Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Zendesk, Inc. | Financial_Report.xls |
EX-3 - EX-3.1 - Zendesk, Inc. | zen-ex3_20140630633.htm |
EX-31 - EX-31.2 - Zendesk, Inc. | zen-ex31_20140630729.htm |
EX-31 - EX-31.1 - Zendesk, Inc. | zen-ex31_20140630728.htm |
EX-32 - EX-32.2 - Zendesk, Inc. | zen-ex32_20140630731.htm |
EX-32 - EX-32.1 - Zendesk, Inc. | zen-ex32_20140630730.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36456
ZENDESK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware |
|
26-4411091 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
1019 Market Street
San Francisco, California 94103
(Address of principal executive offices)
415.418.7506
(Registrant’s Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
¨ |
Non-accelerated filer |
|
x (do not check if a smaller reporting company) |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2014, there were 72,380,374 shares of the registrant’s common stock outstanding.
ZENDESK, INC.
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
Item 1 |
4 |
|
|
Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 |
4 |
|
|
5 |
|
|
6 |
|
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 |
7 |
|
|
8 |
Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
16 |
Item 3 |
|
26 |
Item 4 |
|
27 |
PART II — OTHER INFORMATION
|
|
|
Item 1 |
27 |
|
Item 1A |
27 |
|
Item 2 |
50 |
|
Item 6 |
51 |
|
|
52 |
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
|
our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, ability to improve our gross margin, and ability to achieve and maintain profitability; |
|
the sufficiency of our cash and cash equivalents, and marketable securities to meet our liquidity needs; |
|
our ability to attract and retain customers to use our customer service platform and live chat software, and to optimize the pricing for our customer service platform and live chat software; |
|
the evolution of technology affecting our platform, services, and markets; |
|
our ability to innovate and provide a superior customer experience; |
|
our ability to successfully expand in our existing markets and into new markets, including expanding our enterprise customer base; |
|
the attraction and retention of qualified employees and key personnel; |
|
worldwide economic conditions and their impact on information technology spending; |
|
our ability to effectively manage our growth and future expenses, including our ability to expand, and realize economies of scale within our self-managed colocation data centers and reduce incremental personnel costs resulting from growth of customers; |
|
our ability to successfully offer Zopim live chat software as a standalone service and further integrate it with our customer service platform; |
|
our ability to maintain, protect, and enhance our intellectual property; |
|
our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations; |
|
the increased expenses and administrative workload associated with being a public company; and |
|
the estimates and methodologies used in calculating our key business metrics. |
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
3
PART I — FINANCIAL INFORMATION
ZENDESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and shares)
|
June 30, |
|
|
December 31, |
|
||
|
2014 |
|
|
2013 |
|
||
|
(Unaudited) |
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
120,054 |
|
|
$ |
53,725 |
|
Marketable securities |
|
9,430 |
|
|
|
9,889 |
|
Accounts receivable, net of allowance for doubtful accounts of $361 and $282 as of June 30, 2014 and December 31, 2013, respectively |
|
9,655 |
|
|
|
7,237 |
|
Prepaid expenses and other current assets |
|
5,806 |
|
|
|
3,008 |
|
Total current assets |
|
144,945 |
|
|
|
73,859 |
|
Marketable securities, noncurrent |
|
2,764 |
|
|
|
2,225 |
|
Property and equipment, net |
|
38,160 |
|
|
|
15,431 |
|
Goodwill and intangible assets, net |
|
15,961 |
|
|
|
— |
|
Other assets |
|
1,482 |
|
|
|
1,221 |
|
Total assets |
$ |
203,312 |
|
|
$ |
92,736 |
|
|
|
|
|
|
|
|
|
Liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
$ |
6,758 |
|
|
$ |
3,988 |
|
Accrued liabilities |
|
11,764 |
|
|
|
4,737 |
|
Accrued compensation and related benefits |
|
7,971 |
|
|
|
4,226 |
|
Deferred revenue |
|
38,526 |
|
|
|
28,473 |
|
Current portion of credit facility |
|
2,685 |
|
|
|
365 |
|
Current portion of capital leases |
|
195 |
|
|
|
364 |
|
Total current liabilities |
|
67,899 |
|
|
|
42,153 |
|
Deferred revenue, noncurrent |
|
462 |
|
|
|
575 |
|
Credit facility, noncurrent |
|
5,015 |
|
|
|
23,395 |
|
Capital leases, noncurrent |
|
— |
|
|
|
10 |
|
Other liabilities |
|
8,193 |
|
|
|
1,510 |
|
Total liabilities |
|
81,569 |
|
|
|
67,643 |
|
Commitments and contingencies (Note 7) |
|
|
|
|
|
|
|
Redeemable convertible preferred stock, par value $0.01 per share, issuable in series: no shares and 24.0 million shares authorized; no shares and 23.6 million shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively |
|
— |
|
|
|
71,369 |
|
Stockholders’ equity (deficit): |
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share: 5.0 million and no shares authorized as of June 30, 2014 and December 31, 2013, respectively; no shares issued and outstanding as of June 30, 2014 and December 31, 2013 |
|
— |
|
|
|
— |
|
Common stock, par value $0.01 per share: 400.0 million and 125.0 million shares authorized; 72.8 million and 23.7 million shares issued; 72.3 million and 23.2 million shares outstanding as of June 30, 2014 and December 31, 2013, respectively (including 0.8 million shares subject to repurchase, legally issued and outstanding, as of June 30, 2014 and December 31, 2013) |
|
715 |
|
|
|
229 |
|
Additional paid-in capital |
|
217,815 |
|
|
|
18,591 |
|
Accumulated other comprehensive income |
|
322 |
|
|
|
10 |
|
Accumulated deficit |
|
(96,457 |
) |
|
|
(64,454 |
) |
Treasury stock at cost (0.5 million shares as of June 30, 2014 and December 31, 2013) |
|
(652 |
) |
|
|
(652 |
) |
Total stockholders’ equity (deficit) |
|
121,743 |
|
|
|
(46,276 |
) |
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit) |
$ |
203,312 |
|
|
$ |
92,736 |
|
See Notes to Condensed Consolidated Financial Statements.
