Highlights:
- Second quarter revenue increased 28% year-over-year to $407.2
million
- Second quarter GAAP operating loss of $92.5 million and
non-GAAP operating income of $23.6 million
- GAAP operating loss includes real estate impairments of $24.9
million and merger-related costs and other expenses of $12.2
million
Zendesk, Inc. (NYSE: ZEN) today reported financial results for
the second quarter ended June 30, 2022.
Results for the Second Quarter 2022
Revenue was $407.2 million for the quarter ended June 30, 2022,
an increase of 28% over the prior year period. GAAP net loss for
the quarter ended June 30, 2022 was $95.1 million, and GAAP net
loss per share (basic and diluted) was $0.77. Non-GAAP net income
was $18.8 million, and non-GAAP net income per share was $0.15
(basic) and $0.14 (diluted). Non-GAAP net income excludes
approximately $75.7 million in share-based compensation and related
expenses (including $1.9 million of employer tax related to
employee stock transactions and $0.4 million of amortization of
share-based compensation capitalized in internal-use software),
$24.9 million of real estate impairments, $12.2 million of
merger-related costs and other expenses, $1.8 million of
amortization of purchased intangibles, $1.4 million of
acquisition-related expenses, $1.2 million of amortization of debt
issuance costs, and includes non-GAAP income tax effects and
adjustments of $3.4 million. GAAP net loss per share for the
quarter ended June 30, 2022 was based on 122.8 million weighted
average shares outstanding (basic and diluted), and non-GAAP net
income per share for the quarter ended June 30, 2022 was based on
122.8 million weighted average shares outstanding (basic) and 138.0
million weighted average shares outstanding (diluted).
Transaction with Private Equity Consortium
Due to Zendesk’s pending acquisition by an investor group led by
leading investment firms Hellman & Friedman LLC and Permira
Advisers LLC that was announced on June 24, 2022, the Company will
not be holding a conference call or live webcast to discuss
Zendesk’s financial results for the second quarter ended June 30,
2022, or provide a Shareholder Letter for such period. In addition,
the Company will not be providing financial guidance for the
quarter ending September 30, 2022 and is suspending its financial
guidance for the year ending December 31, 2022 in light of the
pending transaction.
About Zendesk
Zendesk started the customer experience revolution in 2007 by
enabling any business around the world to take their customer
service online. Today, Zendesk is the champion of great service
everywhere for everyone, and powers billions of conversations,
connecting more than 100,000 brands with hundreds of millions of
customers over telephony, chat, email, messaging, social channels,
communities, review sites and help centers. Zendesk products are
built with love to be loved. The company was conceived in
Copenhagen, Denmark, built and grown in California, taken public in
New York City, and today employs more than 6,000 people across the
world. Learn more at www.zendesk.com.
References to Zendesk, the “Company,” “our,” or “we” in this
press release refer to Zendesk, Inc. and its subsidiaries on a
consolidated basis.
