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

	

FORM 8-K

	
 	
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 27, 2016

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

	

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

	
			
1019 Market Street
San Francisco, California	 	94103	
(Address of Principal Executive Offices)	 	(Zip Code)	
Registrant’s Telephone Number, Including Area Code: 415.418.7506
______________________________________
(Former Name or Former Address, if Changed Since Last Report)

	

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instructions A.2. below):
		
¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)	
		
¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)	
		
¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))	
		
¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))	

	

 
 
Item 2.02. Results of Operations and Financial Condition.

On November 1, 2016, Zendesk, Inc. (the “Company”) issued a press release announcing its results for the quarter ended September 30, 2016. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference. The Company also issued a letter to its shareholders announcing its financial results for the quarter ended September 30, 2016 (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 October 27, 2016, the Board of Directors of the Company (the “Board”) appointed Adrian McDermott, age 47, as its President of Products. Mr. McDermott served as the Company’s Senior Vice President, Product Development, from July 2010 until his appointment as President of Products. Mr. McDermott holds a B.Sc. in computer science from De Montfort University.

There are no arrangements or understandings between Mr. McDermott and any other persons pursuant to which he was selected as President of Products. There are also no family relationships between Mr. McDermott and any director or executive officer of the Company and he has no direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.

Item 5.03. Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

On October 27, 2016, the Board approved an amendment and restatement of the Company’s Amended and Restated By-laws, effectively immediately. The Company’s Amended and Restated By-laws were amended and restated to, among other things, (1) clarify the roles and responsibilities of the Chief Executive Officer of the Company with respect to certain matters, and (2) expressly permit the appointment of more than one President of the Company, as determined by the Board in its discretion.

The foregoing summary of the Amended and Restated By-laws is qualified in its entirety by reference to, and should be read in conjunction with, the complete text of the Amended and Restated By-laws which is attached as Exhibit 3.1 to this Current Report on Form 8-K and incorporated herein by reference.

Item 7.01. Regulation FD Disclosure.
On November 1, 2016, 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. This graphic will also be available for viewing at the Company’s investor website, investor.zendesk.com, although the Company reserves the right to discontinue that availability at any time.
 
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

3.1      Amended and Restated By-laws of Zendesk, Inc., adopted October 27, 2016.
99.1    Press Release issued by Zendesk, Inc., dated November 1, 2016.
99.2    Letter to Shareholders, dated November 1, 2016.
99.3    November 2016 Update, dated November 1, 2016.

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	
 	 	Elena Gomez	
 	 	Chief Financial Officer
(Principal Financial and Accounting Officer)	
November 1, 2016

Exhibit Index

	
		
Exhibit No.	Description	
3.1	Amended and Restated By-laws of Zendesk, Inc., adopted October 27, 2016.	
99.1	Press Release issued by Zendesk, Inc., dated November 1, 2016.	
99.2	Letter to Shareholders, dated November 1, 2016.	
99.3	November 2016 Update, dated November 1, 2016.	

Exhibit 3.1
AMENDED AND RESTATED
BY-LAWS
OF
ZENDESK, INC.
(the “Corporation”)
Adopted October 27, 2016
ARTICLE I
Stockholders
SECTION 1.      Annual Meeting . The annual meeting of stockholders of the Corporation (any such meeting being referred to in these By-laws as an “Annual Meeting”) shall be held at the hour, date and place within or without the United States which is fixed by the Board of Directors, which time, date and place may subsequently be changed at any time by vote of the Board of Directors. If no Annual Meeting has been held for a period of thirteen (13) months after the Corporation’s last Annual Meeting, a special meeting in lieu thereof may be held, and such special meeting shall have, for the purposes of these By-laws or otherwise, all the force and effect of an Annual Meeting. Any and all references hereafter in these By-laws to an Annual Meeting or Annual Meetings shall be deemed to also refer to any special meeting(s) in lieu thereof.
SECTION 2.      Notice of Stockholder Business and Nominations .
(a)      Annual Meetings of Stockholders .
(1)      Nominations of persons for election to the Board of Directors of the Corporation and the proposal of other business to be considered by the stockholders may be brought before an Annual Meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-law, who is entitled to vote at the meeting, who is present (in person or by proxy) at the meeting and who complies with the notice procedures set forth in this By-law as to such nomination or business. For the avoidance of doubt, the foregoing clause (ii) shall be the exclusive means for a stockholder to bring nominations or business properly before an Annual Meeting (other than matters properly brought under Rule 14a-8 (or any successor rule) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and such stockholder must comply with the notice and other procedures set forth in Article I, Section 2(a)(2) and (3) of this By-law to bring such nominations or business properly before an Annual Meeting. In addition to the other requirements set forth in this By-law, for any proposal of business to be considered at an

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Annual Meeting, it must be a proper subject for action by stockholders of the Corporation under Delaware law.
(2)      For nominations or other business to be properly brought before an Annual Meeting by a stockholder pursuant to clause (ii) of Article I, Section 2(a)(1) of this By-law, the stockholder must (i) have given Timely Notice (as defined below) thereof in writing to the Secretary of the Corporation, (ii) have provided any updates or supplements to such notice at the times and in the forms required by this By-law and (iii) together with the beneficial owner(s), if any, on whose behalf the nomination or business proposal is made, have acted in accordance with the representations set forth in the Solicitation Statement (as defined below) required by this By-law. To be timely, a stockholder’s written notice shall be received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the one-year anniversary of the preceding year’s Annual Meeting; provided , however , that in the event the Annual Meeting is first convened more than thirty (30) days before or more than sixty (60) days after such anniversary date, or if no Annual Meeting were held in the preceding year, notice by the stockholder to be timely must be received by the Secretary of the Corporation not later than the close of business on the later of the ninetieth (90th) day prior to the scheduled date of such Annual Meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made (such notice within such time periods shall be referred to as “Timely Notice”). Notwithstanding anything to the contrary provided herein, for the first Annual Meeting following the initial public offering of common stock of the Corporation, a stockholder’s notice shall be timely if received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of the ninetieth (90th) day prior to the scheduled date of such Annual Meeting or the tenth (10th) day following the day on which public announcement of the date of such Annual Meeting is first made or sent by the Corporation. Such stockholder’s Timely Notice shall set forth:
(A)      as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected);
(B)      as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest in such business of each Proposing Person (as defined below);
(C)      (i) the name and address of the stockholder giving the notice, as they appear on the Corporation’s books, and the names and addresses of the other Proposing Persons (if any) and (ii) as to each Proposing Person, the following

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information: (a) the class or series and number of all shares of capital stock of the Corporation which are, directly or indirectly, owned beneficially or of record by such Proposing Person or any of its affiliates or associates (as such terms are defined in Rule 12b-2 promulgated under the Exchange Act), including any shares of any class or series of capital stock of the Corporation as to which such Proposing Person or any of its affiliates or associates has a right to acquire beneficial ownership at any time in the future; (b) all Synthetic Equity Interests (as defined below) in which such Proposing Person or any of its affiliates or associates, directly or indirectly, holds an interest including a description of the material terms of each such Synthetic Equity Interest, including without limitation, identification of the counterparty to each such Synthetic Equity Interest and disclosure, for each such Synthetic Equity Interest, as to (x) whether or not such Synthetic Equity Interest conveys any voting rights, directly or indirectly, in such shares to such Proposing Person, (y) whether or not such Synthetic Equity Interest is required to be, or is capable of being, settled through delivery of such shares and (z) whether or not such Proposing Person and/or, to the extent known, the counterparty to such Synthetic Equity Interest has entered into other transactions that hedge or mitigate the economic effect of such Synthetic Equity Interest; (c) any proxy (other than a revocable proxy given in response to a public proxy solicitation made pursuant to, and in accordance with, the Exchange Act), agreement, arrangement, understanding or relationship pursuant to which such Proposing Person has or shares a right to, directly or indirectly, vote any shares of any class or series of capital stock of the Corporation; (d) any rights to dividends or other distributions on the shares of any class or series of capital stock of the Corporation, directly or indirectly, owned beneficially by such Proposing Person that are separated or separable from the underlying shares of the Corporation; and (e) any performance-related fees (other than an asset based fee) that such Proposing Person, directly or indirectly, is entitled to based on any increase or decrease in the value of shares of any class or series of capital stock of the Corporation or any Synthetic Equity Interests (the disclosures to be made pursuant to the foregoing clauses (a) through (e) are referred to, collectively, as “Material Ownership Interests”) and (iii) a description of the material terms of all agreements, arrangements or understandings (whether or not in writing) entered into by any Proposing Person or any of its affiliates or associates with any other person for the purpose of acquiring, holding, disposing or voting of any shares of any class or series of capital stock of the Corporation;
(D)      (i) a description of all agreements, arrangements or understandings by and among any of the Proposing Persons, or by and among any Proposing Persons and any other person (including with any proposed nominee(s)), pertaining to the nomination(s) or other business proposed to be brought before the meeting of stockholders (which description shall identify the name of each other person who is party to such an agreement, arrangement or understanding), and (ii) identification of the names and addresses of other stockholders (including beneficial owners) known by any of the Proposing Persons to support such nominations or other business proposal(s), and to the extent known the class and number of all shares of the

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Corporation’s capital stock owned beneficially or of record by such other stockholder(s) or other beneficial owner(s); and
(E)      a statement whether or not the stockholder giving the notice and/or the other Proposing Person(s), if any, will deliver a proxy statement and form of proxy to holders of, in the case of a business proposal, at least the percentage of voting power of all of the shares of capital stock of the Corporation required under applicable law to approve the proposal or, in the case of a nomination or nominations, at least the percentage of voting power of all of the shares of capital stock of the Corporation reasonably believed by such Proposing Person to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder (such statement, the “Solicitation Statement”).
For purposes of this Article I of these By-laws, the term “Proposing Person” shall mean the following persons: (i) the stockholder of record providing the notice of nominations or business proposed to be brought before a stockholders’ meeting, and (ii) the beneficial owner(s), if different, on whose behalf the nominations or business proposed to be brought before a stockholders’ meeting is made. For purposes of this Section 2 of Article I of these By-laws, the term “Synthetic Equity Interest” shall mean any transaction, agreement or arrangement (or series of transactions, agreements or arrangements), including, without limitation, any derivative, swap, hedge, repurchase or so-called “stock borrowing” agreement or arrangement, the purpose or effect of which is to, directly or indirectly: (a) give a person or entity economic benefit and/or risk similar to ownership of shares of any class or series of capital stock of the Corporation, in whole or in part, including due to the fact that such transaction, agreement or arrangement provides, directly or indirectly, the opportunity to profit or avoid a loss from any increase or decrease in the value of any shares of any class or series of capital stock of the Corporation, (b) mitigate loss to, reduce the economic risk of or manage the risk of share price changes for, any person or entity with respect to any shares of any class or series of capital stock of the Corporation, (c) otherwise provide in any manner the opportunity to profit or avoid a loss from any decrease in the value of any shares of any class or series of capital stock of the Corporation, or (d) increase or decrease the voting power of any person or entity with respect to any shares of any class or series of capital stock of the Corporation.
(3)      A stockholder providing Timely Notice of nominations or business proposed to be brought before an Annual Meeting shall further update and supplement such notice, if necessary, so that the information (including, without limitation, the Material Ownership Interests information) provided or required to be provided in such notice pursuant to this By-law shall be true and correct as of the record date for the meeting and as of the date that is ten (10) business days prior to such Annual Meeting, and such update and supplement shall be received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the fifth (5th) business day after the record date for the Annual Meeting (in the case of the update and supplement required to be made as of the record date), and not later than the close of business on the eighth (8th) business day prior

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to the date of the Annual Meeting (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting).
(4)      Notwithstanding anything in the second sentence of Article I, Section 2(a)(2) of this By-law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least ten (10) days before the last day a stockholder may deliver a notice of nomination in accordance with the second sentence of Article I, Section 2(a)(2), a stockholder’s notice required by this By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be received by the Secretary of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation.
(b)      General .
(1)      Only such persons who are nominated in accordance with the provisions of this By-law shall be eligible for election and to serve as directors and only such business shall be conducted at an Annual Meeting as shall have been brought before the meeting in accordance with the provisions of this By-law or in accordance with Rule 14a-8 under the Exchange Act. The Board of Directors or a designated committee thereof shall have the power to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the provisions of this By-law. If neither the Board of Directors nor such designated committee makes a determination as to whether any stockholder proposal or nomination was made in accordance with the provisions of this By-law, the presiding officer of the Annual Meeting shall have the power and duty to determine whether the stockholder proposal or nomination was made in accordance with the provisions of this By-law. If the Board of Directors or a designated committee thereof or the presiding officer, as applicable, determines that any stockholder proposal or nomination was not made in accordance with the provisions of this By-law, such proposal or nomination shall be disregarded and shall not be presented for action at the Annual Meeting.
(2)      Except as otherwise required by law, nothing in this Article I, Section 2 shall obligate the Corporation or the Board of Directors to include in any proxy statement or other stockholder communication distributed on behalf of the Corporation or the Board of Directors information with respect to any nominee for director or any other matter of business submitted by a stockholder.
(3)      Notwithstanding the foregoing provisions of this Article I, Section 2, if the nominating or proposing stockholder (or a qualified representative of the stockholder) does not appear at the Annual Meeting to present a nomination or any business, such nomination or business shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Article I, Section 2, to be considered a qualified representative of the proposing stockholder, a person must be authorized by a written instrument executed by such stockholder or an electronic