4
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
29,506 |
|
|
$ |
16,396 |
|
|
$ |
54,598 |
|
|
$ |
30,307 |
|
Cost of revenue (1) |
|
11,731 |
|
|
|
5,681 |
|
|
|
20,726 |
|
|
|
10,551 |
|
Gross profit |
|
17,775 |
|
|
|
10,715 |
|
|
|
33,872 |
|
|
|
19,756 |
|
Operating expenses (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
10,499 |
|
|
|
3,528 |
|
|
|
15,677 |
|
|
|
6,877 |
|
Sales and marketing |
|
20,339 |
|
|
|
8,208 |
|
|
|
34,626 |
|
|
|
16,203 |
|
General and administrative |
|
8,315 |
|
|
|
5,140 |
|
|
|
14,699 |
|
|
|
8,098 |
|
Total operating expenses |
|
39,153 |
|
|
|
16,876 |
|
|
|
65,002 |
|
|
|
31,178 |
|
Operating loss |
|
(21,378 |
) |
|
|
(6,161 |
) |
|
|
(31,130 |
) |
|
|
(11,422 |
) |
Other expense, net |
|
(450 |
) |
|
|
(133 |
) |
|
|
(909 |
) |
|
|
(210 |
) |
Loss before provision for income taxes |
|
(21,828 |
) |
|
|
(6,294 |
) |
|
|
(32,039 |
) |
|
|
(11,632 |
) |
Provision (benefit) for income taxes |
|
(85 |
) |
|
|
58 |
|
|
|
(36 |
) |
|
|
78 |
|
Net loss |
|
(21,743 |
) |
|
|
(6,352 |
) |
|
|
(32,003 |
) |
|
|
(11,710 |
) |
Accretion of redeemable convertible preferred stock |
|
(6 |
) |
|
|
(12 |
) |
|
|
(18 |
) |
|
|
(24 |
) |
Net loss attributable to common stockholders |
$ |
(21,749 |
) |
|
$ |
(6,364 |
) |
|
$ |
(32,021 |
) |
|
$ |
(11,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders, basic and diluted |
$ |
(0.48 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.55 |
) |
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted |
|
45,760 |
|
|
|
21,568 |
|
|
|
33,817 |
|
|
|
21,213 |
|
(1) Includes share-based compensation expense as follows:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Cost of revenue |
$ |
1,010 |
|
|
$ |
61 |
|
|
$ |
1,100 |
|
|
$ |
100 |
|
Research and development |
|
4,168 |
|
|
|
155 |
|
|
|
4,478 |
|
|
|
226 |
|
Sales and marketing |
|
3,268 |
|
|
|
229 |
|
|
|
3,758 |
|
|
|
388 |
|
General and administrative |
|
2,537 |
|
|
|
2,022 |
|
|
|
3,471 |
|
|
|
2,155 |
|
See Notes to Condensed Consolidated Financial Statements.
5
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
$ |
(21,743 |
) |
|
$ |
(6,352 |
) |
|
$ |
(32,003 |
) |
|
$ |
(11,710 |
) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on available-for-sale investments |
|
(7 |
) |
|
|
(10 |
) |
|
|
(8 |
) |
|
|
(21 |
) |
Foreign currency translation gain |
|
123 |
|
|
|
— |
|
|
|
320 |
|
|
|
— |
|
Comprehensive loss |
$ |
(21,627 |
) |
|
$ |
(6,362 |
) |
|
$ |
(31,691 |
) |
|
$ |
(11,731 |
) |
See Notes to Condensed Consolidated Financial Statements.
6
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
Six Months Ended June 30, |
|
|||||
|
2014 |
|
|
2013 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net loss |
$ |
(32,003 |
) |
|
$ |
(11,710 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
4,504 |
|
|
|
2,165 |
|
Share-based compensation |
|
12,807 |
|
|
|
2,869 |
|
Other |
|
178 |
|
|
|
21 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
(1,857 |
) |
|
|
(1,032 |
) |
Prepaid expenses and other current assets |
|
(2,617 |
) |
|
|
(823 |
) |
Other assets and liabilities |
|
490 |
|
|
|
348 |
|
Accounts payable |
|
(535 |
) |
|
|
404 |
|
Accrued liabilities |
|
872 |
|
|
|
874 |
|
Accrued compensation and related benefits |
|
3,426 |
|
|
|
777 |
|
Deferred revenue |
|
9,647 |
|
|
|
5,945 |
|
Net cash used in operating activities |
|
(5,088 |
) |
|
|
(162 |
) |
Cash flows from investing activities |
|
|
|
|
|
|
|
Purchases of property and equipment |
|
(13,097 |
) |
|
|
(3,979 |
) |
Internal-use software and website development costs |
|
(3,915 |
) |
|
|
(2,344 |
) |
Purchases of marketable securities |
|
(6,464 |
) |
|
|
(12,409 |
) |
Proceeds from maturities of marketable securities |
|
6,250 |
|
|
|
— |
|
Cash paid for the acquisition of Zopim, net of cash acquired |
|
(1,896 |
) |
|
|
— |
|
Net cash used in investing activities |
|
(19,122 |
) |
|
|
(18,732 |
) |
Cash flows from financing activities |
|
|
|
|
|
|
|
Proceeds from initial public offering, net of issuance costs |
|
104,377 |
|
|
|
— |
|
Proceeds from exercise of employee stock options |
|
3,372 |
|
|
|
233 |
|
Proceeds from issuance of debt |
|
3,940 |
|
|
|
— |
|
Principal payments on debt |
|
(20,000 |
) |
|
|
— |
|
Taxes paid related to net share settlement of equity awards |
|
(969 |
) |
|
|
— |
|
Principal payments on capital lease obligations |
|
(179 |
) |
|
|
(166 |
) |
Net cash provided by financing activities |
|
90,541 |
|
|
|
67 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
(2 |
) |
|
|
17 |
|
Net increase (decrease) in cash and cash equivalents |
|
66,329 |
|
|
|
(18,810 |
) |
Cash and cash equivalents at the beginning of period |
|
53,725 |
|
|
|
48,688 |
|
Cash and cash equivalents at the end of period |
$ |
120,054 |
|
|
$ |
29,878 |
|
|
|
|
|
|
|
|
|
Supplemental cash flow data: |
|
|
|
|
|
|
|
Cash paid for interest and income taxes |
$ |
660 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
Issuance of common stock for the acquisition of Zopim |
$ |
10,893 |
|
|
$ |
— |
|
Purchases of property and equipment in accounts payable and accrued expenses |
$ |
5,001 |
|
|
$ |
45 |
|
Property and equipment acquired through tenant improvement allowances |
$ |
3,554 |
|
|
$ |
— |
|
Share-based compensation capitalized in internal-use software development costs |
$ |
1,125 |
|
|
$ |
85 |
|
IPO costs in accounts payable |
$ |
1,145 |
|
|
$ |
— |
|
Vesting of early exercised stock options |
$ |
810 |
|
|
$ |
612 |
|
See Notes to Condensed Consolidated Financial Statements.
