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

	
 	
FORM 8-K

	
 	
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 25, 2019

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

	

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

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

Registrant’s Telephone Number, Including Area Code: 415.418.7506
(Former Name or Former Address, if Changed Since Last Report)

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

		
o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)	
o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)	
o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))	
o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))	
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.    
Emerging growth company     ¨

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

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

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

Item 2.02. Results of Operations and Financial Condition.

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

Item 5.02. Appointment of Certain Officers.

Appointment of Officer

On July 25, 2019, the Company's Board of Directors (the “Board”) appointed Ying (“Christina”) Liu as the Company’s Chief Accounting Officer, effective July 25, 2019, to serve until her successor is duly appointed or until her earlier resignation, death or removal from office. Ms. Liu will serve as the Company’s principal accounting officer. Elena Gomez, the Company’s Chief Financial Officer, previously served as principal accounting officer and will continue to serve as principal financial officer.

There are no arrangements or understandings between Ms. Liu and any other persons pursuant to which she was appointed as Chief Accounting Officer. There are also no family relationships between Ms. Liu and the executive officers or directors of the Company, and no transactions involving the Company and Ms. Liu that the Company would be required to report pursuant to Item 404(a) of Regulation S-K.

Item 7.01. Regulation FD Disclosure.

On July 30, 2019, Mikkel Svane, Chief Executive Officer of the Company, will make the graphic included with this Current Report on Form 8-K as Exhibit 99.3 available to the public. The graphic and the investor deck 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

99.1    Press Release issued by Zendesk, Inc., dated July 30, 2019.
99.2    Letter to Shareholders, dated July 30, 2019.
99.3    July 2019 Update, dated July 30, 2019.

Exhibit Index

	
		
Exhibit No.	Descri p tion
	
99.1	Press Release issued by Zendesk, Inc., dated July 30, 2019.
	
99.2    	Letter to Shareholders, dated July 30, 2019.
	
99.3    	July 2019 Update, dated July 30, 2019.

SIGNATURES

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

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

Exhibit 99.1
ZENDESK ANNOUNCES SECOND QUARTER 2019 RESULTS
 
Highlights

•	Second quarter revenue increased 37% year over year to $194.6 million	
		
•	Second quarter GAAP operating loss of $51.4 million and non-GAAP operating income of $3.8 million	

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

Results for the Second Quarter 2019
 
Revenue was $194.6 million for the quarter ended June 30, 2019 , an increase of 37% over the prior year period. GAAP net loss for the quarter ended June 30, 2019 was $54.5 million , and GAAP net loss per share (basic and diluted) was $0.50 . Non-GAAP net income was $5.9 million , and non-GAAP net income per share (basic and diluted) was $0.05 . Non-GAAP net income excludes approximately $46.8 million in share-based compensation and related expenses (including $2.7 million of employer tax related to employee stock transactions and $0.4 million of amortization of share-based compensation capitalized in internal-use software), $6.3 million of amortization of debt discount and issuance costs, $5.8 million of acquisition-related expenses, $2.6 million of amortization of purchased intangibles, and non-GAAP income tax effects of $1.0 million . GAAP net loss per share for the quarter ended June 30, 2019 was based on 110.0 million weighted average shares outstanding (basic and diluted), and non-GAAP net income per share for the quarter ended June 30, 2019 was based on 110.0 million weighted average shares outstanding (basic) and 119.7 million weighted average shares outstanding (diluted).

Outlook

As of July 30, 2019, Zendesk provided guidance for the quarter ending September 30, 2019 and updated its guidance for the year ending December 31, 2019.
 
For the quarter ending September 30, 2019, Zendesk expects to report:
		
•	Revenue in the range of $206 - 208 million	
		
•	GAAP operating income (loss) in the range of $(46) - (44) million, which includes share-based compensation and related expenses of approximately $43 million, amortization of purchased intangibles of approximately $3 million, and acquisition-related expenses of approximately $2 million	
		
•	Non-GAAP operating income (loss) in the range of $2 - 4 million, which excludes share-based compensation and related expenses of approximately $43 million, amortization of purchased intangibles of approximately $3 million, and acquisition-related expenses of approximately $2 million	
		
•	Approximately 111 million weighted average shares outstanding (basic)	
		
•	Approximately 121 million weighted average shares outstanding (diluted)	

For the full year ending December 31, 2019, Zendesk expects to report:
		
•	Revenue in the range of $807 - 811 million	
		
•	GAAP operating income (loss) in the range of $(178) - (175) million, which includes share-based compensation and related expenses of approximately $173 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $11 million	
		
•	Non-GAAP operating income (loss) in the range of $16 - 19 million, which excludes share-based compensation and related expenses of approximately $173 million, amortization of purchased intangibles of approximately $10 million, and acquisition-related expenses of approximately $11 million	
		
•	Approximately 111 million weighted average shares outstanding (basic)	
		
•	Approximately 122 million weighted average shares outstanding (diluted)	
		
•	Free cash flow in the range of $35 - 45 million	

Our guidance for free cash flow for the full year ending December 31, 2019 has been adjusted from the guidance for free cash flow provided in our shareholder letter dated April 30, 2019. This guidance was adjusted due to, among other factors, refinements in our cash flow forecasting methodology, increased acquisition activity and the associated acquisition-related expenses, the prepayment of certain vendor expenses in order to achieve more favorable pricing, additional capital expenditures intended to increase our real estate utilization, and revisions to the timing of and changes in the form of certain contingent payments from share-based to cash-based payments.

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

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

Shareholder Letter and Conference Call Information
 
The detailed Shareholder Letter is available at https://investor.zendesk.com and Zendesk will host a conference call to answer questions today, July 30, 2019, at 2:00 p.m. Pacific Time, 5:00 p.m. Eastern Time. A live webcast of the conference call will be available at https://investor.zendesk.com. The conference call can also be accessed by dialing 833-287-0801, or +1 647-689-4460 (outside the U.S. and Canada). The conference ID is 7164839. A replay of the call via webcast will be available at https://investor.zendesk.com or by dialing 800-585-8367 or +1 416-621-4642 (outside the U.S. and Canada) and entering passcode 7164839. The dial-in replay will be available until the end of day August 2, 2019. The webcast replay will be available for 12 months.

About Zendesk

The best customer experiences are built with Zendesk. Our customer service and engagement products are powerful and flexible, and scale to meet the needs of any business. Zendesk serves businesses across a multitude of industries, with more than 145,000 paid customer accounts offering service and support in over 30 languages. Zendesk is headquartered in San Francisco, and operates worldwide with 17 offices in North America, Europe, Asia, Australia, and South America. Learn more at www.zendesk.com.

Forward-Looking Statements

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

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

The forward-looking statements contained in this press release are also subject to additional risks, uncertainties, and factors, including those more fully described in Zendesk’s filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019. Further information on potential risks that could affect actual results will be included in the subsequent periodic and current reports and other filings that Zendesk makes with the Securities and Exchange Commission from time to time, including its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

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

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

	
																	
