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): July 27, 2020

	
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:

☐	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 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).    
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 July 30, 2020, Zendesk, Inc. (the “Company”) issued a press release announcing its results for the quarter ended June 30, 2020. 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 June 30, 2020 (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.

On July 27, 2020, the Company’s Board of Directors (the “Board”) appointed Archana Agrawal to the Board as a Class I director, effective that day, with a term expiring at the Company’s 2021 annual meeting of stockholders. Concurrent with her election as a director of the Company, Ms. Agrawal was appointed to the Nominating and Corporate Governance Committee of the Board.

There are no arrangements or understandings between Ms. Agrawal and any other persons pursuant to which she was selected to serve as a director. Additionally, there are no transactions involving the Company and Ms. Agrawal that the Company would be required to report pursuant to Item 404(a) of Regulation S-K.

Ms. Agrawal will be entitled to receive compensation for her Board and committee service in accordance with the Company’s standard compensation arrangements for non-employee directors pursuant to the Company’s Amended and Restated Non-Employee Director Compensation Policy (the “Non-Employee Director Compensation Policy”), which is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 30, 2019, as adjusted by the Board from time to time. Additionally, as set forth in the Non-Employee Director Compensation Policy and in connection with Ms. Agrawal’s appointment, the Board has granted Ms. Agrawal restricted stock units having a fair market value equal to $200,000 (pro-rated for the amount of time remaining until the anniversary of the most recent annual meeting of stockholders), based on the average closing price of the Company’s common stock over the 30 trading days prior to the date of grant. The Company has also entered into its standard form of Indemnification Agreement with Ms. Agrawal in connection with her appointment to the Board.

Item 7.01. Regulation FD Disclosure.

        On July 30, 2020, Mikkel Svane, Chief Executive Officer of the Company, will make the graphic included with this Current Report on Form 8-K as Exhibit 99.3 available to the public. The graphic and the Shareholder Letter will also be available for viewing at the Company’s investor website, https://investor.zendesk.com, although the Company reserves the right to discontinue that availability at any time.

        The information in this Item 7.01 (including Exhibit 99.3) 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 July 30, 2020.
99.2 Letter to Shareholders, dated July 30, 2020.
99.3 July 2020 Update, dated July 30, 2020.
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)	
July 30, 2020			

         Exhibit 99.1
ZENDESK ANNOUNCES SECOND QUARTER 2020 RESULTS
 
Highlights
 
•Second quarter revenue increased 27% year over year to $246.7 million
•Second quarter GAAP operating loss of $31.5 million and non-GAAP operating income of $19.1 million
•Archana Agrawal, Chief Marketing Officer of Airtable, joins board of directors

SAN FRANCISCO – July 30, 2020 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the second quarter ended June 30, 2020, and released a Shareholder Letter on its investor relations website at https://investor.zendesk.com.

Results for the Second Quarter 2020
 
Revenue was $246.7 million for the quarter ended June 30, 2020, an increase of 27% over the prior year period. GAAP net loss for the quarter ended June 30, 2020 was $64.7 million, and GAAP net loss per share (basic and diluted) was $0.56. Non-GAAP net income was $16.4 million, non-GAAP net income per share (basic and diluted) was $0.14. Non-GAAP net income excludes approximately $46.5 million in share-based compensation and related expenses (including $2.3 million of employer tax related to employee stock transactions and $0.5 million of amortization of share-based compensation capitalized in internal-use software), a $26.0 million loss on early extinguishment of debt, $7.5 million of amortization of debt discount and issuance costs, $2.3 million of amortization of purchased intangibles, $1.8 million of acquisition-related expenses, and non-GAAP income tax effects and adjustments of $3.1 million. GAAP net loss per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2020 was based on 114.6 million weighted average shares outstanding (basic) and 120.4 million weighted average shares outstanding (diluted).

Appointment of Archana Agrawal to Board of Directors

Zendesk appointed Archana Agrawal to its board of directors, effective July 27, 2020. Archana is a seasoned technology executive with nearly two decades of experience in the software industry. She has served as the Chief Marketing Officer of Airtable, a low-code app development platform, since March 2020 and as a member of the board of directors of MongoDB, Inc., since August 2019. Previously, Archana served as the Head of Enterprise and Cloud Marketing at Atlassian, an enterprise software company, from May 2016 to March 2020. Archana joined Atlassian in 2013 as Head of Data Science and Growth Marketing. Prior to that, Archana was at Ladders, Inc. from 2007 until 2013, where she led corporate-wide analytics. She began her career at the IBM Almaden Research Center. She holds an M.B.A. from Harvard Business School and received her M.S. in computer science from the University of Illinois at Urbana-Champaign.

“Archana has a unique background in applying data science to enterprise marketing and customer acquisition,” said Mikkel Svane, Zendesk chief executive officer. “Her experience across fast-growing software companies will serve us well as we continue to expand our reach in the enterprise.”

“Zendesk has led the way in changing how organizations buy enterprise software and in making customer experience a critical differentiator for businesses,” Agrawal said. “I’m thrilled to be joining the board at a time when Zendesk has become so critical to companies of every size as they rapidly adapt to new customer and business realities.”

Outlook

We believe our financial performance will continue to be impacted by uncertain and highly disrupted global economic conditions. Many customers continue to face end-market demand challenges and we are seeing higher levels of contraction compared to historical trends. We continue to partner with customers who are undergoing business challenges to help them with modified invoicing and subscription terms. These conditions and actions have impacted and will continue to impact our near-term net expansion rate and overall financial performance, and have played a role in impacting our free cash flow generation. We are being disciplined and prudent in how we manage our business.

Longer term, with improved macroeconomic conditions, we continue to believe the fundamentals of our business model will drive meaningful revenue growth. In particular, we believe that our customer experience solutions will continue to lead in innovation and be more compelling relative to traditional larger enterprise competitors. We will continue to innovate and improve our product offering and how we operate and engage with consumers. These initiatives give us confidence in our plan to deliver high revenue growth and operating leverage.

As of July 30, 2020, Zendesk provided guidance for the quarter ending September 30, 2020.
For the quarter ending September 30, 2020, Zendesk expects to report:
•Revenue in the range of $250 - 255 million
•GAAP operating income (loss) in the range of $(42) - (38) million, which includes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
•Non-GAAP operating income (loss) in the range of $10 - 14 million, which excludes share-based compensation and related expenses of approximately $48 million, amortization of purchased intangibles of approximately $2 million, and acquisition-related expenses of approximately $2 million
•Approximately 116 million weighted average shares outstanding (basic)
•Approximately 122 million weighted average shares outstanding (diluted)

There are many factors that can affect our actual results which are discussed below and in the risk factors in our filings with the Securities and Exchange Commission. Some of the key risk factors include global macroeconomic conditions, the impact of the COVID-19 pandemic on our business, business conditions of customers in challenged industries, the effect on demand for our products from customers, and the ability of our customers to manage the current severe economic downturn.

We have not reconciled free cash flow guidance to net cash from operating activities for the full year 2020 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 2020 is not available without unreasonable effort.

Additionally, 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.

COVID-19 Update

Over the last several months, we have continued to focus on supporting our employees, customers, and community as we navigate the COVID-19 pandemic. Our business continuity plans continue to ensure that we take care of health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. Additional information regarding these efforts and the expected impact on our business can be found in our Shareholder Letter for the quarter ended June 30, 2020, as well as our quarterly report on Form 10-Q for the quarter ended June 30, 2020 to be filed with the Securities and Exchange Commission.

Shareholder Letter and Conference Call Information
 
The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a live video webcast at 2:00 p.m. Pacific Time (5:00 p.m. Eastern Time) on Thursday, July 30, 2020 to discuss the results. The live video webcast can be accessed through Zendesk’s investor relations website at https://investor.zendesk.com. A replay of the webcast will be available for 12 months.

About Zendesk

Zendesk is a service-first CRM company that builds support, sales, and customer engagement software designed to foster better customer relationships. From large enterprises to startups, we believe that powerful, innovative customer experiences should be within reach for every company, no matter the size, industry or ambition. Zendesk serves more than 160,000 customers across a multitude of industries in over 30 languages. Zendesk is headquartered in San Francisco, and operates offices worldwide. 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) the effect of uncertainties related to the COVID-19 pandemic on U.S. and global markets, Zendesk’s business, operations, revenue results, cash flow, operating expenses, hiring, demand for its solutions, sales cycles, customer retention, and its customers’ businesses and industries; (ii) other adverse changes in general economic or market conditions; (iii) Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or achieve increased market acceptance of its products; (iv) Zendesk’s ability to effectively expand its sales capabilities; (v) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) 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; (vii) the intensely competitive market in which Zendesk operates and the difficulty that Zendesk may have in competing effectively; (viii) Zendesk’s ability to effectively market and sell its products to larger enterprises; (ix) Zendesk’s ability to introduce and market new products and to support its products on a shared services platform; (x) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (xi) Zendesk’s ability to prevent, mitigate, and respond effectively to both historical and future data breaches and to securely maintain customer data; (xii) Zendesk’s ability to effectively manage its growth and organizational change, including its international expansion strategy; (xiii) Zendesk’s ability to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions; (xiv) Zendesk's ability to comply with privacy and data security regulations; (xv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xvi) the development of the market for software as a service business software applications; (xvii) real or perceived errors, failures, or bugs in its products; and (xviii) Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services.