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transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such written instrument or electronic transmission, or a reliable reproduction of the written instrument or electronic transmission, to the presiding officer at the meeting of stockholders.
(4)      For purposes of this By-law, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(5)      Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-law. Nothing in this By-law shall be deemed to affect any rights of (i) stockholders to have proposals included in the Corporation’s proxy statement pursuant to Rule 14a-8 (or any successor rule), as applicable, under the Exchange Act and, to the extent required by such rule, have such proposals considered and voted on at an Annual Meeting or (ii) the holders of any series of Undesignated Preferred Stock to elect directors under specified circumstances.
SECTION 3.      Special Meetings . Except as otherwise required by statute and subject to the rights, if any, of the holders of any series of Undesignated Preferred Stock, special meetings of the stockholders of the Corporation may be called only by the Board of Directors, the Chairperson of the Board of Directors, or the Chief Executive Officer acting pursuant to a resolution approved by the affirmative vote of a majority of the Directors then in office. The Board of Directors may postpone or reschedule any previously scheduled special meeting of stockholders. Only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation and stockholder proposals of other business shall not be brought before a special meeting of stockholders to be considered by the stockholders unless such special meeting is held in lieu of an annual meeting of stockholders in accordance with Article I, Section 1 of these By-laws, in which case such special meeting in lieu thereof shall be deemed an Annual Meeting for purposes of these By-laws and the provisions of Article I, Section 2 of these By-laws shall govern such special meeting.
SECTION 4.      Notice of Meetings; Adjournments .
(a)      A notice of each Annual Meeting stating the hour, date and place, if any, of such Annual Meeting and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, shall be given not less than ten (10) days nor more than sixty (60) days before the Annual Meeting, to each stockholder entitled to vote thereat by delivering such notice to such stockholder or by mailing it, postage prepaid, addressed to such stockholder at the address of such stockholder as it appears on the Corporation’s stock transfer books. Without limiting the manner by which notice may otherwise be given to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the Delaware General Corporation Law (“DGCL”).

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(b)      Notice of all special meetings of stockholders shall be given in the same manner as provided for Annual Meetings, except that the notice of all special meetings shall state the purpose or purposes for which the meeting has been called.
(c)      Notice of an Annual Meeting or special meeting of stockholders need not be given to a stockholder if a waiver of notice is executed, or waiver of notice by electronic transmission is provided, before or after such meeting by such stockholder or if such stockholder attends such meeting, unless such attendance is for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened.
(d)      The Board of Directors may postpone and reschedule any previously scheduled Annual Meeting or special meeting of stockholders and any record date with respect thereto, regardless of whether any notice or public disclosure with respect to any such meeting has been sent or made pursuant to Section 2 of this Article I of these By-laws or otherwise. In no event shall the public announcement of an adjournment, postponement or rescheduling of any previously scheduled meeting of stockholders commence a new time period for the giving of a stockholder’s notice under this Article I of these By-laws.
(e)      When any meeting is convened, the presiding officer may adjourn the meeting if (i) no quorum is present for the transaction of business, (ii) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders, or (iii) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any Annual Meeting or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date and place, if any, to which the meeting is adjourned and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting; provided, however, that if the adjournment is for more than thirty (30) days from the meeting date, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting shall be given to each stockholder of record entitled to vote thereat and each stockholder who, by law or under the Certificate of Incorporation of the Corporation (as the same may hereafter be amended and/or restated, the “Certificate”) or these By-laws, is entitled to such notice.
SECTION 5.      Quorum . A majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at any meeting of stockholders. If less than a quorum is present at a meeting, the holders of voting stock representing a majority of the voting power present at the meeting or the presiding officer may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 4 of this Article I. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

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SECTION 6.      Voting and Proxies . Stockholders shall have one vote for each share of stock entitled to vote owned by them of record according to the stock ledger of the Corporation as of the record date, unless otherwise provided by law or by the Certificate. Stockholders may vote either (i) in person, (ii) by written proxy or (iii) by a transmission permitted by Section 212(c) of the DGCL. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission permitted by Section 212(c) of the DGCL may be substituted for or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Proxies shall be filed in accordance with the procedures established for the meeting of stockholders. Except as otherwise limited therein or as otherwise provided by law, proxies authorizing a person to vote at a specific meeting shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them.
SECTION 7.      Action at Meeting . When a quorum is present at any meeting of stockholders, any matter before any such meeting (other than an election of a director or directors) shall be decided by a majority of the votes properly cast for and against such matter, except where a larger vote is required by law, by the Certificate or by these By-laws. Any election of directors by stockholders shall be determined by a plurality of the votes properly cast on the election of directors.
SECTION 8.      Stockholder Lists . The Secretary or an Assistant Secretary (or the Corporation’s transfer agent or other person authorized by these By-laws or by law) shall prepare and make, at least ten (10) days before every Annual Meeting or special meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for a period of at least ten (10) days prior to the meeting in the manner provided by law. The list shall also be open to the examination of any stockholder during the whole time of the meeting as provided by law.
SECTION 9.      Presiding Officer . The Board of Directors shall designate a representative to preside over all Annual Meetings or special meetings of stockholders, provided that if the Board of Directors does not so designate such a presiding officer, then the Chairperson of the Board, if one is elected, shall preside over such meetings. If the Board of Directors does not so designate such a presiding officer and there is no Chairperson of the Board or the Chairperson of the Board is unable to so preside or is absent, then the Chief Executive Officer shall preside over such meetings, provided further that if there is no Chief Executive Officer or the Chief Executive Officer is unable to so preside or is absent, then a President, if one is elected, shall preside over such meetings. The presiding officer at any Annual Meeting or special meeting of stockholders shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Sections 4 and 5 of this Article I. The order of business and all other matters of procedure at any meeting of the stockholders shall be determined by the presiding officer.

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SECTION 10.      Inspectors of Elections . The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the presiding officer shall appoint one or more inspectors to act at the meeting. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall perform such duties as are required by the DGCL, including the counting of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. The presiding officer may review all determinations made by the inspectors, and in so doing the presiding officer shall be entitled to exercise his or her sole judgment and discretion and he or she shall not be bound by any determinations made by the inspectors. All determinations by the inspectors and, if applicable, the presiding officer, shall be subject to further review by any court of competent jurisdiction.
ARTICLE II     
Directors
SECTION 1.      Powers . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors except as otherwise provided by the Certificate or required by law.
SECTION 2.      Number and Terms . The number of directors of the Corporation shall be fixed solely and exclusively by resolution duly adopted from time to time by the Board of Directors. The directors shall hold office in the manner provided in the Certificate.
SECTION 3.      Qualification . No director need be a stockholder of the Corporation.
SECTION 4.      Vacancies . Vacancies in the Board of Directors shall be filled in the manner provided in the Certificate.
SECTION 5.      Removal . Directors may be removed from office only in the manner provided in the Certificate.
SECTION 6.      Resignation . A director may resign at any time by giving written notice to the Chairperson of the Board, if one is elected, the Chief Executive Officer, a President, if one is elected, or the Secretary. A resignation shall be effective upon receipt, unless the resignation otherwise provides.
SECTION 7.      Regular Meetings . The regular annual meeting of the Board of Directors shall be held, without notice other than this Section 7, on the same date and at the same place as the Annual Meeting following the close of such meeting of stockholders. Other regular meetings of the Board of Directors may be held at such hour, date and place as the Board of Directors may

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by resolution from time to time determine and publicize by means of reasonable notice given to any director who is not present at the meeting at which such resolution is adopted.
SECTION 8.      Special Meetings . Special meetings of the Board of Directors may be called, orally or in writing, by or at the request of a majority of the directors, the Chairperson of the Board, if one is elected, the Chief Executive Officer, or a President, if one is elected. The person calling any such special meeting of the Board of Directors may fix the hour, date and place thereof.
SECTION 9.      Notice of Meetings . Notice of the hour, date and place of all special meetings of the Board of Directors shall be given to each director by the Secretary or an Assistant Secretary, or in case of the death, absence, incapacity or refusal of such persons, by the Chairperson of the Board, if one is elected, the Chief Executive Officer, or a President, if one is elected, or such other officer designated by the Chairperson of the Board, if one is elected, the Chief Executive Officer, or a President, if one is elected. Notice of any special meeting of the Board of Directors shall be given to each director in person, by telephone, or by facsimile, electronic mail or other form of electronic communication, sent to his or her business or home address, at least twenty-four (24) hours in advance of the meeting, or by written notice mailed to his or her business or home address, at least forty-eight (48) hours in advance of the meeting. Such notice shall be deemed to be delivered when hand-delivered to such address, read to such director by telephone, deposited in the mail so addressed, with postage thereon prepaid if mailed, dispatched or transmitted if sent by facsimile transmission or by electronic mail or other form of electronic communications. A written waiver of notice signed before or after a meeting by a director and filed with the records of the meeting shall be deemed to be equivalent to notice of the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because such meeting is not lawfully called or convened. Except as otherwise required by law, by the Certificate or by these By-laws, neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
SECTION 10.      Quorum . At any meeting of the Board of Directors, a majority of the total number of directors shall constitute a quorum for the transaction of business, but if less than a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice. Any business which might have been transacted at the meeting as originally noticed may be transacted at such adjourned meeting at which a quorum is present. For purposes of this section, the total number of directors includes any unfilled vacancies on the Board of Directors.
SECTION 11.      Action at Meeting . At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of the directors present shall constitute action by the Board of Directors, unless otherwise required by law, by the Certificate or by these By-laws.
SECTION 12.      Action by Consent . Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the records of the meetings of the Board of Directors. Such filing shall be in paper form if the minutes are maintained in paper form and shall

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be in electronic form if the minutes are maintained in electronic form. Such consent shall be treated as a resolution of the Board of Directors for all purposes.
SECTION 13.      Manner of Participation . Directors may participate in meetings of the Board of Directors by means of conference telephone or other communications equipment by means of which all directors participating in the meeting can hear each other, and participation in a meeting in accordance herewith shall constitute presence in person at such meeting for purposes of these By-laws.
SECTION 14.      Presiding Director . The Board of Directors shall designate a representative to preside over all meetings of the Board of Directors, provided that if the Board of Directors does not so designate such a presiding director or such designated presiding director is unable to so preside or is absent, then the Chairperson of the Board, if one is elected, shall preside over all meetings of the Board of Directors. If both the designated presiding director, if one is so designated, and the Chairperson of the Board, if one is elected, are unable to preside or are absent, the Board of Directors shall designate an alternate representative to preside over a meeting of the Board of Directors.
SECTION 15.      Committees . The Board of Directors, by vote of a majority of the directors then in office, may elect one or more committees, including, without limitation, a Compensation Committee, a Nominating & Corporate Governance Committee and an Audit Committee, and may delegate thereto some or all of its powers except those which by law, by the Certificate or by these By-laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors may abolish any such committee at any time. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report its action to the Board of Directors.
SECTION 16.      Compensation of Directors . Directors shall receive such compensation for their services as shall be determined by a majority of the Board of Directors, or a designated committee thereof, provided that directors who are serving the Corporation as employees and who receive compensation for their services as such, shall not receive any salary or other compensation for their services as directors of the Corporation.
ARTICLE III     
Officers
SECTION 1.      Enumeration . The officers of the Corporation shall consist of a Chief Executive Officer, a Treasurer, a Secretary, and such other officers, including, without limitation, a Chairperson of the Board of Directors, one or more Presidents, and one or more Vice Presidents (including Executive Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and Assistant Secretaries, as the Board of Directors may determine.

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SECTION 2.      Election . At the regular annual meeting of the Board of Directors following the Annual Meeting, the Board of Directors shall elect the Chief Executive Officer, the Treasurer and the Secretary. Other officers may be elected by the Board of Directors at such regular annual meeting of the Board of Directors or at any other regular or special meeting.
SECTION 3.      Qualification . No officer need be a stockholder or a director. Any person may occupy more than one office of the Corporation at any time.
SECTION 4.      Tenure . Except as otherwise provided by the Certificate or by these By-laws, each of the officers of the Corporation shall hold office until the regular annual meeting of the Board of Directors following the next Annual Meeting and until his or her successor is elected and qualified or until his or her earlier resignation or removal.
SECTION 5.      Resignation . Any officer may resign by delivering his or her written resignation to the Corporation addressed to the Chief Executive Officer, a President, if one is elected, or the Secretary, and such resignation shall be effective upon receipt, unless the resignation otherwise provides.
SECTION 6.      Removal . Except as otherwise provided by law, the Board of Directors may remove any officer with or without cause by the affirmative vote of a majority of the directors then in office.
SECTION 7.      Absence or Disability . In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in place of such absent or disabled officer.
SECTION 8.      Vacancies . Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors.
SECTION 9.      President(s) . Each President shall, subject to the direction of the Board of Directors, have such powers and shall perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate.
SECTION 10.      Chairperson of the Board . The Chairperson of the Board, if one is elected, shall have such powers and shall perform such duties as the Board of Directors may from time to time designate.
SECTION 11.      Chief Executive Officer . Subject to the provisions of these Bylaws and to the direction of the Board of Directors, the Chief Executive Officer of the Corporation shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers that are commonly incident to the office of chief executive or that are delegated to him or her by the Board of Directors. He or she shall have power to sign contracts and other instruments of the Corporation that are authorized and shall have general supervision and direction of all of the duties, employees and agents of the Corporation.

