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Zendesk: Contraction Ahead Is Not A Concern

May 04, 2020 9:30 AM ETZendesk, Inc. (ZEN)
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  • Expected Q2 revenue will be below the consensus as customers across travel and ride-sharing absorb the impact of COVID-19 pandemic.
  • Despite the contraction ahead, we maintain a bullish view on Zendesk.
  • Fundamentals have always been solid. Over the last 2-3 years, revenue has nearly doubled while gross margin has expanded by ~1,000 bps.
  • Shares now trade at ~9.3x P/S upon the ~9% drop from its weekly high in the last week of April, creating a good entry point for investors.


Zendesk (NYSE:ZEN), the leader in the cloud customer experience CRM market, withdrew its full-year guidance given the ongoing uncertainties due to the COVID-19 pandemic. The pandemic is impacting a lot of its 160,000 paid customers across sizes and industries, particularly those in the ride-sharing and travel sectors. We expect a near-term contraction into Q2, which creates a possible entry point for long-term investors to pick up the stock at a bargain.

Risk: Ongoing Contractions Across the Customer Base

Q1 was a good quarter for Zendesk. The company maintained a+30% top-line growth while the gross margin expanded by ~480 bps to 78%. It also beat the guidance, though shares price was down 5% upon the Q1 earnings call as the market priced in the contraction ahead. Zendesk's Q2 revenue guidance will be below the consensus as ~20% of its customers are in the industries most impacted by COVID-19, such as travel and ride-sharing. Customers in the ride-hailing/transportation industry include Uber (UBER), Lyft (LYFT), Ola, and Easy Taxi. On the other hand, Zendesk's customers in the travel/hospitality industry include Airbnb, Skyscanner, OpenTable, Lonely Planet, Azerbaijan Airlines, Qatar Airways, and Four Seasons Hotel. Some of these customers are seeing over 70% - 95% contractions in demand, and as a response, Zendesk is moving quickly to manage the crisis by offering them various flexibilities, such as extended payment terms and a one-time discount.

(Zendesk's FCF, quarterly. source: stockrow)

To reduce further pressure on its customers, Zendesk also implemented a new policy on March 1st to invoice the customers at the renewal date instead of the 30 days prior. This change of timing severely impacted the FCF (Free Cash Flows) for the quarter. The -$15.6 million of FCF in Q1 2020 marked the first time in over four years that Zendesk recorded a negative FCF in a quarter. Within the same

This article was written by

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Former tech operator, entrepreneur, and venture capitalist with over a decade of experience starting, investing, and building companies in Asia and US. Long-only manager seeking multi-asset technology / growth opportunities driving disruptive innovation globally.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ZEN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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