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

Condensed Consolidated Statements of Operations
(In thousands, except per share data; unaudited)

																								
	Three Months Ended June 30,		Six Months Ended June 30,	
 	2020		2019		2020		2019	
Revenue	$	246,664 	 		$	194,583 	 		$	484,140 	 		$	376,068 	 	
Cost of revenue	61,515 	 		57,670 	 		121,217 	 		113,324 	 	
Gross profit	185,149 	 		136,913 	 		362,923 	 		262,744 	 	
Operating expenses:								
Research and development	59,003 	 		50,510 	 		119,424 	 		97,301 	 	
Sales and marketing	121,397 	 		94,746 	 		245,707 	 		186,447 	 	
General and administrative	36,247 	 		43,019 	 		70,573 	 		74,271 	 	
Total operating expenses	216,647 	 		188,275 	 		435,704 	 		358,019 	 	
Operating loss	(31,498)	 		(51,362)	 		(72,781)	 		(95,275)	 	
Other expense, net:								
	
Interest expense	(8,086)	 		(6,614)	 		(14,973)	 		(13,158)	 	
Loss on early extinguishment of debt	(25,950)	 		— 	 		(25,950)	 		— 	 	
Interest and other income, net	2,166 	 		4,026 	 		9,068 	 		10,196 	 	
Total other expense, net	(31,870)	 		(2,588)	 		(31,855)	 		(2,962)	 	
Loss before provision for income taxes	(63,368)	 		(53,950)	 		(104,636)	 		(98,237)	 	
Provision for income taxes	1,288 	 		591 	 		2,804 	 		1,024 	 	
Net loss	$	(64,656)	 		$	(54,541)	 		$	(107,440)	 		$	(99,261)	 	
Net loss per share, basic and diluted	$	(0.56)	 		$	(0.50)	 		$	(0.94)	 		$	(0.91)	 	
Weighted-average shares used to compute net loss per share, basic and diluted	114,600 	 		109,986 	 		114,069 	 		109,312 	 	

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

	June 30,
2020		December 31,
2019	
Assets	 		 	
Current assets:	 		 	
Cash and cash equivalents	$	700,457 	 		$	196,591 	 	
Marketable securities	296,829 	 		286,958 	 	
Accounts receivable, net of allowance for doubtful accounts of $7,914 and $2,846 as of June 30, 2020 and December 31, 2019, respectively	143,017 	 		127,808 	 	
Deferred costs	40,939 	 		35,619 	 	
Prepaid expenses and other current assets	50,210 	 		45,847 	 	
Total current assets	1,231,452 	 		692,823 	 	
Marketable securities, noncurrent	303,861 	 		361,948 	 	
Property and equipment, net	102,601 	 		102,090 	 	
Deferred costs, noncurrent	38,192 	 		35,230 	 	
Lease right-of-use assets	93,523 	 		89,983 	 	
Goodwill and intangible assets, net	201,804 	 		206,883 	 	
Other assets	24,585 	 		25,632 	 	
Total assets	$	1,996,018 	 		$	1,514,589 	 	
Liabilities and stockholders’ equity	 			
Current liabilities:	 			
Accounts payable	$	13,793 	 		$	38,376 	 	
Accrued liabilities	35,904 	 		36,347 	 	
Accrued compensation and related benefits	64,270 	 		61,512 	 	
Deferred revenue	314,179 	 		320,642 	 	
Lease liabilities	23,309 	 		21,804 	 	
	
Total current liabilities	451,455 	 		478,681 	 	
Convertible senior notes, net	1,043,365 	 		483,464 	 	
Deferred revenue, noncurrent	1,934 	 		3,320 	 	
Lease liabilities, noncurrent	83,495 	 		83,478 	 	
Other liabilities	5,460 	 		7,662 	 	
Total liabilities	1,585,709 	 		1,056,605 	 	
				
Stockholders’ equity:				
Preferred stock, par value $0.01 per share	— 	 		— 	 	
Common stock, par value $0.01 per share	1,151 	 		1,130 	 	
Additional paid-in capital	1,212,469 	 		1,155,044 	 	
Accumulated other comprehensive income	2,834 	 		591 	 	
Accumulated deficit	(806,145)	 		(698,781)	 	
Total stockholders’ equity	410,309 	 		457,984 	 	
Total liabilities and stockholders’ equity	$	1,996,018 	 		$	1,514,589 	 	

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

	Three Months Ended June 30,	
 	2020		2019	
Cash flows from operating activities	 		 	
Net loss	$	(64,656)	 		$	(54,541)	 	
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:	 			
Depreciation and amortization	10,749 	 		8,969 	 	
Share-based compensation	43,712 	 		43,751 	 	
Amortization of deferred costs	10,765 	 		7,622 	 	
Amortization of debt discount and issuance costs	7,487 	 		6,277 	 	
Loss on early extinguishment of debt	25,950 	 		— 	 	
Repayment of convertible senior notes attributable to debt discount	(38,637)	 		— 	 	
Other	3,090 	 		452 	 	
Changes in operating assets and liabilities:				
Accounts receivable	(46,666)	 		(15,901)	 	
Prepaid expenses and other current assets	(4,959)	 		(5,380)	 	
Deferred costs	(14,867)	 		(14,123)	 	
Lease right-of-use assets	5,272 	 		4,734 	 	
Other assets and liabilities	(308)	 		(1,242)	 	
Accounts payable	(12,692)	 		5,678 	 	
Accrued liabilities	1,638 	 		(2,057)	 	
Accrued compensation and related benefits	13,329 	 		8,887 	 	
Deferred revenue	13,616 	 		27,294 	 	
Lease liabilities	(3,534)	 		(2,562)	 	
Net cash provided by (used in) operating activities	(50,711)	 		17,858 	 	
Cash flows from investing activities	 			
Purchases of property and equipment	(5,622)	 		(4,896)	 	
Internal-use software development costs	(3,225)	 		(1,753)	 	
Purchases of marketable securities	(111,906)	 		(125,681)	 	
Proceeds from maturities of marketable securities	117,752 	 		53,031 	 	
Proceeds from sales of marketable securities	39,814 	 		151,550 	 	
Business combinations, net of cash acquired	— 	 		(70,794)	 	
	
Net cash provided by investing activities	36,813 	 		1,457 	 	
Cash flows from financing activities				
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $20,400	1,129,600 	 		— 	 	
Purchase of capped calls related to 2025 convertible senior notes	(129,950)	 		— 	 	
Payments for 2023 convertible senior notes partial repurchase	(578,973)	 		— 	 	
Proceeds from capped calls related to 2023 convertible senior notes	83,040 	 		— 	 	
Proceeds from exercises of employee stock options	5,101 	 		4,773 	 	
Proceeds from employee stock purchase plan	8,802 	 		6,895 	 	
Taxes paid related to net share settlement of share-based awards	(2,241)	 		(2,663)	 	
Net cash provided by financing activities	515,379 	 		9,005 	 	
Effect of exchange rate changes on cash, cash equivalents and restricted cash	15 	 		33 	 	
Net increase in cash, cash equivalents and restricted cash	501,496 	 		28,353 	 	
Cash, cash equivalents and restricted cash at beginning of period	202,620 	 		145,028 	 	
Cash, cash equivalents and restricted cash at end of period	$	704,116 	 		$	173,381 	 	
Non-GAAP Results

(In thousands, except per share data)
The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this release.

