TWILIO INC, 10-Q filed on 10/31/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Oct. 25, 2019
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2019  
Document Transition Report false  
Entity File Number 001-37806  
Entity Registrant Name TWILIO INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 26-2574840  
Entity Address, Address Line One 101 Spear Street  
Entity Address, Address Line Two First Floor  
Entity Address, City or Town San Francisco  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94105  
City Area Code 415  
Local Phone Number 390-2337  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Title of 12(b) Security Class A Common Stock, par value $0.001 per share  
Trading Symbol TWLO  
Security Exchange Name NYSE  
Entity Central Index Key 0001447669  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   124,601,389
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   12,551,350
Former Address    
Entity Information [Line Items]    
Entity Address, Address Line One 375 Beale Street  
Entity Address, Address Line Two Suite 300  
Entity Address, City or Town San Francisco  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94105  
v3.19.3
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 330,601 $ 487,215
Short-term marketable securities 1,551,175 261,128
Accounts receivable, net 131,193 97,712
Prepaid expenses and other current assets 55,455 26,893
Total current assets 2,068,424 872,948
Restricted cash 75 18,119
Property and equipment, net 118,481 63,534
Operating right of use asset 148,069 0
Intangible assets, net 465,255 27,558
Goodwill 2,283,387 38,165
Other long-term assets 26,477 8,386
Total assets 5,110,168 1,028,710
Current liabilities:    
Accounts payable 25,949 18,495
Accrued expenses and other current liabilities 135,544 96,343
Deferred revenue and customer deposits 26,015 22,972
Operating lease liability, current 22,211 0
Financing lease liability, current 6,509 0
Total current liabilities 216,228 137,810
Operating lease liability, noncurrent 134,755 0
Financing lease liability, noncurrent 8,174 0
Convertible senior notes, net 452,184 434,496
Other long-term liabilities 14,341 18,169
Total liabilities 825,682 590,475
Commitments and contingencies (Note 12)
Stockholders’ equity:    
Preferred stock 0 0
Class A and Class B common stock 137 100
Additional paid-in capital 4,868,261 808,527
Accumulated other comprehensive income 4,578 1,282
Accumulated deficit (588,490) (371,674)
Total stockholders’ equity 4,284,486 438,235
Total liabilities and stockholders’ equity $ 5,110,168 $ 1,028,710
v3.19.3
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Revenues:        
Revenue $ 295,066 $ 168,895 $ 803,244 $ 445,765
Cost of revenue 136,904 77,031 369,017 204,553
Gross profit 158,162 91,864 434,227 241,212
Operating expenses:        
Research and development 104,481 42,340 281,119 119,727
Sales and marketing 100,657 45,949 262,685 116,520
General and administrative 47,690 28,608 166,409 76,213
Total operating expenses 252,828 116,897 710,213 312,460
Loss from operations (94,666) (25,033) (275,986) (71,248)
Other income (expense), net 4,377 (1,939) 2,861 (3,172)
Loss before provision for income taxes (90,289) (26,972) (273,125) (74,420)
Income tax benefit (provision) 2,555 (84) 56,309 (371)
Net loss attributable to common stockholders $ (87,734) $ (27,056) $ (216,816) $ (74,791)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.64) $ (0.28) $ (1.70) $ (0.78)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted (in shares) 136,400,739 98,019,629 127,506,529 96,359,437
v3.19.3
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (87,734) $ (27,056) $ (216,816) $ (74,791)
Other comprehensive income (loss):        
Unrealized gain on marketable securities 1,275 291 3,296 126
Foreign currency translation 0 (873) 0 (771)
Total other comprehensive income (loss) 1,275 (582) 3,296 (645)
Comprehensive loss attributable to common stockholders $ (86,459) $ (27,638) $ (213,520) $ (75,436)
v3.19.3
Condensed Consolidated Statements of Stockholders Equity - USD ($)
$ in Thousands
Total
Common Stock
Common Class A
Common Stock
Common Class B
Additional Paid In Capital
Accumulated Other Comprehensive Income
Accumulated Deficit
Follow-on Public Offering
Common Class A
Balance (in shares) at Dec. 31, 2017   69,906,550 24,063,246        
Balance at Dec. 31, 2017 $ 359,846 $ 70 $ 24 $ 608,165 $ 2,025 $ (250,438)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (23,729)         (23,729)  
Adjustment to opening retained earnings due to adoption of ASC 606 713         713  
Exercise of vested stock options (in shares)     1,190,387        
Exercise of vested stock options 6,678   $ 1 6,677      
Vesting of early exercised stock options 21     21      
Vesting of restricted stock units (in shares)   491,501 52,716        
Value of equity awards withheld for tax liability (in shares)   (8,352) (4,380)        
Value of equity awards withheld for tax liability (371)     (371)      
Exercise of unvested stock options (in shares)   0          
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   1,358,716 (1,358,716)        
Conversion of shares of Class B common stock into shares of Class A common stock   $ 1 $ (1)        
Unrealized gain on marketable securities (317)       (317)    
Stock-based compensation 18,968     18,968      
Foreign currency translation 731       731    
Balance (in shares) at Mar. 31, 2018   71,748,415 23,943,253        
Balance at Mar. 31, 2018 362,540 $ 71 $ 24 633,460 2,439 (273,454)  
Balance (in shares) at Dec. 31, 2017   69,906,550 24,063,246        
Balance at Dec. 31, 2017 359,846 $ 70 $ 24 608,165 2,025 (250,438)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Unrealized gain on marketable securities 126            
Foreign currency translation (771)            
Balance (in shares) at Sep. 30, 2018   78,999,646 19,727,396        
Balance at Sep. 30, 2018 434,353 $ 75 $ 22 757,392 1,380 (324,516)  
Balance (in shares) at Dec. 31, 2017   69,906,550 24,063,246        
