Zendesk A SaaS Leader? This Analyst Is Pounding The Table

Cloud customer engagement services provider Zendesk Inc (NYSE: ZEN) is staying one step ahead of the competition, executing on its growth strategy in a largely untapped $7.6 billion market, according to Summit Research, which started coverage on ZEN with a Buy rating and $25 price target.

In a note, analysts such as Jonathan Kees said the company is moving successfully towards positive free cash flow and profitability, and maintaining revenue growth in 30 percent over the next several years.

Kees believes Zendesk possesses a number of compelling competitive advantages which should drive solid share gains and growth over the long term. These include ease of installation, support, and use, along with resultant high customer satisfaction; robust analytics; new features/products roll-out; open interface and integration; and one of the largest third party integrations, including more than 4,500 registered developers.

"With our estimate of $300M in CY16 revenues in a $7.6B market, we view Zendesk as a small player in a large market that is still new, fragmented, and growing," Kees said.

Most of Zendesk's customers are SMBs (small to medium businesses) though the company has been moving up market, with customer deals with more than 100 seats now almost a third of monthly recurring revenues. Among other benefits, larger customers buy more, tend to purchase annual contracts, and raise overall ARPU (average revenue per user).

However, the analyst is concerned as number of new competitors have popped up since Zendesk's founding, which helped defined the cloud CRM customer engagement market. They have moved aggressively to target the SMB segment as well.

"Our competition concern continues as ZEN moves up market and faces deep pocketed competitors like salesforce.com, inc. (NYSE: CRM) and Oracle Corporation (NYSE: ORCL), that can easily bundle customer engagement functionality with their total offerings," Kees noted.

Lastly, Zendesk has announced targets of positive free cash flow (FCF) by 2017, profitability by 2020, and $1 billion in sales by 2020. Zendesk has off balance sheet obligations of $10.7 million before 2017, $19.5 million by 2019, and $12.7 million by 2020.

"Though it has net cash of $246M, our concern here is that the company walks a tightrope in executing effectively in a far more competitive marketplace, while executing on its financial targets and plans," Kees continued.

Meanwhile, the company's current CFO Alan Black has announced that he would be leaving the firm in the current year. The company has been searching for an appropriate replacement.

Commenting on the CFO departure, Kees said, "We are always little cautious and little worried when a CFO leaves a company. However, we are cautiously optimistic Zendesk will take appropriate steps to identify a CFO who can take the company to the next level ($1 billion in revenue by 2020)."