 	 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	 	2019	 	2018	 	2019	 	2018	
Revenue	 	$	194,583		 	$	141,882		 	$	376,068		 	$	271,673		
Cost of revenue	 	57,670		 	44,160		 	113,324		 	83,216		
Gross profit	 	136,913		 	97,722		 	262,744		 	188,457		
Operating expenses:	 	 	 	 	 	 	 	 	
Research and development	 	50,510		 	37,624		 	97,301		 	74,708		
Sales and marketing	 	94,746		 	69,450		 	186,447		 	134,508		
General and administrative	 	43,019		 	24,245		 	74,271		 	46,452		
Total operating expenses	 	188,275		 	131,319		 	358,019		 	255,668		
Operating loss	 	(51,362	)	 	(33,597	)	 	(95,275	)	 	(67,211	)	
Other income (expense), net	 	 	 	 	 	 	 	 	
Interest income	 	5,294		 	3,826		 	10,766		 	5,344		
Interest expense	 	(6,614	)	 	(6,289	)	 	(13,158	)	 	(7,053	)	
Other income (expense), net	 	(1,268	)	 	27		 	(570	)	 	272		
Total other income (expense), net	 	(2,588	)	 	(2,436	)	 	(2,962	)	 	(1,437	)	
Loss before provision for (benefit from) income taxes	 	(53,950	)	 	(36,033	)	 	(98,237	)	 	(68,648	)	
Provision for (benefit from) income taxes	 	591		 	(1,667	)	 	1,024		 	(4,957	)	
Net loss	 	$	(54,541	)	 	$	(34,366	)	 	$	(99,261	)	 	$	(63,691	)	
Net loss per share, basic and diluted	 	$	(0.50	)	 	$	(0.33	)	 	$	(0.91	)	 	$	(0.61	)	
Weighted-average shares used to compute net loss per share, basic and diluted	 	109,986		 	105,000		 	109,312		 	104,350		

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

	
								
 	June 30,
2019	 	December 31,
2018	
Assets	 	 	 	
Current assets:	 	 	 	
Cash and cash equivalents	$	171,218		 	$	126,518		
Marketable securities	255,930		 	300,213		
Accounts receivable, net of allowance for doubtful accounts of $3,252 and $2,571 as of June 30, 2019 and December 31, 2018, respectively	105,806		 	85,280		
Deferred costs	30,259		 	24,712		
Prepaid expenses and other current assets	45,697		 	35,873		
Total current assets	608,910		 	572,596		
Marketable securities, noncurrent	371,245		 	393,671		
Property and equipment, net	87,520		 	75,654		
Deferred costs, noncurrent	31,805		 	26,914		
Lease right-of-use assets	102,702		 	—		
Goodwill and intangible assets, net	212,436		 	146,327		
Other assets	24,379		 	22,717		
Total assets	$	1,438,997		 	$	1,237,879		
Liabilities and stockholders’ equity	 	 	 	
Current liabilities:	 	 	 	
Accounts payable	$	38,887		 	$	16,820		
Accrued liabilities	36,598		 	34,097		
Accrued compensation and related benefits	51,955		 	46,603		
Deferred revenue	286,552		 	245,243		
Lease liabilities	22,784		 	—		
Convertible senior notes, net	470,641		 	—		
Total current liabilities	907,417		 	342,763		
Convertible senior notes, net	—		 	458,176		
Deferred revenue, noncurrent	797		 	2,719		
Lease liabilities, noncurrent	97,860		 	—		
Other liabilities	5,946		 	17,300		
Total liabilities	1,012,020		 	820,958		
 	 	 	 	
Stockholders’ equity:	 	 	 	
Preferred stock, par value $0.01 per share	—		 	—		
Common stock, par value $0.01 per share	1,106		 	1,080		
Additional paid-in capital	1,053,488		 	950,693		
Accumulated other comprehensive loss	772		 	(5,724	)	
Accumulated deficit	(628,389	)	 	(529,128	)	
Total stockholders’ equity	426,977		 	416,921		
Total liabilities and stockholders’ equity	$	1,438,997		 	$	1,237,879		

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

	
									
 	 	Three Months Ended June 30,	
 	 	2019	 	2018	
Cash flows from operating activities	 	 		 	 		
Net loss	 	$	(54,541	)	 	$	(34,366	)	
Adjustments to reconcile net loss to net cash provided by operating activities:	 	 	 	 	
Depreciation and amortization	 	8,969		 	8,798		
Share-based compensation	 	43,751		 	28,148		
Amortization of deferred costs	 	7,622		 	5,020		
Amortization of debt discount and issuance costs	 	6,277		 	5,930		
Other	 	452		 	2,048		
Changes in operating assets and liabilities:	 	 	 	 	
Accounts receivable	 	(15,901	)	 	(17,587	)	
Prepaid expenses and other current assets	 	(5,380	)	 	(4,061	)	
Deferred costs	 	(14,123	)	 	(10,536	)	
Lease right-of-use assets	 	4,734		 	—		
Other assets and liabilities	 	(1,242	)	 	2,716		
Accounts payable	 	5,678		 	9,214		
Accrued liabilities	 	(2,057	)	 	590		
Accrued compensation and related benefits	 	8,887		 	5,091		
Deferred revenue	 	27,294		 	22,691		
Lease liabilities	 	(2,562	)	 	—		
Net cash provided by operating activities	 	17,858		 	23,696		
Cash flows from investing activities	 	 	 	 	
Purchases of property and equipment	 	(4,896	)	 	(13,228	)	
Internal-use software development costs	 	(1,753	)	 	(1,817	)	
Purchases of marketable securities	 	(125,681	)	 	(170,690	)	
Proceeds from maturities of marketable securities	 	53,031		 	39,317		
Proceeds from sales of marketable securities	 	151,550		 	1,866		
Cash paid for the acquisition of Smooch, net of cash acquired	 	(70,794	)	 	—		
Net cash provided by (used in) investing activities	 	1,457		 	(144,552	)	
Cash flows from financing activities	 	 	 	 	
Issuance costs related to convertible senior notes	 	—		 	(570	)	
Proceeds from exercises of employee stock options	 	4,773		 	3,554		
Proceeds from employee stock purchase plan	 	6,895		 	4,853		
Taxes paid related to net share settlement of share-based awards	 	(2,663	)	 	(1,412	)	
Other	 	—		 	(1,716	)	
Net cash provided by financing activities	 	9,005		 	4,709		
Effect of exchange rate changes on cash, cash equivalents and restricted cash	 	33		 	(1	)	
Net increase (decrease) in cash, cash equivalents and restricted cash	 	28,353		 	(116,148	)	
Cash, cash equivalents and restricted cash at beginning of period	 	145,028		 	610,545		
Cash, cash equivalents and restricted cash at end of period	 	$	173,381		 	$	494,397		

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

																
 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2019	 	2018	 	2019	 	2018	
Reconciliation of gross profit and gross margin	 	 	 	 	 	 	 	
GAAP gross profit	$	136,913		 	$	97,722		 	$	262,744		 	$	188,457		
Plus: Share-based compensation	5,246		 	3,474		 	10,183		 	6,572		
Plus: Employer tax related to employee stock transactions	391		 	296		 	840		 	556		
Plus: Amortization of purchased intangibles	1,943		 	612		 	3,561		 	1,224		
Plus: Amortization of share-based compensation capitalized in internal-use software	413		 	356		 	833		 	718		
Plus: Acquisition-related expenses	160		 	—		 	$	274		 	$	—		
Non-GAAP gross profit	$	145,066		 	$	102,460		 	$	278,435		 	$	197,527		
GAAP gross margin	70	 %	 	69	 %	 	70	 %	 	69	 %	
Non-GAAP adjustments	5	 %	 	3	 %	 	4	 %	 	4	 %	
Non-GAAP gross margin	75	 %	 	72	 %	 	74	 %	 	73	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating expenses	 	 	 	 	 	 	 	
GAAP research and development	$	50,510		 	$	37,624		 	$	97,301		 	$	74,708		
Less: Share-based compensation	(11,911	)	 	(9,529	)	 	(23,548	)	 	(19,758	)	
Less: Employer tax related to employee stock transactions	(931	)	 	(642	)	 	(2,223	)	 	(1,385	)	
Less: Acquisition-related expenses	(864	)	 	(404	)	 	(1,431	)	 	(787	)	
Non-GAAP research and development	$	36,804		 	$	27,049		 	$	70,099		 	$	52,778		
GAAP research and development as percentage of revenue	26	 %	 	27	 %	 	26	 %	 	27	 %	
Non-GAAP research and development as percentage of revenue	19	 %	 	19	 %	 	19	 %	 	19	 %	
 	 	 	 	 	 	 	 	
