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Zendesk and Freshworks Growing Steadily

Posted on Monday, Jul 23rd 2018

Freshdesk, now called Freshworks, was originally founded as an affordable alternative to Zendesk. It recently crossed $100 million in annual recurring revenue while Zendesk recently surpassed a $500 million annual revenue run rate. Needless to say, the cloud-based help desk category is alive and well, and the companies are each exploring beyond their original product lines.

Zendesk’s Financials

First quarter revenue at Zendesk (NYSE: ZEN) increased 38% over the year to $129.8 million. GAAP net loss was $29.3 million, or $0.28 per share. Non-GAAP net income was $2.9 million or $0.02 per share. Analysts expected loss of $0.10 on revenue of $64 million.

Cash and cash equivalents at the end of the first quarter was $609.2 million.

By geography, revenue from the US was 52.7%, EMEA was 29.2% and Other was 18.1% of the total revenue.

At the end of the first quarter, Zendesk had 125,000 paid customer accounts, up 23%.

For the second quarter, Zendesk expects to report revenue in the range of $136 to $138 million, GAAP operating loss of $34 -$32 million, and non-GAAP operating loss of $2 to $0 million. Analysts expect loss of $0.08 on revenue of $72.38 million.

For the full year 2018, Zendesk expects to report revenue of $565-$572 million, GAAP operating loss of $132-127 million, and non-GAAP operating income of $0-$5 million. Analysts expect loss of $0.30 on revenue of $303.45 million. In fiscal 2017, annual revenue was up 38% to $430.5 million, GAAP net loss was $110.56 million or $1.11 per share and non-GAAP net loss was $13.1 million or $0.13 per share. GAAP gross margin increased to 70.4% in 2017 compared to 69.9% in 2016.

Zendesk’s Roadmap to Profitability and $1 billion Annual Revenue

Zendesk is targeting to reach $1 billion in annual revenue and profitability by 2020. To reach this goal, it is focusing on three things – elevating its brand, developing or becoming a multiproduct company, and further growing its reach into the enterprise. Towards achieving this goal, for 2017, it achieved strong revenue growth and positive full-year free cash flow by moving upmarket through larger deals with mid-market and enterprise companies and becoming a multiproduct company with new revenue opportunities. It also began to migrate its data center investments to cloud infrastructure to enable greater reliability, flexibility, and scale.

For 2018, key priorities for Zendesk include accelerating its upmarket business through larger deals and greater penetration with enterprise customers as well as providing the best omnichannel customer experiences possible and harnessing more data and machine learning opportunities.

Zendesk’s New Offerings and Acquisitions

Answer Bot is Zendesk’s first machine learning product to directly monetize its data assets. In January, it launched Answer Bot for Web Forms, allowing it to work in more customer touchpoints and handle more requests. Answer Bot increases self-service efficiency by responding to customers’ questions with relevant knowledge base articles. In addition, Answer Bot is now available in both Spanish and Portuguese. The company expects to add additional channels and languages this year.

Zendesk has launched three enterprise-focused product over the past year: Chat Enterprise, Talk Enterprise, and Guide Enterprise. Launched in April, Guide Enterprise helps its largest customers identify knowledge gaps in customer service content and collaborate more easily across their extended teams. It includes an AI-powered feature called Content Cues, which works in conjunction with Answer Bot to help businesses create robust self-service experiences.

While Answer Bot automates responses to customers, the Content Cues algorithm reviews questions from customers and existing help center articles to suggest topics that are missing or need improvement. Guide Enterprise’s advanced workflow and approvals feature, called Team Publishing, makes it easy for large organizations to collaborate on knowledge base content by getting their agents and team members more involved in the process.

Last year, ZenDesk launched new tools to help brands be more predictive with potential trouble spots. It soon followed it up with the acquisition of Outbound.io to help brands be more proactive in their outreach. Outbound provides the tools to send messages to customers through SMS, responsive email, web, or push notifications. Outbound was founded in 2013 by former Nest senior software engineer Dhruvkaran Mehta and Josh Weissburg. It had raised $2.07 million in venture funding from Y Combinator, Subtraction Capital, and Lunch Van Fund. Terms of the deal were not disclosed.