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, progress toward its long-term financial objectives, and
the proposed transaction. 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)
Zendesk’s ability to adapt its products to changing market dynamics
and customer preferences or achieve increased market acceptance of
its products; (ii) the intensely competitive market in which
Zendesk operates; (iii) the development of the market for software
as a service business software applications; (iv) Zendesk’s
substantial reliance on its customers renewing their subscriptions
and purchasing additional subscriptions; (v) Zendesk’s ability to
effectively market and sell its products to larger enterprises;
(vi) Zendesk’s ability to develop or acquire and market new
products and to support its products on a unified, reliable shared
services platform; (vii) Zendesk’s reliance on third-party
services, including services for hosting, email, and messaging;
(viii) Zendesk’s ability to retain key employees and attract
qualified personnel, particularly in the primary regions Zendesk
operates; (ix) Zendesk’s ability to effectively manage its growth
and organizational change, including its international expansion
strategy; (x) 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; (xi) Zendesk’s ability to integrate acquired
businesses and technologies successfully or achieve the expected
benefits of such acquisitions; (xii) real or perceived errors,
failures, or bugs in Zendesk’s products; (xiii) potential service
interruptions or performance problems associated with Zendesk’s
technology and infrastructure; (xiv) Zendesk’s ability to securely
maintain customer data and prevent, mitigate, and respond
effectively to both historical and future data breaches; (xv)
Zendesk’s ability to comply with privacy and data security
regulations; (xvi) Zendesk’s ability to optimize the pricing for
its solutions; (xvii) other adverse changes in general economic or
market conditions; and (xviii) known and unknown risks,
uncertainties, and other factors related to the proposed
transaction, including: the timing, receipt and terms and
conditions of any required governmental and regulatory approvals of
the proposed transaction that could reduce anticipated benefits or
cause the parties to abandon the proposed transaction; the
occurrence of any event, change or other circumstances that could
give rise to the termination of the merger agreement entered into
pursuant to the proposed transaction; the possibility that Zendesk
stockholders may not approve the proposed transaction; the risk
that the parties to the merger agreement may not be able to satisfy
the conditions to the proposed transaction in a timely manner or at
all; risks related to disruption of management time from ongoing
business operations due to the proposed transaction; the risk that
any announcements relating to the proposed transaction could have
adverse effects on the market price of Zendesk’s common stock; the
risk of any unexpected costs or expenses resulting from the
proposed transaction; the risk of any litigation relating to the
proposed transaction; the risk that the proposed transaction and
its announcement could have an adverse effect on the ability of
Zendesk to retain customers and retain and hire key personnel and
maintain relationships with customers, suppliers, employees,
stockholders and other business relationships and on its operating
results and business generally; and the risk the pending proposed
transaction could distract management of Zendesk.
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 Annual Report on
Form 10-K for the year ended December 31, 2021. 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, 2022.
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.
Additional Information and Where to Find It
This communication relates to the proposed transaction involving
Zendesk, Inc. (“Zendesk”). In connection with the proposed
transaction, Zendesk has filed with the U.S. Securities and
Exchange Commission (the “SEC”) a preliminary proxy statement on
Schedule 14A. The definitive proxy statement (the “Proxy
Statement”) will be mailed to Zendesk’s stockholders when
available. This communication is not a substitute for the Proxy
Statement or for any other document that Zendesk may file with the
SEC and send to its stockholders in connection with the proposed
transaction. The proposed transaction will be submitted to
Zendesk’s stockholders for their consideration. Before making any
voting decision, Zendesk’s stockholders are urged to read all
relevant documents filed or to be filed with the SEC, including the
Proxy Statement, as well as any amendments or supplements to those
documents, when they become available because they will contain
important information about the proposed transaction.
Zendesk’s stockholders will be able to obtain a free copy of the
Proxy Statement, as well as other filings containing information
about Zendesk, without charge, at the SEC’s website (www.sec.gov).
Copies of the Proxy Statement and the filings with the SEC that
will be incorporated by reference therein can also be obtained,
without charge, by directing a request to Zendesk, Inc., 989 Market
Street, San Francisco, CA 94103, Attention: Investor Relations,
email: ir@zendesk.com, or from Zendesk’s website
www.zendesk.com.
Participants in the Solicitation
Zendesk and certain of its directors, executive officers and
employees may be deemed to be participants in the solicitation of
proxies in respect of the proposed transaction. Information
regarding Zendesk’s directors and executive officers is available
in Zendesk’s proxy statement on Schedule 14A for the 2022 annual
meeting of stockholders, which was filed with the SEC on July 11,
2022. Other information regarding the participants in the proxy
solicitation and a description of their direct and indirect
interests, by security holdings or otherwise, will be contained in
the Proxy Statement and other relevant materials to be filed with
the SEC in connection with the proposed transaction when they
become available. Free copies of the Proxy Statement and such other
materials may be obtained as described in the preceding
paragraph.
