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Zendesk Faces Investor Ire, Freshworks Prepares for IPO

Posted on Friday, Nov 8th 2019

Helpdesk automation service provider Zendesk (NYSE: ZEN) recently announced its third quarter results that surpassed market expectations. The company continues to invest in growing its market reach even as it faces the ire of its investors.

Zendesk’s Financials

Zendesk’s revenues grew 36% over the year to $210.5 million, ahead of the market’s forecast of $207.4 million. EPS was $0.12, significantly ahead of the Street’s estimated $0.06, and 33% more than $0.09 a year ago. It was a milestone quarter for Zendesk as it crossed the annualized revenue run rate of $800 million and ended the quarter with more than 150,000 paid customer accounts.

For the fourth quarter, Zendesk expects revenues of $226-$228 million with a non-GAAP operating income of $8-$10 million. It expects to end the current year with revenues of $813-$815 million with a non-GAAP operating income of $23-$25 million. The market was looking for revenues of $226.96 million for the quarter and $810.4 million for the year. Zendesk is hopeful of achieving its goal of $1 billion in revenues by the year 2020.

Zendesk’s Growth Focus

To continue to drive market expansion, Zendesk has been focused on product innovation. It recently launched Sunshine Conversations, an API-based platform that allows businesses to integrate messaging using social channels and directly interact with customers. The platform also allows developers to build messaging into their own apps and services so that customers can connect with companies over their own websites, social channels, and private in-app messaging services. It allows organizations to integrate conversations across every digital channel so that functions across the organization including sales, service, and marketing have the same context. The tool will allow end consumers to make payments, browse products, and book reservations within their preferred messaging system.

Earlier last month, Zendesk launched Gather, a new product that enables companies to provide trusted and transparent support to customers through online community forums. The service offers a space where customers can engage with each other and experts to seek and offer guidance and insight. The service will allow organizations to scale their customer service organization and leverage experts. Zendesk is hoping to attract more enterprise customers using this service.

Despite the product upgrades, the investors are not too pleased with Zendesk. The company is facing a class action suit contesting that it failed to disclose that its clients had been subject to data breaches dating back to 2016 and that it was experiencing a slowdown in demand for its SaaS offerings. The suit claims that Zendesk’s business metrics and financial prospects were not as viable as represented and were materially false and misleading. The recent security breach that resulted in the disclosure of encryption keys for almost 700 accounts is not helping its case either.

Zendesk’s stock is currently trading at $69.84 with a market capitalization of $7.8 billion. It touched a 52-week high of $94.89 in July this year and hit a 52-week low of $45.60 in December last year.

Freshworks’ Financials

Meanwhile, Indian rival Freshworks is rumored to be going full steam ahead on its IPO plans. According to recent news reports, Chennai-based Freshworks is preparing for a Nasdaq-based IPO with a target date in 2021. As part of this effort, the company is focusing on growth and awareness in the US market. Its Founder Girish Mathrubootham has shifted his base to the San Mateo headquarters and the company has stepped up hiring in the US. Last year, Freshworks had also added former App Dynamics CFO Suresh Seshadri as its CFO.

Freshworks has raised $399 million in funding so far from investors including Sequoia Capital India, Accel, Google, Tiger Global Management, and CapitalG. Its last round of funding was held earlier this month when it raised $150 million in a round led by Google at a valuation of $3.5 billion. Just over a year ago, Freshdesk was valued at $1.5 billion when it had raised $100 million.

Freshworks does not disclose detailed financials, but it did reveal that it had crossed annual recurring revenues of $200 million. It was profitable as of last year.

Freshworks’ Acquisition

Freshworks has consistently focused on capital-efficient acquisitions to drive growth and this year was no different. Recently, it announced the acquisition of Natero, a Mountain View-based startup focused on data analytics. Set up in 2012, Natero offers a customer success service that uses AI and ML tools to help businesses reduce churn and manage customers. Its solution leverages predictive analytics, customer intelligence, and workflow management to create a data-driven platform that helps businesses proactively manage customer satisfaction and maximize customer lifetime value.

Natero has been privately held and does not disclose its financials. It has raised $3.3 million in funding so far, and its revenues are estimated to be $5 million. Freshworks plans to leverage the acquisition to enhance its customer service capabilities.

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