7
ZENDESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Overview and Basis of Presentation
Company and Background
Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.
Our mission is to help organizations build successful long-term relationships with their customers. We are a software development company that provides a software-as-a-service, or SaaS, customer service platform that enables our customers to provide tailored support through multiple channels, establish effective self-service support resources, proactively serve customers through customer engagement capabilities, integrate with other applications and consolidate and analyze data from customer interactions in powerful ways. We also provide SaaS live chat software that can be utilized independently to facilitate proactive communications between organizations and their customers or integrated seamlessly into our customer service platform.
References to Zendesk, “Company”, “our”, or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our final prospectus filed with the SEC on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. There have been no changes to our significant accounting policies described in the prospectus that have had a material impact on our condensed consolidated financial statements and related notes.
The consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2014.
Initial Public Offering
In May, 2014, we completed our initial public offering, or IPO, in which we issued and sold 12.8 million shares of common stock at a public offering price of $9.00 per share. We received net proceeds of $103.1 million after deducting underwriting discounts and commissions of $8.1 million and other offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 34.3 million shares of common stock.
All restricted stock units, or RSUs, and certain options granted to employees prior to the IPO vest upon the satisfaction of both a service condition and a performance condition. These RSUs and stock options with both a service condition and performance condition are collectively referred to as “Performance Awards” in the following discussion. The service condition for substantially all of the Performance Awards is satisfied over three or four years. The performance condition was satisfied upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense had been recognized for the Performance Awards prior to the IPO. Upon the satisfaction of the performance condition, we recognized a cumulative share-based compensation expense for the portion of the Performance Awards that had met the service condition. For the three and six months ended June 30, 2014, share-based compensation expense related to the Performance Awards recognized was $6.1 million, using the accelerated attribution method. The remaining unrecognized share-based compensation expense related to the Performance Awards will be recorded over the remaining requisite service period using the accelerated attribution method, net of estimated forfeitures.
As of June 30, 2014, we had a total of $63.8 million future period share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.7 years.
8
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of acquired intangible assets, goodwill, unrecognized tax benefits, useful lives of intangible assets and property and equipment, and the capitalization and estimated useful life of our capitalized internal-use software.
These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
Recently Issued and Adopted Accounting Pronouncements
On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. This ASU will be effective for our fiscal year beginning January 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
Note 2. Acquisition
On March 21, 2014, we completed the acquisition of Zopim Technologies Pte Ltd., or Zopim, a software development company that provides a SaaS live chat service. The fair value of assets acquired and liabilities assumed was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of those preliminary estimates that are not yet finalized relate to accrued liabilities and income and non-income based tax liabilities. During the three months ended June 30, 2014, we made adjustments of $0.2 million to the preliminary purchase price allocation related to final working capital acquired. The total adjusted acquisition date fair value of consideration transferred was $15.8 million ($4.9 million of cash and $10.9 million of our common stock), which included $1.1 million of cash and $2.4 million of common stock consideration held back between 12 and 18 months as partial security for standard indemnification obligations. Of the total purchase price, $9.6 million was allocated to goodwill, $6.6 million to identifiable intangible assets, and $0.4 million to net liabilities assumed. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities, and is not deductible for tax purpose. Pro forma revenue and results of operations have not been presented because the historical results of Zopim were not material to our consolidated financial statements in any period presented.
In connection with the acquisition, we also established a retention plan pursuant to which we issued RSUs for 0.9 million shares of our common stock, which vest in three annual installments from the date of acquisition, and agreed to pay cash in an aggregate amount of $3.0 million in two annual installments from the date of acquisition to Zopim employees in connection with their continued employment, which is recorded as compensation expense over the associated service periods of such employees.
Note 3. Fair Value Measurements
The following tables present information about our financial assets measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):
|
Fair Value Measurement at |
|
|||||||||
|
June 30, 2014 |
|
|||||||||
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
$ |
— |
|
|
$ |
12,194 |
|
|
$ |
12,194 |
|
Money market funds |
|
10,799 |
|
|
|
— |
|
|
|
10,799 |
|
Total |
$ |
10,799 |
|
|
$ |
12,194 |
|
|
$ |
22,993 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
$ |
10,799 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
$ |
12,194 |
|
9
|
Fair Value Measurement at |
|
|||||||||
|
December 31, 2013 |
|
|||||||||
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
$ |
— |
|
|
$ |
12,114 |
|
|
$ |
12,114 |
|
Money market funds |
|
10,836 |
|
|
|
— |
|
|
|
10,836 |
|
Total |
$ |
10,836 |
|
|
$ |
12,114 |
|
|
$ |
22,950 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
$ |
10,836 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
$ |
12,114 |
|
There were no transfers between fair value measurement levels during the six months ended June 30, 2014.