Condensed Consolidated Statements of
Operations (In thousands, except per share data; unaudited)
Three Months Ended June
30,
Six Months Ended June
30,
2022
2021
2022
2021
Revenue
$
407,208
$
318,216
$
795,535
$
616,264
Cost of revenue
82,790
66,743
158,468
127,637
Gross profit
324,418
251,473
637,067
488,627
Operating expenses:
Research and development
110,539
82,826
218,616
156,609
Sales and marketing
209,160
165,250
410,820
322,768
General and administrative
97,210
45,818
160,748
88,951
Total operating expenses
416,909
293,894
790,184
568,328
Operating loss
(92,491
)
(42,421
)
(153,117
)
(79,701
)
Other income (expense), net:
Interest expense
(3,121
)
(14,591
)
(6,242
)
(29,006
)
Interest and other income
(expense), net
2,094
960
2,932
6,044
Total other income (expense),
net
(1,027
)
(13,631
)
(3,310
)
(22,962
)
Loss before provision for income taxes
(93,518
)
(56,052
)
(156,427
)
(102,663
)
Provision for income taxes
1,564
2,355
5,601
4,709
Net loss
$
(95,082
)
$
(58,407
)
$
(162,028
)
$
(107,372
)
Net loss per share, basic and diluted
$
(0.77
)
$
(0.49
)
$
(1.32
)
$
(0.91
)
Weighted-average shares used to compute
net loss per share, basic and diluted
122,841
119,050
122,404
118,484
Condensed Consolidated Balance
Sheets (In thousands, except par value; unaudited)
June 30, 2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents
$
567,980
$
476,103
Marketable securities
590,263
539,780
Accounts receivable, net of
allowance for credit losses of $5,742 and $6,190 as of June 30,
2022 and December 31, 2021, respectively
258,127
273,898
Deferred costs
82,497
72,042
Prepaid expenses and other
current assets
71,514
56,809
Total current assets
1,570,381
1,418,632
Marketable securities, noncurrent
473,949
559,652
Property and equipment, net
90,955
97,815
Deferred costs, noncurrent
78,266
72,553
Lease right-of-use assets
48,259
69,936
Goodwill and intangible assets, net
193,610
197,098
Other assets
36,689
35,593
Total assets
$
2,492,109
$
2,451,279
Liabilities and stockholders’
equity
Current liabilities:
Accounts payable
$
70,682
$
49,213
Accrued liabilities
56,562
50,075
Accrued compensation and
related benefits
105,297
138,127
Deferred revenue
563,873
512,933
Lease liabilities
21,977
21,253
Current portion of convertible
senior notes, net
148,687
139,738
Total current liabilities
967,078
911,339
Convertible senior notes, net
1,137,424
979,350
Deferred revenue, noncurrent
6,326
4,277
Lease liabilities, noncurrent
51,727
63,212
Other liabilities
2,733
3,883
Total liabilities
2,165,288
1,962,061
Stockholders’ equity:
Preferred stock, par value
$0.01 per share
—
—
Common stock, par value $0.01
per share
1,232
1,215
Additional paid-in capital
1,568,922
1,637,157
Accumulated other comprehensive
loss
(22,176
)
(8,911
)
Accumulated deficit
(1,221,157
)
(1,140,243
)
Total stockholders’ equity
326,821
489,218
Total liabilities and stockholders’
equity
$
2,492,109
$
2,451,279
Condensed Consolidated Statements of
Cash Flows (In thousands; unaudited)
Three Months Ended June
30,
2022
2021
Cash flows from operating
activities
Net loss
$
(95,082
)
$
(58,407
)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and
amortization
9,340
9,108
Share-based compensation
73,359
56,694
Amortization of deferred
costs
21,719
16,185
Amortization of debt discount
and issuance costs
1,225
12,694
Real estate impairments
24,908
—
Allowance for credit losses on
accounts receivable
1,668
1,327
Other, net
1,750
1,088
Changes in operating assets and
liabilities:
Accounts receivable
(39,312
)
(27,868
)
Prepaid expenses and other
