Zendesk, Inc.

Zendesk, Inc. (NYSE: ZEN) is a technology company that empowers organizations to improve their customer engagement and better understand their customers.

Key Highlights:

• Acquisition Update: Recently, the company declared its acquisition of Momentive, an IT company that delivers Artificial Intelligence (AI) solutions to corporates and has more than 20 million active users. Momentive products include GetFeedback and SurveyMonkey, among others. The above acquisition is expected to add roughly USD 3.5 billion of revenue in 2024. The company would focus on enhancing the customer’s experience by using this AI technology.

• Increase in Cash Flows: In Q3FY21, the company reported a surge in cash from operations of USD 73.810 million, as compared to USD 33.395 million in pcp. The growth was primarily due to prudent working capital management. Notably, the company reported a higher cash balance of USD 532.5 million as of September 30, 2021, as compared to USD 422.8 million at Q2FY21 end, which is a key positive as it enhances the overall liquidity position.

• Improved Operating Metrics: The company reported a growth in its RPO during Q3FY21, wherein its total RPO grew 46% on y-o-y basis. Notably, its remaining performance obligations (RPO) stood at USD 1,167 million, which is the highest in the last five quarters. A higher RPO indicates higher revenue visibility.           

Source: Company Presentation

Q3FY21 Financial Highlights:

• ZEN announced its quarterly result, wherein the company posted a revenue of USD 346.974 million, jumped from USD 261.926 million in pcp. The growth was driven by an increase in revenue scale, customer success optimization, and higher hosting efficiencies.
• Gross profit soared to USD 276.748 million, from USD 199.107 million in pcp, thanks to the higher revenue, partially offset by higher cost of sales.
• The quarter was marked by higher research & development expenses, plus an increase in both sales & marketing expense and general & administrative costs. Operating loss stood at USD 38.908 million, as compared to a loss of USD 28.326 million in pcp.
• The company reported a net loss of USD 54.417 million, as compared to a loss of USD 40.703 million in pcp.

Risks: The company is witnessing higher input costs, which has resulted in lowering profitability. Continuation of the above trend would likely dampen the overall performance of the firm.

Valuation Methodology (Illustrative): EV to Sales Based

Stock Recommendation:

For FY21, the company expects its revenue in between USD 1.329 - 1.335 billion, while its free cash flow is expected in between USD 140 - 150 million. With the acquisition of Momentive, the company is likely to witness improved business prospects in the coming days. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Software & IT Services) mean on an NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of USD 100.35 on November 09, 2021.

One-Year Technical Price Chart (as on November 09, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.