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SECTION 12.      Vice Presidents and Assistant Vice Presidents . Any Vice President (including any Executive Vice President or Senior Vice President) and any Assistant Vice President shall have such powers and shall perform such duties as the Board of Directors, the Chief Executive Officer, or a President may from time to time designate.
SECTION 13.      Treasurer and Assistant Treasurers . The Treasurer shall, subject to the direction of the Board of Directors and except as the Board of Directors or the Chief Executive Officer may otherwise provide, have general charge of the financial affairs of the Corporation and shall cause to be kept accurate books of account. The Treasurer shall have custody of all funds, securities, and valuable documents of the Corporation. He or she shall have such other duties and powers as may be designated from time to time by the Board of Directors or the Chief Executive Officer. Any Assistant Treasurer shall have such powers and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate.
SECTION 14.      Secretary and Assistant Secretaries . The Secretary shall record all the proceedings of the meetings of the stockholders and the Board of Directors (including committees of the Board of Directors) in books kept for that purpose. In his or her absence from any such meeting, a temporary secretary chosen at the meeting shall record the proceedings thereof. The Secretary shall have charge of the stock ledger (which may, however, be kept by any transfer or other agent of the Corporation). The Secretary shall have custody of the seal of the Corporation, and the Secretary, or an Assistant Secretary shall have authority to affix it to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or that of an Assistant Secretary. The Secretary shall have such other duties and powers as may be designated from time to time by the Board of Directors or the Chief Executive Officer. In the absence of the Secretary, any Assistant Secretary may perform his or her duties and responsibilities. Any Assistant Secretary shall have such powers and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate.
SECTION 15.      Other Powers and Duties . Subject to these By-laws and to such limitations as the Board of Directors may from time to time prescribe, the officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors or the Chief Executive Officer.
ARTICLE IV     
Capital Stock
SECTION 1.      Certificates of Stock . Each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by any two officers of the Corporation, including, without limitation, the Chairperson of the Board, the Chief Executive Officer, a President, a Vice President, the Treasurer, an Assistant Treasurer, the Secretary, or an Assistant Secretary. The Corporation seal and the signatures by the Corporation’s officers, the transfer agent or the registrar may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer, transfer agent or

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registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent or registrar at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. Notwithstanding anything to the contrary provided in these Bylaws, the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares (except that the foregoing shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation), and by the approval and adoption of these Bylaws the Board of Directors has determined that all classes or series of the Corporation’s stock may be uncertificated, whether upon original issuance, re-issuance, or subsequent transfer.
SECTION 2.      Transfers . Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock that are represented by a certificate may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate theretofore properly endorsed or accompanied by a written assignment or power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require. Shares of stock that are not represented by a certificate may be transferred on the books of the Corporation by submitting to the Corporation or its transfer agent such evidence of transfer and following such other procedures as the Corporation or its transfer agent may require.
SECTION 3.      Record Holders . Except as may otherwise be required by law, by the Certificate or by these By-laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-laws.
SECTION 4.      Record Date . In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (a) in the case of determination of stockholders entitled to vote at any meeting of stockholders, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting and (b) in the case of any other action, shall not be more than sixty (60) days prior to such other action. If no record date is fixed: (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (ii) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

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SECTION 5.      Replacement of Certificates . In case of the alleged loss, destruction or mutilation of a certificate of stock of the Corporation, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe.
ARTICLE V     
Indemnification
SECTION 1.      Definitions . For purposes of this Article:
(a)      “Corporate Status” describes the status of a person who is serving or has served (i) as a Director of the Corporation, (ii) as an Officer of the Corporation, (iii) as a Non-Officer Employee of the Corporation, or (iv) as a director, partner, trustee, officer, employee or agent of any other corporation, partnership, limited liability company, joint venture, trust, employee benefit plan, foundation, association, organization or other legal entity which such person is or was serving at the request of the Corporation. For purposes of this Section 1(a), a Director, Officer or Non-Officer Employee of the Corporation who is serving or has served as a director, partner, trustee, officer, employee or agent of a Subsidiary shall be deemed to be serving at the request of the Corporation. Notwithstanding the foregoing, “Corporate Status” shall not include the status of a person who is serving or has served as a director, officer, employee or agent of a constituent corporation absorbed in a merger or consolidation transaction with the Corporation with respect to such person’s activities prior to said transaction, unless specifically authorized by the Board of Directors or the stockholders of the Corporation;
(b)      “Director” means any person who serves or has served the Corporation as a director on the Board of Directors of the Corporation;
(c)      “Disinterested Director” means, with respect to each Proceeding in respect of which indemnification is sought hereunder, a Director of the Corporation who is not and was not a party to such Proceeding;
(d)      “Expenses” means all attorneys’ fees, retainers, court costs, transcript costs, fees of expert witnesses, private investigators and professional advisors (including, without limitation, accountants and investment bankers), travel expenses, duplicating costs, printing and binding costs, costs of preparation of demonstrative evidence and other courtroom presentation aids and devices, costs incurred in connection with document review, organization, imaging and computerization, telephone charges, postage, delivery service fees, and all other disbursements, costs or expenses of the type customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, settling or otherwise participating in, a Proceeding;
(e)      “Liabilities” means judgments, damages, liabilities, losses, penalties, excise taxes, fines and amounts paid in settlement;
(f)      “Non-Officer Employee” means any person who serves or has served as an employee or agent of the Corporation, but who is not or was not a Director or Officer;

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(g)      “Officer” means any person who serves or has served the Corporation as an officer of the Corporation appointed by the Board of Directors of the Corporation;
(h)      “Proceeding” means any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, inquiry, investigation, administrative hearing or other proceeding, whether civil, criminal, administrative, arbitrative or investigative; and
(i)      “Subsidiary” shall mean any corporation, partnership, limited liability company, joint venture, trust or other entity of which the Corporation owns (either directly or through or together with another Subsidiary of the Corporation) either (i) a general partner, managing member or other similar interest or (ii) (A) fifty percent (50%) or more of the voting power of the voting capital equity interests of such corporation, partnership, limited liability company, joint venture or other entity, or (B) fifty percent (50%) or more of the outstanding voting capital stock or other voting equity interests of such corporation, partnership, limited liability company, joint venture or other entity.
SECTION 2.      Indemnification of Directors and Officers .
(a)      Subject to the operation of Section 4 of this Article V of these By-laws, each Director and Officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), and to the extent authorized in this Section 2.
(1)      Actions, Suits and Proceedings Other than By or In the Right of the Corporation . Each Director and Officer shall be indemnified and held harmless by the Corporation against any and all Expenses and Liabilities that are incurred or paid by such Director or Officer or on such Director’s or Officer’s behalf in connection with any Proceeding or any claim, issue or matter therein (other than an action by or in the right of the Corporation), which such Director or Officer is, or is threatened to be made, a party to or participant in by reason of such Director’s or Officer’s Corporate Status, if such Director or Officer acted in good faith and in a manner such Director or Officer reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful.
(2)      Actions, Suits and Proceedings By or In the Right of the Corporation . Each Director and Officer shall be indemnified and held harmless by the Corporation against any and all Expenses that are incurred by such Director or Officer or on such Director’s or Officer’s behalf in connection with any Proceeding or any claim, issue or matter therein by or in the right of the Corporation, which such Director or Officer is, or is threatened to be made, a party to or participant in by reason of such Director’s or Officer’s Corporate Status, if such Director or Officer acted in good faith and in a manner such Director or Officer reasonably believed to be in or not opposed to the best interests of the Corporation; provided, however, that no indemnification shall be made under this Section 2(a)(2) in respect of any claim, issue or matter as to which such Director or Officer shall have been finally adjudged

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by a court of competent jurisdiction to be liable to the Corporation, unless, and only to the extent that, the Court of Chancery or another court in which such Proceeding was brought shall determine upon application that, despite adjudication of liability, but in view of all the circumstances of the case, such Director or Officer is fairly and reasonably entitled to indemnification for such Expenses that such court deems proper.
(3)      Survival of Rights . The rights of indemnification provided by this Section 2 shall continue as to a Director or Officer after he or she has ceased to be a Director or Officer and shall inure to the benefit of his or her heirs, executors, administrators and personal representatives.
(4)      Actions by Directors or Officers . Notwithstanding the foregoing, the Corporation shall indemnify any Director or Officer seeking indemnification in connection with a Proceeding initiated by such Director or Officer only if such Proceeding (including any parts of such Proceeding not initiated by such Director or Officer) was authorized in advance by the Board of Directors of the Corporation, unless such Proceeding was brought to enforce such Officer’s or Director’s rights to indemnification or, in the case of Directors, advancement of Expenses under these By-laws in accordance with the provisions set forth herein.
SECTION 3.      Indemnification of Non-Officer Employees . Subject to the operation of Section 4 of this Article V of these By-laws, each Non-Officer Employee may, in the discretion of the Board of Directors of the Corporation, be indemnified by the Corporation to the fullest extent authorized by the DGCL, as the same exists or may hereafter be amended, against any or all Expenses and Liabilities that are incurred by such Non-Officer Employee or on such Non-Officer Employee’s behalf in connection with any threatened, pending or completed Proceeding, or any claim, issue or matter therein, which such Non-Officer Employee is, or is threatened to be made, a party to or participant in by reason of such Non-Officer Employee’s Corporate Status, if such Non-Officer Employee acted in good faith and in a manner such Non-Officer Employee reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The rights of indemnification provided by this Section 3 shall exist as to a Non-Officer Employee after he or she has ceased to be a Non-Officer Employee and shall inure to the benefit of his or her heirs, personal representatives, executors and administrators. Notwithstanding the foregoing, the Corporation may indemnify any Non-Officer Employee seeking indemnification in connection with a Proceeding initiated by such Non-Officer Employee only if such Proceeding was authorized in advance by the Board of Directors of the Corporation.
SECTION 4.      Determination . Unless ordered by a court, no indemnification shall be provided pursuant to this Article V to a Director, to an Officer or to a Non-Officer Employee unless a determination shall have been made that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal Proceeding, such person had no reasonable cause to believe his or her conduct was unlawful. Such determination shall be made by (a) a majority vote of the Disinterested Directors, even though less than a quorum of the Board of Directors, (b) a committee comprised of

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Disinterested Directors, such committee having been designated by a majority vote of the Disinterested Directors (even though less than a quorum), (c) if there are no such Disinterested Directors, or if a majority of Disinterested Directors so directs, by independent legal counsel in a written opinion, or (d) by the stockholders of the Corporation.
SECTION 5.      Advancement of Expenses to Directors Prior to Final Disposition .
(a)      The Corporation shall advance all Expenses incurred by or on behalf of any Director in connection with any Proceeding in which such Director is involved by reason of such Director’s Corporate Status within thirty (30) days after the receipt by the Corporation of a written statement from such Director requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Director and shall be preceded or accompanied by an undertaking by or on behalf of such Director to repay any Expenses so advanced if it shall ultimately be determined that such Director is not entitled to be indemnified against such Expenses. Notwithstanding the foregoing, the Corporation shall advance all Expenses incurred by or on behalf of any Director seeking advancement of expenses hereunder in connection with a Proceeding initiated by such Director only if such Proceeding (including any parts of such Proceeding not initiated by such Director) was (i) authorized by the Board of Directors of the Corporation, or (ii) brought to enforce such Director’s rights to indemnification or advancement of Expenses under these By-laws.
(b)      If a claim for advancement of Expenses hereunder by a Director is not paid in full by the Corporation within thirty (30) days after receipt by the Corporation of documentation of Expenses and the required undertaking, such Director may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and if successful in whole or in part, such Director shall also be entitled to be paid the expenses of prosecuting such claim. The failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to make a determination concerning the permissibility of such advancement of Expenses under this Article V shall not be a defense to an action brought by a Director for recovery of the unpaid amount of an advancement claim and shall not create a presumption that such advancement is not permissible. The burden of proving that a Director is not entitled to an advancement of expenses shall be on the Corporation.
(c)      In any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that the Director has not met any applicable standard for indemnification set forth in the DGCL.
SECTION 6.      Advancement of Expenses to Officers and Non-Officer Employees Prior to Final Disposition .
(a)      The Corporation may, at the discretion of the Board of Directors of the Corporation, advance any or all Expenses incurred by or on behalf of any Officer or any Non-Officer Employee in connection with any Proceeding in which such person is involved by reason of his or her Corporate Status as an Officer or Non-Officer Employee upon the receipt by the Corporation of a statement or statements from such Officer or Non-Officer Employee requesting such advance or advances