	Three Months Ended June 30,		Six Months Ended June 30,	
 	2020		2019		2020		2019	
Reconciliation of gross profit and gross margin	 		 					
GAAP gross profit	$	185,149 	 		$	136,913 	 		$	362,923 	 		$	262,744 	 	
Plus: Share-based compensation	5,187 	 		5,246 	 		10,246 	 		10,183 	 	
Plus: Employer tax related to employee stock transactions	292 	 		391 	 		717 	 		840 	 	
Plus: Amortization of purchased intangibles	1,617 	 		1,943 	 		3,724 	 		3,561 	 	
Plus: Amortization of share-based compensation capitalized in internal-use software	464 	 		413 	 		914 	 		833 	 	
Plus: Acquisition-related expenses	66 	 		160 	 		$	207 	 		$	274 	 	
Non-GAAP gross profit	$	192,775 	 		$	145,066 	 		$	378,731 	 		$	278,435 	 	
GAAP gross margin	75 	%		70 	%		75 	%		70 	%	
Non-GAAP adjustments	3 	%		5 	%		3 	%		4 	%	
Non-GAAP gross margin	78 	%		75 	%		78 	%		74 	%	
								
Reconciliation of operating expenses								
GAAP research and development	$	59,003 	 		$	50,510 	 		$	119,424 	 		$	97,301 	 	
Less: Share-based compensation	(12,529)	 		(11,911)	 		(25,155)	 		(23,548)	 	
Less: Employer tax related to employee stock transactions	(700)	 		(931)	 		(1,587)	 		(2,223)	 	
Less: Acquisition-related expenses	(1,167)	 		(864)	 		(2,178)	 		(1,431)	 	
Non-GAAP research and development	$	44,607 	 		$	36,804 	 		$	90,504 	 		$	70,099 	 	
GAAP research and development as percentage of revenue	24 	%		26 	%		25 	%		26 	%	
Non-GAAP research and development as percentage of revenue	18 	%		19 	%		19 	%		19 	%	
								
GAAP sales and marketing	$	121,397 	 		$	94,746 	 		$	245,707 	 		$	186,447 	 	
Less: Share-based compensation	(17,573)	 		(13,575)	 		(34,132)	 		(25,973)	 	
Less: Employer tax related to employee stock transactions	(890)	 		(763)	 		(2,064)	 		(1,791)	 	
Less: Amortization of purchased intangibles	(671)	 		(658)	 		(1,370)	 		(1,235)	 	
Less: Acquisition-related expenses	(470)	 		(379)	 		(1,091)	 		(771)	 	
Non-GAAP sales and marketing	$	101,793 	 		$	79,371 	 		$	207,050 	 		$	156,677 	 	
GAAP sales and marketing as percentage of revenue	49 	%		49 	%		51 	%		50 	%	
Non-GAAP sales and marketing as percentage of revenue	41 	%		41 	%		43 	%		42 	%	
								
GAAP general and administrative	$	36,247 	 		$	43,019 	 		$	70,573 	 		$	74,271 	 	
Less: Share-based compensation	(8,423)	 		(13,019)	 		(16,261)	 		(20,704)	 	
Less: Employer tax related to employee stock transactions	(462)	 		(567)	 		(1,225)	 		(1,318)	 	
Less: Acquisition-related expenses	(134)	 		(4,358)	 		(238)	 		(4,989)	 	
Non-GAAP general and administrative	$	27,228 	 		$	25,075 	 		$	52,849 	 		$	47,260 	 	
GAAP general and administrative as percentage of revenue	15 	%		22 	%		15 	%		20 	%	
Non-GAAP general and administrative as percentage of revenue	11 	%		13 	%		11 	%		13 	%	
								
Reconciliation of operating income (loss) and operating margin								
GAAP operating loss	$	(31,498)	 		$	(51,362)	 		$	(72,781)	 		$	(95,275)	 	
Plus: Share-based compensation	43,712 	 		43,751 	 		85,794 	 		80,408 	 	
Plus: Employer tax related to employee stock transactions	2,344 	 		2,652 	 		5,593 	 		6,172 	 	
Plus: Amortization of purchased intangibles	2,288 	 		2,601 	 		5,094 	 		4,796 	 	
Plus: Acquisition-related expenses	1,837 	 		5,761 	 		3,714 	 		7,465 	 	
Plus: Amortization of share-based compensation capitalized in internal-use software	464 	 		413 	 		914 	 		833 	 	
Non-GAAP operating income	$	19,147 	 		$	3,816 	 		$	28,328 	 		$	4,399 	 	
GAAP operating margin	(13)	%		(26)	%		(15)	%		(25)	%	
Non-GAAP adjustments	21 	%		28 	%		21 	%		26 	%	
Non-GAAP operating margin	8 	%		2 	%		6 	%		1 	%	

																								
	Three Months Ended June 30,		Six Months Ended June 30,	
 	2020		2019		2020		2019	
Reconciliation of net income (loss)								
GAAP net loss	$	(64,656)	 		$	(54,541)	 		$	(107,440)	 		$	(99,261)	 	
Plus: Share-based compensation	43,712 	 		43,751 	 		85,794 	 		80,408 	 	
Plus: Employer tax related to employee stock transactions	2,344 	 		2,652 	 		5,593 	 		6,172 	 	
Plus: Amortization of purchased intangibles	2,288 	 		2,601 	 		5,094 	 		4,796 	 	
Plus: Acquisition-related expenses	1,837 	 		5,761 	 		3,714 	 		7,465 	 	
Plus: Amortization of share-based compensation capitalized in internal-use software	464 	 		413 	 		914 	 		833 	 	
Plus: Amortization of debt discount and issuance costs	7,487 	 		6,277 	 		14,036 	 		12,465 	 	
Plus: Loss on early extinguishment of debt	25,950 	 		— 	 		25,950 	 		— 	 	
Less: Income tax effects and adjustments	(3,063)	 		(985)	 		(4,854)	 		(1,896)	 	
Non-GAAP net income	$	16,363 	 		$	5,929 	 		$	28,801 	 		$	10,982 	 	
								
Reconciliation of net income (loss) per share, basic								
GAAP net loss per share, basic	$	(0.56)	 		$	(0.50)	 		$	(0.94)	 		$	(0.91)	 	
Non-GAAP adjustments to net loss	0.70 	 		0.55 	 		1.19 	 		1.01 	 	
Non-GAAP net income per share, basic	$	0.14 	 		$	0.05 	 		$	0.25 	 		$	0.10 	 	
								
Reconciliation of net income (loss) per share, diluted								
GAAP net loss per share, diluted	$	(0.56)	 		$	(0.50)	 		$	(0.94)	 		$	(0.91)	 	
Non-GAAP adjustments to net loss	0.70 	 		0.55 	 		1.18 	 		1.00 	 	
Non-GAAP net income per share, diluted	$	0.14 	 		$	0.05 	 		$	0.24 	 		$	0.09 	 	
								
Weighted-average shares used in GAAP per share calculation, basic and diluted	114,600 	 		109,986 	 		114,069 	 		109,312 	 	
								
Weighted-average shares used in non-GAAP per share calculation								
Basic	114,600 	 		109,986 	 		114,069 	 		109,312 	 	
Diluted	120,397 	 		119,678 	 		120,309 	 		118,339 	 	
								
Computation of free cash flow								
Net cash provided by (used in) operating activities	$	(50,711)	 		$	17,858 	 		$	(53,320)	 		$	36,827 	 	
Plus: repayment of convertible senior notes attributable to debt discount	38,637 	 		— 	 		38,637 	 		— 	 	
Less: purchases of property and equipment	(5,622)	 		(4,896)	 		(15,560)	 		(14,154)	 	
Less: internal-use software development costs	(3,225)	 		(1,753)	 		(6,283)	 		(2,966)	 	
Free cash flow	$	(20,921)	 		$	11,209 	 		$	(36,526)	 		$	19,707 	 	
								
Net cash provided by (used in) operating activities margin	(21)	%		9 	%		(11)	%		10 	%	
Non-GAAP adjustments	13 	%		(3)	%		3 	%		(5)	%	
Free cash flow margin	(8)	%		6 	%		(8)	%		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.

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

Amortization of Debt Discount and Issuance Costs: The imputed interest rates of the 2023 Notes and the 2025 Notes were approximately 5.26% and 5.00%, respectively. This is a result of the debt discounts recorded for the conversion features of the Notes that are required to be separately accounted for as equity, and debt issuance costs, which reduce the carrying value of the convertible debt instruments. The debt discounts are amortized as interest expense together with the issuance costs of the debt. The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and we believe the exclusion of this interest expense will provide for a more useful comparison of our operational performance in different periods.

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2020, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities, plus repayment of convertible senior notes attributable to debt discount, less purchases of property and equipment and internal-use software development costs. Free cash flow margin is calculated as free cash flow as a percentage of total revenue. Zendesk uses free cash flow, free cash flow margin, and other measures, to evaluate the ability of its operations to generate cash that is available for purposes other than capital expenditures and capitalized software development costs. Zendesk believes that information regarding free cash flow and free cash flow margin provides investors with an important perspective on the cash available to fund ongoing operations.