current assets
3,576
(1,272
)
Deferred costs
(30,087
)
(32,267
)
Lease right-of-use assets
3,956
4,354
Other assets and
liabilities
(491
)
(2,166
)
Accounts payable
39,961
(420
)
Accrued liabilities
(2,352
)
(483
)
Accrued compensation and
related benefits
(6,320
)
14,152
Deferred revenue
44,351
45,720
Lease liabilities
(3,144
)
(11,561
)
Net cash provided by
operating activities
49,025
26,878
Cash flows from investing
activities
Purchases of property and equipment
(5,412
)
(2,896
)
Internal-use software development
costs
(2,880
)
(3,070
)
Purchases of marketable securities
(198,582
)
(199,540
)
Proceeds from maturities of marketable
securities
147,330
182,044
Proceeds from sales of marketable
securities
74,847
20,462
Purchases of strategic investments
(1,000
)
—
Net cash provided by (used
in) investing activities
14,303
(3,000
)
Cash flows from financing
activities
Proceeds from exercises of employee stock
options
1,414
11,204
Proceeds from employee stock purchase
plan
10,209
11,594
Taxes paid related to net share settlement
of share-based awards
(2,263
)
(3,502
)
Net cash provided by
financing activities
9,360
19,296
Effect of exchange rate changes on cash,
cash equivalents and restricted cash
77
(11
)
Net increase in cash, cash equivalents and
restricted cash
72,765
43,163
Cash, cash equivalents and restricted cash
at beginning of period
496,929
380,085
Cash, cash equivalents and restricted
cash at end of period
$
569,694
$
423,248
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,
2022
2021
2022
2021
Reconciliation of gross profit and
gross margin
GAAP gross profit
$
324,418
$
251,473
$
637,067
$
488,627
Plus: Share-based
compensation
6,982
5,218
13,159
9,704
Plus: Employer tax related to
employee stock transactions
139
327
386
780
Plus: Amortization of purchased
intangibles
1,177
1,136
2,355
2,355
Plus: Acquisition-related
expenses
—
55
—
124
Plus: Amortization of
share-based compensation capitalized in internal-use software
413
387
837
771
Non-GAAP gross profit
$
333,129
$
258,596
$
653,804
$
502,361
GAAP gross margin
80
%
79
%
80
%
79
%
Non-GAAP adjustments
2
%
2
%
2
%
3
%
Non-GAAP gross margin
82
%
81
%
82
%
82
%
Reconciliation of operating
expenses
GAAP research and development
$
110,539
$
82,826
$
218,616
$
156,609
Less: Share-based
compensation
(20,482
)
(17,024
)
(39,769
)
(32,697
)
Less: Employer tax related to
employee stock transactions
(653
)
(1,082
)
(1,535
)
(2,509
)
Less: Acquisition-related
expenses
(1,299
)
(811
)
(2,637
)
(1,779
)
Less: Amortization of
share-based compensation capitalized in internal-use software
(17
)
(17
)
(34
)
(34
)
Non-GAAP research and development
$
88,088
$
63,892
$
174,641
$
119,590
GAAP research and development as
percentage of revenue
27
%
26
%
27
%
25
%
Non-GAAP research and development as
percentage of revenue
22
%
20
%
22
%
19
%
GAAP sales and marketing
$
209,160
$
165,250
$
410,820
$
322,768
Less: Share-based
compensation
(31,120
)
(24,501
)
(57,920
)
(47,733
)
Less: Employer tax related to
employee stock transactions
(992
)
(1,385
)
(2,188
)
(3,454
)
Less: Amortization of purchased
intangibles
(642
)
(642
)
(1,284
)
(1,284
)
Less: Acquisition-related
expenses
(1
)
(64
)
(374
)
(112
)
Non-GAAP sales and marketing
$
176,405
$
138,658
$
349,054
$
270,185
GAAP sales and marketing as percentage of
revenue
51
%
52
%
52
%
52
%
Non-GAAP sales and marketing as percentage
of revenue
43
%
44
%
44
%
44
%
GAAP general and administrative
$
97,210
$
45,818
$
160,748
$
88,951
Less: Share-based
compensation
(14,775
)
(9,951
)
(26,449
)
(18,934
)