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from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by such Officer or Non-Officer Employee and shall be preceded or accompanied by an undertaking by or on behalf of such person to repay any Expenses so advanced if it shall ultimately be determined that such Officer or Non-Officer Employee is not entitled to be indemnified against such Expenses.
(b)      In any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that the Officer or Non-Officer Employee has not met any applicable standard for indemnification set forth in the DGCL.
SECTION 7.      Contractual Nature of Rights .
(a)      The provisions of this Article V shall be deemed to be a contract between the Corporation and each Director and Officer entitled to the benefits hereof at any time while this Article V is in effect, in consideration of such person’s past or current and any future performance of services for the Corporation. Neither amendment, repeal or modification of any provision of this Article V nor the adoption of any provision of the Certificate of Incorporation inconsistent with this Article V shall eliminate or reduce any right conferred by this Article V in respect of any act or omission occurring, or any cause of action or claim that accrues or arises or any state of facts existing, at the time of or before such amendment, repeal, modification or adoption of an inconsistent provision (even in the case of a proceeding based on such a state of facts that is commenced after such time), and all rights to indemnification and advancement of Expenses granted herein or arising out of any act or omission shall vest at the time of the act or omission in question, regardless of when or if any proceeding with respect to such act or omission is commenced. The rights to indemnification and to advancement of expenses provided by, or granted pursuant to, this Article V shall continue notwithstanding that the person has ceased to be a director or officer of the Corporation and shall inure to the benefit of the estate, heirs, executors, administrators, legatees and distributees of such person.
(b)      If a claim for indemnification hereunder by a Director or Officer is not paid in full by the Corporation within sixty (60) days after receipt by the Corporation of a written claim for indemnification, such Director or Officer may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, such Director or Officer shall also be entitled to be paid the expenses of prosecuting such claim. The failure of the Corporation (including its Board of Directors or any committee thereof, independent legal counsel, or stockholders) to make a determination concerning the permissibility of such indemnification under this Article V shall not be a defense to an action brought by a Director or Officer for recovery of the unpaid amount of an indemnification claim and shall not create a presumption that such indemnification is not permissible. The burden of proving that a Director or Officer is not entitled to indemnification shall be on the Corporation.
(c)      In any suit brought by a Director or Officer to enforce a right to indemnification hereunder, it shall be a defense that such Director or Officer has not met any applicable standard for indemnification set forth in the DGCL.

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SECTION 8.      Non-Exclusivity of Rights . The rights to indemnification and to advancement of Expenses set forth in this Article V shall not be exclusive of any other right which any Director, Officer, or Non-Officer Employee may have or hereafter acquire under any statute, provision of the Certificate or these By-laws, agreement, vote of stockholders or Disinterested Directors or otherwise.
SECTION 9.      Insurance . The Corporation may maintain insurance, at its expense, to protect itself and any Director, Officer or Non-Officer Employee against any liability of any character asserted against or incurred by the Corporation or any such Director, Officer or Non-Officer Employee, or arising out of any such person’s Corporate Status, whether or not the Corporation would have the power to indemnify such person against such liability under the DGCL or the provisions of this Article V.
SECTION 10.      Other Indemnification . The Corporation’s obligation, if any, to indemnify or provide advancement of Expenses to any person under this Article V as a result of such person serving, at the request of the Corporation, as a director, partner, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount such person may collect as indemnification or advancement of Expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or enterprise (the “Primary Indemnitor”). Any indemnification or advancement of Expenses under this Article V owed by the Corporation as a result of a person serving, at the request of the Corporation, as a director, partner, trustee, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall only be in excess of, and shall be secondary to, the indemnification or advancement of Expenses available from the applicable Primary Indemnitor(s) and any applicable insurance policies.
ARTICLE VI     
Miscellaneous Provisions
SECTION 1.      Fiscal Year . The fiscal year of the Corporation shall be determined by the Board of Directors.
SECTION 2.      Seal . The Board of Directors shall have power to adopt and alter the seal of the Corporation.
SECTION 3.      Execution of Instruments . All deeds, leases, transfers, contracts, bonds, notes and other obligations to be entered into by the Corporation in the ordinary course of its business without director action may be executed on behalf of the Corporation by the Chairperson of the Board, if one is elected, the Chief Executive Officer, a President, if one is elected, or the Treasurer or any other officer, employee or agent of the Corporation as the Board of Directors or the executive committee of the Board may authorize.
SECTION 4.      Voting of Securities . Unless the Board of Directors otherwise provides, the Chairperson of the Board, if one is elected, the Chief Executive Officer, a President, if one is elected, or the Treasurer may waive notice of and act on behalf of the Corporation, or appoint another person

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or persons to act as proxy or attorney in fact for the Corporation with or without discretionary power and/or power of substitution, at any meeting of stockholders or shareholders of any other corporation or organization, any of whose securities are held by the Corporation.
SECTION 5.      Resident Agent . The Board of Directors may appoint a resident agent upon whom legal process may be served in any action or proceeding against the Corporation.
SECTION 6.      Corporate Records . The original or attested copies of the Certificate, By-laws and records of all meetings of the incorporators, stockholders and the Board of Directors and the stock transfer books, which shall contain the names of all stockholders, their record addresses and the amount of stock held by each, may be kept outside the State of Delaware and shall be kept at the principal office of the Corporation, at an office of its counsel, at an office of its transfer agent or at such other place or places as may be designated from time to time by the Board of Directors.
SECTION 7.      Certificate . All references in these By-laws to the Certificate shall be deemed to refer to the Amended and Restated Certificate of Incorporation of the Corporation, as amended and/or restated and in effect from time to time.
SECTION 8.      Exclusive Jurisdiction of Delaware Courts . Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or the Certificate or By-laws, or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine.  Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 8.
SECTION 9.      Amendment of By-laws .
(a)      Amendment by Directors . Except as provided otherwise by law, these By-laws may be amended or repealed by the Board of Directors by the affirmative vote of a majority of the directors then in office.
(b)      Amendment by Stockholders . These By-laws may be amended or repealed at any Annual Meeting, or special meeting of stockholders called for such purpose in accordance with these By-Laws, by the affirmative vote of at least seventy-five percent (75%) of the outstanding shares entitled to vote on such amendment or repeal, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of the majority of the outstanding shares entitled to vote on such amendment or repeal, voting together as a single class. Notwithstanding the foregoing, stockholder approval shall not be required unless mandated by the Certificate, these By-laws, or other applicable law.

21

SECTION 10.      Notices . If mailed, notice to stockholders shall be deemed given when deposited in the mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation. Without limiting the manner by which notice otherwise may be given to stockholders, any notice to stockholders may be given by electronic transmission in the manner provided in Section 232 of the DGCL.
SECTION 11.      Waivers . A written waiver of any notice, signed by a stockholder or director, or waiver by electronic transmission by such person, whether given before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such person. Neither the business to be transacted at, nor the purpose of, any meeting need be specified in such a waiver.

    
22

Exhibit 99.1
ZENDESK ANNOUNCES THIRD QUARTER 2016 RESULTS
 
Highlights:

•	Third quarter revenue increased 45% year-over-year to $80.7 million	
		
•	Third quarter GAAP operating loss of $26.2 million and non-GAAP operating loss of $4.3 million	

SAN FRANCISCO – November 1, 2016 – Zendesk, Inc. (NYSE: ZEN) today reported financial results for the fiscal quarter ended September 30, 2016 , and released a Shareholder Letter on its Investor Relations website at https://investor.zendesk.com.
 
Results for the Third Quarter 2016
 
Revenue was $80.7 million for the quarter ended September 30, 2016 , an increase of 45% over the prior year period. GAAP net loss for the quarter ended September 30, 2016 was $25.8 million , and GAAP net loss per share was $0.27 . Non-GAAP net loss was $3.9 million , and non-GAAP net loss per share was $0.04 . Non-GAAP net loss excludes approximately $21.0 million in share-based compensation related expenses (including $0.6 million of employer tax related to employee stock transactions and $0.4 million of amortized share-based compensation capitalized in internal-use software) and $1.0 million of amortization of purchased intangibles. GAAP and non-GAAP net loss per share for the quarter ended September 30, 2016 were based on 94.1 million weighted average shares outstanding.
 
Outlook
 
As of November 1, 2016 , Zendesk provided guidance for its expected revenue, GAAP operating loss and non-GAAP operating loss for the quarter ending December 31, 2016 and updated its guidance for the year ending December 31, 2016.
 
For the quarter ending December 31, 2016, Zendesk expects to report:

•	Revenue in the range of $86.0 - 88.0 million	
		
•	GAAP operating loss of $29.0 - 30.0 million, which includes share-based compensation and related expenses of approximately $23.0 million and amortization of purchased intangibles of approximately $1.0 million	
		
•	Non-GAAP operating loss of $5.0 - 6.0 million, which excludes share-based compensation and related expenses of approximately $23.0 million and amortization of purchased intangibles of approximately $1.0 million	
		
•	Approximately 95.6 million weighted average shares outstanding	
 
For the full year 2016, Zendesk expects to report:

•	Revenue in the range of $309.0 - 311.0 million	
		
•	GAAP operating loss of $108.5 - 109.5 million, which includes share-based compensation and related expenses of approximately $82.7 million and amortization of purchased intangibles of approximately $3.8 million	
		
•	Non-GAAP operating loss of $22.0 - 23.0 million, which excludes share-based compensation and related expenses of approximately $82.7 million and amortization of purchased intangibles of approximately $3.8 million	
		
•	Approximately 93.1 million weighted average shares outstanding	

Zendesk’s estimates of share-based compensation and acquisition related expenses in future periods assume, among other things, the occurrence of no additional acquisitions, investments or restructurings and no further revisions to share-based compensation and related expenses.

Shareholder Letter and Conference Call Information
 
The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a conference call to answer questions today, November 1, 2016, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live webcast of the conference call will be available at https://investor.zendesk.com . The conference call can also be accessed by dialing 877-201-0168, or +1 647-788-4901 (outside the U.S. and Canada). The conference ID is 97287420. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 855-859-2056 or +1 404-537-3406 (outside the U.S. and Canada) and entering passcode 97287420. The dial-in replay will be available until the end of day November 3, 2016. The webcast replay will be available for 12 months.

About Zendesk
 
Zendesk builds software for better customer relationships. It empowers organizations to improve customer engagement and better understand their customers. More than 87,000 paid customer accounts in over 150 countries and territories use Zendesk products. Based in San Francisco, Zendesk has operations in the United States, Europe, Asia, Australia, and South America. Learn more at www.zendesk.com .
 
Forward-Looking Statements
 
This press release contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, and progress towards its long-term financial objectives. The words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) adverse changes in general economic or market conditions; (ii) Zendesk’s ability to adapt its customer service platform to changing market dynamics and customer preferences or achieve increased market acceptance of its platform; (iii) 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; (iv) Zendesk’s limited operating history, which makes it difficult to evaluate its prospects and future operating results; (v) Zendesk’s ability to effectively manage its growth and organizational change; (vi) the market in which Zendesk operates is intensely competitive, and Zendesk may not compete effectively; (vii) the development of the market for software as a service business software applications; (viii) Zendesk’s ability to sell its live chat software as a standalone service and more fully integrate its live chat software with its customer service platform; (ix) Zendesk’s ability to integrate We Are Cloud SAS with its existing corporate operations, to sell its analytics software as a standalone service, and to integrate Zendesk’s analytics software with Zendesk’s customer service platform; (x) breaches in Zendesk’s security measures or unauthorized access to its customers’ data; (xi) service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xii) real or perceived errors, failures, or bugs in its products; (xiii) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xiv) Zendesk’s ability to effectively expand its sales capabilities.

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 June 30, 2016. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.