GAAP sales and marketing	$	94,746		 	$	69,450		 	$	186,447		 	$	134,508		
Less: Share-based compensation	(13,575	)	 	(9,178	)	 	(25,973	)	 	(17,186	)	
Less: Employer tax related to employee stock transactions	(763	)	 	(500	)	 	(1,791	)	 	(1,074	)	
Less: Amortization of purchased intangibles	(658	)	 	(57	)	 	(1,235	)	 	(167	)	
Less: Acquisition-related expenses	(379	)	 	(281	)	 	(771	)	 	(563	)	
Non-GAAP sales and marketing	$	79,371		 	$	59,434		 	$	156,677		 	$	115,518		
GAAP sales and marketing as percentage of revenue	49	 %	 	49	 %	 	50	 %	 	50	 %	
Non-GAAP sales and marketing as percentage of revenue	41	 %	 	42	 %	 	42	 %	 	43	 %	
 	 	 	 	 	 	 	 	
GAAP general and administrative	$	43,019		 	$	24,245		 	$	74,271		 	$	46,452		
Less: Share-based compensation	(13,019	)	 	(5,967	)	 	(20,704	)	 	(11,619	)	
Less: Employer tax related to employee stock transactions	(567	)	 	(282	)	 	(1,318	)	 	(589	)	
Less: Acquisition-related expenses	(4,358	)	 	—		 	(4,989	)	 	—		
Non-GAAP general and administrative	$	25,075		 	$	17,996		 	$	47,260		 	$	34,244		
GAAP general and administrative as percentage of revenue	22	 %	 	17	 %	 	20	 %	 	17	 %	
Non-GAAP general and administrative as percentage of revenue	13	 %	 	13	 %	 	13	 %	 	13	 %	
 	 	 	 	 	 	 	 	
Reconciliation of operating income (loss) and operating margin	 	 	 	 	 	 	 	
GAAP operating loss	$	(51,362	)	 	$	(33,597	)	 	$	(95,275	)	 	$	(67,211	)	
Plus: Share-based compensation	43,751		 	28,148		 	80,408		 	55,135		
Plus: Employer tax related to employee stock transactions	2,652		 	1,720		 	6,172		 	3,604		
Plus: Amortization of purchased intangibles	2,601		 	669		 	4,796		 	1,391		
Plus: Acquisition-related expenses	5,761		 	685		 	7,465		 	1,350		
Plus: Amortization of share-based compensation capitalized in internal-use software	413		 	356		 	833		 	718		
Non-GAAP operating income (loss)	$	3,816		 	$	(2,019	)	 	$	4,399		 	$	(5,013	)	
GAAP operating margin	(26	)%	 	(24	)%	 	(25	)%	 	(25	)%	
Non-GAAP adjustments	28	 %	 	23	 %	 	26	 %	 	23	 %	
Non-GAAP operating margin	2	 %	 	(1	)%	 	1	 %	 	(2	)%	

	
																
 	Three Months Ended June 30,	 	Six Months Ended June 30,	
 	2019	 	2018	 	2019	 	2018	
Reconciliation of net income (loss)	 	 	 	 	 	 	 	
GAAP net loss	$	(54,541	)	 	$	(34,366	)	 	$	(99,261	)	 	$	(63,691	)	
Plus: Share-based compensation	43,751		 	28,148		 	80,408		 	55,135		
Plus: Employer tax related to employee stock transactions	2,652		 	1,720		 	6,172		 	3,604		
Plus: Amortization of purchased intangibles	2,601		 	669		 	4,796		 	1,391		
Plus: Acquisition-related expenses	5,761		 	685		 	7,465		 	1,350		
Plus: Amortization of share-based compensation capitalized in internal-use software	413		 	356		 	833		 	718		
Plus: Amortization of debt discount and issuance costs	6,277		 	5,930		 	12,465		 	6,650		
Less: Income tax effects and adjustments	(985	)	 	(1,977	)	 	(1,896	)	 	(1,977	)	
Non-GAAP net income	$	5,929		 	$	1,165		 	$	10,982		 	$	3,180		
 	 	 	 	 	 	 	 	
Reconciliation of net income (loss) per share, basic	 	 	 	 	 	 	 	
GAAP net loss per share, basic	$	(0.50	)	 	$	(0.33	)	 	$	(0.91	)	 	$	(0.61	)	
Non-GAAP adjustments to net loss	0.55		 	0.34		 	1.01		 	0.64		
Non-GAAP net income per share, basic	$	0.05		 	$	0.01		 	$	0.10		 	$	0.03		
 	 	 	 	 	 	 	 	
Reconciliation of net income (loss) per share, diluted	 	 	 	 	 	 	 	
GAAP net loss per share, diluted	$	(0.50	)	 	$	(0.33	)	 	$	(0.91	)	 	$	(0.61	)	
Non-GAAP adjustments to net loss	0.55		 	0.34		 	1.00		 	0.64		
Non-GAAP net income per share, diluted	$	0.05		 	$	0.01		 	$	0.09		 	$	0.03		
 	 	 	 	 	 	 	 	
Weighted-average shares used in GAAP per share calculation, basic and diluted	109,986		 	105,000		 	109,312		 	104,350		
 	 	 	 	 	 	 	 	
Weighted-average shares used in non-GAAP per share calculation	 	 	 	 	 	 	 	
Basic	109,986		 	105,000		 	109,312		 	104,350		
Diluted	119,678		 	111,725		 	118,339		 	110,300		
 	 	 	 	 	 	 	 	
Computation of free cash flow	 	 	 	 	 	 	 	
Net cash provided by operating activities	$	17,858		 	$	23,696		 	$	36,827		 	$	39,938		
Less: purchases of property and equipment	(4,896	)	 	(13,228	)	 	(14,154	)	 	(20,036	)	
Less: internal-use software development costs	(1,753	)	 	(1,817	)	 	(2,966	)	 	(4,161	)	
Free cash flow	$	11,209		 	$	8,651		 	$	19,707		 	$	15,741		
 	 	 	 	 	 	 	 	
Net cash provided by operating activities margin	9	 %	 	17	 %	 	10	 %	 	15	 %	
Non-GAAP adjustments	(3	)%	 	(11	)%	 	(5	)%	 	(9	)%	
Free cash flow margin	6	 %	 	6	 %	 	5	 %	 	6	 %	

About Non-GAAP Financial Measures

To provide investors and others with additional information regarding Zendesk’s results, the following non-GAAP financial measures were disclosed: non-GAAP gross profit and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash flow, and free cash flow margin.

Specifically, Zendesk excludes the following from its historical and prospective non-GAAP financial measures, as applicable:

Share-Based Compensation and Amortization of Share-based Compensation Capitalized in Internal-use Software: Zendesk utilizes share-based compensation to attract and retain employees. It is principally aimed at aligning their interests with those of its stockholders and at long-term retention, rather than to address operational performance for any particular period. As a result, share-based compensation expenses vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer taxes related to its employee stock transactions as an expense that is dependent on its stock price, employee exercise and other award disposition activity, and other factors that are beyond Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for reasons that are generally unrelated to financial and operational performance in any particular period.

Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, including the amortization of the cost associated with an acquired entity’s developed technology, as items arising from pre-acquisition activities determined at the time of an acquisition. While these intangible assets are evaluated for impairment regularly, amortization of the cost of purchased intangibles is an expense that is not typically affected by operations during any particular period.

Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction costs, integration costs, restructuring costs, and acquisition-related retention payments, including amortization of acquisition-related retention payments capitalized in internal-use software, as events that are not necessarily reflective of operational performance during a period. In particular, Zendesk believes the consideration of measures that exclude such expenses can assist in the comparison of operational performance in different periods which may or may not include such expenses.