Balance at Dec. 31, 2017 359,846 $ 70 $ 24 608,165 2,025 (250,438)  
Balance (in shares) at Dec. 31, 2018   80,769,763 19,310,465        
Balance at Dec. 31, 2018 438,235 $ 80 $ 20 808,527 1,282 (371,674)  
Balance (in shares) at Mar. 31, 2018   71,748,415 23,943,253        
Balance at Mar. 31, 2018 362,540 $ 71 $ 24 633,460 2,439 (273,454)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (24,006)         (24,006)  
Exercise of vested stock options (in shares)     960,414        
Exercise of vested stock options 7,037   $ 1 7,036      
Vesting of early exercised stock options 4     4      
Vesting of restricted stock units (in shares)   457,495 40,070        
Value of equity awards withheld for tax liability (in shares)   (5,860) (5,888)        
Value of equity awards withheld for tax liability (539)     (539)      
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   4,109,726 (4,109,726)        
Conversion of shares of Class B common stock into shares of Class A common stock   $ 4 $ (4)        
Unrealized gain on marketable securities 152       152    
Stock-based compensation 22,487     22,487      
Shares issued under ESPP (in shares)   201,581          
Shares issued under ESPP 4,474     4,474      
Foreign currency translation (629)       (629)    
Issuance of debt conversion option 119,435     119,435      
Debt conversion option issuance costs (2,819)     (2,819)      
Capped call option issuance costs (58,465)     (58,465)      
Balance (in shares) at Jun. 30, 2018   76,511,357 20,828,123        
Balance at Jun. 30, 2018 429,671 $ 75 $ 21 725,073 1,962 (297,460)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (27,056)         (27,056)  
Exercise of vested stock options (in shares)     847,528        
Exercise of vested stock options 8,863   $ 1 8,862      
Vesting of early exercised stock options 1     1      
Vesting of restricted stock units (in shares)   511,713 40,069        
Value of equity awards withheld for tax liability (in shares)   (5,860) (5,888)        
Value of equity awards withheld for tax liability (810)     (810)      
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   1,982,436 (1,982,436)        
Unrealized gain on marketable securities 291       291    
Stock-based compensation 24,266     24,266      
Foreign currency translation (873)       (873)    
Balance (in shares) at Sep. 30, 2018   78,999,646 19,727,396        
Balance at Sep. 30, 2018 434,353 $ 75 $ 22 757,392 1,380 (324,516)  
Balance (in shares) at Dec. 31, 2018   80,769,763 19,310,465        
Balance at Dec. 31, 2018 438,235 $ 80 $ 20 808,527 1,282 (371,674)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (36,503)         (36,503)  
Exercise of vested stock options (in shares)   748,679 1,023,984        
Exercise of vested stock options 15,328 $ 1 $ 1 15,326      
Vesting of early exercised stock options 9     9      
Vesting of restricted stock units (in shares)   641,406 39,360        
Value of equity awards withheld for tax liability (in shares)   (5,860) (4,431)        
Value of equity awards withheld for tax liability (1,062)     (1,062)      
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   4,339,519 (4,339,519)        
Conversion of shares of Class B common stock into shares of Class A common stock   $ 4 $ (4)        
Shares issued in acquisition (in shares)   23,555,081          
Shares issued in acquisition 2,658,898 $ 24   2,658,874      
Equity awards assumed in acquisition 191,620     191,620      
Unrealized gain on marketable securities 1,041       1,041    
Stock-based compensation 59,947     59,947      
Balance (in shares) at Mar. 31, 2019   110,048,588 16,029,859        
Balance at Mar. 31, 2019 3,327,513 $ 109 $ 17 3,733,241 2,323 (408,177)  
Balance (in shares) at Dec. 31, 2018   80,769,763 19,310,465        
Balance at Dec. 31, 2018 438,235 $ 80 $ 20 808,527 1,282 (371,674)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Unrealized gain on marketable securities 3,296            
Foreign currency translation 0            
Balance (in shares) at Sep. 30, 2019   124,475,791 12,597,150        
Balance at Sep. 30, 2019 4,284,486 $ 123 $ 14 4,868,261 4,578 (588,490)  
Balance (in shares) at Mar. 31, 2019   110,048,588 16,029,859        
Balance at Mar. 31, 2019 3,327,513 $ 109 $ 17 3,733,241 2,323 (408,177)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (92,579)         (92,579)  
Exercise of vested stock options (in shares)   313,924 503,797        
Exercise of vested stock options 9,927   $ 1 9,926      
Vesting of restricted stock units (in shares)   675,028 29,576        
Vesting of restricted stock units 1 $ 1          
Value of equity awards withheld for tax liability (in shares)   (5,934) (5,888)        
Value of equity awards withheld for tax liability (1,518)     (1,518)      
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   2,172,598 (2,172,598)        
Conversion of shares of Class B common stock into shares of Class A common stock   $ 2 $ (2)        
Shares issued in acquisition (in shares)             8,064,515
Shares issued in acquisition 980,000 $ 8   979,992      
Equity awards assumed in acquisition (7,126)     (7,126)      
Unrealized gain on marketable securities 980       980    
Stock-based compensation 72,361     72,361      
Costs related to public offering (953)     (953)      
Shares issued under ESPP (in shares)   108,895          
Shares issued under ESPP 8,254     8,254      
Balance (in shares) at Jun. 30, 2019   121,377,614 14,384,746        
Balance at Jun. 30, 2019 4,296,860 $ 120 $ 16 4,794,177 3,303 (500,756)  
Increase (Decrease) in Stockholders' Equity [Roll Forward]              
Net loss (87,734)         (87,734)  
Exercise of vested stock options (in shares)   231,571 351,563        
Exercise of vested stock options 6,845   $ 0 6,845      
Vesting of early exercised stock options 12     12      
Vesting of restricted stock units (in shares)   713,904 25,291        
Vesting of restricted stock units 1 $ 1          
