Zendesk (ZEN) priced in the middle of their range at $9/share this morning. This is another promising SaaS technology company that’s at a $100M revenue run rate but still has a negative 24% operating margin. Like most SaaS companies their aim is to reach 20% margins over time. Lately the market has been a little fickle regarding what valuation multiples to put on these companies.
UPDATE 5/19: Since pricing ZEN has been ripping higher and closed today at $16.50. Several articles have cast some doubt as to whether the rise was “real” end market demand for purchasing in the aftermarket from insiders who “indicated an interest” to buy up to $25M of stock in the aftermarket. Combined with the normal Wall Street antics of basing allocations on after-market order promises (illegal but part of how things get done) have pushed the name up short-term. We continue to really like the name but nearly doubling from the IPO price in this market suggests some caution.
Still we really like Zendesk, the software, the team, solid growth and a good market opportunity. We even changed our own support software over to Zendesk after seeing what it can do. It’s also cheaper than the basic products we were already using.
As a name we want to follow we added the Zendesk IPO roadshow transcript to the archive (along with the IPO slide deck) and include a few highlights here:
Zendesk is a relatively young company. We launched less than seven years ago out of tiny Copenhagen, Denmark. Today, more than 40,000 global customer accounts later, we describe ourselves as the new face of customer service on a mission to bring organizations and their customers closer together.
Zendesk is a cloud-native product bringing all the advantages of cloud services to the organization. Zendesk enables organizations to support the modern customer — meeting them on their turf and providing a modern, open, transparent, empowering experience — and it’s designed for a new generation of business software users that expect an experience as simple, easy and intuitive as installing a new app on your iPhone. We think we have set a new standard for business software.
Uber is disrupting the transportation industry with their transparent, mobile app and a phenomenal customer experience. Their approach to service is a perfect example of how companies can capitalize on proactive service to impact the bottom line. For example, when you give a bad rating to a driver after an unsatisfactory ride, Uber uses Zendesk to automatically trigger workflow communication that will try to turn around your bad experience and save your brand perception.
We think about our market in two dimensions — feature maturity and segment. The customer service and contact center software market is a $10 billion market according to IDC, but the whole CRM market is so much larger, particularly as it spreads into adjacent areas like sales and marketing automation. Zendesk has succeeded in penetrating the worldwide SMB and mid market at global scale — a market typically much harder to quantify by analysts.
In 2013, our revenue grew 88% and while growing rapidly, we at the same time generated positive cash flow from operations. Moreover, we have been successful at growing the company at a very rapid rate consistently, quarter-over-quarter, for years.
Today we have over 40,000 customer accounts worldwide. Our strongest markets include the United States, Canada, Brazil, the United Kingdom, Germany and Australia. Overall, we derived 59% of our 2013 revenue from customers in the United States and over 40% from customers located elsewhere around the world. In terms of the sources of our growth, in 2013, 60% of the increase of our revenue came from customers we had at the beginning of the year and 40% came from new customers added during the year.
Our annualized dollar-based net expansion rate has been well over 100% for years. In 2013, the rate was 123%, meaning that we ended the year with $123 of recurring revenue for every $100 of recurring revenue we had from customers on hand at the beginning of the year. Underlying this metric is strong customer retention and success in expanding the number of seats and upgrading subscription plans utilized by existing customers.
With an estimated 72M shares or so outstanding post deal ZEN has a market capitalization of $648M on pricing. This represents 5x current year (2014) sales. Post deal we’ll be out with an updated SaaS spreadsheet that goes through the current valuation metrics for the group.
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