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

Income Tax Effects: Zendesk utilizes a fixed long-term projected tax rate in its computation of non-GAAP income tax effects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a financial projection that excludes the direct impact of other non-GAAP adjustments. The projected rate considers other factors such as Zendesk's current operating structure, existing tax positions in various jurisdictions, and key legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2019, Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically re-evaluate this tax rate, as necessary, for significant events, based on relevant tax law changes, material changes in the forecasted geographic earnings mix, and any significant acquisitions.

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

Zendesk has not reconciled free cash flow guidance to net cash from operating activities for the year ending December 31, 2019 because Zendesk does not provide guidance on the reconciling items between net cash from operating activities and free cash flow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such reconciling items will have a significant impact on Zendesk’s free cash flow and, accordingly, a reconciliation of net cash from operating activities to free cash flow for the year ending December 31, 2019 is not available without unreasonable effort.

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

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

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

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

Zendesk’s management believes it is useful for itself and investors to review, as applicable, both GAAP information that may include items such as share-based compensation and related expenses, amortization of debt discount and issuance costs, amortization of purchased intangibles, and acquisition-related expenses, and the non-GAAP measures that exclude such information in order to assess the performance of Zendesk’s business and for planning and forecasting in subsequent periods. When Zendesk uses such a non-GAAP financial measure with respect to historical periods, it provides a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP financial measure. When Zendesk uses such a non-GAAP financial measure in a forward-looking manner for future periods, and a reconciliation is not determinable without unreasonable effort, Zendesk provides the reconciling information that is determinable without unreasonable effort and identifies the information that would need to be added or subtracted from the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

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

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

new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s products to service separate subsidiaries, divisions, or work processes. Other than usage of Zendesk’s products through its omnichannel subscription offering, each of these accounts is also treated as a separate paid customer account.

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

Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue net of contraction and churn by Zendesk’s base revenue. Zendesk defines its base revenue as the aggregate annual recurring revenue across its products for customers with paid customer accounts as of the date one year prior to the date of calculation. Zendesk defines the retained revenue net of contraction and churn as the aggregate annual recurring revenue across its products for the same customer base included in the measure of base revenue at the end of the annual period being measured. The dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that Zendesk identifies involving the consolidation of customer accounts or the split of a single paid customer account into multiple paid customer accounts. In addition, the dollar-based net expansion rate is adjusted to include paid customer accounts in the customer base used to determine retained revenue net of contraction and churn that share common corporate information with customers in the customer base that are used to determine the base revenue. Giving effect to this consolidation results in Zendesk’s dollar-based net expansion rate being calculated across approximately 103,400 customers, as compared to the approximately 149,000 total paid customer accounts as of June 30, 2019 .

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

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

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

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

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

Zendesk determines its annual revenue run rate by multiplying the revenue generated over its most recently completed quarter by four.

Source: Zendesk, Inc.

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

or

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

Zendesk Shareholder Letter Q1 2019 - 1

 

Introduction $194.6M We continued to see strong demand for our family of products in the second quarter of 2019, as Q2 2019 revenue companies around the world seek to transform their businesses by adopting modern software and applications to better serve their customers. Our 37% revenue in the second quarter of 2019 grew by 37% versus the prior year period, driven by the Q2 2019 Y/Y revenue growth growing appeal of our software that serves companies ranging from high-growth startups and small businesses to midsized and large analytics tool. We quickly followed those Mikkel Svane, CEO enterprises. More than 145,000 paid customer milestones in the second quarter with our accounts, across more than 160 countries, have acquisition of Smooch Technologies Holdings chosen Zendesk to help them provide the best ULC, the company behind Smooch and its conversations platform, to expand our customer experiences. conversational messaging eﬀorts. We also In the second quarter, we delivered revenue of introduced our ﬁrst combined oﬀering for sales $194.6 million. We maintained the health of our and customer service called Zendesk Duet and SMB business and saw continued strong demand expanded Answer Bot to new channels. for The Zendesk Suite, while simultaneously advancing upmarket with enterprise customers. We are focused now on investing in advancing During the quarter, the percentage of our annual features and tightening integration of these new Elena Gomez, CFO recurring revenue from customers with 100 or products and our platform and further building our more Zendesk Support agents advanced to 42% go-to-market eﬀorts around them. We will versus 38% a year ago. Our dollar-based net demonstrate how all of these investments in our expansion rate remained healthy at 117%. family of products and our Sunshine platform come together to enable organizations to deliver For the past year, we have been rapidly the most seamless, holistic customer experience introducing new product innovation and packages at our Relate conference. With our investments, that we believe set us up for future sustained we will be able to expand our capabilities and growth and entry into new markets. At our annual reach more broadly into the CRM space. We Zendesk Relate user conference last November, believe we are in a strong position to build our we introduced Zendesk Sunshine, our open and company and lead CRM innovation to become a ﬂexible CRM platform; Zendesk Sell, our entry into multibillion-dollar revenue company that continues sales software; and Zendesk Explore, our data to deliver durable growth and scale. Marc Cabi, Strategy & IR Zendesk Shareholder Letter Q2 2019 - 2

 

Summary financial table See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q2 2019 - 3

 

Investing for growth Our investments in the past year in introducing transformative products Our messaging investments are focused on two key areas: 1) seamlessly and a new CRM platform have extended our capabilities and reach integrating all the major social channels and web and mobile messaging beyond support to serve the broader customer journey. We will continue channels into our family of products and 2) enabling messaging to make big investments as we mature and more tightly integrate our new solutions more broadly for brands and partners through the products and platform, and as we develop new packaging, bundles, and conversations platform powered by Smooch. Our conversation solutions go-to-market initiatives to make purchasing and implementing our team is discovering and building for use cases to serve the unique ways solutions even easier for organizations. We are focused on product and that modern businesses—such as multi-sided marketplaces—serve all platform investments as follows. their stakeholders. Power every customer-facing conversation for our customers Our investments in messaging will enable organizations to connect with their customers through popular social messaging apps or web and The Zendesk Suite has demonstrated early success with a bundled mobile messaging solutions as a part of omnichannel conversations omnichannel solution. With The Suite, companies can quickly and easily integrated with Zendesk Support. For example, we have been implement an omnichannel experience in which all support agents can advancing our support of WhatsApp across channels since our Smooch interact with customers seamlessly across email, chat, voice, and acquisition. Additionally, we envision organizations using Zendesk to self-service help options. We believe the acquisition of Smooch centrally manage private messaging conversations with customers on represents our next step in delivering a more holistic omnichannel their websites and mobile apps. experience by connecting conversations between businesses and customers on any messaging channel—from websites and mobile apps to We also plan to invest in the conversations platform powered by leading messaging apps. Smooch. Our long-term vision for this platform is to enable conversations beyond only agents and customers. As an example, Mobile messaging has become a leading form of communication, with marketplace businesses might use our platform to power direct more than 2 billion consumers using mobile messaging apps. Customers conversations between buyers and sellers, and allow escalation to a expect the convenience and interactivity of messaging to be a part of their customer service representative from the marketplace. We believe there experience when communicating with businesses, just as it is in their are many opportunities and are investing in a conversation solutions personal interactions. The best customer experiences will be driven by team to support businesses seeking to leverage Smooch’s best-in-class the ability to create seamless, continuous conversations between conversations platform to craft personalized messaging experiences. customers and organizations across multiple communication channels, including messaging. Zendesk Shareholder Letter Q2 2019 - 4

 