Value of equity awards withheld for tax liability (in shares)   (5,860) (5,888)        
Value of equity awards withheld for tax liability (1,568)     (1,568)      
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   2,158,562 (2,158,562)        
Conversion of shares of Class B common stock into shares of Class A common stock   $ 2 $ (2)        
Equity awards assumed in acquisition (1,940)     (1,940)      
Unrealized gain on marketable securities 1,275       1,275    
Stock-based compensation 70,735     70,735      
Foreign currency translation 0            
Balance (in shares) at Sep. 30, 2019   124,475,791 12,597,150        
Balance at Sep. 30, 2019 $ 4,284,486 $ 123 $ 14 $ 4,868,261 $ 4,578 $ (588,490)  
v3.19.3
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (216,816) $ (74,791)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 79,295 18,246
Right-of-use asset amortization 16,732 0
Net amortization of investment premium and discount (4,163) (845)
Amortization of debt discount and issuance costs 17,689 8,374
Stock-based compensation 197,332 61,287
Tax benefit related to release of valuation allowance (55,999) 0
Other adjustments 3,981 5,198
Changes in operating assets and liabilities:    
Accounts receivable (27,619) (39,643)
Prepaid expenses and other current assets (20,743) (6,600)
Other long-term assets (10,756) (3,681)
Accounts payable 4,333 1,641
Accrued expenses and other current liabilities 33,826 39,732
Deferred revenue and customer deposits 3,043 5,092
Operating right of use liability (15,397) 0
Long-term liabilities (2,714) (1,177)
Net cash provided by operating activities 2,024 12,833
CASH FLOWS FROM INVESTING ACTIVITIES:    
Acquisitions, net of cash acquired 146,957 (29,662)
Purchases of marketable securities and other investments (1,769,125) (213,533)
Proceeds from sales and maturities of marketable securities 475,260 113,497
Capitalized software development costs (16,809) (15,276)
Purchases of long-lived assets (18,994) (3,428)
Net cash used in investing activities (1,182,711) (148,402)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from a public offering, net of underwriting discount 980,000 0
Payments of costs related to the public offering (850) 0
Proceeds from issuance of convertible senior notes 0 550,000
Payment of debt issuance costs 0 (12,877)
Purchase of capped call 0 (58,465)
Principal payments on notes payable (5,400) 0
Principal payments on finance leases (3,927) 0
Proceeds from exercises of stock options and issuances under ESPP 40,354 27,052
Value of equity awards withheld for tax liabilities (4,148) (1,720)
Net cash provided by financing activities 1,006,029 503,990
Effect of exchange rate changes on cash, cash equivalents and restricted cash 0 105
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (174,658) 368,526
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 505,334 120,788
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period 330,676 489,314
Cash paid for income taxes, net 509 544
Cash paid for interest 1,406 0
NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Purchases of property, equipment and intangible assets, accrued but not paid 1,478 785
Finance lease right-of-use assets assumed in a business combination 14,173 0
Purchases of property and equipment through finance leases 3,141 0
Acquisition holdback 4,230 2,000
Acquisition - value of common stock issued, stock awards assumed and measurement period adjustments 2,841,452 0
Stock-based compensation capitalized in software development costs $ 5,711 $ 4,434
v3.19.3
Organization and Description of Business
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Description of Business Organization and Description of Business
Twilio Inc. (the “Company”) was incorporated in the state of Delaware on March 13, 2008. The Company is the leader in the Cloud Communications Platform category and enables developers to build, scale and operate real-time communications within their software applications via simple-to-use Application Programming Interfaces (“API”). The power, flexibility, and reliability offered by the Company’s software building blocks empower entities of virtually every shape and size to build world-class engagement into their customer experience.
The Company’s headquarters are located in San Francisco, California, and the Company has subsidiaries in Australia, Bermuda, Colombia, Czech Republic, Estonia, France, Germany, Hong Kong, Ireland, Japan, the Netherlands, Singapore, Spain, Sweden, United Kingdom and the United States.
v3.19.3
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
(a)Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K filed with the SEC on March 1, 2019 (“Annual Report”).
The condensed consolidated balance sheet as of December 31, 2018, included herein, was derived from the audited financial statements as of that date, but may not include all disclosures including certain notes required by U.S. GAAP on an annual reporting basis.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2019 or any future period.
(b)Principles of Consolidation
The condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
(c)Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, revenue allowances and sales credit reserves; recoverability of long-lived and intangible assets; capitalization and useful life of the Company’s capitalized internal-use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.
(d)Concentration of Credit Risk
Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities and accounts receivable. The Company maintains cash, cash equivalents and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.
The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the three and nine months ended September 30, 2019 and 2018, respectively, no customer organization accounted for more than 10% of the Company’s total revenue.
As of September 30, 2019, and December 31, 2018, no customer organization represented more than 10% of the Company’s gross accounts receivable.
(e)Deferred Revenue and Customer Deposits