Zendesk has not reconciled free cash flow guidance to net cash from operating activities for the year ending December 31, 2020 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, 2020 is not available without unreasonable effort.

Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP operating margin beyond the fiscal quarter ending September 30, 2020 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. In the quarter ended March 31, 2020, Zendesk began to offer two new omnichannel subscriptions, the Zendesk Support Suite and the Zendesk Sell Suite, which provide access to multiple support solutions and sales solutions, respectively, through a single paid customer account. The number of Support Suite paid customer accounts are included in the number of paid customer accounts on Suite, which are included in the number of paid customer accounts on products other than Support and Chat and are not included in the number of paid customer accounts on Support or Chat. The number of Sell Suite paid customer accounts are included in the number of paid customer accounts on products other than Support and Chat and are not included in the number of paid customer accounts on Support or Chat. Each Duet paid customer account is included once in the number of paid customer accounts on Support and once in the number of paid customer accounts on products other than Support and Chat.

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’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 108,300 customers, as compared to the approximately 164,200 total paid customer accounts as of June 30, 2020.

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, its legacy Starter plan, Sell, Sunshine Conversations, its legacy Smooch product, free trials, or other free services into its measurement of dollar-based net expansion rate.

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

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

Source: Zendesk, Inc.

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

or

Media Contact:
Marissa Tree, +1 415-609-4510
press@zendesk.com

Exhibit 99.2 Shareholder Letter Q2 2020 July 30, 2020

 

Introduction Q2 2020 REVENUE In a diﬃcult and complex market environment, Zendesk delivered second-quarter revenue Q2 2020 Y/Y growth of 27% and improved GAAP and non-GAAP operating margins by 14 and 6 Mikkel Svane percentage points, respectively, year-over-year. CEO These results were driven by continued demand for our customer experience solutions, our ability to adapt quickly to a distributed business climate, and prudent expense management. Customer engagement has become the heartbeat During this crisis, we're investing in driving even of businesses as the global pandemic forces them faster time to value for our customers across our to change how they operate and communicate. In products, sales processes, and enablement, while a world that's more distributed and physically further building out our messaging solutions at a distant, the need to stay in touch with both time when connected customer conversations are customers and employees has become more critically important. essential, across more channels. Businesses require ﬂexible and easier-to-use software As always, we are prioritizing customer Elena Gomez solutions to help them navigate new priorities and relationships in everything that we do. Many of our CFO shifts in business models. customers face challenges in this disruptive economic environment. We are working with them To meet these needs, we're focusing on what we to adjust contract terms, sacriﬁcing potential do best: delivering fast time to value through short-term economics in favor of strengthening customer experience solutions that empower long-term relationships. These actions have organizations to communicate authentically and impacted and will continue to impact our seamlessly across channels. Organizations are near-term net expansion rate and overall ﬁnancial implementing our software within days rather than performance, including free cash ﬂow. We view weeks or months so they can quickly scale and this as a long-term investment in our customers meet fast-changing customer needs. that helps us both retain more business and create future expansion opportunities. Marc Cabi SVP, Finance, Strategy and IR Zendesk Shareholder Letter Q2 2020 - 2

 

We are fortunate to be in a position to help our customers while investing in our long-term growth initiatives. We have a strong balance sheet, a compelling subscription-based business model, and a large and diverse customer base of more than 160,000 customers across more than 160 countries and territories. We strengthened our ﬁnancial position in June with the completion of a convertible debt oﬀering, with part of the proceeds used to repurchase existing convertible debt. As of June 30, 2020, we had $1.3 billion of cash, cash equivalents, and marketable securities. Global economic conditions continue to be uncertain and volatile, and this may become a period of prolonged economic disruption. We have been disciplined in our business operations, are carefully prioritizing our investments, and prudently managing our expenses. While we expect near-term uncertainty, we believe we are in a solid position, operating eﬀectively, and making the right investments to emerge stronger from the pandemic and deliver long-term growth Partner story and scale. Tata Consultancy Services Tata Consultancy Services (TCS) and Zendesk announced their partnership in March, combining TCS’ vast, expert network of global customer experience consultants with Zendesk’s powerfully simple, enterprise-grade CRM solutions. The partnership is part of Zendesk’s strategy to expand its network of global system integrators to better reach and help prospects, customers, and partners. TCS is using its business intelligence and technical acumen to build strong delivery capabilities with a dedicated Zendesk practice. The companies are currently collaborating on building various industry-speciﬁc solutions powered by the Zendesk Sunshine platform. Zendesk Shareholder Letter Q2 2020 - 3

 

Summary ﬁnancial table Second quarter ﬁscal year 2020 (in thousands, except per share data) See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q2 2020 - 4

 

Current trends We’re seeing encouraging trends in demand for our customer experience solutions and the development of new use cases, although the economic climate and market uncertainty is undoubtedly creating signiﬁcant headwinds. Sales of our solutions exhibited solid growth year-over-year in the second quarter. However, contraction in the second quarter was signiﬁcantly elevated compared to prior periods as we worked with customers to address their business challenges. We saw solid market demand for our solutions as customers streamline communication and prioritize the use of analytics to improve the customer experience. In the second quarter, demand for the Zendesk Support Suite omnichannel bundle, our Explore data Customer story product, and Sunshine Conversations messaging platform were Children’s Council of San Francisco particularly strong. Support Suite features new messaging capabilities, supporting end customers’ need to feel Almost four months into California’s shelter-in-place order, the ﬂood “always-connected” and to allow for the personalized, asynchronous of inquiries received by Children’s Council of San Francisco is holding communication between an organization and its customer that is so steady. The nonproﬁt connects healthcare workers and vulnerable critical today. families with access to the lifelines they need—emergency child care, virtual workshops on stress management and family dynamics, and other vital online resources. Since March 2020, the nonproﬁt has ﬁelded a 10x increase in inquiries compared to the same period in 2019. Children’s Council uses Zendesk Support and Guide and maintains a multilingual help center with 80+ centralized articles that connect parents, child care professionals, and essential workers with critical information and expertise. With limited funding and resources, the nonproﬁt has relied on Zendesk’s ﬂexibility and ease of use to create additional content and help execute programs to families in need. For example, it used Support and Guide to coordinate the distribution of 160 play-and-learn activity kits, reaching 440 children across nearly every zip code in San Francisco. In support of the Black Lives Matter movement, it used Guide to create a home for materials about how to talk to children about race and social justice. Zendesk Shareholder Letter Q2 2020 - 5

 

Zendesk’s solutions are easy to use, agile, and allow organizations to quickly scale and see rapid time to value. These qualities allowed organizations to use our software in critical ways in their business: ● Many organizations transitioned to remote work or distance learning and needed better ways to communicate with employees or students ● Delivery, communications, entertainment, and gaming companies scaled quickly to meet rapidly rising customer volume ● Retailers accelerated their move to e-commerce, converted in-store representatives to online consultants, and/or implemented curbside pickup ● Consumer products companies engaged more directly with Customer story their customers and, in some circumstances, began selling DFO Global directly to customers ● Healthcare companies oﬀered more online information and DFO Global is a growing performance marketing agency that virtual assistance specializes in e-commerce. To keep costs down while scaling its ● Governmental and non-governmental agencies and support operation, the company is implementing Zendesk organizations leveraged new technologies to more eﬀectively Support, Chat, and Guide. Advanced self-service oﬀerings will provide help for communities in need. Zendesk became help DFO Global deﬂect many of its approximately 150K monthly FedRAMP authorized in the second quarter, which will allow inquiries and hasten agent onboarding. By working in a certain government agencies and their aﬃliates to evaluate consolidated omnichannel platform, agents will be able to using Zendesk’s customer service and engagement platform seamlessly converse with customers across channels to provide with conﬁdence that it meets the Low Impact a better, and scalable, customer experience. Software-as-a-Service (LI-SaaS) baseline of security standards. Given restrictions in the LI-SaaS standard veriﬁcation, not all agencies or use cases can be supported at this veriﬁcation level. Zendesk Shareholder Letter Q2 2020 - 6

 

