About Operating Metrics Zendesk does not provide a reconciliation of its non-GAAP operating margin guidance to Zendesk reviews a number of operating metrics to evaluate its business, measure per- GAAP operating margin for future periods beyond the current fiscal year because Zendesk formance, identify trends, formulate business plans, and make strategic decisions. These does not provide guidance on the reconciling items between GAAP operating margin and include the number of paid customer accounts on Zendesk Support, Zendesk Chat, and its non-GAAP operating margin for such periods, as a result of the uncertainty regarding, and other products, dollar-based net expansion rate, monthly recurring revenue represented by the potential variability of, these items. The actual amount of such reconciling items will have its churned customers, and the percentage of its monthly recurring revenue from Support a significant impact on Zendesk’s non-GAAP operating margin and, accordingly, a reconcili- originating from customers with 100 or more agents on Support. ation of GAAP operating margin to non-GAAP operating margin guidance for such periods is Zendesk defines the number of paid customer accounts at the end of any particular period not available without unreasonable effort. as the sum of (i) the number of accounts on Support, exclusive of its legacy Starter plan, free Zendesk’s disclosures regarding its expectations for its non-GAAP gross margin include trials, or other free services, (ii) the number of accounts using Chat, exclusive of free trials adjustments to its expectations for its GAAP gross margin that exclude share-based com- or other free services, and (iii) the number of accounts on all of its other products, exclusive pensation and related expenses in Zendesk’s cost of revenue and amortization of purchased of free trials and other free services, each as of the end of the period and as identified by intangibles related to developed technology. The share-based compensation and related a unique account identifier. Use of Support, Chat, and Zendesk’s other products requires expenses excluded due to such adjustments are primarily comprised of the share-based separate subscriptions and each of these accounts are treated as a separate paid custom- compensation and related expenses for employees associated with Zendesk’s platform er account. Existing customers may also expand their utilization of Zendesk’s products by infrastructure and customer experience organization. adding new accounts and a single consolidated organization or customer may have multiple accounts across each of Zendesk’s products to service separate subsidiaries, divisions, or Zendesk does not provide a reconciliation of its non-GAAP gross margin guidance to GAAP work processes. Each of these accounts is also treated as a separate paid customer account. gross margin for future periods because Zendesk does not provide guidance on the rec- Zendesk’s dollar-based net expansion rate provides a measurement of its ability to increase onciling items between GAAP gross margin and non-GAAP gross margin, as a result of the revenue across its existing customer base through expansion of authorized agents asso- uncertainty regarding, and the potential variability of, these items. The actual amount of such ciated with a paid customer account, upgrades in subscription plans, and the purchase of reconciling items will have a significant impact on Zendesk’s non-GAAP gross margin and, additional products as offset by churn, contraction in authorized agents associated with a accordingly, a reconciliation of GAAP gross margin to non-GAAP gross margin guidance for paid customer account, and downgrades in subscription plans. Zendesk’s dollar-based net the period is not available without unreasonable effort. expansion rate is based upon monthly recurring revenue for a set of paid customer accounts Zendesk uses non-GAAP financial information to evaluate its ongoing operations and for on its products. Monthly recurring revenue for a paid customer account is a legal and con- internal planning and forecasting purposes. Zendesk’s management does not itself, nor does tractual determination made by assessing the contractual terms of each paid customer ac- it suggest that investors should, consider such non-GAAP financial measures in isolation count, as of the date of determination, as to the revenue Zendesk expects to generate in the from, or as a substitute for, financial information prepared in accordance with GAAP. Zendesk next monthly period for that paid customer account, assuming no changes to the subscrip- presents such non-GAAP financial measures in reporting its financial results to provide inves- tion and without taking into account any one-time discounts or any platform usage above tors with an additional tool to evaluate Zendesk’s operating results. Zendesk believes these the subscription base, if any, that may be applicable to such subscription. Monthly recurring non-GAAP financial measures are useful because they allow for greater transparency with revenue is not determined by reference to historical revenue, deferred revenue, or any other respect to key metrics used by management in its financial and operational decision-making. GAAP financial measure over any period. It is forward-looking and contractually derived as of This allows investors and others to better understand and evaluate Zendesk’s operating the date of determination. results and future prospects in the same manner as management. Zendesk calculates its dollar-based net expansion rate by dividing the retained revenue Zendesk’s management believes it is useful for itself and investors to review, as applicable, net of contraction and churn by Zendesk’s base revenue. Zendesk defines its base revenue both GAAP information that may include items such as share-based compensation and relat- as the aggregate monthly recurring revenue across its products for customers with paid ed expenses, amortization of purchased intangibles, and acquisition-related expenses, and customer accounts on Support or Chat as of the date one year prior to the date of calcula- the non-GAAP measures that exclude such information in order to assess the performance tion. Zendesk defines the retained revenue net of contraction and churn as the aggregate of Zendesk’s business and for planning and forecasting in subsequent periods. When Ze- monthly recurring revenue across its products for the same customer base included in the ndesk uses such a non-GAAP financial measure with respect to historical periods, it provides measure of base revenue at the end of the annual period being measured. The dollar-based a reconciliation of the non-GAAP financial measure to the most closely comparable GAAP fi- net expansion rate is also adjusted to eliminate the effect of certain activities that Zendesk nancial measure. When Zendesk uses such a non-GAAP financial measure in a forward-look- identifies involving the transfer of agents between paid customer accounts, consolidation of ing manner for future periods, and a reconciliation is not determinable without unreasonable customer accounts, or the split of a single paid customer account into multiple paid customer effort, Zendesk provides the reconciling information that is determinable without unreason- accounts. In addition, the dollar-based net expansion rate is adjusted to include paid cus- able effort and identifies the information that would need to be added or subtracted from the tomer accounts in the customer base used to determine retained revenue net of contraction non-GAAP measure to arrive at the most directly comparable GAAP measure. Investors are and churn that share common corporate information with customers in the customer base encouraged to review the related GAAP financial measures and the reconciliation of these that are used to determine the base revenue. Giving effect to this consolidation results in non-GAAP financial measures to their most directly comparable GAAP financial measure as Zendesk’s dollar-based net expansion rate being calculated across approximately 92,800 detailed above. customers, as compared to the approximately 118,900 total paid customer accounts as of December 31, 2017. Zendesk Shareholder Letter Q4 2017 - 22