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancelable contracts. Customer refundable prepayments are recorded as customer deposits. During the three and nine months ended September 30, 2019, the Company recognized $2.3 million and $17.7 million of revenue, respectively, and during the three and nine months ended September 30, 2018, the Company recognized $3.9 million and $11.1 million of revenue, respectively, that was included in the deferred revenue and customer deposits balance as of the beginning of the year.
(f)Deferred Sales Commissions

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio of data method to determine the estimated period of benefit of capitalized commissions which is determined to be five years. Amortization expense related to these capitalized costs related to initial contracts, upsells and renewals, is recognized on a straight line basis over the estimated period of benefit of the capitalized commissions. Total net capitalized costs as of September 30, 2019, and December 31, 2018, were $23.6 million and $9.4 million, respectively, and are included in prepaid expenses and other current and long‑term assets in the accompanying condensed consolidated balance sheets. Amortization of these assets was $1.3 million and $2.9 million in the three and nine months ended September 30, 2019, respectively, and $0.4 million and $0.9 million in the three and nine months ended September 30, 2018, respectively, and is included in sales and marketing expense in the accompanying condensed consolidated statements of operations.
(g)     Recently Adopted Accounting Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, "Leases (Topic 842)", which was further clarified in July 2018 by ASU 2018‑10, “Codification Improvements to Topic 842, Leases”, and ASU 2018‑11, “Leases-Targeted Improvements”. ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard. ASU 2018-11 addresses implementation issues related to the new lease standard. The standard is effective for interim and annual reporting periods beginning after December 15, 2018. Under the new standard, lessees are required to recognize in the balance sheet the right-of-use ("ROU") assets and lease liabilities that arise from operating leases. The Company adopted the standard using the optional alternative method on a prospective basis with an effective date as of the beginning of the Company’s fiscal year, January 1, 2019, and applied it to the operating leases that existed on that date. Prior year comparative financial information was not recast under the new standard and continues to be presented under ASC 840. The Company elected to utilize the package of practical expedients available for expired or existing contracts which allowed the Company to carryforward historical assessments of (a) whether contracts are or contain leases, (b) lease classification, and (c) initial direct costs. The Company elected the use of hindsight practical expedient in determining the lease term and assessing the likelihood that lease renewal, termination or purchase option will be exercised. The Company also elected to apply the short-term lease exception for all leases. Under the short-term lease exception, the Company will not recognize ROU assets or lease liabilities for leases that, at the acquisition date, have a remaining lease term of 12 months or less.