Sales to small businesses and larger enterprise organizations were solid during the quarter. We believe that many of our initiatives to diﬀerentiate how we serve those customers are beginning to come to fruition and helped to maintain momentum despite the uncertainties brought on by COVID-19. However, sales to midsized customers experienced some headwinds as expansions slowed below historical patterns. We believe this was due to customer conservatism given the state of the macro environment. Our quick time to value and rapid deployment remains compelling for organizations of all sizes. With our small customers, we’re beneﬁting from continued improvements to our learn-try-and-buy and in-product adoption experiences. We have successfully hired both sales leaders and experienced Customer story enterprise sales professionals across all our regions, including the U.S. Holland & Barrett This has deepened our capabilities in selling to midsized and larger enterprise organizations. We’ve invested in account coverage and are Health and wellness giant Holland & Barrett is the largest of its continuing to mature our outbound selling approach. Our investment kind in Europe, operating over 1,300 shops in markets as diverse in our partner ecosystem has also led to a higher percentage of as Asia and the Middle East. It started using The Zendesk Suite in partner-involved bookings in the second quarter. 2018 to consolidate a number of legacy solutions and enable more eﬀortless conversations. As social distancing orders rolled out In light of the current environment, second-quarter sales were globally at the beginning of 2020, the company saw online orders particularly strong in our EMEA region, with sales growth levels spike as more customers remained at home. Ever nimble despite exceeding pre-COVID levels, although contraction was above its mammoth reach, the company decided to convert a number of historical trends. its in-store employees to online customer support agents to bolster support in this area. Its agility has ensured that the same While our sales trends have been encouraging, contraction is friendly faces that Holland & Barrett’s customers are used to elevated. Many customers face end-market demand challenges, seeing in stores are empowered to continue doing what they do especially in the travel, hospitality, and ridesharing industries. best: help customers get what they need to stay healthy and well. Additionally, more than 4,000 customers have reached out to us for ﬁnancial relief since the onset of COVID-19, which we have managed, where appropriate, through modiﬁcations to billings and/or subscription terms. The highest volume of these requests were received in March and April, with volume having slowed as we exited the quarter and in recent weeks. Zendesk Shareholder Letter Q2 2020 - 7

 

Investments The pandemic has changed the way people interact and do business. We expect many of the customer service trends that have emerged during this time to continue long term, such as demand for online and delivery services and the ability to work and serve customers remotely. We believe organizations also will continue to prioritize software investments that deliver quick time to value and agility. These are areas where Zendesk excels, and we’re making investments that build on these opportunities for the long term and position us for growth and strength as we come out of the current crisis. Our assumption is that the macro environment will remain challenging into 2021. We are ruthlessly prioritizing investments, being Customer story very prudent with our expenses, and instilling simplicity into Conrad everything we do. Forced to close all of its brick-and-mortar locations, German Some of our near-term investments include democratizing access to electronics retailer and B2B distributor Conrad has shifted its focus messaging. We want every company to be able to get up and running to improving e-commerce customer experiences during the on major social messaging channels and with native messaging built pandemic. It extended its marketplace team to add categories and into their apps and services. We are planning for deeper integration of onboard new sellers to its e-commerce site, making it easier for social and native messaging capabilities in our Support Suite, which customers to navigate its vast catalog of 5M+ products. This meant we launched earlier this year with a new agent workspace and initial Conrad also had to scale its digital support and worked with its two messaging features. BPO partners to ensure that the 200+ agents were prepared to continue to use Zendesk Support, Chat, and Guide as they transitioned to working from home. The company is implementing Zendesk Sell across its 150-person sales team to provide the data and tools needed to meet revenue targets. Conrad’s improvements have simpliﬁed, centralized, and enhanced its B2C and B2B customer experiences, helping it to emerge as a stronger, more resilient company that its customers can continue to depend on. Zendesk Shareholder Letter Q2 2020 - 8

 

We’ll continue to broaden our self-service capabilities and enhance customer onboarding to scale our sales to small customers. For midsized and large enterprise customers, we’ve recently made three key hires: SVP Sales of EMEA, SVP Sales of APAC, and COO of APAC. These leaders bring unique perspectives, operational rigor, and experience in enterprise-selling motions to the team. They are working to share best practices, extend the reach of our technical expertise, and foster alignment across all our regions. We are also continuing to build our partner ecosystem to extend our reach with customers. Customer story Sprout Social Sprout Social’s platform helps businesses manage their social media presence—especially important during a time when nearly all business is transacted online. The company started using Zendesk Support in 2012 and over time expanded its use to include Guide, Chat, Talk Partner Edition, and Explore to oﬀer 24/7 global support. With modern, ﬂexible tools already in place, the team was prepared to handle the initial surge in billing and account-related requests during the onset of COVID-19; and a number of strategic, data-driven projects had freed resources ahead of time. For example, one Explore-driven project led to a product improvement that resulted in a 36 percent reduction in ticket volume, and a 29 percent reduction in chat volume for one of its busiest support topics. Leveraging data in this way has allowed Sprout Social’s support team to remain stable amidst greater change. Zendesk Shareholder Letter Q2 2020 - 9

 

Customer story Customer story Packlink Madison Reed Packlink is an online shipping service oﬀering individuals and As barbers and salons closed during the pandemic, Madison Reed e-commerce merchants a fast and easy way of booking parcel resolved to help people do their own hair and achieve salon-quality deliveries with the world's top couriers. The company felt results. Faced with closing its brick-and-mortar locations and meeting COVID-19’s eﬀects early on, ﬁrst in Italy and then as the virus a sharp uptick in e-commerce demand, Madison Reed used Zendesk moved through Europe. Ticket volume increased by 138 percent to quickly convert in-store colorists to online colorists. The company’s and help center views by 80 percent. With Zendesk Support, speedy pivot has kept Madison Reed’s experts employed and enabled Guide, Gather, and Chat in place, the support team quickly the company to meet customers where they are: online, at home. transitioned to working from home and was able to swiftly onboard Madison Reed uses Zendesk Support, Chat, Talk, and Guide to keep new remote agents to help with the increased volume. So far, CSAT track of every conversation across each customer’s channel of choice. is up by six points and the team is answering 75 percent of requests in less than 24 hours. New customers easily ﬁnd answers about how the service works on its Guide-powered help center, reducing extra ticket volume. Packlink credits Zendesk’s ﬂexibility and ease of use with the team’s ability to scale, bolster its self-service, and adjust to its new working model. Zendesk Shareholder Letter Q2 2020 - 10

 

Scaling for the future Archana Agrawal, Board Member Zendesk is well-positioned to continue its leadership in customer experience innovation and deliver long-term growth. To help us achieve our objectives, we continue to add new talent and leadership to our company that have proven experience scaling businesses. On July 27, 2020, Archana Agrawal joined our board of directors, bringing nearly two decades of experience as a seasoned leader in the SaaS space. Archana has a unique background in bringing data science into enterprise marketing and customer acquisition. Archana has served as the Chief Marketing Oﬃcer of Airtable, a low-code app development platform, since March 2020 and as a member of the board of directors of MongoDB, Inc. since August 2019. Previously, Archana served as the Head of Enterprise and Cloud Marketing at Atlassian, an enterprise software company, from May 2016 to March 2020. Archana joined Atlassian in 2013 as Head of Data Science and Growth Marketing. Prior to that, Archana was at Ladders, Inc. from 2007 until 2013, where she led corporate-wide analytics. She began her career at the IBM Almaden Research Center. She holds an M.B.A. from Harvard Business School and received her M.S. in computer science from the University of Illinois at Urbana-Champaign. Archana Agrawal Board Member Zendesk Shareholder Letter Q2 2020 - 11

 

Guidance For the quarter ending September 30, 2020, we expect to report: We believe our ﬁnancial performance will continue to be impacted by ● Revenue in the range of $250 - 255 million uncertain and highly disrupted global economic conditions. Many ● GAAP operating income (loss) in the range of $(42) - (38) customers continue to face end-market demand challenges and we are million, which includes share-based compensation and seeing higher levels of contraction compared to historical trends. We related expenses of approximately $48 million, amortization continue to partner with customers who are undergoing business of purchased intangibles of approximately $2 million, and challenges to help them with modiﬁed invoicing and subscription acquisition-related expenses of approximately $2 million terms. These conditions and actions have impacted and will continue to ● Non-GAAP operating income (loss) in the range of $10 - 14 impact our near-term net expansion rate and overall ﬁnancial million, which excludes share-based compensation and performance, and have played a role in impacting our free cash ﬂow related expenses of approximately $48 million, amortization generation. We are being disciplined and prudent in how we manage of purchased intangibles of approximately $2 million, and our business. acquisition-related expenses of approximately $2 million ● Approximately 116 million weighted average shares Longer term, with improved macroeconomic conditions, we continue outstanding (basic) to believe the fundamentals of our business model will drive ● Approximately 122 million weighted average shares meaningful revenue growth. In particular, we believe that our customer outstanding (diluted) experience solutions will continue to lead in innovation and be more compelling relative to traditional large enterprise competitors. We will continue to innovate and improve our product oﬀering and how we operate and engage with consumers. These initiatives give us conﬁdence in our plan to deliver high revenue growth and operating leverage. Zendesk Shareholder Letter Q2 2020 - 12

