Billion Dollar Unicorns: Zendesk and Freshdesk in Expansion Mode

According to a recent Gartner report, the global customer relationship management (CRM) software market is estimated to have grown to $23.2 billion in 2014, up 13.3% from $20.4 billion in 2013. SaaS accounted for almost 47% of the market driven by organizations of all sizes looking for easier-to-deploy and faster-ROI alternatives to modernizing legacy systems, implementing new applications, or providing alternative complementary functionality. Billion Dollar Unicorn club member Zendesk as well as rival Freshdesk are the new generation players riding on this trend.

Zendesk’s Financials

2007-founded Zendesk last week reported second quarter revenue of $48.2 million, up 63% y-o-y, beating the street estimate of $46.34 million. Net loss was $21.5 million or $0.25 per share. Non-GAAP net loss per share was $0.08, ahead of the estimate of loss of $0.11 per share. Although the company remains unprofitable, gross margin was 66.5%, up from 60.2% a year ago, and operating expenses increased by just 35.4% year over year.

The outlook was also positive, surpassing analyst expectations. Zendesk expects third quarter revenue between $51 million and $53 million, up by about 53%. Full year revenue is expected to be $198 million to $201 million, compared to the street estimate of $194.2 million.

Zendesk’s Changing Customer Profile

At the end of the second quarter, Zendesk had over 1,000 employees and 60,000 paid customer accounts. Over the past year, enterprise has been a key focus for Zendesk. In the enterprise segment of organizations with 500 or more employees, Zendesk landed several new customers including Booking.com, CenturyLink, STA Travel, and Viacom’s Kids & Family Group of Nickelodeon. CEO Mikkel Svane attributed the success in their enterprise customer acquisition strategy to their BPO channel.

Customers with 100 or more seats now represent 27% of their monthly recurring revenue versus 23% last year. Since the beginning of 2014, they have signed more than 150 contracts with an individual value of more than $50,000 annually.

During the quarter, Zendesk focused on improving their LiveChat product’s capabilities for larger teams and organizations and by the end of the quarter, they had landed more than 215 Premium chat accounts.

Zendesk is also expanding their global footprint and 44% of revenues came from outside the United States. The number of languages and regional variations for customer service agents has doubled to 28 since its IPO. For end users, they support more than 40 languages on their customer service platform.

Following the results, Zendesk’s stock surged and is currently trading at $22.41 with a market capitalization of $1.93 billion. It touched a 52-week high of $28.20 in October last year.

Freshdesk

Like Zendesk, 2010-founded Freshdesk is also looking beyond SMBs. Their customer list now includes names like Sony Pictures, Cisco, Honda, 3M, Hugo Boss, and Good Reads. They are also expanding globally. They have around 350 employees and have shifted their headquarters to San Fransisco, have an office in London, and are about to open another in Australia.

Reports show that Freshdesk has grown bookings more than three times in the past several years. They have doubled their number of customers to more than 40,000 customers in the past year but do not give the breakup of their paid and unpaid customers.

They are estimated to have recorded revenues of $10 million in 2013. In June 2014, they had raised $31 million at a valuation of $250 million. Their last round of funding was held in April when they raised $50 million from their existing investors, Tiger Global leading and Accel Partners and Google Capital pitching in. Valuation was undisclosed but analysts estimate that the round valued them at “mid-to-high hundreds of millions”.

The company plans to use the funds to scale the business and invest in the product in a lean manner, rather than burning the money in building a costly sales and marketing organization. Their main focus is SMBs and they use in-bound marketing campaigns to keep costs down.

More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : Billion Dollar Unicorns