Zendesk : Q3 2020 Shareholder Letter

Shareholder Letter

Q3 2020

OCTOBER 29, 2020

Mikkel Svane

CEO

Elena Gomez

CFO

Marc Cabi

SVP, Finance, Strategy and IR

Achieved $1B annual revenue run rate*

Our revenue in the third quarter grew 24% year-over-year. We saw signs that the initial shock of the COVID-19 pandemic is behind us as demand for our solutions demonstrated strong growth and as churn and contraction rates improved significantly, moving closer to historical levels. As a result of our better-than-expected performance and the measured approach we have taken toward investment in an uncertain environment, we delivered substantial improvement in GAAP and non-GAAP operating margins, which increased 6.0 and 4.5 percentage points, respectively, year-over-year.

Zendesk achieved a significant milestone by crossing a billion-dollar annual revenue run rate during the third quarter, a testament to the broad adoption we see for our customer experience solutions worldwide. We are on a clear trajectory to reach our billion dollar annual revenue goal in 2020, one that we set in 2016.

We are excited by the momentum built in our business over the course of the last quarter, but we know nothing is predictable in a pandemic. We continue to remain cautious. The persistent impact of the pandemic may continue to impact the global economy and our customers.

While the pandemic has created many challenges, it has also created circumstances that play to our attributes as businesses adapt and react to a radically changed environment. Companies across industries and of all sizes are quickly reorienting towards digital customer engagement. Zendesk helps them quickly make the necessary adjustments and deliver results for a better customer experience.

Q3 2020 OUTPERFORMANCE			GUIDANCE

*Annual revenue run rate was calculated by multiplying our revenue for the third quarter of 2020 by four.

Zendesk Shareholder Letter Q3 2020 2

Summary financial results

Third quarter fiscal year 2020

(in thousands, except per share data)

3

Momentum and resilience of our business is showing

Our business trends demonstrated good momentum in the third quarter, following a pronounced impact on our business from COVID-19 in the second quarter. We saw strong demand for our solutions and good growth in the number of new paid customer accounts. Our churn rate trended toward historical levels. Our contraction rate improved significantly compared to the second quarter but remained elevated compared to historical trends. We are encouraged that some of our customers that contracted in the second quarter already expanded in the third quarter.

Remaining performance obligations (RPO) growth re-accelerated in the third quarter. Total RPO grew 43% year-over-year while short-term and long-term RPO increased 39% and 56% year-over-year, respectively.

We believe COVID-19 has forced every organization to focus on how they can better engage with their customers, suppliers, and employees. Organizations are using our solutions to quickly adapt and scale in a new virtual environment and to help them reimagine how they work and serve customers. For example, traditional brick-and-mortar businesses are embracing new models of engagement across stores, ecommerce, and emerging channels like social and messaging. They are moving quickly to strengthen ecommerce and virtual offerings, transition in-store talent to online, offer new digital touch points, and offer special services such as curbside pickup and delivery. Additionally, acrossmany types of industries, companies are going direct-to-consumersothey can own the relationship and experience with their customers.

Messaging is a new frontier of customer conversation, and we areseeing organizations embrace it for its convenience and immediacy.Our customers are implementing messaging solutions through our Sunshine Conversations platform and by using the major social messaging channels now integrated into our Support Suite, and both are becoming key differentiators for us.

Bookings* in ARR ($M)

Bookings* in ARR ($M)

New business bookings momentum continues

business of churn strong

Churn returning to

pre-covid levels

Strong expansion

bookings

Expansion net contraction

to growth

Contraction trending

toward pre-covid levels

*Core bookings, which exclude bookings from
Sell and Sunshine Conversations. Additionally,
the two vertical axises above do not start with
zero.	4