 

We withdrew our annual guidance last quarter, and we have not We have not reconciled free cash ﬂow guidance to net cash from provided any updated forecast for free cash ﬂow, a ﬁnancial metric we operating activities for the full year 2020 because we do not provide have typically only provided on an annual basis. While we continue to guidance on the reconciling items between net cash from operating provide guidance on a quarterly basis only, after a full quarter to activities and free cash ﬂow, as a result of the uncertainty regarding, assess impact on free cash ﬂow, we do expect free cash ﬂow and the potential variability of, these items. The actual amount of such performance to be positive over the second half and that our full year reconciling items will have a signiﬁcant impact on our free cash ﬂow 2020 free cash ﬂow will be neutral to slightly positive as customer and, accordingly, a reconciliation of net cash from operating activities mitigation eﬀorts decrease and beneﬁts of ongoing expense to free cash ﬂow for the full year 2020 is not available without management are realized. This will be dependent on our ongoing unreasonable eﬀort. experience with bookings, renewals, and collections as well as our Additionally, Zendesk’s estimates of share-based compensation and ongoing eﬀorts at expense management. We are conﬁdent that the related expenses, amortization of purchased intangibles, prudent approach we are taking to management leaves us well acquisition-related expenses, weighted average shares outstanding, situated to continue our investments in growth given the strength of and free cash ﬂow in future periods assume, among other things, the our balance sheet. occurrence of no additional acquisitions, investments, or In 2015, we set the ambitious goal of achieving $1 billion in revenue restructurings and no further revisions to share-based compensation by 2020, and we are optimistic that despite the current economic and related expenses. disruption we will be able to reach this goal. There are many factors that can aﬀect our actual results, which are discussed below and in the risk factors in our ﬁlings with the Securities and Exchange Commission. Some of the key risk factors include global macroeconomic conditions, the impact of the novel coronavirus and resulting COVID-19 disease pandemic on our business, business conditions of customers in challenged industries, the eﬀect on demand for our products from customers, and the ability of our customers to manage the current severe economic downturn. Zendesk Shareholder Letter Q2 2020 - 13

 

Global diversity, equity, and inclusion Our commitments We believe that diversity, equity, and a culture of inclusion make Zendesk is committed to playing an active role in establishing a more Zendesk a more innovative and competitive company, and we value equitable society and laid out ﬁve ways we are going to address these the talent and contributions of our employees from all cultures and challenges as a company. backgrounds. The recent deaths of Black Americans at the hands of police stand against our values as a company and led us to make new commitments to bolster our own eﬀorts against discrimination and racism. 1 Supporting our employees We responded publicly following the death of George Floyd with a simple message: We can’t be silent. We followed those words with a 2 Empowering managers series of steps both internally and externally to commit to playing an active role in establishing a more equitable society, and to expand our Formalizing a policy own diversity, equity, and inclusion eﬀorts. We hosted listening and 3 discussion sessions with employees globally, called empathy circles, to learn, grieve, and heal together. We made donations to the 4 Investing in global diversity, equity, and inclusion Southern Poverty Law Center and National Association for the Advancement of Colored People to combat racism and discrimination more broadly. And we began an initiative to embed diversity, equity, 5 Financial assistance and inclusion into how we hire, develop, and retain employees. During the quarter, we continued our tradition of celebrating Pride month, and for the ﬁrst time in our company’s history, we celebrated Mental Health Awareness month and Memorial Day by launching a series of video interviews with members of our Global Veterans Network Employee Resource Group, who shared how they were able to emerge from past periods of isolation with resilience. We also created a unique day of educational experiences on Juneteenth by hosting a series of virtual events and learning engagements where employees could share their intersectional experiences and learn more about diverse communities. Zendesk Shareholder Letter Q2 2020 - 14

 

Timeline Note: Timeline not to scale. *Annual revenue run rate was calculated by multiplying our revenue for the most recent applicable quarter by four. For more information about our revenue run rate, please see the “About Operating Metrics” section at the back of this letter. Zendesk Shareholder Letter Q2 2020 - 15

 

Conversica Customers Accelerating revenue with Intelligent Virtual Assistants Among the customers to join or expand with us recently are: Canadian Red Cross A Canadian non-proﬁt DFO Global organization A performance marketing company Cargas Systems A ﬁnancial software and Fred Hutchinson Cancer consulting company Research Center A cancer research center Children’s Council Holland & Barrett of San Francisco A health and wellness retailer A non-proﬁt organization Collective Health Latitude Financial Simpliﬁes employee healthcare Services Australia for U.S. companies with A digital payments and technology solutions that make ﬁnance company healthcare work for everyone Conrad Libbey A German retailer of A glassware company electronic products Zendesk Shareholder Letter Q2 2020 - 16

 

Customers Among the customers to join or expand with us recently are: Madison Reed Personio A hair care and hair color brand An HR operating system Marley Spoon Salling Group A meal delivery company A Denmark-based retail group NTT Data Intramart Sprout Social A business process platform An industry-leading provider of social media management software Packlink SPVIE Assurances An online shipping service An insurance solution company Penn National Gaming Turo A gaming and racing properties A car sharing marketplace owner and operator Zendesk Shareholder Letter Q2 2020 - 17

 

We’re working our magic June 2020 Gartner Magic Quadrant for the CRM Customer Engagement Center In June 2020, our eﬀorts were again Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only recognized by Gartner. For the ﬁfth year those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and should not be construed as statements of fact. Gartner disclaims all in a row, Gartner Inc. named Zendesk a warranties, expressed or implied, with respect to this research, including any Leader in the Magic Quadrant for the warranties of merchantability or ﬁtness for a particular purpose. The Gartner content described herein, (the "Gartner Content") represent(s) research opinion or viewpoints published, as part of a syndicated CRM Customer Engagement Center. subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Gartner Content speaks as of its original publication date (and not as of the date of this Shareholder Letter) and the opinions expressed in the Gartner Content are subject to change without notice. Zendesk Shareholder Letter Q2 2020 - 18

 

In June 2020, Frost & Sullivan named Zendesk as a recipient of its 2020 North American Omnichannel Digital Customer Engagement Competitive Strategy Innovation and Leadership award. In July 2020, Frost & Sullivan recognized Zendesk with the 2020 North American Product Leadership Award for its Sell sales force automation (SFA) solution. Zendesk Shareholder Letter Q2 2020 - 19

 

Operating metrics % of total quarter-ending Support ARR from paid customer accounts with 100+ Support agents A key metric we use to gauge our penetration within larger organizations is represented by the percentage of Support ARR generated by customers with 100 or more Support agents. That percentage was approximately 43% at the end of the second quarter Q2 2020 of 2020, compared to 43% at the end of the ﬁrst quarter of 2020 100+ agents % and 42% as reported at the end of the second quarter of 2019. 43 Dollar-based net expansion rate Our dollar-based net expansion rate, which we use to quantify our annual expansion within existing customers, was 111% at the end of the second quarter, compared to 115% at the end of the ﬁrst quarter of 2020. Our dollar-based net expansion rate was 117% at the end of the second quarter of 2019. Consistent with expectations in prior quarters, we believe a healthy dollar-based net expansion rate for Zendesk in a normal market environment is 110% - 120%. Zendesk Shareholder Letter Q2 2020 - 20

 

We believe an indicator of our midsized and large 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 large enterprise customers and deliver more complex and strategic use cases, we typically enter into contracts with longer subscription terms. In the second quarter of 2020, RPO growth and the mix of long-term and short-term RPO were impacted by a reduction in average subscription term driven by customer conservatism in light of economic conditions and the elevated churn and contraction we experienced in the quarter. Remaining performance obligations (RPO) in millions Short-term RPO Long-term RPO Zendesk Shareholder Letter Q2 2020 - 21

 

Select ﬁnancial measures (in millions) Quarter-over-quarter comparisons (q/q) are for the three months ended June 30, 2020, compared to the three months ended March 31, 2020. Year-over-year comparisons (y/y) are for the three months ended June 30, 2020, compared to the three months ended June 30, 2019. See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q2 2020 - 22

 

Condensed consolidated statements of operations (in thousands, except per share data; unaudited) Zendesk Shareholder Letter Q2 2020 - 23

 

Condensed consolidated balance sheets (in thousands, except par value; unaudited) Zendesk Shareholder Letter Q2 2020 - 24

 

Condensed consolidated statements of cash ﬂows (in thousands; unaudited) Zendesk Shareholder Letter Q2 2020 - 25

 

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 Q2 2020 - 26

 

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 Q2 2020 - 27

 

