider in its early days with lots of good opportunities being developed. The availability of our platform I think really expands partners’ opportunity to work with Zendesk. So that's kind of what we're targeting. I think there'll be a big part of our Relate conversation in March. What I do have is a list of the next layer of partners that have already done work with us. And when you look in Europe, when you look in Asia, and in LATAM, we have a fairly good presence of those next layer of

partners already doing business with us and I think that will translate into the Accentures of the world as we continue to expand our capabilities around platform.

Brad Sills, Analyst, Bank of America Merrill Lynch
Alright. Thanks, Marc. And then one more if I may on Sunshine. Any use cases or, or applications, verticals, any color you can provide on where you're seeing some early traction there? Thanks so much.

Mikkel Svane, CEO, Founder and Chair
Yeah. Again, I want to say we look forward to talking a lot more about Sunshine at our event under the sun in Miami. But we do have, I think we already have, we shared a few good stories.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Yeah, I think the shareholder letter covers the early stories. You know, as we create more capabilities around events in addition to objects I think there will be much more excitement around it. And that's right around the quarter.

Mikkel Svane, CEO, Founder and Chair
Yeah. Yeah. Yeah.

Brad Sills, Analyst, Bank of America Merrill Lynch
Great, thanks guys.

Operator
And our next question comes from Steve Koenig with Wedbush Securities.

Steve Koenig, Analyst, Wedbush Securities, Inc.
Hi Zendesk. Hey, thanks for taking my questions. Maybe one quick one and then a follow-up. The slipped deals, can you give us any color on where they, where were they concentrated in terms of geography?
 
Marc Cabi, Vice President, Strategy and Head of Investor Relations
You know they were actually across in many of the different geographies. I'd say that the ones that kind of stick out to me were Americas, but I think there were a couple in Europe as well. LATAM performed extremely well. I didn't see anything slip there.

Steve Koenig, Analyst, Wedbush Securities, Inc.
Got it, okay. Thanks, Marc. And then just for the follow-up here. Maybe it would be great if you can give me some color on your sales capacity additions. You know, maybe not so much the EMEA that you talked a little bit about, but kind of your rank and file sales capacity. How do you balance enterprise versus SMB and how are you making sure you maintain focus on SMB as you grow the enterprise mix and drive cross-sell in that SMB market because you have a lot of products you can bring to bear in SMB?

Elena Gomez, Chief Financial Officer
Yeah, no that’s definitely at the forefront of our planning, very long, planning process, but at the highest altitude we're always looking for overall improving of our cost of acquisition. So it's not only what you put on the street per sales capacity, but also the marketing and pipeline that's generated from that so you kind of have to look at the whole thing, but we're always constantly balancing if we can make the SMB segment more efficient it allows us to invest, obviously upmarket. And there is that healthy tension in the organization about, let's just make sure we're not over rotating any one segment because we view them both as really important. And one, as you know, is a very predictable revenue stream and the other one is a bit more lumpy, but our investments have to support growth in both.

Steve Koenig, Analyst, Wedbush Securities, Inc.
Yeah Elena. Just quickly, any changes in retention rates or differences? I mean SMB in general in software has a, has a lower retention rate, but any, any changes in your trends?

Elena Gomez, Chief Financial Officer
No, not really. I mean I'm really encouraged that since I've been here and actually even before I got here our churn and contraction rates have remained relatively steady within a band. On occasion, we'll see some quarters that do a little bit better because we have some save programs and so on but nothing that's moving the needle that's concerning at all.

Steve Koenig, Analyst, Wedbush Securities, Inc.
Got it. Great, thank you very much.

Elena Gomez, Chief Financial Officer
Sure.

Operator
And our next question comes from Jeff Van Rhee with Craig-Hallum.

Jeff Van Rhee, Analyst, Craig-Hallum Capital Group LLC
Great, thanks. Thanks for taking my questions. Couple from me. Just briefly, I want to jump back to the push outs if I could for a second. In North America, have you seen anything like this before to give you conviction, confidence that it's not the start of a trend? I'm sure you’re taking a close

look at the ones that have pushed and just, I guess two questions: have you seen anything like that before and what gives you conviction that it's not part of a broader trend?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
So we've always mentioned that these larger deals, timing is always something difficult to predict sometimes. And we've seen this throughout our history. As we move upmarket, we're still establishing the patterns of both landing and closing larger deals. And this is not that different. This quarter, there happened to be a few of them at the same time that did close in October. So I think from a timing perspective, one of the reasons we provide the guidance the way we do is to protect ourselves against those kind of factors.