Zendesk’s Competition

For small to medium-sized organizations, Zendesk competes with custom computer applications such as shared accounts for email communication, phone banks for voice communication, and pen and paper, text editors, and spreadsheets for tracking and management. For larger organizations, it competes with custom software systems and large enterprise software vendors, including salesforce.com, Oracle, Microsoft, and ServiceNow. In addition, it competes with Freshworks and desk.com (a salesforce.com service) that compete with Zendesk Support.

Freshdesk is now Freshworks

Founded in 2010, San Bruno, California and Chennai-based Freshdesk has now rebranded itself as Freshworks. This move comes after it expanded its portfolio to offer IT services management software Freshservice, CRM software Freshsales, call center software Freshcaller, applicant tracking software Freshteam for recruiters, customer messaging software Freshchat, and conversion optimization suite Freshmarketer.

The expansion in offerings is a result of its acquisition spree over the past three years including cloud-based video collaboration platform 1CLICK.io, online social discovery platform Frilp, app customer support offering Konotor, online collaboration platform Framebench, Airwoot for its AI capabilities, and social chat platform Chatimity. Read our previous article India’s Most Important SaaS Venture: Strategic Options Ahead of Freshdesk for more details on these acquisitions.

Marketing software provider Zarget and chatbot platform Joe Hukum are its most recent acquisitions.

Zarget’s cloud-based marketing software suite combines tools like A/B testing, heatmaps, funnel analysis, polls, and feedback loops to increase the conversion rate optimization. It was founded in 2015 by Arvind Parthiban, Naveen Venkat, and Santosh Kumar with an angel investment from Freshworks founder Girish Mathrubootham and some of the early Freshdesk employees who were friends of the Zarget founders. Zarget went on to raise $7.5M in two rounds of funding from Accel Partners, Matrix Partners India, and Sequoia Capital India. Zarget was acquired by Freshworks in August 2017 for an undisclosed sum.

Delhi-based Joe Hukum is a personalisable chat-based order taking and fulfilment platform aimed at providing efficient concierge services to customers. It was founded by ex-HealthKart employees Arihant Jain, Ajeet Kushwaha, and Rahul Agarwal. It had raised undisclosed seed funding from TracxnLabs and a group of angels led by Citrus Payments founder Jitendra Gupta and HealthKart founder Prashant Tandon. Joe Hukum was acquired in July 2017 for an undisclosed sum.

Zarget has now become Freshmarketer. The 2015 Konotor acquisition has become Freshchat. The 2016 Chatimity acquisition is powering the infrastructure for chat and some of its machine learning capabilities.

Freshworks’ Financials

Revenue for fiscal year 2017 was reported to be Rs 199.20 crore (~$29 million), up 109% from Rs 94.89 crore (~$13 million) in 2016. Loss was Rs 62.20 lakhs (~$90,000) in 2017 compared to profit of Rs 8 crore (~$1.1 million) in 2016. Last month, Freshworks reported that it has crossed $100 million in annual recurring revenue for fiscal year 2017-2018.

Freshworks now caters to over 150,000 businesses, including enterprises such as Honda, Bridgestone, Hugo Boss, University of Pennsylvania, Toshiba, Cisco and global SMBs. Close to 36% of its revenue is from larger customers and the remaining 64% is from SMBs. The US and Europe account for about 40% each of its business. Apart from Zendesk, it competes with Salesforce, Helpshift, and ServiceNow.

Let us now look at its funding and valuation trajectory. In April 2011, Freshdesk won a $40,000 grant from Microsoft as the winner of a startup challenge contest. In November 2011, it secured $1 million in Series A funding from venture capital firm Accel Partners with paying customers. It raised another $5 million in April 2012 and $7 million in November 2013 from Tiger Global and Accel Partners. It followed that up with $31 million in June 2014 from Accel Partners and Google Capital at a valuation of $250 million and $50 million in April 2015 at a $500 million valuation. In the latest round in November 2016, it raised $55 million from Sequoia Capital and Accel Partners at an estimated valuation of $700 million.

Early this year, Founder CEO Girish Mathrubootham said the company has no further need for capital and has no plans yet for an IPO.

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