Gross unrealized gains or losses for cash equivalents and available-for-sale marketable securities as of June 30, 2014 and December 31, 2013 were not material. As of June 30, 2014 and December 31, 2013, there were no securities that were in an unrealized loss position for more than 12 months.
The following table classifies our available-for-sale marketable securities by contractual maturities as of June 30, 2014 and December 31, 2013 (in thousands):
|
June 30, 2014 |
|
|
December 31, 2013 |
|
||
Due in one year |
$ |
9,430 |
|
|
$ |
9,889 |
|
Due in one to five years |
|
2,764 |
|
|
|
2,225 |
|
Total |
$ |
12,194 |
|
|
$ |
12,114 |
|
Note 4. Property and Equipment
Property and equipment, net consists of the following (in thousands):
|
June 30, 2014 |
|
|
December 31, 2013 |
|
||
Capitalized internal-use software |
$ |
13,119 |
|
|
$ |
11,104 |
|
Furniture and fixtures |
|
4,156 |
|
|
|
1,383 |
|
Hosting equipment |
|
11,630 |
|
|
|
7,931 |
|
Computer equipment and software |
|
3,583 |
|
|
|
1,680 |
|
Leasehold improvements |
|
12,438 |
|
|
|
1,717 |
|
Construction in progress |
|
6,014 |
|
|
|
341 |
|
Total |
|
50,940 |
|
|
|
24,156 |
|
Less accumulated depreciation and amortization |
|
(12,780 |
) |
|
|
(8,725 |
) |
Property and equipment, net |
$ |
38,160 |
|
|
$ |
15,431 |
|
Depreciation expense was $1.2 million and $0.7 million for the three months ended June 30, 2014 and 2013, respectively, and $2.3 million and $1.1 million for the six months ended June 30, 2014 and 2013, respectively.
We capitalized $3.2 million and $1.3 million in internal-use software during the three months ended June 30, 2014 and 2013, respectively, and $5.0 million and $2.4 million during the six months ended June 30, 2014 and 2013, respectively. Included in the capitalized development costs are $1.1 million and $0.1 million in share-based compensation costs for the three months ended June 30, 2014 and 2013, respectively, and $1.1 and $0.1 million for the six months ended June 30, 2014 and 2013, respectively. Amortization expense of capitalized internal-use software totaled $1.0 million and $0.5 million for the three months ended June 30, 2014 and 2013, respectively, and $1.7 million and $1.0 million for the six months ended June 30, 2014 and 2013, respectively. The carrying value of capitalized internal-use software at June 30, 2014 and December 31, 2013 was $10.2 million and $6.8 million, respectively, including $3.4 million and $0.3 million in construction in progress, respectively.
Note 5. Goodwill and Purchased Intangible Assets
Goodwill as of June 30, 2014 was $9.8 million. No goodwill was recorded as of December 31, 2013.
10
Purchased intangible assets subject to amortization as of June 30, 2014 consisted of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.
|
Cost |
|
|
Accumulated Amortization |
|
|
Net |
|
|
Remaining Useful Life |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
|
Developed technology |
$ |
5,308 |
|
|
$ |
(420 |
) |
|
$ |
4,888 |
|
|
|
3.2 |
|
Customer relationship |
|
1,327 |
|
|
|
(92 |
) |
|
|
1,235 |
|
|
|
3.7 |
|
Trade name |
|
61 |
|
|
|
(17 |
) |
|
|
44 |
|
|
|
0.7 |
|
|
$ |
6,696 |
|
|
$ |
(529 |
) |
|
$ |
6,167 |
|
|
|
|
|
Amortization expense of purchased intangible assets for the three and six months ended June 30, 2014 was $0.5 million. No amortization expense was recorded for the three and six months ended June 30, 2013.
Estimated future amortization expense as of June 30, 2014 is as follows (in thousands):
Remainder of 2014 |
$ |
963 |
|
2015 |
|
1,862 |
|
2016 |
|
1,854 |
|
2017 |
|
1,418 |
|
2018 |
|
70 |
|
2019 and thereafter |
|
— |
|
|
$ |
6,167 |
|
Note 6. Credit Facility
We have a credit facility with Silicon Valley Bank consisting of a $20.0 million revolving line of credit and a $10.0 million equipment line of credit. As of December 31, 2013, outstanding balance under the revolving line of credit was $20.0 million. In June 2014 we repaid all outstanding principal and accrued interest under the revolving line of credit and as of June 30, 2014 there was no balance outstanding. As of June 30, 2014 and December 31, 2013, outstanding balance under the equipment line of credit was $7.7 million and $3.8 million, respectively.
Prior to our IPO, borrowings on the revolving line of credit bore interest at the Prime Rate plus 2.0% per annum. Upon the consummation of the IPO, the interest rate was reduced to the Prime Rate. Borrowings on the revolving line of credit are subject to a borrowing base limit determined monthly based on our recurring revenue metrics from previous months and the ratio of certain current assets to current liabilities as of the previous month end. To the extent we borrow funds pursuant to the revolving line of credit, we are entitled to make interest-only payments until January 1, 2016, when the outstanding balance is due in full.
Borrowings on the equipment line of credit bear interest of 2.5% per annum. For each equipment advance, we are entitled to make interest-only payments until September 14, 2014, when the last draw against the equipment line of credit can be made. The outstanding balance as of September 14, 2014 will be payable in equal monthly installments for 30 months thereafter, with the last payment due on March 14, 2017. We are also required to make a final payment fee of 4.0% of the aggregate principal amount of all historical advances made under the equipment line of credit on March 14, 2017.
The credit facility is collateralized by substantially all of our assets, excluding our intellectual property. Our domestic subsidiary is a guarantor of the credit facility and we have pledged up to 65% of the equity in our international subsidiaries as collateral. The credit facility also imposes various covenants on us, including the delivery of financial and other information, the maintenance of our primary operating and securities accounts with the lender, the maintenance of minimum revenue targets and an agreed ratio of certain current assets to current liabilities, as well as limitations on dispositions, changes in business or management, certain mergers or consolidations, dividends and other corporate activities. As of June 30, 2014 and December 31, 2013, we were in compliance with all of the covenants contained in the credit facility.