Jeff Van Rhee, Analyst, Craig-Hallum Capital Group LLC
Okay. And then on the customer count, maybe just the 15% year-over-year growth in total customers contrasted with the number of customers for dollar based net expansion being down 3%. I think you had suggested the dollar based net number was a better proxy, if I recall, for uniques. And I know there's some variables in there with the, with the Suite and other things distort that, but can you just touch on the discrepancy between those two numbers in which is the better read?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
So the dollar based net expansion is kind of more of a unique logo view than the customer count there. And that does reflect, if you recall over the last few quarters we've talked about at the very low end of our Chat business, that we have attrition in that customer base and that's reflected in the net logo count for you.

Jeff Van Rhee, Analyst, Craig-Hallum Capital Group LLC
Okay. And then I guess just lastly, realizing I guess we've got the commentary about the ‘20 guide being that you're comfortable with $1 billion model. With the deferred, with the billings numbers and the RPO deceleration, is there any chance you could give us a little finer point around that? I mean the consensus is at 1.06 - might you go out and say that you're at least comfortable with the consensus?

Elena Gomez, Chief Financial Officer
We're not going to guide to 2020. I know people are eager for that, but we'll comment on that in 90 days.

Jeff Van Rhee, Analyst, Craig-Hallum Capital Group LLC
Okay.

Operator
And our next question comes from Jennifer Lowe with UBS.

Jennifer Lowe, Analyst, UBS Securities LLC
Great, thank you. I know there's already been a bunch of questions on this so I don't want to belabor it, but, you know, just looking at what we talked about 90 days ago regarding execution versus macro, it seems like there the mindset was ‘we think its execution, we're going to explore before we really figure out what's going on there’. Now it seems a little bit more of a waiting on macro and adjusting how you execute for the macro, but I guess I just want to be crisp as you think about what you've discovered over the past 90 days. How do you sort of parse out what's macro versus execution? And is it missed execution or you just need to change how you execute to adapt to a new macro-economic backdrop?

Elena Gomez, Chief Financial Officer
So I'm not going to comment on what is percentage is macro and what percentage is execution. It's not productive for us, but I think the most important thing we can control is our internal execution. We need to do better. We need to focus on our regional leadership. We need to make sure we have hiring in place and most importantly, we need to make sure we start 2020 strong and have the capacity and leadership in place to get started with a strong 2020 start of the year.

Jennifer Lowe, Analyst, UBS Securities LLC
And maybe just to finish that out. So if I look at, you know, Australia being one of the countries that was called out last quarter. In Australia you have a company like Atlassian which does something very different than Zendesk but maybe not as different with Jira Service Desk. I'm just curious if there's anything new competitively you're seeing there or if this is purely sort of within your control. I mean, I guess competition is within your control too, but is there a competitive element that you, that you discovered there?

Marc Cabi, Vice President, Strategy and Head of Investor Relations
No, when we are doing research in Q2, we identified that, you know, Australia has a large trading pattern with China. So, but what's interesting is that in Q3, again, one quarter doesn't make a trend, but we saw a nice recovery in Australia. So I think, you know, there are a combination of factors in any one country. It's really hard for us to talk about any one country when we have 160 to monitor, but, you know, for the purpose of transparency last quarter we did highlight those because, you know, again that uneven performance wasn’t region-wide, it was country-specific. You know, in the future, you know, we’ll probably refine how we disclose that, but, and when it warrants, we will be transparent as we can be with you guys.

Jennifer Lowe, Analyst, UBS Securities LLC
Great, thank you.

Operator
And there are no further questions at this time. I will now turn the conference back over to Mr. Marc Cabi.

Marc Cabi, Vice President, Strategy and Head of Investor Relations
Thank you, Kavita. Again I'd like to thank everyone for joining us today for our third-quarter conference call and we look forward to speaking with you at year-end after we close our Q4 in February. Thank you so much.