Zendesk’s 4Q Sales Outlook Surprises; Shares Rise 4.6%

Shares of Zendesk closed 4.6% higher on Friday after the customer service software company announced a better-than-expected 4Q sales outlook. For 4Q, Zendesk projects revenues to land between $274 million and $279 million, which is higher than Street estimates of $273.6 million. The company’s full-year sales guidance range of $1.020-$1.025 billion also exceeded analysts’ expectations of $1.01 billion.

Meanwhile, Zendesk’s (ZEN) 3Q adjusted EPS jumped 42% year-over-year to $0.17 surpassing analysts’ estimates of $0.11. Moreover, its revenues increased 24% year-over-year to $261.9 million and beat the Street consensus of $253.7 million, reflecting strong demand for customer service software. The company’s CFO Elena Gomez said, “Revenue outperformance was driven by strong demand for our solutions and improved churning contraction rate during the quarter.”

Zendesk saw improvement across multiple key revenue metrics. Its net expansion rate improved to 112% in Q3 from 111% in Q2. The company registered a significant rise in its RPO (Recruitment Process Outsourcing), which signifies the percentage of customers committed to partner with the company. As per the company, “Total RPO increased 43% year-over-year, short-term RPO increased 39% and long-term RPO increased 56% year-over-year.” (See ZEN stock analysis on TipRanks).

On Oct. 30, Oppenheimer analyst Koji Ikeda reiterated a Buy rating and a price target of $130 (17.2% upside potential). In a note to investors, Ikeda wrote, “We believe the results lend support to our thesis that the bad news is behind the business and think 3Q could mark the beginning of a more consistent results trend, which should catalyze a re-rating of ZEN’s current discount valuation multiples higher.”

Currently, the Street is bullish on the stock. The Strong Buy analyst consensus is based on 10 Buys and 1 Hold. With shares up nearly 45% year-to-date, the average price target of $136.82 implies further upside potential of about 23.3% to current levels.

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