Zendesk (ZEN) is trading lower despite a decent Q1 report last night. However, it's not all that surprising to see investors lock in some profits after a big move in a stock.
Zendesk provides a cloud-based platform for call centers. Instead of customers just calling a 1-800 number, ZEN's platform modernizes the experience by allowing companies to communicate with customers using email, chat, voice, social media, and websites. Its platform also consolidates the data from customer interactions and provides analytics.
Despite what the reaction in the stock price today indicates, the Q1 report was pretty good. Non-GAAP EPS doubled yr/yr to $0.04, which was slightly better than expected. Revenue rose 39.8% yr/yr to $181.5 mln, which was above prior guidance of $178-180 mln. ZEN does not guide for EPS but does guide for revenue and that was basically in-line with market expectations: Q2 revs of $191-193 mln and 2019 revs of $802-810 mln.
Zendesk also named Michael Curtis to its board of directors. We do not normally mention board additions, but when they come from high profile tech companies, we feel it's worth a mention. Mr. Curtis most recently served as the VP of engineering at Airbnb. Prior to that, he was a director of engineering at Facebook (FB). That's some good experience that a smaller company like ZEN can hopefully draw from.
Zendesk has been growing robustly since it made its IPO debut in 2014 with an annual revenue run rate of $100 mln. That has grown to nearly $600 mln in 2018 with 2019 guidance for $800+ mln. Zendesk has a goal of $1 bln in revenue by 2020.
The biggest catalysts for that growth are: landing larger customers and continually rolling out new products. In terms of larger deal sizes, ZEN has said that the $50,000 annual contract deal size is now a regular size for ZEN. That was not the case before.
That success blends in with the second catalyst: rolling out successful new products. For example, in 4Q18, ZEN launched a new CRM platform, Zendesk Sunshine. ZEN has described Sunshine as a door opener and a conversation changer in a way that ZEN has not seen before. On the call last night, CEO and founder Mikkel Svane said that Sunshine is "opening new opportunity for us beyond customer support and helping us become closer partners with our largest customers. It's still early days for Sunshine, but we are encouraged by the very positive reception."
So why is the stock trading lower despite the upside results? We think it's primarily because the size of the Q1 beat was not nearly as large as recent quarters. Also, the Q2 guidance is just in-line. Last quarter, ZEN guided sharply higher for the next quarter. So that was a bit disappointing. Also, the stock has been making a big run of late, going from $50 in late December to around $85 currently for a +70% move. When a stock makes a move like that, it's not surprising to see some profit taking even on a pretty good earnings report.