Extending our footprint in support and beyond Last November we introduced Zendesk Sell, extending our capabilities beyond support into salesforce automation software. Zendesk Sell expanded our reach into the broader CRM market and ﬁts with our long-term product strategy to cover the customer experience from sales to support to proactive outreach and engagement. The combination of Zendesk Sell and Zendesk Support provides support agents with additional context gathered in the sales process and allows support agents to notify sales of opportunities that surface during a support conversation. The launch of Zendesk Duet in June brought Zendesk Sell’s sales automation and Zendesk Support’s ticketing capabilities together into a single package. Designed specially to provide a holistic view of customers for both support agents and sales representatives, each team can easily access the other team’s tools to tie customer conversations together and gain more complete Nubank insight into the entire customer journey—from pre-sales through post-sales. Duet is our ﬁrst step in bundling products across CRM functions. We are Brazilian ﬁnancial technology company Nubank continuing to mature Sell’s features and develop more robust capabilities. launched in 2013 with its mobile-ﬁrst banking and credit card services that challenged traditional To extend our reach in support, we are developing tools to help foster ﬁnancial institutions. Today, Nubank is one of the collaboration across organizations. For instance, we recently launched side fastest-growing companies in Latin America, conversations with Slack in Zendesk Support. It enables customer service expanding from two million customers to more than teams to collaborate and communicate with anyone in their company, such as ten million over the last two years. The company’s a sales representative, by messaging on Slack directly from Zendesk Support. growth is fueled by word of mouth—more than 80 percent of new customers are referrals from existing We also continue to invest in and advance Zendesk Explore, our data users. Nubank started using Zendesk Support in analytics tool, to help businesses build and scale personal, connected 2014 as an email ticketing system and subsequently experiences for their customers. Integrated with our products, Explore makes it easier for companies to see and analyze data across all support channels added more functionality as the company grew. The with a vision of a single view of customer analytics across teams and Zendesk API connects diﬀerent systems to give channels, so companies can focus on measuring and improving the customer agents a better view of customers and what they experience they deliver. need, reducing response times and allowing Nubank to be truly customer-centric. Zendesk Shareholder Letter Q2 2019 - 5

 

Leveraging smarter, faster technologies for better customer experiences We’re continuing to invest in improving customer experiences by leveraging smarter and faster technologies. We are focused on automating tasks for organizations and customers where possible. One particular area of focus is self-service, as customers increasingly want answers quickly without barriers, whether this information is automatically served to them or simply available to them to help themselves. In June, we expanded Answer Bot—which provides artiﬁcial intelligence self-service capabilities for Zendesk Guide—across all web and mobile channels (some in early access programs), allowing companies to provide always-on support and faster responses for consumers. This extension of Answer Bot enables customers to quickly access answers to common questions regardless of the channel they are reaching out on, MetroNet which is an important part of our omnichannel strategy. Indiana-based MetroNet is a rapidly-growing provider of 100 percent ﬁber-optic internet, television, and We also launched more advanced capabilities for our Guide Enterprise telephone services in the Midwest. The company knowledge management product to help customer experience teams maintains a laser-focus on exceptional customer care leverage automation and AI to develop, maintain, and manage more complex needs across multiple brands, products, and services. and regularly receives satisfaction scores that outpace the industry average. MetroNet is constantly With our artiﬁcial intelligence-based products, organizations are able to evaluating ways to enhance the customer experience, better serve their customers and free agent time to focus on more which led them to Zendesk. MetroNet’s care complicated requests and strategic initiatives. associates will be better equipped to leverage their considerable knowledge and continue exceeding customer expectations through their use of Zendesk products including Talk Partner Edition to integrate Five9 for their call center and Answer Bot to power automated and self-service customer support. Zendesk Shareholder Letter Q2 2019 - 6

 

Redefining customer experience through our CRM platform, Zendesk Sunshine Zendesk Sunshine, our open and ﬂexible CRM platform, drives our longer-term strategy to move further upmarket and address more enterprise use cases, as well as to expand beyond customer support into the broader CRM market. Living in the public cloud on Amazon Web Services, Sunshine gives developers the freedom to build in their own way with open standards. Businesses can use Sunshine to connect and understand all their customer data and build and deploy customer apps and services faster. We want to redeﬁne customer experience through our open-standards platform that provides complete context around customer actions, activities, and proﬁles. Since launch, we have seen customers use Sunshine to build a truly holistic view of the customer journey across all relevant channels and also engage in proactive outreach to their customers. Mizzen+Main We are investing in three key platform features this year. First, we are Mizzen+Main is a pioneering men's apparel brand that making it easier for businesses to get data in and out of Sunshine with uses performance technology to move menswear into enhancements to our APIs, as well as building AWS connectors for the next era. With incredible demand for its products, various use cases. Next, we are integrating Sunshine data further into our Mizzen+Main expanded from its digital native roots into products. Finally, we are creating world-class developer experiences by physical stores. The service team implemented engaging and extending our developer community. Zendesk Support in 2014 and more recently turned to Zendesk Sunshine to make agent interactions more Sunshine is still in its early stages as we build features, uses cases, a relevant. By pulling in data from their marketing CRM developer community, and a partner network. There has been a lot of platform, Zaius, agents will have a full view of the excitement from customers and partners for the platform as they see how customer, including recent activity and personalized Sunshine has the ability to transform organizations and product recommendations. With the ﬂexible and customer experiences. extensible Sunshine platform, Mizzen+Main is putting deep customer intelligence from both systems where it matters most—at the ﬁngertips of its agents—transforming its service team into a satisfaction-boosting proﬁt center. Zendesk Shareholder Letter Q2 2019 - 7

 

Zendesk Relate 2020 We will demonstrate—live and in person—how all of these investments in our family of products and our Sunshine platform come together to enable organizations to deliver seamless, holistic customer experiences at Zendesk Relate, our annual user conference. Relate is our ﬂagship event, where we make big announcements and share with our customers how they can strategically use our products and platform to provide the best customer experiences. Relate will be held March 3-5, 2020, in Miami. At Relate, we will also host our annual investor event, where we will talk in more detail about our long-term vision and strategy to be a multibillion-dollar revenue company. Zendesk Shareholder Letter Q2 2019 - 8

 

Timeline Note: Timeline not to scale. *Annual run rate is based on annualizing our quarterly revenue. Zendesk Shareholder Letter Q2 2019 - 9

 

Customers Among the customers to join or expand with us recently are: Alliance Laundry Systems FreshBooks A provider of commercial A Canada-based provider of laundry systems cloud accounting solutions Back Market Fullscript A France-based ecommerce A Canada-based platform for online platform for refurbished products supplement prescriptions Bonhams GMO Pepabo, Inc. A privately owned A Japan-based IT services provider international auction house Corsair Klipsch A provider of high-performance PC A global manufacturer of premium peripherals and components sound solutions Duolingo A science-based language education platform Zendesk Shareholder Letter Q2 2019 - 10

 

Customers Among the customers to join or expand with us recently are: Life Fitness Origami A global provider in commercial A Japanese mobile ﬁtness equipment and game tables payment platform Ligentia PayJoy A global freight forwarder and A provider of pay-as-you-go supply chain management provider smartphone ﬁnancing MetroNet The Motley Fool A U.S.-based communication A multimedia ﬁnancial service provider services company Mizzen+Main Under Armour A U.S.-based clothing company that A U.S.-based athletic specializes in performance menswear wear company Nubank Weber-Stephen Products A Brazilian ﬁnancial A manufacturer of charcoal, gas, and technology company electric outdoor grills and accessories Zendesk Shareholder Letter Q2 2019 - 11

 

We’re working our magic June 2019 Gartner Magic Quadrant for the CRM Customer Engagement Center Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only In June 2019, our efforts were those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner’s research organization and again recognized by Gartner. should not be construed as statements of fact. Gartner disclaims all warranties, expressed or implied, with respect to this research, including any warranties of For the fourth year in a row, merchantability or ﬁtness for a particular purpose. Gartner Inc. named Zendesk a The Gartner Reports described herein, (the “Gartner Reports”) represent(s) research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”) and are not representations of fact. Each Leader in the Magic Quadrant Gartner Report speaks as of its original publication date (and not as of the date of this Shareholder Letter), and the opinions expressed in the Gartner Reports for the CRM Customer are subject to change without notice. Engagement Center. Zendesk Shareholder Letter Q2 2019 -

 

