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Why Shares of Zendesk Are Surging Today

What happened

Shares of customer service software provider Zendesk (NYSE: ZEN) jumped on Thursday following a strong third-quarter report. Zendesk beat analyst estimates across the board, with revenue growth accelerating compared to the second quarter. The stock was up about 12.5% at 11 a.m. EDT.

So what

Zendesk reported third-quarter revenue of $112.8 million, up 40% year over year and about $3.6 million higher than the average analyst estimate. Paid customer accounts reached roughly 114,000, up from 107,000 at the end of the second quarter.

Image source: Zendesk.

Zendesk signed 50% more contracts with an annual value of $50,000 or more compared to the prior-year period, and the average size of those contracts rose 40%. This helped boost the percentage of monthly recurring revenue generated from customers with 100 or more agents to 37%, up from 35% during the second quarter.

Non-GAAP earnings per share came in at a loss of $0.02, better than a loss of $0.04 in the third quarter of 2016 and $0.04 better than analysts expected. GAAP EPS was a loss of $0.28, down from a loss of $0.27 in the prior-year period. Higher revenue was more than offset by higher operating expenses on a GAAP basis.

Management talked up the company's success winning large customers in its letter to shareholders: "We closed a significantly larger number of enterprise-class deals this quarter -- both new business and expansions. In addition, we are building optimism around our 2018 growth potential, given greater visibility into our pipeline of expansion opportunities with existing customers and new business opportunities with prospective customers across a variety of industries."

Now what

Zendesk expects to report fourth-quarter revenue between $118 million and $120 million, up from $88.6 million in the fourth quarter of 2016. The company also expects a non-GAAP operating loss of between $3 million and $5 million. For the full year, Zendesk sees revenue of between $425 million and $427 million, along with a non-GAAP operating loss of between $18 million and $22 million.

Clearly, Zendesk is making inroads among larger customers, greatly increasing the number of large contract signings during the third quarter. Those deals helped accelerate revenue growth, leading investors to push up the stock.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool recommends Zendesk. The Motley Fool has a disclosure policy.