Photo Credit: Petr Machá?ek on Unsplash

Complaint management solutions provider Zendesk (NYSE: ZEN) recently announced its fourth-quarter results that continue to outpace the market’s estimates. Zendesk recently also received an offer of acquisition from private equity firms, which it rejected. The company believes that it has a significant market opportunity that it can address as a public player.

Zendesk’s Financials

Zendesk’s fourth-quarter revenues grew 32% to $375.4 million, ahead of the market’s estimate of $369.49 million. GAAP net loss was $61.9 million. Non GAAP EPS of $0.16 missed the Street’s estimates of $0.18.

For the full year, Zendesk’s revenues increased 30% to $1.339 billion.

For the first quarter, Zendesk forecast revenues of $381-$387 million, compared with the market’s forecast of $384.65 million. For the full year, it expects revenues at $1.675-$1.705 billion compared with the market’s forecast of $1.69 billion.

Zendesk’s Growth

Zendesk registered a strong finish to the year. It attributed its success to its growing enterprise customer base and the introduction of Suite. Together, these two factors helped them land larger deals, longer contract lengths with their customers, and record-high customer retention rates. Zendesk has been focusing on the enterprise market for the last few years and it is seeing those efforts pay off. The customer accounts that are generating more than $250K ARR now account for 38% of its total ARR, compared with 32% last year.

Since its launch in February last year, Suite has now grown to exceed $500 million ARR and now accounts for 35% of its ARR. More than 90% of its bookings from new customers were on Suite, and it accounted for nearly 60% of its total bookings during the quarter.

Late last quarter, Zendesk had announced its $4.1 billion acquisition of Momentive. I expected Zendesk to see significant rationalization in marketing and sales costs due to the acquisition as it built out a customer intelligence company. Recently, Zendesk provided more commentary on the rationale for the expensive acquisition.

Zendesk expects the acquisition to increase its 2025 revenue by $1.2 billion, 35% higher than Zendesk’s standalone plan. Zendesk continues to believe that the acquisition will help Zendesk expand its product offerings through greater global reach, and by cross-selling opportunities. It believes that its addressable market has almost doubled to $165 billion by 2025 on account of the acquisition. It expects to generate approximately $55 million as part of the first phase of 2023 revenue synergies, growing to approximately $275 million in 2025. It expects to see significant additional revenue opportunities from the introduction of new products, new pricing and packaging, and improved strategic positioning as a customer intelligence platform.

Meanwhile, Zendesk itself received an unsolicited non-binding acquisition proposal from a consortium of private equity firms that it rejected. The consortium was looking to acquire Zendesk at $127-$132 per share, which was rejected by the Board because it believes that the strategic plan coupled with the integration of Momentive will generate substantial additional long-term value for shareholders.

Zendesk’s stock is currently trading at $118.04 with a market capitalization of $14.4 billion. It touched a 52-week high of $159.80 in February last year. The stock had fallen to a 52-week low of $87.90 in November last year.

We haven’t seen a comprehensive AI strategy from Zendesk yet. Earlier we had recommended Unbabel as a potential AI acquisition. Also, we recommend Aisera as an excellent target for both Zendesk and Freshworks.