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

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

	
																	
 	 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	 	2016	 	2015	 	2016	 	2015	
Revenue	 	$	80,717		 	$	55,661		 	$	223,376		 	$	146,122		
Cost of revenue	 	23,866		 	17,039		 	68,318		 	47,491		
Gross profit	 	56,851		 	38,622		 	155,058		 	98,631		
Operating expenses:	 			 	 	 	 	 	 	
Research and development	 	22,953		 	16,031		 	66,683		 	43,517		
Sales and marketing	 	43,899		 	29,079		 	119,421		 	79,725		
General and administrative	 	16,212		 	12,319		 	48,149		 	33,982		
Total operating expenses	 	83,064		 	57,429		 	234,253		 	157,224		
Operating loss	 	(26,213	)	 	(18,807	)	 	(79,195	)	 	(58,593	)	
Other income (expense), net	 	681		 	145		 	745		 	(428	)	
Loss before provision for income taxes	 	(25,532	)	 	(18,662	)	 	(78,450	)	 	(59,021	)	
Provision for income taxes	 	294		 	262		 	800		 	554		
Net loss	 	$	(25,826	)	 	$	(18,924	)	 	$	(79,250	)	 	$	(59,575	)	
Net loss per share, basic and diluted	 	$	(0.27	)	 	$	(0.22	)	 	$	(0.86	)	 	$	(0.71	)	
Weighted-average shares used to compute net loss per share, basic and diluted	 	94,085		 	87,777		 	92,274		 	83,536		

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

	
									
 	 	September 30,
2016	 	December 31,
2015	
Assets	 	 	 	 	
Current assets:	 	 	 	 	
Cash and cash equivalents	 	$	77,589		 	$	216,226		
Marketable securities	 	133,758		 	29,414		
Accounts receivable, net of allowance for doubtful accounts of $1,213 and $763 as of September 30, 2016 and December 31, 2015, respectively	 	37,645		 	26,168		
Prepaid expenses and other current assets	 	19,437		 	11,423		
Total current assets	 	268,429		 	283,231		
Marketable securities, noncurrent	 	71,139		 	22,336		
Property and equipment, net	 	57,507		 	56,540		
Goodwill and intangible assets, net	 	54,848		 	57,050		
Other assets	 	4,504		 	3,529		
Total assets	 	$	456,427		 	$	422,686		
Liabilities and stockholders’ equity	 	 	 	 	
Current liabilities:	 	 	 	 	
Accounts payable	 	$	5,491		 	$	9,332		
Accrued liabilities	 	12,839		 	9,742		
Accrued compensation and related benefits	 	17,929		 	14,115		
Deferred revenue	 	110,174		 	84,210		
Total current liabilities	 	146,433		 	117,399		
Deferred revenue, noncurrent	 	1,538		 	1,405		
Other liabilities	 	9,922		 	10,592		
Total liabilities	 	157,893		 	129,396		
 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	
Preferred stock, par value $0.01 per share	 	—		 	—		
Common stock, par value $0.01 per share	 	953		 	905		
Additional paid-in capital	 	595,135		 	511,183		
Accumulated other comprehensive loss	 	(1,730	)	 	(2,225	)	
Accumulated deficit	 	(295,172	)	 	(215,921	)	
Treasury stock, at cost	 	(652	)	 	(652	)	
Total stockholders’ equity	 	298,534		 	293,290		
Total liabilities and stockholders’ equity	 	$	456,427		 	$	422,686		

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

	
									
 	 	Three Months Ended September 30,	
 	 	2016	 	2015	
Cash flows from operating activities	 	 		 	 		
Net loss	 	$	(25,826	)	 	$	(18,924	)	
Adjustments to reconcile net loss to net cash used in operating activities:	 	 	 	 	
Depreciation and amortization	 	6,853		 	4,868		
Share-based compensation	 	19,995		 	13,442		
Other	 	622		 	207		
Excess tax benefit from share-based award activity	 	(133	)	 	(29	)	
Changes in operating assets and liabilities:	 	 	 	 	
Accounts receivable	 	(9,355	)	 	(9,692	)	
Prepaid expenses and other current assets	 	459		 	(900	)	
Other assets and liabilities	 	(1,449	)	 	(257	)	
Accounts payable	 	(1,641	)	 	(856	)	
Accrued liabilities	 	842		 	991		
Accrued compensation and related benefits	 	(286	)	 	(96	)	
Deferred revenue	 	9,353		 	11,068		
Net cash used in operating activities	 	(566	)	 	(178	)	
Cash flows from investing activities	 	 	 	 	
Purchases of property and equipment	 	(4,084	)	 	(6,825	)	
Internal-use software development costs	 	(1,540	)	 	(1,165	)	
Purchases of marketable securities	 	(80,469	)	 	(21,144	)	
Proceeds from maturities of marketable securities	 	7,495		 	12,405		
Proceeds from sale of marketable securities	 	25,613		 	14,333		
Cash paid for the acquisition of Zopim, net of cash acquired	 	—		 	(551	)	
Net cash used in investing activities	 	(52,985	)	 	(2,947	)	
Cash flows from financing activities	 	 	 	 	
Proceeds from exercise of employee stock options	 	10,499		 	797		
Taxes paid related to net share settlement of equity awards	 	(281	)	 	(278	)	
Proceeds from employee stock purchase plan	 	3,032		 	2,295		
Excess tax benefit from share-based award activity	 	133		 	29		
Net cash provided by financing activities	 	13,383		 	2,843		
Effect of exchange rate changes on cash and cash equivalents	 	(279	)	 	(1	)	
Net decrease in cash and cash equivalents	 	(40,447	)	 	(283	)	
Cash and cash equivalents at beginning of period	 	118,036		 	255,669		
Cash and cash equivalents at end of period	 	$	77,589		 	$	255,386		

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

																
 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016	 	2015	 	2016	 	2015	
Reconciliation of gross profit and gross margin	 	 	 	 	 	 	 	
GAAP gross profit	$	56,851		 	$	38,622		 	$	155,058		 	$	98,631		
Plus: Share-based compensation	1,919		 	1,131		 	5,355		 	3,136		
Plus: Employer tax related to equity transactions	85		 	33		 	277		 	142		
Plus: Amortization of purchased intangibles	848		 	352		 	2,525		 	1,058		
Plus: Amortization of share-based compensation capitalized in internal-use software	387		 	269		 	1,223		 	753		
Non-GAAP gross profit	$	60,090		 	$	40,407		 	$	164,438		 	$	103,720		
GAAP gross margin	70	 %	 	69	 %	 	69	 %	 	67	 %	
Non-GAAP adjustments	4	 %	 	4	 %	 	5	 %	 	4	 %	
Non-GAAP gross margin	74	 %	 	73	 %	 	74	 %	 	71	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating expenses	 	 	 	 	 	 	 	
GAAP research and development	$	22,953		 	$	16,031		 	$	66,683		 	$	43,517		
Less: Share-based compensation	(7,172	)	 	(4,974	)	 	(20,548	)	 	(13,484	)	
Less: Employer tax related to equity transactions	(232	)	 	(87	)	 	(802	)	 	(348	)	
Non-GAAP research and development	$	15,549		 	$	10,970		 	$	45,333		 	$	29,685		
GAAP research and development as percentage of revenue	28	 %	 	29	 %	 	30	 %	 	30	 %	
Non-GAAP research and development as percentage of revenue	19	 %	 	20	 %	 	20	 %	 	20	 %	
 	 	 	 	 	 	 	 	
GAAP sales and marketing	$	43,899		 	$	29,079		 	$	119,421		 	$	79,725		
Less: Share-based compensation	(6,657	)	 	(3,786	)	 	(17,780	)	 	(10,154	)	
Less: Employer tax related to equity transactions	(184	)	 	(50	)	 	(574	)	 	(301	)	
Less: Amortization of purchased intangibles	(106	)	 	(77	)	 	(314	)	 	(243	)	
Non-GAAP sales and marketing	$	36,952		 	$	25,166		 	$	100,753		 	$	69,027		
GAAP sales and marketing as percentage of revenue	54	 %	 	52	 %	 	53	 %	 	55	 %	
Non-GAAP sales and marketing as percentage of revenue	46	 %	 	45	 %	 	45	 %	 	47	 %	
 	 	 	 	 	 	 	 	
GAAP general and administrative	$	16,212		 	$	12,319		 	$	48,149		 	$	33,982		
Less: Share-based compensation	(4,247	)	 	(3,551	)	 	(12,654	)	 	(10,283	)	
Less: Employer tax related to equity transactions	(120	)	 	(76	)	 	(462	)	 	(314	)	
Less: Transaction costs related to acquisition	—		 	(290	)	 	—		 	(290	)	
Non-GAAP general and administrative	$	11,845		 	$	8,402		 	$	35,033		 	$	23,095		
GAAP general and administrative as percentage of revenue	20	 %	 	22	 %	 	22	 %	 	23	 %	
Non-GAAP general and administrative as percentage of revenue	15	 %	 	15	 %	 	16	 %	 	16	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating loss and operating margin	 	 	 	 	 	 	 	
GAAP operating loss	$	(26,213	)	 	$	(18,807	)	 	$	(79,195	)	 	$	(58,593	)	
Plus: Share-based compensation	19,995		 	13,442		 	56,337		 	37,057		
Plus: Employer tax related to equity transactions	621		 	246		 	2,115		 	1,105		
Plus: Amortization of purchased intangibles	954		 	429		 	2,839		 	1,301		
Plus: Transaction costs related to acquisition	—		 	290		 	—		 	290		
Plus: Amortization of share-based compensation capitalized in internal-use software	387		 	269		 	1,223		 	753		
Non-GAAP operating loss	$	(4,256	)	 	$	(4,131	)	 	$	(16,681	)	 	$	(18,087	)	
GAAP operating margin	(32	)%	 	(34	)%	 	(35	)%	 	(40	)%	
Non-GAAP adjustments	27	 %	 	27	 %	 	28	 %	 	28	 %	
Non-GAAP operating margin	(5	)%	 	(7	)%	 	(7	)%	 	(12	)%	

	
																
 	Three Months Ended September 30,	 	Nine Months Ended September 30,	
 	2016		2015	 	2016	 	2015	
Reconciliation of net loss	 	 	 	 	 	 	 	
GAAP net loss	$	(25,826	)	 	$	(18,924	)	 	$	(79,250	)	 	$	(59,575	)	
Plus: Share-based compensation	19,995		 	13,442		 	56,337		 	37,057		
Plus: Employer tax related to equity transactions	621		 	246		 	2,115		 	1,105		
Plus: Amortization of purchased intangibles	954		 	429		 	2,839		 	1,301		
Plus: Transaction costs related to acquisition	—		 	290		 	—		 	290		
Plus: Amortization of share-based compensation capitalized in internal-use software	387		 	269		 	1,223		 	753		
Non-GAAP net loss	$	(3,869	)	 	$	(4,248	)	 	$	(16,736	)	 	$	(19,069	)	
 	 	 	 	 	 	 	 	
Reconciliation of net loss per share, basic and diluted	 	 	 	 	 	 	 	
GAAP net loss per share, basic and diluted	$	(0.27	)	 	$	(0.22	)	 	$	(0.86	)	 	$	(0.71	)	
Non-GAAP adjustments to net loss	0.23		 	0.17		 	0.68		 	0.48		
Non-GAAP net loss per share, basic and diluted	$	(0.04	)	 	$	(0.05	)	 	$	(0.18	)	 	$	(0.23	)	
 	 	 	 	 	 	 	 	
Weighted-average shares used to compute net loss per share, basic and diluted	94,085		 	87,777		 	92,274		 	83,536		
 	 	 	 	 	 	 	 	
Computation of free cash flow	 	 	 	 	 	 	 	
Net cash provided by (used in) operating activities	$	(566	)	 	$	(178	)	 	$	3,994		 	$	(4,951	)	
Less: purchases of property and equipment	(4,084	)	 	(6,825	)	 	(12,494	)	 	(14,231	)	
Less: internal-use software development costs	(1,540	)	 	(1,165	)	 	(4,313	)	 	(3,548	)	
Free cash flow	$	(6,190	)	 	$	(8,168	)	 	$	(12,813	)	 	$	(22,730	)	

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 loss and operating margin, non-GAAP net loss, non-GAAP net loss per share, basic and diluted, and free cash flow.

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 and Acquisition Related Expenses: 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. Zendesk views acquisition related expenses 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.

Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities, less purchases of property and equipment and internal-use software development costs. Zendesk uses free cash flow, among 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 provides investors with an important perspective on the cash available to fund ongoing operations.

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

Zendesk's management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation expense, amortization of share-based compensation capitalized in internal-use software, amortization of purchased intangibles, transaction costs related to acquisitions, 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 for its customer service platform (Zendesk Support) and live chat software (Zendesk Chat), dollar-based net expansion rate, monthly recurring revenue represented by its churned customers, and the percentage of its monthly recurring revenue originating from customers with more than 100 agents.

Zendesk defines the number of paid customer accounts at the end of any particular period as the sum of the number of accounts on its customer service platform, exclusive of its legacy Starter plan, free trials or other free services, and the number of accounts using its live chat software, exclusive of free trials or other free services, each as of the end of the period and as identified by a unique account identifier. Use of Zendesk’s customer service platform and live chat software requires separate subscriptions and each of these accounts are treated as a separate paid customer account. Existing customers may also expand their utilization of Zendesk’s customer service platform or live chat software by adding new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s customer service platform and live chat software to service separate subsidiaries, divisions, or work processes. Each of these accounts is also treated as a separate paid customer account. Zendesk does not currently incorporate accounts using its analytics software into the determination of the number of paid customer accounts. Accounts that subscribe to Zendesk’s Essential plan are included in the determination of the number of paid customer accounts.

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 features on Zendesk’s customer service platform, such as voice subscriptions, 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 monthly recurring revenue for a set of paid customer accounts on its customer service platform and live chat software. 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 one-time discounts or any platform usage above the subscription base, if any, that may be applicable to such subscription. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other United States generally accepted accounting principles, or 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 monthly recurring revenue of the paid customer accounts on Zendesk’s customer service platform and live chat software 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 monthly recurring revenue of 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 transfer of agents between paid customer accounts, 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 74,300 customers, as compared to the approximately 87,400 total paid customer accounts as of September 30, 2016. 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 on its customer service platform or live chat software and paid customer accounts associated with reseller and other similar channel arrangements.

