Zendesk: Key Metrics Pointing To Strong Momentum


  • Zendesk remains an excellent long-term hold in the tech space.
  • I appreciated the quarterly update given that Zendesk displayed key metric improvements.
  • Zendesk also noted that it might be looking to leverage machine learning and data capture to improve its platform or monetize its data assets.
  • Continue to be long Zendesk.

Zendesk (NYSE:ZEN) had a great second quarter. I continue to be confident in the name despite owning shares and having nothing to show for it. I’m not quite sure what the market is reluctant about this story but I’m not reluctant to hold for the long haul. Zendesk continues to display growing health with excellent rates of growth, posting 63% revenue growth for Q2 Y/Y (up a whopping 14% sequentially) and excellent rates of retention. As of the end of the second quarter Zendesk’s dollar-based net expansion rate, a non-GAAP measure and key metric for the company, was a strong 122%. This is up 300 bps from a revised figure from Q1/15 and indicative of a very happy customer base – myself included.

And that last part, the fact that somebody running a small startup can use and see instant value-add from Zendesk is a large part of what makes the Zendesk story so buyable. Zendesk as a platform is universally appealing regardless of company size and the platform is universally scalable. What this means is that Zendesk essentially offers the same platform to me, owning a small digital property, as it does to its largest enterprise customer. Of course, I don’t have use for all of Zendesk’s services (at least not the entire suite) as some of its enterprise customers do. But that doesn’t mean that I won’t at some point. If I happen to grow into more use cases, which I intend to, you better believe that’s going to benefit Zendesk.

The fact that Zendesk doesn’t have separate core platforms based on size is a huge take rate multiplier in my opinion. It’s also a huge reason the company continues to see its ARPU and total “ARPU volume” rise Y/Y for comparable periods on a cohort basis. I was just on the Marketo (NASDAQ:MKTO) Q2/15 investor call and heard real-time from Marketo management how not having a scalable platform is costing a major competitor business to Marketo. This functionality of the core platform without scale limitations has provided Zendesk with organic “growth creep” tailwind to its growth rates according to my modeling. Put simply, higher ARPU being driven by underlying customer expansion – growth of the customer’s business, although it’s hard to back out. But be careful to separate what I’m referencing from actual growth in ARPU as traditionally defined. What I’m referring to is a five-seat customer scaling up to a 100-seat customer at the same ARPU (but more “ARPU” by volume). This dynamic as a whole is what makes Zendesk great and as a whole is what was displayed during Q2 reporting.

Zendesk CEO Mikkel Svane made quick note of the fact that the company has experienced and should continue to experience uplift from SMB customer growth (in terms of the customer’s business growing, as described above):

“We have a great relationship with so called unicorn companies. Those private companies that are valued at more than $1 billion by the investors. In early 2014, The Wall Street Journal began tracking these unicorns under the $1 billion start up drop. Of the 122 companies on the latest list from July 2015, 47 of them, almost 40%, were Zendesk customers as of the end of the Q2 2015 (SOURCE: ZEN Q2/15 investor call)”

Zendesk also is attacking its market from all directions. It captures SMBs in large size and it’s beginning to capture more and more of the enterprise market. It’s also capturing customers of all varieties on a global basis – something that I’ve detailed development by development in coverage for Seeking Alpha. Zendesk is not only expanding its global sales footprint, it’s also expanding its global infrastructure base. All of that was evident in Q2 reporting in a big way. 56% of Zendesk revenue was derived from customers in the Unites States while 44% of revenue came from customers internationally – I expect this figure to remain roughly the same on a percentage basis but for international revenue to become more diversified by country.

As for larger customers, Zendesk customers that have a 100 or more seats with the company, a hugely important segment the company has targeted to drive forward growth, have continued to grow. This group now represents 27% of monthly recurring revenue as of the end of Q2 versus 23% as of the end of Q2 of last year. That 400 bps improvement might seem small at face value but consider that just four reporting periods has passed as well as the fact that Zendesk is just now ramping into enterprise optimization. I believe this figure has much, much room for improvement in the near term. Also take into account that Zendesk just launched in 1H what could be one of its core products – LiveChat. LiveChat in itself just rolled out a new feature for managing multiple brands within a company – obviously this has been tailored for larger companies. So, expect accelerated rates of growth from the large customer segment in the immediate term.

All told I remain incredibly enthusiastic about the progress at Zendesk and I remain as bullish today as I was at initiation. Zendesk has plenty of cash to drive growth long into the future and stands to benefit from continuing to invest that cash into new, disruptive tech capacity. CEO Svane gave investors some insight into what might be coming next from the company on the investor call in stating:

“We’re actively building deeper capabilities in data analytics and machine learning on top of this massive data asset. And I described in the past calls the Zendesk benchmark as well as some early data driven recommendations that we provide to customers and we expect to provide much more of this in the future.”

Machine Learning has been hot recently with companies like Twitter (NYSE:TWTR), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) all making acquisitions in the niche. Zendesk has access to hundreds of millions of data points, especially with its integration to Facebook’s “Businesses on Facebook” that it can use to better its platform and take potentially towards monetization efforts. I’m excited to see how this develops going forward. Considering the above mentioned $255.7 million in C&CE on the books at Zendesk the potential developments are essentially endless. I’ll wait for a directional update from the company before speculating too much.

I continue to like Zendesk from the long side.

Good luck everybody.

Source: Zendesk: Key Metrics Pointing To Strong Momentum

Via: Google Alert for ML

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