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Cloud Stocks: Zendesk Adds Products, While Freshdesk Keeps Acquiring

Posted on Tuesday, Feb 23rd 2021

Recently, CRM service player Zendesk (NYSE: ZEN) announced its fourth-quarter results that surpassed the market’s expectations. Rival Freshworks also released a peek into its financials that reveals stellar growth. Many believe that Freshworks may be eyeing a listing this year.

Zendesk’s Financials

Zendesk’s fourth-quarter revenues grew 23% to $283.5 million, ahead of the market’s estimate of $277.93 million. GAAP net loss came in at $54.8million. Adjusted EPS of $0.11 missed the Street’s estimates of $0.15.

Among key metrics, the percentage of Support monthly recurring revenue (MRR) from customers with 100 or more Support agents was 44% compared with 43% a year ago. The percentage of total annualized recurring revenues (ARR) from customers with ARR of $100,000 or more was 49% at the end of the quarter. Total remaining performance obligations (RPO) increased 44% to $925 million. The number of paid customer accounts grew to 173,600. Its dollar-based net expansion rate was 112%.

For the full year, revenues grew 26% to $1.03 billion. It ended the year with an operating loss of $155.9 million and an adjusted operating income of $71.8 million.

For the first quarter, Zendesk forecast revenues of $291-$296 million, compared with the market’s forecast of $289.47 million. For the full year, it expects revenues of $1.28-$1.31 billion compared with the market’s forecast of $1.27 billion.

Zendesk’s Product Expansion

Recently, Zendesk announced the general availability of its messaging solution as part of the Zendesk Suite. The new solution combines all of Zendesk’s service capabilities into a single offering. It provides businesses with the ability to have continuous conversations, regardless of the customer’s method of messaging. Companies are able to provide connected conversational experiences through web, mobile, and social channels that all work with built-in automation. It offers capabilities such as proactive notifications, the ability to enable third-party bots, and the ability to transact right in the conversation when looking through products, reserving seats, or making payments.

Zendesk realizes that messaging is becoming the preferred way for businesses and customers to interact with each other because it is convenient, fast, and feels more personalized. A recent Customer Experience (CX) Trends Report published by Zendesk showed a 110% increase in the use of social messaging as a way of interaction with businesses. In 2020, 64% of consumers said they tried a new way to get in touch with customer service; and messaging and bots were among the leading choices.

Earlier this year, Zendesk had announced its partnership with social messaging service WhatsApp. The recent messaging service is a continuation of the same effort where Zendesk is making sure that the customer feels connected through any mode of communication.

Zendesk’s PaaS strategy

Zendesk’s PaaS strategy includes an open CRM platform, API integrations, and a marketplace. Zendesk Sunshine is its open CRM platform that allows developers to store, manage, and connect all of their customer data so that they can build powerful products on top of the Zendesk product with its APIs, apps, and mobile SDKs. Developers can also use the Zendesk Marketplace to find partners, apps, and integrations.

Zendesk’s stock is currently trading at $152.54 with a market capitalization of $17.96 billion. It touched a 52-week high of $166.60 earlier this month. The stock had fallen to a 52-week low of $50.23 in March last year.

Freshworks’ Growth

Meanwhile, rival Freshworks is also seeing strong growth. It recently announced that it had surpassed $300 million in ARR, growing the business by 40%. The company did not provide additional financial details.

Freshworks has been expanding its portfolio through acquisitions. In February 2020, it announced the acquisition of AnsweriQ, an AI startup that provides tools for self-service solutions and agent-assisted use cases. AnsweriQ is a pure AI player and has developed algorithms that can handle complex data privacy and residency issues. Freshworks is integrating these technologies within its own Freddy AI engine. Seattle-based AnswerIQ was founded in 2017 by Pradeep Rathinam and Prashant Luthra. Its financial details are not known, but the company had raised $5 million in funding from Madrona Venture Group at an undisclosed valuation.

In July last year, it also announced the acquisition of an IT orchestration and cloud management platform Flint. Flint’s intelligent automation and cloud computing capabilities provide IT organizations the agility to adapt to the needs of an increasingly remote workforce. The acquisition is allowing Freshworks to leverage intelligent automation to efficiently provision IT resources, rapidly remediate business-critical incidents, and automate workloads using out-of-the-box connectors to other popular service providers including Microsoft, VMware, Amazon, Google, Alibaba, Slack, OneLogin, and Okta. Freshworks is counting on the acquisition to help it build out its operations management capabilities to go from alert management to also automatically solve common IT issues. Terms of the acquisition were not disclosed.

Like Zendesk, Freshdesk also offers a secure, robust, and flexible platform that is powered by APIs to extend and build deep integrations with both Freshworks’ own and third party products. The service includes a data store and serverless runtimes, a rich component library, and an SDK that allows developers to develop and deploy apps quite easily. Its app marketplace has over 1,200 apps that reach more than 300,000 of its customers.

Freshworks remains privately funded and has raised $484 million from investors including Steadview Capital, Sequoia Capital India, Accel, Google, Tiger Global Management, and CapitalG. Its last round of funding was held in January 2020 when it raised $85 million in a round led by Steadview Capital at a valuation of over $3.5 billion. Many suspect that Freshworks will list later this year.

I think, there are quite a few potential acquisitions out there for Zendesk to evaluate as well. One such acquisition target could be SupportLogic, which was introduced to me by Ken Elefant from Sorenson Ventures. San Francisco-based SupportLogic was set up in 2016 by Krishna Raj Raja. SupportLogic extracts AI/NLP-driven signals from customer datasets to improve support quality. By syncing with existing ticketing systems, its technology can provide recommendations, intelligent workflows, and seamless integration with collaboration software. It has integrated with Zendesk, Freshworks, and other support systems including Salesforce, ServiceNow, and Jira Software. The company has raised $12 million so far in funding from investors including Sorenson Ventures, Emergent Ventures, and Sierra Ventures.

Another similar player is Mountain View and Lisbon-based Unbabel. Founded in 2013, Unbabel leverages AI capabilities to help organizations serve customers in their native languages, with an always-on, scalable translation across digital channels. It too has deep integrations with Zendesk, Freshworks, and Salesforce. It has raised more than $90M in funding from investors including Greycroft, Faber, Samsung NEXT, e.ventures, Scale Venture Partners, Notion Capital, FundersClub, Structure Capital, Caixa Capital, and M12.

Zendesk’s API strategy is helping create an ecosystem that supports the growth of companies like Unbabel and SupportLogic that have leveraged Zendesk’s solution to build their own businesses. In return, Zendesk gets access to possible acquisition targets and customers that will face a significant exit barrier when wanting to transition away from Zendesk.

Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article. I am an investor in Zendesk.

This segment is a part in the series : Cloud Stocks


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