11
Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):
2014 (remaining 6 months) |
$ |
749 |
|
2015 |
|
3,041 |
|
2016 |
|
3,118 |
|
2017 |
|
792 |
|
2018 and thereafter |
|
— |
|
|
$ |
7,700 |
|
Note 7. Commitments and Contingencies
Leases
We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Rent expense was $1.8 million and $0.5 million for the three months ended June 30, 2014 and 2013, respectively, and $3.5 million and $0.9 million for the six months ended June 30, 2014 and 2013, respectively. Deferred rent was $6.6 million and $1.0 million as of June 30, 2014 and December 31, 2013, respectively, which is included in other liabilities.
We lease computer equipment from various parties under capital lease agreements that expire through March 2015. The total outstanding balance financed under capital leases was $0.2 million and $0.4 million as of June 30, 2014 and December 31, 2013, respectively. Accumulated depreciation on the leased assets was $0.8 million and $0.7 million as of June 30, 2014 and December 31, 2013, respectively. Depreciation of assets recorded under the capital leases is included in depreciation expense.
Litigation and Loss Contingencies
We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, and threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.
We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated financial position, results of operations, comprehensive loss, or cash flows.
Note 8. Common Stock and Stockholders’ Equity (Deficit)
Convertible Preferred Stock
Upon the completion of the IPO, all outstanding convertible preferred stock was converted into 34.3 million shares of common stock.
Reverse Stock Split
In April 2014, our board of directors and stockholders approved an amendment of our sixth amended and restated certificate of incorporation, as amended to effect a one-for-two reverse stock split of our common stock and a corresponding adjustment to the conversion prices of our redeemable convertible preferred stock. All share and per share information and the conversion prices of each outstanding series of our redeemable convertible preferred stock referenced throughout the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect this stock split.
Common Stock Authorized
Upon the completion of the IPO, we increased the amount of common stock authorized for issuance from 125.0 million to 400.0 million common shares with a par value of $0.01 per share.
12
Employee Equity Plans
Employee Stock Purchase Plan
Our board of directors adopted the Employee Stock Purchase Plan, or ESPP, in February 2014, which became effective on May 14, 2014. The ESPP initially reserved and authorized the issuance of up to 3.6 million shares of common stock. The ESPP provides that the number of shares reserved and available for issuance under the plan will automatically increase each January, beginning on January 1, 2015, by the lesser of 1.5 million shares, 1% of the number of shares issued and outstanding on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.
2009 Stock Option and Grant Plan
Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our IPO, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.
2014 Stock Option and Grant Plan
Our board of directors adopted the 2014 Stock Option and Incentive Plan, or the 2014 Plan, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. The 2014 Plan serves as the successor to our 2009 Plan. The 2014 Plan initially reserved and authorized the issuance of 7.5 million shares of our common stock. Additionally, shares not issued or subject to outstanding grants under the 2009 Plan rolled into the 2014 Plan, resulting in a total of 8.3 million available shares under the 2014 Plan as of the effective date. The 2014 Plan provides that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2015, by 5% of the outstanding number of shares of our common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.
The following table summarizes our stock option and RSU award activities for the six months ended June 30, 2014 (in thousands, except per share information):
|
|
|
|
|
Options Outstanding |
|
|
RSUs Outstanding |
|
||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
||
|
Shares |
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
Average |
|
|||||
|
Available |
|
|
Number of |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
Outstanding |
|
|
Grant Date |
|
|||||||
|
for Grant |
|
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
|
RSUs |
|
|
Fair Value |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding — January 1, 2014 |
|
1,854 |
|
|
|
10,134 |
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
|
|
811 |
|
|
$ |
6.76 |
|
Increase in authorized shares |
|
13,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted |
|
(5,468 |
) |
|
|
5,468 |
|
|
|
9.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs granted |
|
(1,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,897 |
|
|
|
11.45 |
|
Stock options exercised |
|
— |
|
|
|
(893 |
) |
|
|
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs vested |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150 |
) |
|
|
7.77 |
|
Stock options forfeited or canceled |
|
354 |
|
|
|
(354 |
) |
|
|
4.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs forfeited or cancelled |
|
182 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(182 |
) |
|
|
7.64 |
|
Outstanding — June 30, 2014 |
|
8,775 |
|
|
|
14,355 |
|
|
$ |
5.38 |
|
|
|
8.41 |
|
|
$ |
172,283 |
|
|
|
2,376 |
|
|
$ |
10.37 |
|
Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange as of June 30, 2014 was $17.38.
13
Early Exercise of Stock Options and Purchase of Unvested Stock Awards
Certain stock options awarded under the 2009 Plan permit early exercise. Common stock purchased pursuant to an early exercise of stock options or unvested stock awards is not deemed to be outstanding for financial reporting purposes until those shares vest. Therefore, cash received in exchange for unvested shares is recorded as a liability and is transferred into common stock and additional paid-in capital as the shares vest. Upon termination of service, we may, at our discretion, repurchase unvested shares acquired through early exercise of stock options or purchase of unvested stock awards at a price equal to the price per share paid upon the exercise of such options or the purchase of such unvested stock awards. As of June 30, 2014 and December 31, 2013, there were 0.8 million shares outstanding as a result of the early exercise of stock options and purchase of unvested stock awards that were classified as accrued liabilities for an aggregated amount of $2.8 million and $1.4 million, respectively. There were no repurchases during the six months ended June 30, 2014.
Note 9. Net Loss Per Share
We compute net loss per share of common stock in conformity with the two-class method required for participating securities. We considered all series of the redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on common stock. We also consider shares of common stock issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of the redeemable convertible preferred stock and the holders of shares of common stock acquired upon early exercise of stock options do not have a contractual obligation to share in our losses. As such, our net losses for the three and six months ended June 30, 2014 and 2013 were not allocated to these participating securities.
Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including common stock issuable upon conversion of the redeemable convertible preferred stock, outstanding share-based awards, and outstanding warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
Net loss |
$ |
(21,743 |
) |
|
$ |
(6,352 |
) |
|
$ |
(32,003 |
) |
|
$ |
(11,710 |
) |
Less: Accretion of redeemable convertible preferred stock |
|
(6 |
) |
|
|
(12 |
) |
|
|
(18 |
) |
|
|
(24 |
) |
Net loss attributable to common stockholders |
$ |
(21,749 |
) |
|
$ |
(6,364 |
) |
|
$ |
(32,021 |
) |
|
$ |
(11,734 |
) |
Basic shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute basic net loss per share |
|
45,760 |
|
|
|
21,568 |
|
|
|
33,817 |
|
|
|
21,213 |
|
Diluted shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to compute diluted net loss per share |
|
45,760 |
|
|
|
21,568 |
|
|
|
33,817 |
|
|
|
21,213 |
|
Net loss per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
$ |
(0.48 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.95 |
) |
|
$ |
(0.55 |
) |
The anti-dilutive securities excluded from the shares used to calculate the diluted net loss per share were as follows (in thousands):
|
As of June 30, |
|
|||||
|
2014 |
|
|
2013 |
|
||
Redeemable convertible preferred stock |
|
— |
|
|
|
34,323 |
|
Shares subject to outstanding common stock options |
|
14,355 |
|
|
|
9,375 |
|
Shares subject to common stock warrants |
|
— |
|
|
|
125 |
|
Restricted stock units |
|
2,376 |
|
|
|
498 |
|
|
|
16,731 |
|
|
|
44,321 |
|
14
Note 10. Income Taxes
The effective tax rates for the three and six months ended June 30, 2014 were less than one percent primarily as a result of the estimated tax loss for the fiscal year. Our current tax expense relates to state minimum taxes and foreign income taxes associated with our non-U.S. operations. There were no material changes to the unrecognized tax benefits in the three and six months ended June 30, 2014.
Note 11. Geographic Information
Our chief operating decision maker reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reporting segment.
Revenue
The following table presents our revenue by geographic areas, as determined based on the billing address of our customers (in thousands):
|
Three Month Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
United States |
$ |
16,858 |
|
|
$ |
9,512 |
|
|
$ |
31,743 |
|
|
$ |
17,568 |
|
EMEA |
|
8,241 |
|
|
|
4,443 |
|
|
|
14,861 |
|
|
|
8,243 |
|
Other |
|
4,407 |
|
|
|
2,441 |
|
|
|
7,994 |
|
|
|
4,496 |
|
Total |
$ |
29,506 |
|
|
$ |
16,396 |
|
|
$ |
54,598 |
|
|
$ |
30,307 |
|
Long-Lived Assets
The following table presents our long-lived assets by geographic areas (in thousands):
|
June 30, 2014 |
|
|
December 31, |
|
||
United States |
$ |
23,079 |
|
|
$ |
6,466 |
|
EMEA |
|
4,574 |
|
|
|
2,054 |
|
Other |
|
396 |
|
|
|
135 |
|
Total |
$ |
28,049 |
|
|
$ |
8,655 |
|
The carrying value of capitalized internal-use software and intangible assets is excluded from the balance of long-lived assets presented in the table above.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with the SEC on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended, or the Securities Act.. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.
Overview
Zendesk’s mission is to help organizations build successful long-term relationships with their customers. We are a software development company that provides a SaaS customer service platform that enables our customers to provide tailored support through multiple channels, establish effective self-service support resources, proactively serve customers through customer engagement capabilities, integrate with other applications, and consolidate and analyze data from customer interactions. We also provide SaaS live chat software that can be utilized independently to facilitate proactive communications between organizations and their customers or integrated seamlessly into our platform.
Our business model is designed to drive organic growth, leverage positive word-of-mouth, and remove friction from the evaluation and purchasing process. We offer a range of subscription account plans for our customer service platform and live chat software that vary in pricing per agent based on functionality and the type and amount of product support we offer. The majority of our customers find us online and subscribe to our customer service platform and live chat software directly from our websites. During the three months ended June 30, 2014, 68% of our qualified sales leads, which are largely comprised of prospects that commence a free trial of our customer service platform, came from organic search, customer referrals, and other unpaid sources. For larger organizations, our sales team focuses on a land and expand strategy, which leverages this grassroots adoption and seeks to expand our footprint within organizations. More recently we have begun to develop a field sales team responsible for lead discovery, qualification, and account management for larger organizations. Many of our existing customers to date have been small to medium sized organizations that make purchasing decisions without interacting with our sales or other personnel; as we continue to focus on and become more dependent on sales to larger organizations, we expect our sales cycles to lengthen and become less predictable.
For the three months ended June 30, 2014 and 2013, our revenue was $29.5 million and $16.4 million, respectively, representing an 80% growth rate. For the six months ended June 30, 2014 and 2013, our revenue was $54.6 million and $30.3 million, respectively, representing an 80% growth rate. For the three months ended June 30, 2014 and 2013, we derived $12.6 million, or 43%, and $6.9 million, or 42%, respectively, of our revenue from customers located outside of the United States. For the six months ended June 30, 2014 and 2013, we derived $22.9 million, or 42%, and $12.7 million, or 42%, respectively, of our revenue from customers located outside of the United States. We expect that the rate of growth in our revenue will decline as our business scales, even if our revenue continues to grow in absolute terms. For the three months ended June 30, 2014 and 2013, we generated net losses of $21.7 million and $6.4 million, respectively. For the six months ended June 30, 2014 and 2013, we generated net losses of $32.0 million and $11.7 million, respectively. We intend to invest aggressively to drive continued growth and market leadership.
The growth of our business and our future success depends on many factors, including our ability to continue to innovate, maintain our leadership in the small and medium-sized business, or SMB, market, expand our enterprise customer base, and increase our global customer footprint. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will expand our operations and headcount in the near term. The expected addition of new personnel and the investments that we anticipate will be necessary to manage our anticipated growth, including investments in leasehold improvements and related fixed assets, will make it more difficult for us to achieve profitability. Many of these investments will occur in advance of experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.
