Should SAP Acquire Freshworks or Zendesk?

I’m publishing this series to discuss a topic that I follow closely - cloud stocks, trends, strategy, acquisitions, and more. Please subscribe to my Cloud Stock Analysis series and never miss an article.

Cloud Customer Service software company Zendesk (NYSE: ZEN) has recently launched a CRM platform while rival Freshworks has launched an AI powered customer engagement platform.

Zendesk’s Financials

Zendesk recently reported its first quarter results that topped analyst estimates. Q1 revenue was up 40% to $181.5 million. GAAP net loss was $44.7 million or $0.41 per share. Non-GAAP net income was $5.1 million or $0.05 per share. Analysts expected earnings of $0.03 per share on revenue of $179.6 million.

Among key metrics, Zendesk’s paid customer accounts grew to 145,600 from 136,600 at the end of Q4 2018 and 125,500 a year ago. Zendesk Support added 2,000 new customers to end the quarter with 75,600 paid customer accounts. Paid customer accounts for other Zendesk products grew by 7,800 to 24,700. Paid customer accounts with 100+ Support agents accounted for nearly 40% of Zendesk’s Support ARR. This number was flat over the previous quarter but was 38% in the previous year.

By region, revenue from US grew 39%, EMEA grew 38%, APAC was up by 39%, and other regions were up 57%.

For the second quarter, Zendesk expects revenues of $191-$193 million with a GAAP operating loss of $44-$42 million. It expects to end the current year with revenues of $802-$810 million with a GAAP operating loss of $164-$160 million. The market was looking for revenues of $172.8 million for the quarter and $779.3 million for the year.

Zendesk’s CRM Platform and Upselling Push

In November 2018, Zendesk expanded its target market from customer service to the broader customer management market with a CRM platform called Zendesk Sunshine and salesforce automation tool Zendesk Sell.

Zendesk Sunshine is built on open standards and the public cloud to enable customers to modernize their architectures and build better customer experiences. It leverages AWS’s security, scalability, and reliability to deliver a more flexible CRM platform and enable organizations to quickly and easily move data between Sunshine and their systems and applications. The platform is organically developed.

Zendesk Sell is focused on driving productivity, improving processes, and enhancing pipeline visibility for sales teams. Priced $19 per month, Zendesk Sell was well received and exceeded early expectations in its first full quarter.

Last May, Zendesk introduced an omnichannel solution called The Zendesk Suite that offers a frictionless purchasing experience. At the end of the first quarter, The Suite attracted over 3,500 paid customer accounts. Its higher price point and subscriptions to several products in the Suite has expanded Zendesk’s average deal size.

In September 2018, Zendesk ramped up its startup program, which provides young companies with Zendesk products and guidance from Zendesk specialists on setting up their software and putting the customer experience at the center of their businesses. Its startup program works with accelerators, incubators, and venture capitalists around the world to identify young companies that could strategically benefit from implementing customer experience software. So far, it has onboarded over 1,200 startups and provided them with the tools to deliver the best experiences for their customers.

Zendesk’s stock is currently trading at $87.32 with a market capitalization of $9.57 billion. It had touched a 52-week high of $90 last week following its results. The stock has recovered from the 52-week low of $45.6 it had fallen to in December last year.

Freshworks’ New Offerings

On the other hand, Zendesk’s rival Freshworks has, with the help of nine acquisitions, expanded its portfolio to offer IT services management software Freshservice, CRM software Freshsales, call center software Freshcaller, applicant tracking software Freshteam for recruiters, customer messaging software Freshchat, and conversion optimization suite Freshmarketer.

Freshworks recently launched an AI powered customer engagement platform called Freddy. Freddy’s semantic relevance engine discovers key topics from a business’s knowledge base and identifies relationships between these topics. This allows Freddy to automatically infer suitable answers to user queries, learn from the Freshworks records of customer interactions across sales, support and marketing, and automatically reply to queries on email, chat, voice-calls and even social media.

Freshworks’ Financials

Founded in 2010, Freshworks is headquartered in San Bruno, California and has subsidiaries in UK, Europe, India, and Australia. It is a private company and does not disclose its global consolidated financials. In June 2018, Freshworks had announced that it had crossed its milestone of $100 million in annual recurring revenue run rate (ARR) for 2017-2018.

Freshworks has so far raised $249 million in funding from investors including Google Capital, Accel Partners, Tiger Global Management, and Sequoia Capital India. In November 2016, it raised $55 million from Sequoia Capital and Accel Partners at an estimated valuation of $700 million. In its latest round in July last year, it raised $100 million at a valuation of $1.5 billion. The company will use the new capital to improve its SaaS platform and expand sales globally. Apart from Zendesk, it competes with Salesforce, Helpshift, and ServiceNow.

Should SAP Acquire Zendesk or Freshworks?

SAP, in November last year, acquired customer experience management platform provider Qualtrics for $8 billion just before it was about to go public. In its IPO filing, Qualtrics reported revenue of $190.6 million in 2016 and $289.9 million in 2017, representing an annual growth rate of 52%. Its net loss was $12 million in 2016 and net income was $2.6 million in 2017. The acquisition is expected to catapult SAP’s revenue growth in the enterprise application software industry, where it competes with Salesforce and Oracle.

In a recent post, we wondered, ‘What should SAP acquire to triple its value by 2023?’. Salesforce.com had 19.6% in the $27.1 billion CRM industry while Oracle has a 7.1% share. In the Gartner Magic Quadrant for the CRM Customer Engagement Center, SAP is seen as a challenger in the market while Salesforce, Oracle, and Zendesk are seen as market leaders while Freshworks is seen as a niche player. With the acquisition of either Zendesk or Freshworks, SAP could move up in the CRM customer engagement space and could increase its value.

Looking For Some Hands-On Advice?

For entrepreneurs who want to discuss their specific businesses with me, I’m very happy to assess your situation during my free online 1Mby1M Roundtables, held almost every week. If you are visiting the San Francisco Bay Area, come meet me at an upcoming Rendezvous meetup. You can also check out my LinkedIn Learning course here, my Lynda.com Bootstrapping course here, and to follow my writings, click Follow from here.