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Zendesk (ZEN) Surpasses Q3 Earnings and Revenue Estimates

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Zendesk Inc. (ZEN - Free Report) reported third-quarter fiscal 2018 earnings of 9 cents per share, beating the Zacks Consensus Estimate by 5 cents. The company had reported a loss of a penny in the year-ago quarter.

Revenues surged 37.8% from the year-ago quarter to $154.8 million, beating the Zacks Consensus Estimate of $152 million. The year-over-year growth was driven by robust adoption of the company’s customer experience software and omni-channel offerings

Top-Line Details

Support MRR from customers with 100 or more Support agents — a key metric to gauge the company’s growth — was up 3 points on a year-over-year basis.

In the third quarter, Zendesk continued its momentum with enterprise customers by enhancing enterprise product features. Additionally, significant efforts of the company’s sales team contributed to the signing of large-sized deals.

Moreover, the company acquired FutureSimple in the quarter under review, which broadens its offering in customer experience with sales force automation software. Notably, there is a significant overlap of customer base of the two companies.

FutureSimple contributed less than $1 million to Zendesk’s revenues and is expected to contribute less than $5 million in the next quarter.

Further, Zendesk Suite, an omni-channel bundle, which brings together Support, Guide, Talk, and Chat products, witnessed its first full quarter and contributed to top-line growth. Notably, the adoption of the same shortened the sales cycle of Zendesk, which is a positive.

Moreover, the company’s omni-channel offerings not only retained the existing customers but also attracted new ones.

The company also moved 90% of its customers from co-located data centers to cloud infrastructure in the third quarter.

Operating Details

Non-GAAP gross margin contracted 20 basis points (bps) on a year-over-year basis to 73.2%.

Non-GAAP operating expenses increased 30.5% year over year to $109.6 million. Research & development (R&D), sales & marketing (S&M) and general & administrative (G&A) expenses surged 33.2%, 33.3% and 18.5%, respectively.

However, as a percentage of revenues, non-GAAP operating expenses declined 400 bps on a year-over-year basis to 70.8%. Moreover, R&D, S&M and G&A declined 60 bps, 140 bps and 200 bps, respectively.

Operating income came to 2.5% year over year to $3.8 million.

Zendesk, Inc. Price, Consensus and EPS Surprise

Guidance

For fourth-quarter 2018, Zendesk expects revenues between $164 and $166 million. Non-GAAP operating income (loss) is expected in the range of ($1 million) to $1 million.

For 2018, Zendesk expects revenues between $591.0 and 593.0 million. Non-GAAP operating income (loss) is expected in the range of $(2.0) - 0.0 million and free cash flow is expected between $28 million and $30 million.

Management expects gross margin to be under pressure in the fourth quarter of 2018 and in 2019, post the acquisition of FutureSimple, as it has lower margins than Zendesk.

Zacks Rank & Stocks to Consider

Currently, Zendesk has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader computer and technology sector include Twitter, Inc. (TWTR - Free Report) , New Relic, Inc. (NEWR - Free Report) and Upland Software, Inc. (UPLD - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Twitter, New Relic and Upland Software is projected to be 22%, 8% and 20%, respectively.

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