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 Q2 2020 - 28

 

About Zendesk ended March 31, 2020. Further information on potential risks that could aﬀect actual results will be included in the subsequent periodic and current reports and other ﬁlings that Zendesk makes Zendesk is a service-ﬁrst CRM company that builds support, sales, and customer engagement with the Securities and Exchange Commission from time to time, including its Quarterly Report on software designed to foster better customer relationships. From large enterprises to startups, we Form 10-Q for the quarter ended June 30, 2020. believe that powerful, innovative customer experiences should be within reach for every company, Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as no matter the size, industry or ambition. Zendesk serves more than 160,000 customers across a of the date such statements are made. Zendesk undertakes no obligation to update any multitude of industries in over 30 languages. Zendesk is headquartered in San Francisco, and forward-looking statements made in this shareholder letter to reﬂect events or circumstances operates oﬃces worldwide. Learn more at www.zendesk.com. after the date of this shareholder letter or to reﬂect new information or the occurrence of Forward-looking statements unanticipated events, except as required by law. About non-GAAP ﬁnancial measures This shareholder letter contains forward-looking statements, including, among other things, statements regarding Zendesk’s future ﬁnancial performance, its continued investment to grow its To provide investors and others with additional information regarding Zendesk’s results, the business, and progress toward its long-term ﬁnancial objectives. Words such as “may,” “should,” following non-GAAP ﬁnancial measures were disclosed: non-GAAP gross proﬁt and gross “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating expectation or intent regarding Zendesk’s ﬁnancial results, operations, and other matters are margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, intended to identify forward-looking statements. You should not rely upon forward-looking free cash ﬂow, and free cash ﬂow margin. statements as predictions of future events. Speciﬁcally, Zendesk excludes the following from its historical and prospective non-GAAP The outcome of the events described in these forward-looking statements is subject to known and ﬁnancial measures, as applicable: unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to diﬀer materially, including (i) the eﬀect of uncertainties related to Share-Based Compensation and Amortization of Share-Based Compensation Capitalized in the COVID-19 pandemic on U.S. and global markets, Zendesk’s business, operations, revenue results, Internal-use Software: Zendesk utilizes share-based compensation to attract and retain cash ﬂow, operating expenses, demand for its solutions, sales cycles, customer retention, and its employees. It is principally aimed at aligning their interests with those of its stockholders and at customers' businesses; (ii) other adverse changes in general economic or market conditions; (iii) long-term retention, rather than to address operational performance for any particular period. As Zendesk’s ability to adapt its products to changing market dynamics and customer preferences or a result, share-based compensation expenses vary for reasons that are generally unrelated to achieve increased market acceptance of its products; (iv) Zendesk’s ability to eﬀectively expand its ﬁnancial and operational performance in any particular period. sales capabilities; (v) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; (vi) Zendesk’s expectation that the future growth rate of its Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer revenues will decline, and that, as its costs increase, Zendesk may not be able to generate suﬃcient taxes related to its employee stock transactions as an expense that is dependent on its stock revenues to achieve or sustain proﬁtability; (vii) the intensely competitive market in which Zendesk price, employee exercise and other award disposition activity, and other factors that are beyond operates and the diﬃculty that Zendesk may have in competing eﬀectively; (viii) Zendesk’s ability to Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for eﬀectively market and sell its products to larger enterprises; (ix) Zendesk’s ability to introduce and reasons that are generally unrelated to ﬁnancial and operational performance in any particular market new products and to support its products on a shared services platform; (x) Zendesk’s ability period. to maintain and develop its strategic relationships with third parties; (xi) Zendesk’s ability to prevent, mitigate, and respond eﬀectively to both historical and future data breaches and to securely maintain Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible customer data; (xii) Zendesk’s ability to eﬀectively manage its growth and organizational change, assets, including the amortization of the cost associated with an acquired entity’s developed including its international expansion strategy; (xiii) Zendesk’s ability to integrate acquired businesses technology, as items arising from pre-acquisition activities determined at the time of an and technologies successfully or achieve the expected beneﬁts of such acquisitions; (xiv) Zendesk's acquisition. While these intangible assets are evaluated for impairment regularly, amortization of ability to comply with privacy and data security regulations; (xv) 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; (xvi) the any particular period. development of the market for software as a service business software applications; (xvii) real or perceived errors, failures, or bugs in its products; and (xviii) Zendesk’s ability to accurately forecast Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction 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, as The forward-looking statements contained in this shareholder letter are also subject to additional 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 Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter assist in the comparison of operational performance in diﬀerent periods which may or may not include such expenses. Zendesk Shareholder Letter Q2 2020 - 29

 

Loss on Early Extinguishment of Debt: In March 2018, Zendesk issued $575 million aggregate The actual amount of such reconciling items will have a signiﬁcant impact on Zendesk’s free cash principal amount of 0.25% convertible senior notes due in 2023 (the “2023 Notes”). In June 2020, ﬂow and, accordingly, a reconciliation of net cash from operating activities to free cash ﬂow for Zendesk issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due the year ending December 31, 2020 is not available without unreasonable eﬀort. in 2025 (the “2025 Notes”). In connection with the oﬀering of the 2025 Notes, Zendesk used $618 million of the net proceeds from the oﬀering of the 2025 Notes to repurchase $426 million Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP aggregate principal amount of the 2023 Notes in cash through individual privately negotiated operating margin beyond the ﬁscal quarter ending September 30, 2020 because Zendesk does transactions (the “2023 Notes Partial Repurchase”). Of the $618 million consideration, $393 not provide guidance on the reconciling items between GAAP operating margin and non-GAAP million and $225 million were allocated to the debt and equity components, respectively. As of operating margin for such periods, as a result of the uncertainty regarding, and the potential the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Notes Partial variability of, these items. The actual amount of such reconciling items will have a signiﬁcant Repurchase, net of unamortized debt discount and issuance costs, was $367 million. The 2023 impact on Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP Notes Partial Repurchase resulted in a $26 million loss on early debt extinguishment. As of June operating margin to non-GAAP operating margin guidance for such periods is not available 30, 2020, $149 million of principal remains outstanding on the 2023 Notes. The loss on early without unreasonable eﬀort. extinguishment of debt is a non-cash item, and we believe the exclusion of this expense will Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include provide for a more useful comparison of our operational performance in diﬀerent periods. adjustments to its expectations for its GAAP gross margin that exclude share-based Amortization of Debt Discount and Issuance Costs: The imputed interest rates of the 2023 compensation and related expenses in Zendesk’s cost of revenue, amortization of purchased Notes and the 2025 Notes were approximately 5.26% and 5.00%, respectively. This is a result of intangibles primarily related to developed technology, and acquisition-related expenses. The the debt discounts recorded for the conversion features of the Notes that are required to be share-based compensation and related expenses excluded due to such adjustments are primarily separately accounted for as equity, and debt issuance costs, which reduce the carrying value of comprised of the share-based compensation and related expenses for employees associated the convertible debt instruments. The debt discounts are amortized as interest expense together with Zendesk’s infrastructure and customer experience organization. with the issuance costs of the debt. The expense for the amortization of debt discount and debt Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross issuance costs is a non-cash item, and we believe the exclusion of this interest expense will margin for future periods because Zendesk does not provide guidance on the reconciling items provide for a more useful comparison of our operational performance in diﬀerent periods. between GAAP gross margin and non-GAAP gross margin, as a result of the uncertainty Income Tax Eﬀects: Zendesk utilizes a ﬁxed long-term projected tax rate in its computation of regarding, and the potential variability of, these items. The actual amount of such reconciling non-GAAP income tax eﬀects to provide better consistency across interim reporting periods. In items will have a signiﬁcant impact on Zendesk’s non-GAAP gross margin and, accordingly, a projecting this long-term non-GAAP tax rate, Zendesk utilizes a ﬁnancial projection that excludes reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not the direct impact of other non-GAAP adjustments. The projected rate considers other factors such available without unreasonable eﬀort. 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 2020, 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 Zendesk provides disclosures regarding its free cash ﬂow, which is deﬁned as net cash from ﬁnancial measures are useful because they allow for greater transparency with respect to key operating activities, plus repayment of convertible senior notes attributable to debt discount, less metrics used by management in its ﬁnancial and operational decision-making. This allows purchases of property and equipment and internal-use software development costs. Free cash investors and others to better understand and evaluate Zendesk’s operating results and future ﬂow margin is calculated as free cash ﬂow as a percentage of total revenue. Zendesk uses free prospects in the same manner as management. cash ﬂow, free cash ﬂow margin, and other measures, to evaluate the ability of its operations to Zendesk’s management believes it is useful for itself and investors to review, as applicable, both generate cash that is available for purposes other than capital expenditures and capitalized GAAP information that may include items such as share-based compensation and related software development costs. Zendesk believes that information regarding free cash ﬂow and free expenses, amortization of debt discount and issuance costs, amortization of purchased cash ﬂow margin provides investors with an important perspective on the cash available to fund intangibles, and acquisition-related expenses, and the non-GAAP measures that exclude such ongoing operations. 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. year ending December 31, 2020 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. Zendesk Shareholder Letter Q2 2020 - 30