16
We have focused on rapidly growing our business and plan to continue to invest for long-term growth. We expect to continue to make significant upfront investments in our self-managed colocation data center infrastructure and additional personnel to support our growth. The amount and timing of these upfront infrastructure investments will vary based on our estimates of projected growth and the scale of such deployments. We also expect to continue to make significant investments in our customer support organization including expanding our product support and professional services teams. Over time, we anticipate that we will gain economies of scale by utilizing added capacity within our self-managed colocation data centers and reducing the need for direct incremental personnel costs resulting from growth in our number of customers. As a result, we expect our gross margin to improve in the future, although our gross margin may fluctuate from period to period as our revenue fluctuates and as a result of the timing and amount of investments to expand our product support team, increased share-based compensation expenses, investments in additional personnel, equipment, and facilities to support our platform architecture, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.
We expect our operating expenses to continue to increase in absolute dollars in future periods. We have invested, and expect to continue to invest, in our software development efforts to introduce new products and broaden our customer service platform’s functionality. We plan to continue to expand our sales and marketing organizations, particularly in connection with our efforts to expand our enterprise customer base. We also expect to incur additional general and administrative costs in order to support the growth of our business and meet increased compliance requirements associated with our transition to, and operation as, a public company.
Key Business Metrics
We review a number of operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions. We do not currently incorporate operating metrics associated with the Zopim live chat software into our measurement of customer accounts or dollar-based net expansion rate.
Number of Customer Accounts. We believe that our ability to increase our number of accounts on our customer service platform is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. We define the number of customer accounts at the end of any particular period as the number of accounts on our customer service platform, exclusive of free trials, at the end of the period as identified by a unique account identifier. Use of our customer service platform by new customers requires activation of a customer account on our platform. Existing customers may also expand their utilization of our customer service platform by adding new customer accounts and a single consolidated organization or customer may have multiple customer accounts to service separate subsidiaries, divisions, or work processes. Each of these is treated as a separate customer account. An increase in the number of customer accounts generally correlates to an increase in the number of authorized agents licensed to use our platform, which directly affects our revenue and results of operations. We view this metric as a measure of our success in converting new sales opportunities. We had 45,740 customer accounts as of June 30, 2014. As the total number of customer accounts increases, we expect the rate of growth in the number of customer accounts to decline.
Dollar-Based Net Expansion Rate. Our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our customer service platform. We believe we can achieve this by focusing on delivering value and functionality that retains our existing customers, expands the number of authorized agents associated with an existing customer account, and results in upgrades to higher-priced subscription plans. Maintaining customer relationships allows us to sustain and increase revenue to the extent customers maintain or increase the number of authorized agents licensed to use our customer service platform. We assess our performance in this area by measuring our dollar-based net expansion rate. Our dollar-based net expansion rate provides a measurement of our ability to increase revenue across our existing customer base through expansion of authorized agents associated with a customer account, and upgrades in subscription plan, as offset by churn, contraction in authorized agents associated with a customer account, and downgrades in subscription plan.
Our dollar-based net expansion rate is based upon our monthly recurring revenue for a set of customer accounts. Monthly recurring revenue for a customer account is a legal and contractual determination made by assessing the contractual terms of each customer account, as of the date of determination, as to the revenue we expect to receive in the next monthly period for that customer account, assuming no changes to the subscription and without taking into account any one-time discounts, if any, that may be applicable to such subscription. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue or any other United States generally accepted accounting principles, or GAAP, financial measure over any period. It is forward-looking and contractually derived as of the date of determination.
17
We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and churn by our base revenue. We define our base revenue as the aggregate monthly recurring revenue of our customer base as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and churn as the aggregate monthly recurring revenue of the same customer base included in our measure of base revenue at the end of the annual period being measured. Our dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that we identify involving the transfer of agents between customer accounts, consolidation of customer accounts, or the split of a single customer account into multiple customer accounts. While not material, we believe the failure to account for these activities would otherwise skew our dollar-based net expansion metrics associated with customers that maintain multiple customer accounts. Our dollar-based net expansion rate was 122% as of June 30, 2014. We expect our dollar-based net expansion rate to decline over time as our aggregate monthly recurring revenue grows.
Prior to the implementation of a new subscription billing system in July 2013, we calculated monthly recurring revenue for a customer account based on the aggregate payment for the subscription to our platform for such customer account, including one-time discounts, and the number of months in the term of the subscription, assuming a 30-day month for the purpose of such calculation. We believe that the impact of the change in our methodology of calculating monthly recurring revenue on our dollar-based net expansion rate is immaterial.
Components of Results of Operations
Revenue
We derive substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on our customer service platform and, to a lesser extent, live chat software. Each subscription may have multiple authorized users, and we refer to each such user as an “agent.” The number of agents ranges from one to thousands for various customer accounts. Our pricing is generally established on a per agent basis. We offer a range of subscription account plans that vary in pricing per agent based on functionality and the type and, for our customer service platform, amount of product support we offer. We sell subscription services under contractual agreements that vary in length, ranging between one month and multiple years, with the majority of subscriptions having a term of either one month or one year.
Subscription fees are generally non-refundable regardless of the actual use of the service. Subscription revenue is affected by the number of customer accounts, number of agents, and the type of plan purchased by our customers, and is recognized ratably over the contractual term of the arrangement beginning on the date that our services are made available to our customers. Subscription services purchased online are typically paid for via a credit card on the date of purchase while subscription services purchased through our internal sales organization are generally billed with monthly, quarterly, or annual payment frequency. Due to our mixed contract lengths and billing frequencies, the annualized value of the arrangements we enter into with our customers may not be fully reflected in deferred revenue at any single point in time. Accordingly, we do not believe that the change in deferred revenue for any period is an accurate indicator of future revenue for a given period of time.