Starting in the quarter ended March 31, 2016, Zendesk began incorporating operating metrics associated with its live chat software into its dollar-based net expansion rate. Zendesk does not currently incorporate operating metrics associated with its analytics software 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 calculates its monthly recurring revenue represented by its churned customers on an annualized basis by dividing base revenue associated with paid customer accounts on Zendesk’s customer service platform that churn, either by termination of the subscription or failure to renew, during the annual period being measured, by Zendesk’s base revenue. Zendesk’s monthly recurring revenue represented by its churned customers excludes expansion or contraction associated with paid customer accounts on Zendesk’s customer service platform and the effect of upgrades or downgrades in subscription plan. The monthly recurring revenue represented by its churned customers is adjusted to exclude paid customer accounts that churned from the customer base used that share common corporate information with customer accounts that did not churn from the customer base during the annual period being measured. While not material, Zendesk believes the failure to make this adjustment could otherwise skew the monthly recurring revenue represented by its churned customers as a result of customers that maintain multiple paid customer accounts on its customer service platform.

Zendesk’s percentage of monthly recurring revenue that is generated by customers with 100 or more agents is determined by dividing the monthly recurring revenue for paid customer accounts with more than 100 agents on its customer service platform as of the measurement date by the monthly recurring revenue for all paid customer accounts on its customer service platform as of the measurement date. Zendesk determines the customers with 100 or more agents as of the measurement date based on the number of activated agents at the measurement date and includes adjustments to aggregate paid customer accounts that share common corporate information.

Zendesk determines the annualized value of a contract by annualizing the monthly recurring revenue for such contract.

Zendesk does not currently incorporate operating metrics associated with its live chat software or its analytics software into its measurement of monthly recurring revenue represented by its churned customers or percentage of monthly recurring revenue that is generated by customers with 100 or more agents.

Zendesk’s freemium plans include its legacy Starter plan for its customer service platform, its Lite plan for its live chat software, and its Inbox service for facilitating and simplifying email collaboration on group email aliases. Zendesk believes these services provide exposure to its brand and establish a relationship that can facilitate further adoption of its customer service platform and live chat software as organizations grow in size and their service needs grow more complex. A customer account on Zendesk’s freemium plans is considered active based on whether functionality of the service has been utilized within the 90-day period preceding the measurement date. A single consolidated organization or customer may have multiple freemium customer accounts across each of Zendesk’s customer service platform, live chat software, and Inbox service. Each of these accounts is treated as a separate customer account on Zendesk’s freemium products.

Source: Zendesk, Inc.

Contact:
Zendesk, Inc.
 
Investor Contact:
Marc Cabi, +1 415-852-3877
ir@zendesk.com
 
or
 
Media Contact:
Matt Hicks, +1 415-529-5606
press@zendesk.com

Zendesk Shareholder Letter Q3 2016 - 1 v Third Quarter 2016 Shareholder Letter November 01, 2016 Exhibit 99.2 

 

Zendesk Shareholder Letter Q3 2016 - 2 Mikkel Svane CEO In case you haven’t noticed, a lot has changed at Zendesk. Over the past year we have invested to broaden our family of products. Last week, we unveiled our new corporate branding and an expanded product portfolio, furthering our vision of delivering better customer experiences. The new Zendesk family of products represents Zendesk’s shift from a single customer service product to a unified product family focused on improving customer relationships. The Zendesk family of products helps organizations understand their customers, improve communication, and offer support where and when it’s needed most. For the third quarter of 2016, we achieved revenue of $80.7 million. While this represents substantial growth of 45% over the third quarter of 2015 and exceeded our previously published guidance, we feel we did not execute to our fullest potential. In July, we realigned our sales and marketing activities with the goal of more efficiently winning new business and expanding within our installed customer base. That reorganization caused more employee turnover and disruption than we had expected and impacted our ability to convert pipeline into closed business, especially late in the quarter and in our largest Americas region. We also fell short of our expectations on service uptime, disappointing our customers in ways that aren’t acceptable. We’ve taken immediate action to address this issue, as discussed in more detail below. Despite those challenges, there was much to be excited about in our business performance during the quarter. Our core low-touch business continued to thrive, with the result being that a very substantial portion of our business is being closed with short and highly efficient sales cycles. We crossed 87,000 paid customer accounts, a number that demonstrates our success in landing new customers. Additionally, we remain focused on landing with larger organizations, continuing to employ our land-and-expand strategy to efficiently manage our customer acquisition costs. We have high confidence in our ability to expand with many of these new customers. Elena Gomez CFO Marc Cabi Strategy & IR 

 

Zendesk Shareholder Letter Q3 2016 - 3 Third quarter 2016 financial summary (in thousands, except per share data) Three Months Ended September 30, GAAP Results 2016 2015 Revenue $ 80,717 $ 55,661 Gross profit 56,851 38,622 Gross margin 70.4% 69.4% Operating loss $ (26,213) $ (18,807) Operating margin -32.5% -33.8% Net loss $ (25,826) $ (18,924) Net loss per share (0.27) (0.22) Non-GAAP Results Non-GAAP gross profit $ 60,090 $ 40,407 Non-GAAP gross margin 74.4% 72.6% Non-GAAP operating loss $ (4,256) $ (4,131) Non-GAAP operating margin -5.3% -7.4% Non-GAAP net loss $ (3,869) $ (4,248) Non-GAAP net loss per share (0.04) (0.05) We remain focused on scaling our operations and delivering year-over-year operating margin improvement. For the third quarter of 2016 versus the third quarter of 2015, we expanded GAAP gross margin to 70.4% from 69.4% and GAAP operating margin to -32.5% from -33.8%. When comparing the same periods on a non-GAAP basis, we expanded gross margin to 74.4% from 72.6% and operating margin to -5.3% from -7.4%. With the re-architecting of our go-to-market organization largely complete and the roll-out of our new brand messaging and family of products, we believe we are well positioned to close out 2016 and turn to 2017. We will maintain our focus on sustaining high growth while demonstrating scale through improved operating margins over time as we pursue our ultimate goal of helping organizations build better relationships with their customers. 

 

Zendesk Shareholder Letter Q3 2016 - 4 The new Zendesk As we prepare for the future of Zendesk, we look back at our accomplishments over the last 9 years. We have come a long way with our customers, who define innovation in a new economy where listening to the voice of the customer and customer satisfaction are prerequisites for success. We have learned so much from our next-generation customers like AdRoll, Instacart, Lonely Planet, MailChimp, Shopify, and a long list of others. They have demonstrated that building relationships and loyalty through a journey of customer interactions and experiences is how to achieve success, not one-off transactions of the days past. In fact, today’s most successful companies are moving away from an old view that customers need to be managed and automated, to a new view where building customer relationships is at the core of their business. The new reality is that business software must be built for customers f irst. Modern software should allow companies to deliver positive experiences without being held back by the inefficiencies of silos created by departments and functions within companies. We embark on a new journey to provide our customers with software tools that allow companies to broaden how they address their customer relationships. Our future strategy is not to replicate an old view of CRM -- defined by sales automation, marketing automation, and service automation -- rather, our vision is to build software for relationships first. Last week, we introduced our new and expanded product family that is designed to help organizations build better customer relationships. Customer support remains a core part of that effort, as does delivering products that enable customers to communicate with companies across multiple channels. In addition, we are expanding our software to better understand customers. 

 

Zendesk Shareholder Letter Q3 2016 - 5 A beautifully simple system for tracking, prioritizing, and solving customer support tickets A self-service destination with articles, interactive forums, and community that helps customers help themselves Live chat software that provides a fast and responsive way to connect with customers in the moment Call center software for more personal and productive phone support conversations Message software that helps companies engage customers on their favorite messaging apps Analytics software that unifies data for all Zendesk products and numerous third-party sources to help businesses measure and understand the entire customer experience Customer intelligence so businesses can proactively reach out with relevant and helpful messages Specifically, we have added two new products to the family that together help organizations build more personal connections with their customers through analytics and customer intelligence. Zendesk Explore powers analytics and unifies data for all of Zendesk’s products and a vast number of third-party sources. It makes customer data accessible across an organization, so businesses can measure and understand the entire customer experience. Zendesk Connect provides customer intelligence so businesses can proactively reach out with relevant and helpful messages. It combines historical data with individual customer activity from websites, mobile apps, and other digital interactions. Using Zendesk Connect, businesses can guide customers through new product experiences, provide relevant information to avoid support issues, and recommend related products -- letting businesses reach out at the right time and place. Along with Zendesk Explore and Zendesk Connect, the Zendesk family of products includes Zendesk Support, Zendesk Help Center, Zendesk Chat, Zendesk Talk, and Zendesk Message. Explore, Connect, and Message are in early access programs. We expect Explore will be generally available for Support and Chat in Q1 2017, with general availability for additional Zendesk products beginning in Q2 2017. We expect Connect and Message will be generally available in Q2 2017. 

 

Zendesk Shareholder Letter Q3 2016 - 6 A scalable brand Along with new products, we introduced our entirely new brand identity for Zendesk. Our challenge was to create a new brand system that allowed us to have unique identities for our individual products, while unifying them under our company brand. Drawing inspiration from our roots in Danish design, we unveiled unique logos for each of our products built on a concept called “Relationshapes.” Each product is identified by the interaction of two everyday shapes. Those shapes come together as a large “Z” to form our new corporate identity. Our brand has long played a key role in our success. As we look to the future, the Zendesk brand will continue to expand toward our broader addressable market of products for better customer relationships. 

 

Zendesk Shareholder Letter Q3 2016 - 7 Product investment A big part of our move toward being a unified family of products is our investments in making sure our products work well together. We are investing in their deep and seamless integration. All of them share a common interface and are being developed to support a single login and ultimately, a shared customer data platform. To underscore our commitment to these goals and the expanded reach of our products, we are pleased to announce the appointment of Adrian McDermott as our President of Products. Over the last six years, Adrian has been instrumental in translating our aspirations into software built for better customer relationships. In this new leadership role, he will continue moving us forward on the path toward building out our unified product family, and transforming the customer and agent experience. Scaling and maturing our infrastructure As the ongoing relationship between organizations and their customers becomes central to the success of modern business models, we recognize and appreciate the trust our customers have placed in us to help manage those relationships. We’ve worked hard to earn that trust by investing in our infrastructure to support the high traffic volume needs of our biggest and fastest growing customers. Zendesk now processes individual customer service requests at a rate of over 1 billion per year. As recent attacks on internet infrastructure have revealed, businesses are increasingly dependent on the availability and performance of mission critical services like ours to manage their operations. Zendesk is not immune to these disruptions and, over the course of 2016, our customers have been impacted by them as well as other incidents more directly under our control. That customer experience is not acceptable to us and we are redoubling our efforts to ensure the availability and Adrian McDermott President of Products Tom Keiser Chief Information Officer & SVP Technology Operations performance of our products are best-in-class. As part of that effort, we have brought our infrastructure and technology operations organizations under the leadership of Tom Keiser. He joined us as our CIO in the second quarter and will now also serve as our SVP of Technology Operations. We believe that Tom, who managed operations teams at scale while at Gap and LBrands and has been transformative in his short tenure at Zendesk, is the right leader to help continue to mature this part of our organization. Another aspect of our evolving operations strategy is the continued refinement of our hosting infrastructure to optimize for reliability, performance, and cost. We currently provide our services through a combination of co-located managed data centers and cloud infrastructure providers such as Amazon Web Services (AWS) and Google Cloud Platform. Earlier this year, Zendesk successfully launched its first AWS implementation in the APAC region. As a result, our pursuit of opportunities to leverage efficient, scalable, and resilient managed hosting solutions has accelerated. During the third quarter, we launched two US-based AWS instances. We will continue to evaluate the success of these efforts over the next few quarters and our approach to infrastructure investments. 

 

Zendesk Shareholder Letter Q3 2016 - 8 Expanding developer channels Earlier this year, we announced an integration with Google Play that allows Zendesk customers to automatically convert Google Play Store reviews into support tickets. We expanded on this in the third quarter, releasing the Channel Framework, which allows developers to build their own integrations and bring customer communications from anywhere into Zendesk. With the Channel Framework, Zendesk customers can turn reviews, comments, and messages into two-way customer service conversations. These channel integrations are currently available on our redesigned Apps Marketplace. We also updated the marketplace with better search and browsing of our apps. We expect the Apps Marketplace to be the foundation for a new multi-product experience where customers will soon be able to install apps into Chat and other emerging products. 

