How Zendesk Can Meet Its $1 Billion Top-Line Target By 2020

William Blair’s Bhavan Suri believes Zendesk Inc ZEN “is well positioned to reach its $1 billion revenue run-rate target by 2020 while also providing incremental operating margin and free cash flow improvements.”

Suri maintains an Outperform rating on the company.

Growth Drivers

Following investor meetings with the chief financial officer and head of investor relations, the analyst expressed confidence that the major salesforce changes at the company were complete and disruptions seen in the previous have mostly subsided.

“We believe the regional realignment in the United States is driving a more simplistic, efficient process, which should help the company execute on its healthy enterprise deal pipeline,” Suri mentioned.

Although a majority of Zendesk’s growth is expected to be driven by its core support platform, the analyst believes the company has been focused on cross-selling its product suite, which is likely to drive long-term growth and ARPU.

Conservative Guidance

Suri noted that many investors were focused on Zendesk’s 2017 guidance, especially the company’s revenue growth drivers and margin expectations.

While the Street expects 32 percent revenue growth with a 4 percent decline in operating margin in 2017, the analyst expects the company to issue a conservative guidance, mostly in line with the current expectations.

Suri added, “The majority of guidance is based on the company’s visible, small-business activity and represents deals with less than $50,000 annual contract value.”

Zendesk’s revenue run-rate target of $1 billion by 2020 suggests a CAGR of about 30 percent over the next four years, which Suri believes is achievable.