We derive an immaterial amount of revenue from implementation, voice, and training services, for which we recognize revenue upon completion.
Cost of Revenue, Gross Margin, and Operating Expenses
Cost of Revenue. Cost of revenue consists primarily of personnel costs (including salaries, benefits, and share-based compensation) for employees associated with our platform infrastructure and our product support organizations, depreciation expense associated with the equipment purchased for our self-managed colocation data centers, data center costs related to hosting our platform, amortization expense associated with capitalized internal-use software, amortization expense associated with acquired intangible assets, payment processing fees, and allocated shared costs. We allocate shared costs such as rent, shared information technology costs, and employee benefit costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category.
We currently utilize third-party managed hosting facilities located in North America, Europe, and Asia and self-managed colocation data centers in which we manage our own network equipment and systems. We currently operate out of two such self-managed colocation data centers located in California and Ireland. In order to improve our long-term cost efficiency, we intend to expand our operations in these and establish other self-managed colocation data centers over time. We also intend to consolidate hosting of our live chat software into our self-managed colocation data centers and conform the live chat software to the technical and other operational and security measures applicable to our customer service platform. In certain markets and for certain products, we may elect not to pursue our self-managed colocation strategy, depending on individual market dynamics.
18
We intend to continue to invest additional resources in our platform infrastructure and our product support organizations. As we continue to invest in technology innovation, we expect to have increased capitalized internal-use software costs and related amortization. We expect that the investment in technology should not only expand the capability of our customer service platform and live chat software but also increase the efficiency of how we deliver our customer service platform and live chat software, enabling us to improve our gross margin over time. The level and timing of investment in these areas could affect our cost of revenue in the future.
Gross Margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates and as a result of the timing and amount of investments to expand our product support team, increased share-based compensation expenses, investments in additional personnel, equipment, and facilities to support our platform architecture, as well as the amortization of costs associated with capitalized internal-use software and acquired intangible assets.
Research and Development. Research and development expenses consist primarily of personnel costs (including salaries, benefits, and share-based compensation) for employees associated with our research and development organization, professional fees paid to third-party development resources, and allocated shared costs.
We focus our research and development efforts on the continued development of our customer service platform and live chat software, including the development and deployment of new features and functionality and enhancements to our software architecture. We expect that, in the future, research and development expenses will increase in absolute dollars. However, we expect our research and development expenses to decrease modestly as a percentage of our revenue over time, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our research and development expenses.
Sales and Marketing. Sales and marketing expenses consist of personnel costs (including salaries, commissions, benefits, share-based compensation, and travel-related expenses) for employees associated with our sales and marketing organizations, costs of marketing activities, and allocated shared costs. Marketing activities include online lead generation, advertising, promotional events, and public and community relations, as well as product design activities designed to improve the adoption of our customer service platform and live chat software. Sales commissions and other incremental costs to acquire contracts are expensed as incurred.
We focus our sales and marketing efforts on generating awareness of our company, creating sales leads, establishing and promoting our brand, and cultivating a community of successful and vocal customers. We plan to continue investing in sales and marketing by increasing the number of direct sales employees, developing our field sales team, expanding our indirect sales channels, building brand awareness, and sponsoring additional marketing events, which we believe will enable us to add new customers and increase penetration within our existing customer base. Because we do not have a long history of expanding our sales force, we cannot predict whether, or to what extent, our revenue will increase as we expand our sales force or how long it will take for new sales personnel to become productive. We expect our sales and marketing expenses to continue to increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future. We expect our sales and marketing expenses to increase modestly as a percentage of our revenue over time, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our sales and marketing expenses.
General and Administrative. General and administrative expenses consist primarily of personnel costs (including salaries, benefits, and share-based compensation) for our executive, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including consulting, legal, and accounting services, and other corporate expenses and allocated shared costs.
We expect to incur incremental costs associated with supporting the growth of our business, both in terms of size and geographic expansion, and to meet the increased compliance requirements associated with our transition to, and operation as, a public company. Such costs include increases in our accounting, legal, and human resources personnel, additional consulting, legal, and audit fees, insurance costs, board of directors’ compensation and the costs of achieving and maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other costs associated with being a public company. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our general and administrative expenses to decrease modestly as a percentage of our revenue over time, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our general and administrative expenses.
Other Expense, Net
Other expense, net consists primarily of interest expense associated with our credit facility and transaction gains or losses on foreign currency.
19
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
29,506 |
|
|
$ |
16,396 |
|
|
$ |
54,598 |
|
|
$ |
30,307 |
|
Cost of revenue (1) |
|
11,731 |
|
|
|
5,681 |
|
|
|
20,726 |
|
|
|
10,551 |
|
Gross profit |
|
17,775 |
|
|
|
10,715 |
|
|
|
33,872 |
|
|
|
19,756 |
|
Operating expenses (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
10,499 |
|
|
|
3,528 |
|
|
|
15,677 |
|
|
|
6,877 |
|
Sales and marketing |
|
20,339 |
|
|
|
8,208 |
|
|
|
34,626 |
|
|
|
16,203 |
|
General and administrative |
|
8,315 |
|
|
|
5,140 |
|
|
|
14,699 |
|
|
|
8,098 |
|
Total operating expenses |
|
39,153 |
|
|
|
16,876 |
|
|
|
65,002 |
|
|
|
31,178 |
|
Operating loss |
|
(21,378 |
) |
|
|
(6,161 |
) |
|
|
(31,130 |
) |
|
|
(11,422 |
) |
Other expense, net |
|
(450 |
) |
|
|
(133 |
) |
|
|
(909 |
) |
|
|
(210 |
) |
Loss before provision for income taxes |
|
(21,828 |
) |
|
|
(6,294 |
) |
|
|
(32,039 |
) |
|
|
(11,632 |
) |
Provision (benefit) for income taxes |
|
(85 |
) |
|
|
58 |
|
|
|
(36 |
) |
|
|
78 |
|
Net loss |
$ |
(21,743 |
) |
|
$ |
(6,352 |
) |
|