 

Zendesk Shareholder Letter Q3 2016 - 9 Advanced Voice Key accomplishments Jan 2015 Zendesk Neighbor Foundation Facebook Messenger Analyst Day Zendesk MessageAnalytics Gartner MQ Visionary Forrester Wave Pathfinder Automatic Answers 65K 75K 85K80K 1,000 Employee Count Paid Customer Accounts July 2016 1,500 70K Satisfaction Prediction 1,200 Jan 2016 60K Gartner MQ Leader Premium Live Chat SMS Google Play Help Center “Copenhagen” Channel Framework New Products RebrandIndia Of_f_ice Opening Of_f_ice 365 Customers Notable customer success stories from the third quarter include Vend, a cloud point-of-sale software company based in New Zealand. Zendesk is at the heart of Vend’s award-winning support. Following the announcement of our Automatic Answers machine learning feature in July, the company was excited to be a part of the early access program to test it on their email and web form channels. With over 6,000 interactions per month with retailers from over 100 countries, Automatic Answers is now solving a couple of hundred requests per month without any input from a retailer advocate. Automatic Answers has helped Vend’s retail customers get the answers they seek faster, without creating extra work for their support team. Other noteworthy customers that recently joined us or expanded with us include: • Instacart, a popular internet-based grocery delivery service • MailChimp, an online email marketing solution • Konami Gaming, innovators of slot machines and gaming enterprise management systems • Neato Robotics, a robotics company making automatic, cordless robot vacuums • Easynvest, a Brazilian investment management company Advanced Voice Key accomplishments Jan 2015 Zendesk Neighbor Foundation Facebook Messenger Analyst Day Zendesk MessageAnalytics Gartner MQ Visionary Forrester Wave Pathfinder Automatic Answers 65K 75K 85K80K 1,000 Employee Count Paid Customer Accounts July 2016 1,500 70K Satisfaction Prediction 1,200 Jan 2016 60K Gartner MQ Leader Premium Live Chat SMS Google Play Help Center “Copenhagen” Channel Framework New Products RebrandIndia Of_f_ice Opening Of_f_ice 365 Key accomplishments Timeline not to scale 

 

Zendesk Shareholder Letter Q3 2016 - 10 Operating metrics Earlier in 2016, we shared our goal of focusing our sales and marketing investments on pursuing opportunities we believe result in building a repeatable and efficient model for customer acquisition. With our Chief Revenue Officer Bryan Cox on board, we’ve refined our go-to- market strategy to focus on these low-touch, more efficient sales cycle opportunities, while still driving efforts to land and pursue expansion opportunities within larger organizations. As a proxy of our success with larger opportunities, we measure our number of contracts signed with an annual value of $50,000 or greater. In the third quarter, we closed 44% more of these contracts versus a year ago. We saw a decrease in the average size of these transactions as compared to the same period last year, which reflects the unpredictable nature of closing some of our largest opportunities. Another metric we use to gauge our penetration within larger organizations is represented by the percentage of recurring revenue generated by customers with more than 100 agents, which remained strong at 33% in the third quarter of 2016 versus 31% in the third quarter of 2015. Our dollar-based net expansion rate at the end of the third quarter was 114%. This result is in line with expectations and, similar to last quarter, is impacted by the anniversary of large wins in the same period of 2015. The combined churn and contraction rate, which is a component of this metric, has not significantly changed since the time of our IPO. We expect our dollar-based net expansion rate to range between 110-120% over the next several quarters. % of total quarter-ending MRR from paid customer accounts with 100+ seats 

 

Zendesk Shareholder Letter Q3 2016 - 11 Corporate Social Responsibility At Zendesk, corporate social responsibility is a core component of our brand. In September, we were proud to receive the Corporate Partner Award for our dedication and commitment to building neighborhood and community partnerships at the 39th Annual Wu Yee Gala hosted in San Francisco. Wu Yee Children’s Services connects diverse and low-income families to critical health and education resources. We have had the pleasure of offering the agency our community space located in our San Francisco headquarters to host family dinners, graduation ceremonies, and even a Frozen Sing- Along night for Wu Yee families. Also in September, Mikkel gave the keynote address at the C.H.E.F.S. Class 61 graduation ceremony, which was hosted in our community space. C.H.E.F.S. (Conquering Homelessness through Employment in Food Services) is a five-month culinary training program operated by Episcopal Community Services that prepares homeless and formerly homeless individuals for jobs in food services. FPO 

 

Zendesk Shareholder Letter Q3 2016 - 12 Financial measures and cash flows Our mission to demonstrate scale through year- over-year margin improvement continued during the third quarter of 2016. During this quarter, we achieved gross margin expansion based primarily on continued improvement in utilization of our capitalized internal-use software, employee resources, and data center capacity. GAAP gross margin increased to 70.4% in the third quarter of 2016 compared to 69.1% in the second quarter of 2016. GAAP gross margin in the third quarter of 2015 was 69.4%. Non-GAAP gross margin increased to 74.4% in the third quarter of 2016 compared to 73.3% in the second quarter of 2016. Non-GAAP gross margin in the third quarter of 2015 was 72.6%. GAAP operating loss for the third quarter of 2016 was $26.2 million compared to GAAP operating loss for the second quarter of 2016 of $26.3 million. GAAP operating loss for the third quarter of 2015 was $18.8 million. Non-GAAP operating loss for the third quarter of 2016 was $4.3 million, which was better than our outlook for the quarter, and compares to non-GAAP operating loss for the second quarter of 2016 of $5.6 million. Non-GAAP operating loss for the third quarter of 2015 was $4.1 million. GAAP operating margin improvement is attributed to improvements in gross margin, and overall productivity gains in administrative and research and development costs. GAAP operating margin for the third quarter of 2016 improved to -32.5% from -35.4% in the second quarter of 2016. GAAP operating margin was -33.8% in the third quarter of 2015. Non-GAAP operating margin improved to -5.3% in the third quarter of 2016 from -7.6% in the second quarter of 2016. Non-GAAP operating margin was -7.4% in the third quarter of 2015. GAAP net loss for the third quarter of 2016 was $25.8 million or $0.27 per share compared to GAAP net loss of $26.3 million or $0.28 per share for the second quarter of 2016. GAAP net loss was $18.9 million or $0.22 per share for the third quarter of 2015. Non-GAAP net loss for the third quarter of 2016 was $3.9 million or $0.04 per share compared to non-GAAP net loss of $5.6 million or $0.06 per share for the second quarter of 2016. Non-GAAP net loss was $4.2 million or $0.05 per share for the third quarter of 2015. Weighted average shares used to compute both GAAP and non- GAAP net loss per share for the third quarter of 2016 was 94.1 million. Non-GAAP results for the third quarter of 2016 exclude $21.0 million in share-based compensation and related expenses (including $0.6 million of employer tax related to employee stock transactions and $0.4 million of amortized share-based compensation capitalized in internal- use software), and $1.0 million of amortization of purchased intangibles. Non-GAAP results for the second quarter of 2016 exclude $19.7 million in share-based compensation and related expenses (including $0.7 million of employer tax related to employee stock transactions and $0.4 million of amortized share-based compensation capitalized in internal-use software), and $1.0 million of amortization of purchased intangibles. Non-GAAP results for the third quarter of 2015 exclude $14.0 million in share-based compensation and related expenses (including $0.2 million of employer tax related to employee stock transactions and $0.3 million of amortized share-based compensation capitalized in internal-use software), $0.3 million of acquisition related costs, and $0.4 million of amortization of purchased intangibles. During the third quarter of 2016, net cash from operating activities was -$0.6 million. We ended the third quarter of 2016 with $77.6 million of cash and equivalents, and we had an additional $133.8 million of short-term marketable securities and $71.1 million in long-term marketable securities. 

 

Zendesk Shareholder Letter Q3 2016 - 13 Guidance The evolution and scaling of our core product to meet our customers’ needs, introduction of an expanded family of products, and the unveiling of our new brand provide a solid foundation upon which we believe we can continue to capitalize and grow our business. We are also excited by the immediate impact our new leaders have had on helping us understand the different dynamics of our business and setting us up to execute more sustainably over the next year. Our core low- touch, high velocity business segment continues to grow at a highly predictable pace. We enter the fourth quarter of 2016 with a healthy pipeline of new and large prospective opportunities. Our financial guidance for the remainder of 2016 reflects the fact that many of our early go-to-market strategies to capitalize on larger opportunities remain unpredictable from quarter to quarter. We are confident in our ability to build a company that can sustain solid revenue growth and meet our goal of $1 billion in revenues in 2020. For the fourth quarter of 2016, we expect revenue to range between $86.0 and $88.0 million and we expect our GAAP operating loss to range between $29.0 and $30.0 million. We expect our non-GAAP operating loss for the fourth quarter of 2016 to range between $5.0 and $6.0 million. Our GAAP operating loss for the fourth quarter of 2016 is estimated to include share-based compensation and related expenses of approximately $23.0 million, and amortization of purchased intangibles of approximately $1.0 million. For the full year of 2016, we expect revenue to range between $309.0 and $311.0 million. We expect our GAAP operating loss for the full year of 2016 to range between $108.5 and $109.5 million, and we expect our non-GAAP operating loss to range between $22.0 and $23.0 million. Our GAAP operating loss for the full year of 2016 is estimated to include share- based compensation and related expenses of approximately $82.7 million, and amortization of purchased intangibles of approximately $3.8 million. The timing of our data center investments and our decision to supplement our co-located data center investments with the use of third-party hosting solutions may impact the allocation of cash flows between cash flows from operations and cash used for investing activities. We currently estimate our net cash from operating activities and free cash flow for the fourth quarter of 2016 to be positive. We continue to target to be free cash flow positive for the full year of 2017. This target regarding free cash flow includes cash used for purchases of property and equipment and internal-use software development costs. We have not reconciled free cash flow guidance to net cash from operating activities for this future period 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 period is not available without unreasonable effort. Finally, we estimate we will have approximately 95.6 million weighted average shares outstanding for the fourth quarter of 2016 and 93.1 million weighted average shares outstanding for the full year of 2016, each based only on current shares outstanding and anticipated activity associated with equity incentive plans. 

 

Zendesk Shareholder Letter Q3 2016 - 14 Condensed consolidated statements of operations (In thousands, except per share data; unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Revenue $80,717 $55,661 $223,376 $146,122 Cost of revenue 23,866 17,039 68,318 47,491 Gross profit 56,851 38,622 155,058 98,631 Operating expenses: Research and development 22,953 16,031 66,683 43,517 Sales and marketing 43,899 29,079 119,421 79,725 General and administrative 16,212 12,319 48,149 33,982 Total operating expenses 83,064 57,429 234,253 157,224 Operating loss (26,213) (18,807) (79,195) (58,593) Other income (expense), net 681 145 745 (428) Loss before provision for income taxes (25,532) (18,662) (78,450) (59,021) Provision for income taxes 294 262 800 554 Net loss (25,826) (18,924) (79,250) (59,575) Net loss per share, basic and diluted $(0.27) $(0.22) $(0.86) $(0.71) Weighted-average shares used to compute net loss per share, basic and diluted 94,085 87,777 92,274 83,536 

 

Zendesk Shareholder Letter Q3 2016 - 15 Condensed consolidated balance sheets (In thousands, except par value; unaudited) September 30, 2016 December 31, 2015 Assets Current Assets: Cash and cash equivalents $77,589 $ 216,226 Marketable securities 133,758 29,414 Accounts receivable, net of allowance for doubtful accounts of $1,213 and $763 as of September 30, 2016 and December 31, 2015, respectively 37,645 26,168 Prepaid expenses and other current assets 19,437 11,423 Total current assets 268,429 283,231 Marketable securities, noncurrent 71,139 22,336 Property and equipment, net 57,507 56,540 Goodwill and intangible assets, net 54,848 57,050 Other assets 4,504 3,529 Total assets $456,427 $ 422,686 Liabilities and stockholders’ equity Current liabilities: Accounts payable $5,491 $ 9,332 Accrued liabilities 12,839 9,742 Accrued compensation and related benefits 17,929 14,115 Deferred revenue 110,174 84,210 Total current liabilities 146,433 117,399 Deferred revenue, noncurrent 1,538 1,405 Other liabilities 9,922 10,592 Total liabilities 157,893 129,396 Stockholders’ equity: Preferred stock, par value $0.01 per share — — Common stock, par value $0.01 per share 953 905 Additional paid-in capital 595,135 511,183 Accumulated other comprehensive loss (1,730) (2,225) Accumulated deficit (295,172) (215,921) Treasury stock, at cost (652) (652) Total stockholders’ equity 298,534 293,290 Total liabilities and stockholders’ equity $456,427 $ 422,686 

 

Zendesk Shareholder Letter Q3 2016 - 16 Three Months Ended September 30, 2016 2015 Cash flows from operating activities Net loss $(25,826) $(18,924) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,853 4,868 Share-based compensation 19,995 13,442 Other 622 207 Excess tax benefit from share-based award activity (133) (29) Changes in operating assets and liabilities: Accounts receivable (9,355) (9,692) Prepaid expenses and other current assets 459 (900) Other assets and liabilities (1,449) (257) Accounts payable (1,641) (856) Accrued liabilities 842 991 Accrued compensation and related benefits (286) (96) Deferred revenue 9,353 11,068 Net cash used in operating activities (566) (178) Cash flows from investing activities Purchases of property and equipment (4,084) (6,825) Internal-use software development costs (1,540) (1,165) Purchases of marketable securities (80,469) (21,144) Proceeds from maturities of marketable securities 7,495 12,405 Proceeds from sale of marketable securities 25,613 14,333 Cash paid for the acquisition of Zopim, net of cash acquired — (551) Net cash used in investing activities (52,985) (2,947) Cash flows from financing activities Proceeds from exercise of employee stock options 10,499 797 Taxes paid related to net share settlement of equity awards (281) (278) Proceeds from employee stock purchase plan 3,032 2,295 Excess tax benefit from share-based award activity 133 29 Net cash provided by financing activities 13,383 2,843 Effect of exchange rate changes on cash and cash equivalents (279) (1) Net decrease in cash and cash equivalents (40,447) (283) Cash and cash equivalents at the beginning of period 118,036 255,669 Cash and cash equivalents at the end of period $77,589 $255,386 Condensed consolidated statements of cash flows (In thousands; unaudited) 