Zendesk has been named a strong performer in Customer Service Solutions by Forrester Research. The Forrester Wave™: Customer Service Solutions, Q2 2019 recognizes Zendesk as being among the highest scores in the market presence category. The report also cites Zendesk’s reputation in “beautifully simple experiences,” noting that “it (Zendesk) has special appeal to digital-ﬁrst companies or companies investing in their digital operations.” For the report, 12 vendors were evaluated across 33 criteria, which were grouped into three categories: current oﬀering, strategy, and market presence. Zendesk received the highest possible score in the Market Presence category. Zendesk Shareholder Letter Q2 2019 - 13

 

Operating metrics A key metric we use to gauge our penetration within larger organizations is represented by the percentage of Support ARR generated by customers with 100 or more Support agents. That % of total percentage was approximately 42% at the end of quarter-ending the second quarter of 2019, compared to 40% at Support ARR the end of the ﬁrst quarter of 2019 and 38% as from paid customer reported at the end of the second quarter of 2018. accounts with 100+ Support agents Our dollar-based net expansion rate, which we use to quantify our annual expansion within existing customers, was 117% at the end of the second quarter, compared to 118% at the end of the ﬁrst quarter of 2019. Our dollar-based net expansion rate was 119% at the end of the second quarter of 2018. Consistent with expectations in prior quarters, we believe a healthy dollar-based net expansion rate for Zendesk is 110% - 120%. Dollar-based net expansion rate Zendesk Shareholder Letter Q2 2019 - 14

 

As we successfully move upmarket, we believe an indicator of our mid-market and enterprise execution is encompassed in the growth of remaining performance obligation (RPO). RPO represents future revenues that are under contract but have not yet been recognized. As we continue to move upmarket to serve enterprise customers Remaining performance and deliver more complex and strategic use cases, we obligation (RPO) have landed longer contract terms with our customers. in millions UPMARKET Zendesk Shareholder Letter Q2 2019 - 15

 

Social impact ﬁrst half of 2019, Zendesk employees volunteered more than 10,000 hours in their local communities. We also brought on board a new Tech Social impact has long been a foundational element of Zendesk’s culture For Good manager to expand our eﬀorts to identify and scale the way and brand. Promoting empathy to solve complex social issues is core to we use Zendesk technology to support homelessness in our our values, as we believe it is an important way for employees to communities; asylum seekers and immigrants who need access to engage with work, our customers, and our communities around the information and support; and disaster relief organizations that support globe. Our goals for social impact fall into three core areas: being a the rebuilding of people’s lives after a natural disaster. good neighbor, which focuses on the employee experience of investing in their communities by volunteering; standing up for equality, where we At Zendesk, we celebrate diversity and inclusion. As part of this, we will make key investments and strive to support and nurture diverse celebrated Pride month. We continued our tradition of participating in workplaces and communities; and democratizing technology, where we Pride festivities with nearly all of our global oﬃces taking part in local aim to bring technology to organizations committed to social change. events. This year, we hosted 24 in-oﬃce educational and community building events, and we have already or will participate in Pride parades As part of these goals, Zendesk employees have committed to giving six or city-sponsored celebrations in San Francisco, Madison, London, hours of their time volunteering in their communities each year. In the Dublin, Montpellier, Copenhagen, São Paulo, and Melbourne. Zendesk Shareholder Letter Q2 2019 - 16

 

Select financial measures Quarter-over-quarter comparisons (q/q) are for the three months ended June 30, 2019, compared to the three months ended March 31, 2019. Year-over-year comparisons (y/y) are for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. See a reconciliation of non-GAAP measures presented at the end of this letter. Zendesk Shareholder Letter Q2 2019 - 17

 

Guidance For the quarter ending September 30, 2019, we expect to report: • Approximately 111 million weighted average shares outstanding (basic) • Revenue in the range of $206 - 208 million • Approximately 122 million weighted average shares outstanding • GAAP operating income (loss) in the range of $(46) - (44) million, which (diluted) includes share-based compensation and related expenses of approximately $43 million, amortization of purchased intangibles of • Free cash ﬂow in the range of $35 - 45 million approximately $3 million, and acquisition-related expenses of Our guidance for free cash ﬂow for the full year ending December 31, approximately $2 million 2019, has been adjusted from the guidance for free cash ﬂow provided in our shareholder letter dated April 30, 2019. This guidance was • Non-GAAP operating income (loss) in the range of $2 - 4 million, which excludes share-based compensation and related expenses of adjusted due to, among other factors, reﬁnements in our cash ﬂow approximately $43 million, amortization of purchased intangibles of forecasting methodology, increased acquisition activity and the approximately $3 million, and acquisition-related expenses of associated acquisition-related expenses, the prepayment of certain approximately $2 million vendor expenses in order to achieve more favorable pricing, additional capital expenditures intended to increase our real estate utilization, • Approximately 111 million weighted average shares outstanding (basic) and revisions to the timing of and changes in the form of certain contingent payments from share-based to cash-based payments. • Approximately 121 million weighted average shares outstanding (diluted) We have not reconciled free cash ﬂow guidance to net cash from operating activities for the full year 2019 because we do not provide For the full year ending December 31, 2019, we expect to report: guidance on the reconciling items between net cash from operating • Revenue in the range of $807 - 811 million activities and free cash ﬂow, as a result of the uncertainty regarding, and the potential variability of, these items. The actual amount of such • GAAP operating income (loss) in the range of $(178) - (175) million, which reconciling items will have a signiﬁcant impact on our free cash ﬂow includes share-based compensation and related expenses of and, accordingly, a reconciliation of net cash from operating activities approximately $173 million, amortization of purchased intangibles of to free cash ﬂow for the full year 2019 is not available without approximately $10 million, and acquisition-related expenses of unreasonable eﬀort. approximately $11 million Zendesk’s estimates of share-based compensation and related • Non-GAAP operating income income (loss) in the range of $16 - 19 expenses, amortization of purchased intangibles, acquisition-related million, which excludes share-based compensation and related expenses, weighted average shares outstanding, and free cash ﬂow in expenses of approximately $173 million, amortization of purchased future periods assume, among other things, the occurrence of no intangibles of approximately $10 million, and acquisition-related additional acquisitions, investments, or restructurings and no further expenses of approximately $11 million revisions to share-based compensation and related expenses. Zendesk Shareholder Letter Q2 2019 - 18

 

Condensed consolidated statements of operations (In thousands, except per share data; unaudited) Zendesk Shareholder Letter Q2 2019 - 19

 

Condensed consolidated balance sheets (In thousands, except par value; unaudited) Zendesk Shareholder Letter Q2 2019 - 20

 

Condensed consolidated statements of cash flows (In thousands; unaudited) Zendesk Shareholder Letter Q2 2019 - 21

 

Non-GAAP results (In thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this letter. Zendesk Shareholder Letter Q2 2019 -

 

(Continued) Non-GAAP results (In thousands, except per share data) The following table shows Zendesk’s GAAP results reconciled to non-GAAP results included in this letter. Zendesk Shareholder Letter Q2 2019 - 23

 