Less: Employer tax related to
employee stock transactions
(135
)
(1,124
)
(980
)
(2,288
)
Less: Acquisition-related
expenses
(122
)
(141
)
(9,846
)
(463
)
Less: Real estate
impairments
(24,908
)
(1,176
)
(24,908
)
(1,176
)
Less: Merger-related costs and
other expenses
(12,213
)
—
(12,213
)
—
Non-GAAP general and administrative
$
45,057
$
33,426
$
86,352
$
66,090
GAAP general and administrative as
percentage of revenue
24
%
14
%
20
%
14
%
Non-GAAP general and administrative as
percentage of revenue
11
%
11
%
11
%
11
%
Reconciliation of operating income
(loss) and operating margin
GAAP operating loss
$
(92,491
)
$
(42,421
)
$
(153,117
)
$
(79,701
)
Plus: Share-based
compensation
73,359
56,694
137,297
109,068
Plus: Employer tax related to
employee stock transactions
1,919
3,918
5,089
9,031
Plus: Amortization of purchased
intangibles
1,819
1,778
3,639
3,639
Plus: Acquisition-related
expenses
1,422
1,071
12,857
2,478
Plus: Amortization of
share-based compensation capitalized in internal-use software
430
404
871
805
Plus: Real estate
impairments
24,908
1,176
24,908
1,176
Plus: Merger-related costs and
other expenses
12,213
—
12,213
—
Non-GAAP operating income
$
23,579
$
22,620
$
43,757
$
46,496
GAAP operating margin
(23
) %
(13
) %
(19
) %
(13
) %
Non-GAAP adjustments
29
%
20
%
25
%
21
%
Non-GAAP operating margin
6
%
7
%
6
%
8
%
Three Months Ended June
30,
Six Months Ended June
30,
2022
2021
2022
2021
Reconciliation of net income
(loss)
GAAP net loss
$
(95,082
)
$
(58,407
)
$
(162,028
)
$
(107,372
)
Plus: Share-based
compensation
73,359
56,694
137,297
109,068
Plus: Employer tax related to
employee stock transactions
1,919
3,918
5,089
9,031
Plus: Amortization of purchased
intangibles
1,819
1,778
3,639
3,639
Plus: Acquisition-related
expenses
1,422
1,071
12,857
2,478
Plus: Amortization of
share-based compensation capitalized in internal-use software
430
404
871
805
Plus: Real estate
impairments
24,908
1,176
24,908
1,176
Plus: Merger-related costs and
other expenses
12,213
—
12,213
—
Plus: Amortization of debt
discount and issuance costs
1,225
12,695
2,446
25,220
Less: Income tax effects and
adjustments
(3,429
)
(2,198
)
(3,406
)
(5,529
)
Non-GAAP net income
$
18,784
$
17,131
$
33,886
$
38,516
Reconciliation of net income (loss) per
share, basic
GAAP net loss per share, basic
$
(0.77
)
$
(0.49
)
$
(1.32
)
$
(0.91
)
Non-GAAP adjustments to net
loss
0.92
0.63
1.60
1.24
Non-GAAP net income per share, basic
$
0.15
$
0.14
$
0.28
$
0.33
Reconciliation of net income (loss) per
share, diluted
GAAP net loss per share, diluted
$
(0.77
)
$
(0.49
)
$
(1.32
)
$
(0.91
)
Non-GAAP adjustments to net
loss
0.91
0.62
1.59
1.21
Non-GAAP net income per share, diluted
$
0.14
$
0.13
$
0.27
$
0.30
Weighted-average shares used in GAAP per
share calculation, basic and diluted
122,841
119,050
122,404
118,484
Weighted-average shares used in non-GAAP
per share calculation
Basic
122,841
119,050
122,404
118,484
Diluted (1)
137,969
127,515
127,100
127,384
Computation of free cash flow
Net cash provided by operating
activities
$
49,025
$
26,878
$
60,237
$
60,473
Less: Purchases of property and
equipment
(5,412
)
(2,896
)
(12,850
)
(5,957
)
Less: Internal-use software
development costs
(2,880
)
(3,070
)
(5,896
)
(7,538
)
Free cash flow
$
40,733
$
20,912
$
41,491
$
46,978
Net cash provided by operating activities
margin
12
%
8
%
8
%
10
%
Non-GAAP adjustments
(2
) %
(1
) %
(3
) %
(2
) %
Free cash flow margin
10
%
7
%
5
%
8
%
(1)
In the first quarter of 2022, we adopted
ASU 2020-06, which simplifies the accounting for convertible debt.
