Today cloud customer service provider Zendesk (ZEN) filed for their IPO with Goldman, Morgan Stanley, and Credit Suisse running the books. Kudos go to PacCrest and Canaccord for making it on the cover as co-managers. The specifics of the deal are not set yet but based on the number of shares already outstanding as of December 31, 2013 of 115M the initial valuation will be high.
The company started up in 2007 and has been the goto product for most tech startups to handle customer service. In contrast ServiceNow (NOW) has traditionally focused on the larger enterprise market versus smaller companies. It looks like these two companies are now vying for the same market as Zendesk moves up into the enterprise space.
Revenues nearly doubled to $72M for 2013 but so did the cost of revenues and the company is ramping expenses, particularly in sales and marketing so the operating loss of $21M was similar to the $24M loss posted in 2012. This is another one of those cloud/SaaS "investing for the future" stories. Investors generally still respond well to these types of stories.
We can expect the story to focus on the need for new customer relationship technology and methods. In terms of positioning Zendesk stresses simplicity and "omni-channel" versus the complicated and disparate systems mostly in place today. Along the lines of providing support in all modalities the company announced the acquisition of Zopim for live chat services for nearly $30M.
The company uses cloud technology and a SaaS business model to offer low initial purchase prices and builds recurring revenue over time. In aggregate existing customers "renew" at rates above 100%. The company was originally founded in Denmark so has had an international approach from the beginning which has translated into a 50/50% revenue mix between the US and overseas.
During the roadshow we'll hear more about how Zendesk has the "right customers" like Uber, Shopify and Box (which has recently filed for their own IPO.)
Zendesk is VC-backed with Charles River Ventures, Benchmark and Matrix backing the company. Interestingly in September 2012 the founders sold nearly 8M shares of stock to the VC firms in a tender offer at $4.81/share.
We found no alarming information in the "Notes" section of the filing and overall compensation and expenses seem prudent. We were a little surprised to see that the use of the $100,000 "signing bonus" was still a technique in use in attracting talent. This seems especially odd when an "IPO payday" is looming.
Looking at company history there was a minor dustup when Zendesk raised prices in 2010 which caused some customers to see their bills almost double. The company was reasonable and transparent about it but it did garner some media attention. To be fair after over two years of constant improvement the platform was much more than it was at the start and far better than other offerings at lower price points.
In conclusion we can see that Zendesk will be a "hot" IPO, at least in terms of excitement and focus. Given what we see in terms of share count and a proposed price that we'd expect to be at least over $10 the valuation will be over 10x revenues at the mid-point of the range.
As a valuation reference point ServiceNow (NOW) priced their deal above the range at $18 back in June of 2012, traded up that day to $24 and has since reached $52/share which is over 18x sales.
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