About Zendesk 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 The best customer experiences are built with Zendesk. Our customer service and engagement forward-looking statements made in this shareholder letter to reﬂect events or circumstances after products are powerful and ﬂexible, and scale to meet the needs of any business. Zendesk serves the date of this shareholder letter or to reﬂect new information or the occurrence of unanticipated businesses across a multitude of industries, with more than 145,000 paid customer accounts events, except as required by law. oﬀering service and support in over 30 languages. Zendesk is headquartered in San Francisco, and operates worldwide with 17 oﬃces in North America, Europe, Asia, Australia, and South America. About non-GAAP financial measures Learn more at www.zendesk.com. To provide investors and others with additional information regarding Zendesk’s results, the Forward-looking statements following non-GAAP ﬁnancial measures were disclosed: non-GAAP gross proﬁt and gross margin, non-GAAP operating expenses, non-GAAP operating income (loss) and operating margin, This shareholder letter contains forward-looking statements, including, among other things, non-GAAP net income (loss), non-GAAP net income (loss) per share, basic and diluted, free cash statements regarding Zendesk’s future ﬁnancial performance, its continued investment to grow its ﬂow, and free cash ﬂow margin. business, and progress toward its long-term ﬁnancial objectives. Words such as “may,” “should,” “will,” “believe,” “expect,” “anticipate,” “target,” “project,” and similar phrases that denote future Speciﬁcally, Zendesk excludes the following from its historical and prospective non-GAAP ﬁnancial expectation or intent regarding Zendesk’s ﬁnancial results, operations, and other matters are measures, as applicable: intended to identify forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Share-Based Compensation and Amortization of Share-based Compensation Capitalized in Internal-use Software: Zendesk utilizes share-based compensation to attract and retain employees. The outcome of the events described in these forward-looking statements is subject to known and It is principally aimed at aligning their interests with those of its stockholders and at long-term unknown risks, uncertainties, and other factors that may cause Zendesk’s actual results, retention, rather than to address operational performance for any particular period. As a result, performance, or achievements to diﬀer materially, including (i) adverse changes in general share-based compensation expenses vary for reasons that are generally unrelated to ﬁnancial and economic or market conditions; (ii) Zendesk’s ability to adapt its products to changing market operational performance in any particular period. dynamics and customer preferences or achieve increased market acceptance of its products; (iii) Zendesk’s ability to eﬀectively expand its sales capabilities; (iv) Zendesk’s ability to eﬀectively Employer Tax Related to Employee Stock Transactions: Zendesk views the amount of employer market and sell its products to larger enterprises; (v) Zendesk’s expectation that the future growth taxes related to its employee stock transactions as an expense that is dependent on its stock price, rate of its revenues will decline, and that, as its costs increase, Zendesk may not be able to employee exercise and other award disposition activity, and other factors that are beyond generate suﬃcient revenues to achieve or sustain proﬁtability; (vi) the intensely competitive market Zendesk’s control. As a result, employer taxes related to its employee stock transactions vary for in which Zendesk operates and the diﬃculty that Zendesk may have in competing eﬀectively; (vii) reasons that are generally unrelated to ﬁnancial and operational performance in any Zendesk’s ability to introduce and market new products and to support its products on a shared particular period. services platform; (viii) Zendesk’s ability to maintain and develop its strategic relationships with third parties; (ix) Zendesk’s ability to integrate acquired businesses and technologies successfully or Amortization of Purchased Intangibles: Zendesk views amortization of purchased intangible assets, achieve the expected beneﬁts of such acquisitions; (x) Zendesk’s ability to eﬀectively manage its including the amortization of the cost associated with an acquired entity’s developed technology, as growth and organizational change, including its international expansion strategy; (xi) potential items arising from pre-acquisition activities determined at the time of an acquisition. While these breaches in Zendesk’s security measures or unauthorized access to its customers’ data; (xii) intangible assets are evaluated for impairment regularly, amortization of the cost of purchased Zendesk's ability to comply with privacy and data security regulations; (xiii) the development of the intangibles is an expense that is not typically aﬀected by operations during any particular period. market for software as a service business software applications; (xiv) potential service interruptions or performance problems associated with Zendesk’s technology and infrastructure; (xv) real or Acquisition-Related Expenses: Zendesk views acquisition-related expenses, such as transaction perceived errors, failures, or bugs in its products; (xvi) Zendesk’s substantial reliance on its costs, integration costs, restructuring costs, and acquisition-related retention payments, including customers renewing their subscriptions and purchasing additional subscriptions; and (xvii) amortization of acquisition-related retention payments capitalized in internal-use software, as events Zendesk’s ability to accurately forecast expenditures on third-party managed hosting services. 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 The forward-looking statements contained in this shareholder letter are also subject to additional operational performance in diﬀerent periods which may or may not include such expenses. 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 Amortization of Debt Discount and Issuance Costs: In March 2018, Zendesk issued $575 million of ended March 31, 2019. Further information on potential risks that could aﬀect actual results will be convertible senior notes due in 2023, which bear interest at an annual ﬁxed rate of 0.25%. The included in the subsequent periodic and current reports and other ﬁlings that Zendesk makes with imputed interest rate of the convertible senior notes was approximately 5.26%. This is a result of the the Securities and Exchange Commission from time to time, including its Quarterly Report on Form debt discount recorded for the conversion feature that is required to be separately accounted for as 10-Q for the quarter ended June 30, 2019. Zendesk Shareholder Letter Q2 2019 - 24

 

equity, and debt issuance costs, which reduce the carrying value of the convertible debt instrument. Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP gross The debt discount is amortized as interest expense together with the issuance costs of the debt. margin for future periods because Zendesk does not provide guidance on the reconciling items The expense for the amortization of debt discount and debt issuance costs is a non-cash item, and between GAAP gross margin and non-GAAP gross margin, as a result of the uncertainty regarding, we believe the exclusion of this interest expense will provide for a more useful comparison of our and the potential variability of, these items. The actual amount of such reconciling items will have a operational performance in diﬀerent periods. signiﬁcant impact on Zendesk’s non-GAAP gross margin and, accordingly, a reconciliation of GAAP gross margin to non-GAAP gross margin guidance for the period is not available without Income Tax Eﬀects: Zendesk utilizes a ﬁxed long-term projected tax rate in its computation of unreasonable eﬀort. non-GAAP income tax eﬀects to provide better consistency across interim reporting periods. In projecting this long-term non-GAAP tax rate, Zendesk utilizes a ﬁnancial projection that excludes Zendesk uses non-GAAP ﬁnancial information to evaluate its ongoing operations and for internal the direct impact of other non-GAAP adjustments. The projected rate considers other factors such planning and forecasting purposes. Zendesk’s management does not itself, nor does it suggest that as Zendesk’s current operating structure, existing tax positions in various jurisdictions, and key investors should, consider such non-GAAP ﬁnancial measures in isolation from, or as a substitute legislation in major jurisdictions where Zendesk operates. For the year ending December 31, 2019, for, ﬁnancial information prepared in accordance with GAAP. Zendesk presents such non-GAAP Zendesk has determined the projected non-GAAP tax rate to be 21%. Zendesk will periodically ﬁnancial measures in reporting its ﬁnancial results to provide investors with an additional tool to re-evaluate this tax rate, as necessary, for signiﬁcant events, based on relevant tax law changes, evaluate Zendesk’s operating results. Zendesk believes these non-GAAP ﬁnancial measures are material changes in the forecasted geographic earnings mix, and any signiﬁcant acquisitions. 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 Zendesk provides disclosures regarding its free cash ﬂow, which is deﬁned as net cash from better understand and evaluate Zendesk’s operating results and future prospects in the same operating activities, less purchases of property and equipment and internal-use software manner as management. development costs. Free cash ﬂow margin is calculated as free cash ﬂow as a percentage of total revenue. Zendesk uses free cash ﬂow, free cash ﬂow margin, and other measures, to evaluate the Zendesk’s management believes it is useful for itself and investors to review, as applicable, both ability of its operations to generate cash that is available for purposes other than capital GAAP information that may include items such as share-based compensation and related expenses, expenditures and capitalized software development costs. Zendesk believes that information amortization of debt discount and issuance costs, amortization of purchased intangibles, and regarding free cash ﬂow and free cash ﬂow margin provides investors with an important perspective acquisition-related expenses, and the non-GAAP measures that exclude such information in order to on the cash available to fund ongoing operations. 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, Zendesk has not reconciled free cash ﬂow guidance to net cash from operating activities for the it provides a reconciliation of the non-GAAP ﬁnancial measure to the most closely comparable year ending December 31, 2019 because Zendesk does not provide guidance on the reconciling GAAP ﬁnancial measure. When Zendesk uses such a non-GAAP ﬁnancial measure in a items between net cash from operating activities and free cash ﬂow, as a result of the uncertainty forward-looking manner for future periods, and a reconciliation is not determinable without regarding, and the potential variability of, these items. The actual amount of such reconciling items unreasonable eﬀort, Zendesk provides the reconciling information that is determinable without will have a signiﬁcant impact on Zendesk’s free cash ﬂow and, accordingly, a reconciliation of net unreasonable eﬀort and identiﬁes the information that would need to be added or subtracted from cash from operating activities to free cash ﬂow for the year ending December 31, 2019 is not the non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are available without unreasonable eﬀort. 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 Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to GAAP detailed above. operating margin for future periods beyond the current ﬁscal year because Zendesk does not provide guidance on the reconciling items between GAAP operating margin and non-GAAP Non-GAAP gross margin for the ﬁrst quarter of 2019 excludes $5.8 million in share-based operating margin for such periods, as a result of the uncertainty regarding, and the potential compensation and related expenses (including $0.4 million of amortization of share-based variability of, these items. The actual amount of such reconciling items will have a signiﬁcant impact compensation capitalized in internal-use software and $0.5 million of employer tax related to on Zendesk’s non-GAAP operating margin and, accordingly, a reconciliation of GAAP operating employee stock transactions), $1.6 million of amortization of purchased intangibles, and $0.1 million margin to non-GAAP operating margin guidance for such periods is not available without of acquisition-related expenses. Non-GAAP operating loss and non-GAAP operating margin for the unreasonable eﬀort. ﬁrst quarter of 2019 exclude $40.6 million in share-based compensation and related expenses (including $3.5 million of employer tax related to employee stock transactions and $0.4 million of Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include amortization of share-based compensation capitalized in internal-use software), $1.7 million of adjustments to its expectations for its GAAP gross margin that exclude share-based compensation acquisition-related expenses, and $2.2 million of amortization of purchased intangibles. Free cash and related expenses in Zendesk’s cost of revenue, amortization of purchased intangibles primarily ﬂow for the ﬁrst quarter of 2019 includes cash used for purchases of property and equipment of related to developed technology, and acquisition-related expenses. The share-based compensation $9.3 million and internal-use software development costs of $1.2 million. and related expenses excluded due to such adjustments are primarily comprised of the share-based compensation and related expenses for employees associated with Zendesk’s infrastructure and customer experience organization. Zendesk Shareholder Letter Q2 2019 - 25