 

When Zendesk uses such a non-GAAP ﬁnancial measure with respect to historical periods, it The number of Sell Suite paid customer accounts are included in the number of paid customer provides a reconciliation of the non-GAAP ﬁnancial measure to the most closely comparable accounts on products other than Support and Chat and are not included in the number of paid GAAP ﬁnancial measure. When Zendesk uses such a non-GAAP ﬁnancial measure in a customer accounts on Support or Chat. Each Duet paid customer account is included once in the forward-looking manner for future periods, and a reconciliation is not determinable without number of paid customer accounts on Support and once in the number of paid customer unreasonable eﬀort, Zendesk provides the reconciling information that is determinable without accounts on products other than Support and Chat. 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 Existing customers may also expand their utilization of Zendesk’s products by adding new are encouraged to review the related GAAP ﬁnancial measures and the reconciliation of these accounts and a single consolidated organization or customer may have multiple accounts across non-GAAP ﬁnancial measures to their most directly comparable GAAP ﬁnancial measure as each of Zendesk’s products to service separate subsidiaries, divisions, or work processes. Other detailed above. than usage of Zendesk’s products through its omnichannel subscription oﬀering, each of these accounts is also treated as a separate paid customer account. Non-GAAP gross margin for the ﬁrst quarter of 2020 excludes $5.9 million in share-based compensation and related expenses (including $0.5 million of amortization of share-based Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase compensation capitalized in internal-use software and $0.4 million of employer tax related to revenue across its existing customer base through expansion of authorized agents associated employee stock transactions), $2.1 million of amortization of purchased intangibles, and $0.1 with a paid customer account, upgrades in subscription plans, and the purchase of additional million of acquisition-related expenses. Non-GAAP operating income and non-GAAP operating products as oﬀset by churn, contraction in authorized agents associated with a paid customer margin for the ﬁrst quarter of 2020 exclude $45.8 million in share-based compensation and account, and downgrades in subscription plans. Zendesk’s dollar-based net expansion rate is related expenses (including $3.3 million of employer tax related to employee stock transactions based upon annual recurring revenue for a set of paid customer accounts on its products. and $0.5 million of amortization of share-based compensation capitalized in internal-use Zendesk determines the annual recurring revenue value of a contract by multiplying the monthly software), $1.9 million of acquisition-related expenses, and $2.8 million of amortization of recurring revenue for such contract by twelve. purchased intangibles. Monthly recurring revenue for a paid customer account is a legal and contractual determination Free cash ﬂow for the ﬁrst quarter of 2020 includes cash used for purchases of property and made by assessing the contractual terms of each paid customer account, as of the date of equipment of $9.9 million and internal-use software development costs of $3.1 million. 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 About operating metrics 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 Zendesk reviews a number of operating metrics to evaluate its business, measure performance, revenue that we expect to generate from ﬁxed-term contracts that are each associated with an identify trends, formulate business plans, and make strategic decisions. These include the number existing account, are solely for additional temporary agents, and are not contemplated to last for of paid customer accounts on Zendesk Support, Zendesk Chat, and its other products, the duration of the primary contract for the existing account from our determination of monthly dollar-based net expansion rate, annual recurring revenue represented by its churned customers, recurring revenue. Monthly recurring revenue is not determined by reference to historical and the percentage of its annual recurring revenue from Support originating from customers with revenue, deferred revenue, or any other GAAP ﬁnancial measure over any period. It is 100 or more agents on Support. forward-looking and contractually derived as of the date of determination. Zendesk deﬁnes the number of paid customer accounts at the end of any particular period as the Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free trials, or contraction and churn by Zendesk’s base revenue. Zendesk deﬁnes its base revenue as the other free services, (ii) the number of accounts using Chat, exclusive of free trials or other free aggregate annual recurring revenue across its products for customers with paid customer services, and (iii) the number of accounts on all of its other products, exclusive of free trials and accounts as of the date one year prior to the date of calculation. Zendesk deﬁnes the retained other free services, each as of the end of the period and as identiﬁed by a unique account revenue net of contraction and churn as the aggregate annual recurring revenue across its identiﬁer. In the quarter ended June 30, 2018, Zendesk began to oﬀer an omnichannel products for the same customer base included in the measure of base revenue at the end of the subscription which provides access to multiple products through a single paid customer account, annual period being measured. The dollar-based net expansion rate is also adjusted to eliminate Zendesk Suite, and in the quarter ended June 30, 2019, Zendesk began to oﬀer a subscription the eﬀect of certain activities that Zendesk identiﬁes involving the consolidation of customer which provides access to Sell and Support through a single paid customer account, Zendesk accounts or the split of a single paid customer account into multiple paid customer accounts. In Duet. In the quarter ended March 31, 2020, Zendesk began to oﬀer two new omnichannel addition, the dollar-based net expansion rate is adjusted to include paid customer accounts in subscriptions, the Zendesk Support Suite and the Zendesk Sell Suite, which provide access to the customer base used to determine retained revenue net of contraction and churn that share multiple support solutions and sales solutions, respectively, through a single paid customer common corporate information with customers in the customer base that are used to determine account. The number of Support Suite paid customer accounts are included in the number of paid the base revenue. Giving eﬀect to this consolidation results in Zendesk’s dollar-based net customer accounts on Suite, which are included in the number of paid customer accounts on expansion rate being calculated across approximately 108,300 customers, as compared to the products other than Support and Chat and are not included in the number of paid customer approximately 164,200 total paid customer accounts as of June 30, 2020. accounts on Support or Chat. Zendesk Shareholder Letter Q2 2020 - 31

 

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, its legacy Starter plan, Sell, Sunshine Conversations, its legacy Smooch product, free trials, or other free services into its measurement of dollar-based net expansion rate. For a more detailed description of how Zendesk calculates its dollar-based net expansion rate, please refer to Zendesk’s periodic reports ﬁled with the Securities and Exchange Commission. Zendesk’s percentage of annual recurring revenue 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 most recent applicable quarter. Zendesk annualizes such results to estimate its annual revenue run rate by multiplying the revenue for its most recent applicable quarter by four. Zendesk’s annual revenue run rate is not a comprehensive statement of its ﬁnancial results for such period and should not be viewed as a substitute for full annual or interim ﬁnancial statements prepared in accordance with GAAP. In addition, Zendesk’s revenue for the most recent applicable quarter or annual revenue run rate are not necessarily indicative of the results to be achieved in any future period. Zendesk Shareholder Letter Q2 2020 - 32

 

Customer metrics June 30, September 30, December 31, March 31, June 30, 2019 2019 2019 2020 2020 Paid customer accounts on 77,100 79,600 81,200 82,600 84,100 Zendesk Support (approx.) + Paid customer accounts 44,300 43,600 42,600 41,800 40,600 on Zendesk Chat (approx.) + Paid customer accounts on other Zendesk products 27,500 30,600 33,200 36,100 39,400 (approx.) = Approximate number of 149,000 153,800 157,000 160,600 164,200 paid customer accounts* *Does not add up to total due to rounding Geographic information Contact Revenue mix by geography Investor contact Karen Sansot Q2’20 +1 415-852-3877 ir@zendesk.com United States 52.9% EMEA 27.9% Media contact APAC 10.8% Marissa Tree +1 415-609-4510 Other 8.4% press@zendesk.com Source: Zendesk, Inc. Zendesk Shareholder Letter Q2 2020 - 33

 

Exhibit 99.3 THE LOG Q2 2020

 

We kept our eye on the horizon in choppy waters

 

Q2 revenue $246.7M

 

Q2 Y/Y revenue growth 27%

 

And helped our customers navigate their way, too

 

They charted new courses for their own customers

 

Transitioned over to e-commerce and scaled digital support

 

Transitioned over Turnedto e-commerce hair colorists and scaledinto virtual digital colorists support

 

Transitioned over to e-commerceManaged tenfold and scaledincrease digital in inquiriessupport to help healthcare workers and families

 

Our fleet kept getting stronger

 

With over 160,000 paid customer accounts. Ahoy. Ahoy.

 

Thanks for all your trust. We’re humbled by the support.

 

Let’s get through this storm together. And wear a mask.