Software companies have been among the biggest beneficiaries in the current lockdown environment resulting from the Covid-19 pandemic. Companies providing software solutions to enterprises as well as individuals have typically done well and outperformed Wall Street expectations.
However, one software sub-category which has not benefitted as much as the others is the customer relationship management (CRM) space. With the general economic turmoil resulting in increasing retrenchments in the sales and customer service divisions, this space has experienced limited growth.
Zendesk, Inc. (ZEN, Financial) is one example. While the company delivered a solid quarterly result, its weakened outlook caused the stock price to slide. Despite the temporary uncertainty, though, I think Zendesk has some strong drivers that are bound to keep it going strong even in these tough times.
Company overview
Zendesk is a California-based software solutions provider dealing in the customer relationship management (CRM) space. The company has a broad suite of CRM offerings that includes Zendesk Support, a system for tracking, prioritizing and solving customer support tickets across various channels; Zendesk Guide, a knowledge base that powers customer self-service and support agent productivity; Zendesk Sell, a sales CRM solution to enhance productivity, processes as well as pipeline visibility for sales teams; and Zendesk Explore, an analytics provider to help organizations measure and enhance the customer experience.
The company's offerings share a common interface and are being developed to support a shared services infrastructure and common customer data platform. The management is also implementing the use of machine learning and artificial intelligence in its offerings.
The company's solutions are offered across organizations in North America, Latin America, Europe, the Middle East, Africa, Australia and the Asia Pacific region. Zendesk has a headcount of close to 3,570 employees and is headquartered in San Francisco, California.
Recent financial results
Zendesk has a solid second quarter where it reported revenue of $246.7 million, an increase of 27% over the corresponding quarter of 2019, beating the analyst consensus estimate of $240.53 million. This growth was driven largely by a rise in the number of customers for Zendesk Support, Zendesk Guide and almost all Zendesk Products except Zendesk Chat.
Source: Zendesk Shareholder Letter – Q2 2020
Zendesk Chat was the only product that witnessed a visible drop in paid customers. The company reported a GAAP net loss of $64.7 million for the quarter, resulting in a GAAP loss per share of $0.56. Its non-GAAP net income was a positive $16.4 million, resulting in adjusted earnings per share of 14 cents, which was well above the analyst consensus estimate of 10 cents.
It is worth highlighting that the company incurred approximately $46.5 million in share-based executive compensation and related expenses and paid off $26 million in debt. However, the fact that the company actually managed to deliver such solid top-line growth and beat estimates in a tough business environment is a good sign. The company's customer base is bound to face tough challenges and poor business conditions on account of the economic downturn, but the demand for Zendesk's products has continued to remain strong.
New partnerships and alliances
After its launch of the Zendesk Sales Suite, which brings together key tools like Sell, Reach, Chat and Voice into a unified, integrated solution, the Zendesk management went ahead and announced its partnership with Tata Consulting Services (TCS), India's largest technology company, to bring high-end CRM solutions to large companies there. This partnership could work wonderfully for both companies as it brings together Zendesk's engagement software, support and sales solutions and TCS's experience helping enterprises undergo digital transformation.
The companies look to deliver custom CRM solutions by aligning Zendesk's product portfolio with TCS's digital transformation skills, technical consultancy, implementation and optimizations services. TCS is expected to play a key role in providing its expertise across a broad spectrum of industries such as financial services, manufacturing and retail. Zendesk has also upgraded its Support Suite to include social media channels such as WhatsApp, Facebook (FB) Messenger, Twitter (TWTR) and WeChat for sales representatives based on Sunshine Conversation, the company's conversational business platform.
This was followed by the company tying up with Apple (AAPL) to ensure the general availability of Apple Business Chat, allowing companies to have real-time customer conversations via Apple Messages directly in Zendesk Support. It is a big upgrade in terms of the communication features offered by Zendesk as its B2C clients can now directly communicate with their customers via WhatsApp or Apple Business Chat.
The company also recently provided integration to Zuper, a platform for intelligent workforce management. This integration is expected to help clients to better align their customer support and field service teams to provide the best possible customer experience. Zuper has a base of thousands of customers across the globe which will benefit from this Zendesk integration.
Zendesk also added some big names to its customer list this quarter, including the Canadian Red Cross, Cargas Systems, Sprout Social, Madison Reed and Marley Spoon.
Final thoughts
Zendesk is one of the few software companies whose stock price has not fully recovered after the recent market crash. This is despite the fact that its offerings have a strong macro-economic outlook.
As per Grand View Research data, the global contact center software market size was valued at $18.1 billion in 2019 and is expected to grow at a CAGR of 19.7% from 2020 to 2027. Support, Zendesk's flagship product, falls directly within this space and is one of the fastest-growing products that offers help desk tools to clients' customer support agents. The other space with an equally strong macro is the customer self-service software space.
As per Research & Markets data, the customer self-service software market was valued at $7.20 billion in 2019 and is expected to grow at a CAGR of 20.94% from 2020 to 2025 and reach a value as high as $21.91 billion in 2025. Zendesk Guide is the offering that falls within this space.
Overall, I think that given the strong macro-economic outlook and the new alliances, the company appears to have a bright future ahead.
Disclosure: No positions.
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