 

About operating metrics 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 Zendesk reviews a number of operating metrics to evaluate its business, measure performance, aggregate annual recurring revenue across its products for customers with paid customer accounts identify trends, formulate business plans, and make strategic decisions. These include the number as of the date one year prior to the date of calculation. Zendesk deﬁnes the retained revenue net of of paid customer accounts on Zendesk Support, Zendesk Chat, and its other products, dollar-based contraction and churn as the aggregate annual recurring revenue across its products for the same net expansion rate, annual recurring revenue represented by its churned customers, and the customer base included in the measure of base revenue at the end of the annual period being percentage of its annual recurring revenue from Support originating from customers with 100 or measured. The dollar-based net expansion rate is also adjusted to eliminate the eﬀect of certain more agents on Support. activities that Zendesk identiﬁes involving the consolidation of customer accounts or the split of a single paid customer account into multiple paid customer accounts. In addition, the dollar-based net Zendesk deﬁnes the number of paid customer accounts at the end of any particular period as the expansion rate is adjusted to include paid customer accounts in the customer base used to sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free trials, or other determine retained revenue net of contraction and churn that share common corporate information free services, (ii) the number of accounts using Chat, exclusive of free trials or other free services, with customers in the customer base that are used to determine the base revenue. Giving eﬀect to and (iii) the number of accounts on all of its other products, exclusive of free trials and other free this consolidation results in Zendesk’s dollar-based net expansion rate being calculated across services, each as of the end of the period and as identiﬁed by a unique account identiﬁer. In the approximately 103,400 customers, as compared to the approximately 149,000 total paid customer quarter ended June 30, 2018, Zendesk began to oﬀer an omnichannel subscription which provides accounts as of June 30, 2019. access to multiple products through a single paid customer account, Zendesk Suite and in the quarter ended June 30, 2019, Zendesk began to oﬀer a subscription which provides access to Sell To the extent that Zendesk can determine that the underlying customers do not share common and Support through a single paid customer account, Zendesk Duet. All of the Suite paid customer corporate information, Zendesk does not aggregate paid customer accounts associated with accounts are included in the number of accounts on all of Zendesk’s other products and are not reseller and other similar channel arrangements for the purposes of determining its dollar-based net included in the number of paid customer accounts using Support or Chat. All of the Duet paid expansion rate. While not material, Zendesk believes the failure to account for these activities customer accounts are included in the number of paid customer accounts using Support. Existing would otherwise skew the dollar-based net expansion metrics associated with customers that customers may also expand their utilization of Zendesk’s products by adding new accounts and a maintain multiple paid customer accounts across its products and paid customer accounts single consolidated organization or customer may have multiple accounts across each of Zendesk’s associated with reseller and other similar channel arrangements. products to service separate subsidiaries, divisions, or work processes. Other than usage of Zendesk’s products through its omnichannel subscription oﬀering, each of these accounts is also Zendesk does not currently incorporate operating metrics associated with its legacy analytics treated as a separate paid customer account. product, its legacy Outbound product, Sell, its legacy Starter plan, free trials, or other free services into its measurement of dollar-based net expansion rate. 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 For a more detailed description of how Zendesk calculates its dollar-based net expansion rate, a paid customer account, upgrades in subscription plans, and the purchase of additional products please refer to Zendesk’s periodic reports ﬁled with the Securities and Exchange Commission. as oﬀset by churn, contraction in authorized agents associated with a paid customer account, and downgrades in subscription plans. Zendesk’s dollar-based net expansion rate is based upon annual Zendesk’s percentage of annual recurring revenue from Support that is generated by customers recurring revenue for a set of paid customer accounts on its products. Zendesk determines the with 100 or more agents on Support is determined by dividing the annual recurring revenue from annual recurring revenue value of a contract by multiplying the monthly recurring revenue for such Support for paid customer accounts with 100 or more agents on Support as of the measurement contract by twelve. Monthly recurring revenue for a paid customer account is a legal and contractual date by the annual recurring revenue from Support for all paid customer accounts on Support as of determination made by assessing the contractual terms of each paid customer account, as of the the measurement date. Zendesk determines the customers with 100 or more agents on Support as date of determination, as to the revenue Zendesk expects to generate in the next monthly period of the measurement date based on the number of activated agents on Support at the measurement for that paid customer account, assuming no changes to the subscription and without taking into date and includes adjustments to aggregate paid customer accounts that share common corporate account any platform usage above the subscription base, if any, that may be applicable to such information. For the purpose of determining this metric, Zendesk builds an estimation of the subscription. Beginning with the quarter ended June 30, 2019, we excluded the impact of revenue proportion of annual recurring revenue from Suite attributable to Support and includes such portion that we expect to generate from ﬁxed-term contracts that are each associated with an existing in the annual recurring revenue from Support. account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring Zendesk does not currently incorporate operating metrics associated with products other than revenue. Monthly recurring revenue is not determined by reference to historical revenue, deferred Support into its measurement of the percentage of annual recurring revenue from Support that is revenue, or any other GAAP ﬁnancial measure over any period. It is forward-looking and generated by customers with 100 or more agents on Support. contractually derived as of the date of determination. Zendesk determines its annual revenue run rate by multiplying the revenue generated over its most recently completed quarter by four. Zendesk Shareholder Letter Q2 2019 - 26

 

Customer metrics *Does not add up to total due to rounding Geographic Contact: information Revenue mix by Investor contact geography Karen Sansot, +1 415-852-3877 ir@zendesk.com Source: Zendesk, Inc. Media contact Tian Lee, +1 415-231-0847 press@zendesk.com Zendesk Shareholder Letter Q2 2019 - 27

 

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