 

Zendesk Shareholder Letter Q3 2016 - 17 Non-GAAP results (In thousands, except per share data) The follow- ing table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this letter. Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Reconciliation of gross profit and gross margin GAAP gross profit $56,851 $38,622 $155,058 $98,631 Plus: Share-based compensation 1,919 1,131 5,355 3,136 Plus: Employer tax related to equity transactions 85 33 277 142 Plus: Amortization of purchased intangibles 848 352 2,525 1,058 Plus: Amortization of share-based compensation capitalized in internal-use software 387 269 1,223 753 Non-GAAP gross profit $60,090 $40,407 $164,438 $103,720 GAAP gross margin 70% 69% 69% 67% Non-GAAP adjustments 4% 4% 5% 4% Non-GAAP gross margin 74% 73% 74% 71% Reconciliation of operating expenses GAAP research and development $22,953 $16,031 $66,683 $43,517 Less: Share-based compensation (7,172) (4,974) (20,548) (13,484) Less: Employer tax related to equity transactions (232) (87) (802) (348) Non-GAAP research and development $15,549 $10,970 $45,333 $29,685 GAAP research and development as percentage of revenue 28% 29% 30% 30% Non-GAAP research and development as percentage of revenue 19% 20% 20% 20% GAAP sales and marketing $43,899 $29,079 $119,421 $79,725 Less: Share-based compensation (6,657) (3,786) (17,780) (10,154) Less: Employer tax related to equity transactions (184) (50) (574) (301) Less: Amortization of purchased intangibles (106) (77) (314) (243) Non-GAAP sales and marketing $36,952 $25,166 $100,753 $69,027 GAAP sales and marketing as percentage of revenue 54% 52% 53% 55% Non-GAAP sales and marketing as percentage of revenue 46% 45% 45% 47% GAAP general and administrative $16,212 $12,319 $48,149 $33,982 Less: Share-based compensation (4,247) (3,551) (12,654) (10,283) Less: Employer tax related to equity transactions (120) (76) (462) (314) Less: Transaction costs related to acquisition — (290) — (290) Non-GAAP general and administrative $11,845 $8,402 $35,033 $23,095 GAAP general and administrative as percentage of revenue 20% 22% 22% 23% Non-GAAP general and administrative as percentage of revenue 15% 15% 16% 16% 

 

Zendesk Shareholder Letter Q3 2016 - 18 (continued...) Non-GAAP results (In thousands, except per share data) The follow- ing table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this letter. Three Months Ended September 30, Nine Months Ended September 30, 2016 2015 2016 2015 Reconciliation of operating loss and operating margin GAAP operating loss $(26,213) $(18,807) $(79,195) $(58,593) Plus: Share-based compensation 19,995 13,442 56,337 37,057 Plus: Employer tax related to equity transactions 621 246 2,115 1,105 Plus: Amortization of purchased intangibles 954 429 2,839 1,301 Plus: Transaction costs related to acquisition — 290 — 290 Plus: Amortization of share-based compensation capitalized in internal-use software 387 269 1,223 753 Non-GAAP operating loss $(4,256) $(4,131) $(16,681) $(18,087) GAAP operating margin (32)% (34)% (35)% (40)% Non-GAAP adjustments 27% 27% 28% 28% Non-GAAP operating margin (5)% (7)% (7)% (12)% Reconciliation of net loss GAAP net loss $(25,826) $(18,924) $(79,250) $(59,575) Plus: Share-based compensation 19,995 13,442 56,337 37,057 Plus: Employer tax related to equity transactions 621 246 2,115 1,105 Plus: Amortization of purchased intangibles 954 429 2,839 1,301 Plus: Transaction costs related to acquisition — 290 — 290 Plus: Amortization of share-based compensation capitalized in internal-use software 387 269 1,223 753 Non-GAAP net loss $(3,869) $(4,248) $(16,736) $(19,069) Reconciliation of net loss per share, basic and diluted GAAP net loss per share, basic and diluted $(0.27) $(0.22) $(0.86) $(0.71) Non-GAAP adjustments to net loss 0.23 0.17 0.68 0.48 Non-GAAP net loss per share, basic and diluted $(0.04) $(0.05) $(0.18) $(0.23) Weighted-average shares used to compute net loss per share, basic and diluted 94,085 87,777 92,274 83,536 Computation of free cash flow Net cash provided by (used in) operating activities $(566) $(178) $3,994 $(4,951) Less: purchases of property and equipment (4,084) (6,825) (12,494) (14,231) Less: internal-use software development costs (1,540) (1,165) (4,313) (3,548) Free cash flow $(6,190) $(8,168) $(12,813) $(22,730) 

 

Zendesk Shareholder Letter Q3 2016 - 19 About Zendesk Zendesk builds software for better customer relationships. It empowers organizations to improve customer engagement and better understand their customers. More than 87,000 paid customer accounts in over 150 countries and territories use Zendesk products. Based in San Francisco, Zendesk has operations in the United States, Europe, Asia, Australia, and South America. Learn more at www.zendesk.com. Forward-Looking Statements This shareholder letter contains forward-looking statements, including, among other things, statements regarding Zendesk’s future financial performance, its continued investment to grow its business, and progress towards its long-term financial objectives. The words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future expectation or intent regarding Zendesk’s financial results, operations, and other matters are intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, performance, or achievements to differ materially, including (i) adverse changes in general economic or market conditions; (ii) Zendesk’s ability to adapt its customer service platform to changing market dynamics and customer preferences or achieve increased market acceptance of its platform; (iii) 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; (iv) Zendesk’s limited operating history, which makes it difficult to evaluate its prospects and future operating results; (v) Zendesk’s ability to effectively manage its growth and organizational change; (vi) the market in which Zendesk operates is intensely competitive, and Zendesk may not compete effectively; (vii) the development of the market for software as a service business software applications; (viii) Zendesk’s ability to sell its live chat software as a standalone service and more fully integrate its live chat software with its customer service platform; (ix) Zendesk’s ability to integrate We Are Cloud SAS with its existing corporate operations, to sell its analytics software as a standalone service, and to integrate Zendesk’s analytics software with Zendesk’s customer service platform; (x) breaches in Zendesk’s security measures or unauthorized access to its customers’ data; (xi) service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xii) real or perceived errors, failures, or bugs in its products; (xiii) Zendesk’s substantial reliance on its customers renewing their subscriptions and purchasing additional subscriptions; and (xiv) Zendesk’s ability to effectively expand its sales capabilities. The forward-looking statements contained in this shareholder letter are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. Forward-looking statements represent Zendesk’s management’s beliefs and assumptions only as of the date such statements are made. Zendesk undertakes no obligation to update any forward-looking statements made in this shareholder letter to reflect events or circumstances after the date of this shareholder letter or to reflect new information or the occurrence of unanticipated events, except as required by law. 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 loss and operating margin, non-GAAP net loss, non-GAAP net loss per share, basic and diluted, and free cash flow. 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 and Acquisition Related Expenses: 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. Zendesk views acquisition related expenses 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. 

 

Zendesk Shareholder Letter Q3 2016 - 20 Zendesk provides disclosures regarding its free cash flow, which is defined as net cash from operating activities, less purchases of property and equipment and internal-use software development costs. Zendesk uses free cash flow, among 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 provides investors with an important perspective on the cash available to fund ongoing operations. Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these non-GAAP financial measures are useful because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. This allows investors and others to better understand and evaluate Zendesk’s operating results and future prospects in the same manner as management. Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation expense, amortization of share-based compensation capitalized in internal-use software, amortization of purchased intangibles, transaction costs related to acquisitions, 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 for its customer service platform (Zendesk Support) and live chat software (Zendesk Chat), dollar- based net expansion rate, monthly recurring revenue represented by its churned customers, and the percentage of its monthly recurring revenue originating from customers with more than 100 agents. Zendesk defines the number of paid customer accounts at the end of any particular period as the sum of the number of accounts on its customer service platform, exclusive of its legacy Starter plan, free trials or other free services, and the number of accounts using its live chat software, exclusive of free trials or other free services, each as of the end of the period and as identified by a unique account identifier. Use of Zendesk’s customer service platform and live chat software requires separate subscriptions and each of these accounts are treated as a separate paid customer account. Existing customers may also expand their utilization of Zendesk’s customer service platform or live chat software by adding new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s customer service platform and live chat software to service separate subsidiaries, divisions, or work processes. Each of these accounts is also treated as a separate paid customer account. Zendesk does not currently incorporate accounts using its analytics software into the determination of the number of paid customer accounts. Accounts that subscribe to Zendesk’s Essential plan are included in the determination of the number of paid customer accounts. 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 features on Zendesk’s customer service platform, such as voice subscriptions, 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 monthly recurring revenue for a set of paid customer accounts on its customer service platform and live chat software. 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 one-time discounts or any platform usage above the subscription base, if any, that may be applicable to such subscription. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other United States generally accepted accounting principles, or 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 monthly recurring revenue of the paid customer accounts on Zendesk’s customer service platform and live chat software 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 monthly recurring revenue of 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 

 

Zendesk Shareholder Letter Q3 2016 - 21 the transfer of agents between paid customer accounts, 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 74,300 customers, as compared to the approximately 87,400 total paid customer accounts as of September 30, 2016. 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 on its customer service platform or live chat software and paid customer accounts associated with reseller and other similar channel arrangements. Starting in the quarter ended March 31, 2016, Zendesk began incorporating operating metrics associated with its live chat software into its dollar-based net expansion rate. Zendesk does not currently incorporate operating metrics associated with its analytics software 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 calculates its monthly recurring revenue represented by its churned customers on an annualized basis by dividing base revenue associated with paid customer accounts on Zendesk’s customer service platform that churn, either by termination of the subscription or failure to renew, during the annual period being measured, by Zendesk’s base revenue. Zendesk’s monthly recurring revenue represented by its churned customers excludes expansion or contraction associated with paid customer accounts on Zendesk’s customer service platform and the effect of upgrades or downgrades in subscription plan. The monthly recurring revenue represented by its churned customers is adjusted to exclude paid customer accounts that churned from the customer base used that share common corporate information with customer accounts that did not churn from the customer base during the annual period being measured. While not material, Zendesk believes the failure to make this adjustment could otherwise skew the monthly recurring revenue represented by its churned customers as a result of customers that maintain multiple paid customer accounts on its customer service platform. Zendesk’s percentage of monthly recurring revenue that is generated by customers with 100 or more agents is determined by dividing the monthly recurring revenue for paid customer accounts with more than 100 agents on its customer service platform as of the measurement date by the monthly recurring revenue for all paid customer accounts on its customer service platform as of the measurement date. Zendesk determines the customers with 100 or more agents as of the measurement date based on the number of activated agents at the measurement date and includes adjustments to aggregate paid customer accounts that share common corporate information. Zendesk determines the annualized value of a contract by annualizing the monthly recurring revenue for such contract. Zendesk does not currently incorporate operating metrics associated with its live chat software or its analytics software into its measurement of monthly recurring revenue represented by its churned customers or percentage of monthly recurring revenue that is generated by customers with 100 or more agents. Zendesk’s freemium plans include its legacy Starter plan for its customer service platform, its Lite plan for its live chat software, and its Inbox service for facilitating and simplifying email collaboration on group email aliases. Zendesk believes these services provide exposure to its brand and establish a relationship that can facilitate further adoption of its customer service platform and live chat software as organizations grow in size and their service needs grow more complex. A customer account on Zendesk’s freemium plans is considered active based on whether functionality of the service has been utilized within the 90-day period preceding the measurement date. A single consolidated organization or customer may have multiple freemium customer accounts across each of Zendesk’s customer service platform, live chat software, and Inbox service. Each of these accounts is treated as a separate customer account on Zendesk’s freemium products. About customer metrics Source and contact: Zendesk, Inc. September 30, 2015 December 31, 2015 March 31, 2016 June 30, 2016 September 30, 2016 Paid customer accounts on Zendesk Support (approx.) 32,700 35,700 39,900 43,700 47,400 + Paid customer accounts on Zendesk Chat (approx.) 31,600 33,400 35,700 37,800 40,000 = Approximate number of paid customer accounts 64,300 69,100 75,600 81,500 87,400 Investor contact: Media contact: Marc Cabi, +1 415-852-3877 Matt Hicks, +1 415-529-5606 ir@zendesk.com press@zendesk.com 

 

 

Exhibit 99.3