Under the new standard, companies are required to use the
if-converted method for calculating diluted EPS instead of the
treasury stock method. For the six months ended June 30, 2022,
approximately 11 million shares related to our 2025 convertible
notes were excluded from the non-GAAP diluted share amount, as the
inclusion of these shares using the if-converted method would have
been anti-dilutive.
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.
Real Estate Impairments: To support an increased percentage of
remote teams, Zendesk records impairments for certain assets
associated with leased properties, or portions thereof, that it
ceases to occupy. Any losses and gains associated with these
activities are generally unrelated to financial and operational
performance in any particular period and Zendesk believes the
exclusion of such losses and gains provides for a more useful
comparison of operational performance in comparative periods that
may or may not include such losses and gains.
Merger-Related Costs and Other Expenses: Zendesk views fees
related to its pending acquisition, including transaction costs, as
events that are not necessarily reflective of operational
performance during a period. Zendesk believes the consideration of
measures that exclude such expenses provides meaningful
supplemental information regarding operational performance. Other
expenses include non-recurring fees paid for third-party advisory
and professional services related to shareholder activism and the
strategic review.
Amortization of Debt Discount and Issuance Costs: On January 1,
2022, Zendesk prospectively adopted ASU 2020-06, regarding ASC
Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which
simplifies the accounting for convertible debt. Prior to the
adoption of ASU 2020-06, the imputed interest rates of our 2023
convertible notes and our 2025 notes were approximately 5.26% and
5.00%, respectively. This was a result of the debt discounts
recorded for the conversion features of the notes that were
required to be separately accounted for as equity, and debt
issuance costs, which reduced the carrying value of the convertible
debt instruments. The debt discounts were amortized as interest
expense together with the issuance costs of the debt. Upon adoption
of the new standard, the liability and equity components of each
instrument were recombined into a single liability instrument
measured at amortized cost. As a result, from the date of adoption,
no debt discount remains and no interest expense related to debt
discount amortization will be recorded. Interest expense related to
the amortization of debt issuance costs will continue to be
recorded over the term of the notes. The expense for the
amortization of debt discount and debt issuance costs is a non-cash
item, and we believe the exclusion of this expense will provide for
a more useful comparison of our operational performance in
different periods.
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, 2022, 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 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, acquisition-related
expenses, real estate impairments, and merger-related costs and
other 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.
In August 2020, the Financial Accounting Standards Board issued
ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815
“Derivatives and Hedging,” which amends the calculation of diluted
earnings per share for certain convertible debt instruments, among
other changes. Under the new standard, Zendesk is required to use
the “if-converted” method to calculate diluted earnings per share
for its convertible debt, which assumes conversion of its
convertible debt instruments at the beginning of the reporting
period, with settlement entirely in shares of common stock, unless
the result would be anti-dilutive. Historically, Zendesk calculated
diluted earnings per share for its convertible debt using the
“treasury stock” method, which assumes that the principal amount of
convertible debt instruments is settled in cash. Accordingly, our
diluted shares outstanding are generally expected to increase under
the new standard. We adopted this standard in the first quarter of
2022. The total amount of shares underlying the convertible notes
is approximately 13 million. Refer to Form 10-Q for the quarter
ended June 30, 2022 for further information.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20220728005970/en/
Zendesk, Inc. Investor Contact: Jason Tsai, +1
415-997-8882 ir@zendesk.com
or
Media Contact: Marissa Tree, +1 415-609-4510
press@zendesk.com
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