As a result of implementing this guidance, the Company recognized a $123.5 million net operating ROU asset and a $132.0 million operating lease liability in its condensed consolidated balance sheet as of January 1, 2019. The ROU asset was presented net of deferred rent of $9.0 million as of January 1, 2019, in the accompanying condensed consolidated balance
sheet. In addition, on February 1, 2019, the Company acquired through its business combination with SendGrid approximately $33.7 million in operating ROU assets, $32.6 million in operating lease liability, $14.2 million in finance ROU assets and $13.6 million in finance lease liability.

The Company measured the lease liability at the present value of the future lease payments as of January 1, 2019. The Company used its incremental borrowing rate to discount the lease payments. The Company derived the discount rate, adjusted for differences in the term and payment patterns, from the information available at the adoption date. The right-of-use asset is valued at the amount of the lease liability adjusted for the remaining December 31, 2018, balance of unamortized lease incentives, prepaid rent and deferred rent. The lease liability is subsequently measured at the present value of unpaid future lease payments as of the reporting date with a corresponding adjustment to the right-of-use asset. Absent a lease modification, the Company will continue to utilize the January 1, 2019, incremental borrowing rate.

The Company recognizes operating lease costs on a straight-line basis and presents these costs as operating expenses within the consolidated statements of operations and comprehensive loss. Within the consolidated statements of cash flows the Company presents the lease payments made on the operating leases within the cash flows from operations and principal payments made on the finance leases as part of financing activities.

The financial results for the three and nine months ended September 30, 2019, are presented under the new standard, while the comparative periods presented are not adjusted and continue to be reported in accordance with the Company’s historical accounting policy.
 
See Note 5, “Right-of-use Assets and Lease Liabilities” for further information.
 
In March 2019, the FASB issued ASU 2019-01, “Codification Improvements” to Leases (Topic 842). This pronouncement did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU 2018‑13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments under ASU 2018‑13 remove, add and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments are effective for interim and annual periods beginning after December 15, 2019. The Company early adopted this guidance effective April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, "Codification Improvements ", which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several topics. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company adopted this guidance effective April 1, 2019. The adoptions of this guidance did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017‑04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company early adopted this guidance effective April 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
(h)    Recently Issued Accounting Guidance, Not yet Adopted
In August 2018, the FASB issued ASU 2018‑15, “Intangibles—Goodwill and Other—Internal‑Use Software (Subtopic 350‑40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal‑use software. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is evaluating the impact of the adoption of this guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward‑looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018‑19, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses”, which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments-Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which clarifies treatment of certain credit losses. In May 2019, the FASB issued ASU 2019-05, "Financial Instruments — Credit Losses (Topic 326): Targeted Transition Relief", which permits an entity, upon adoption of ASU 2016-13, to irrevocably elect the fair value option (on an instrument-by-instrument basis) for eligible financial assets measured at amortized cost basis. These ASUs are effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements.

v3.19.3
Fair Value Measurements
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
The following tables provide the financial assets measured at fair value on a recurring basis as of September 30, 2019, and December 31, 2018:
 
 
Amortized
Cost or
Carrying
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Less Than
12 Months
 
Fair Value Hierarchy as of
September 30, 2019
 
Aggregate
Fair Value
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
(in thousands)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
184,880

 
$

 
$

 
$
184,880

 
$

 
$

 
$
184,880

Reverse repurchase agreements
 
57,500

 

 

 

 
57,500

 

 
57,500

Commercial paper
 
13,484

 

 

 
 
 
13,484

 
 
 
13,484

Total included in cash and cash equivalents
 
255,864

 

 

 
184,880

 
70,984

 

 
255,864

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
205,818

 
203

 
(60
)
 
205,961

 

 

 
205,961

Corporate debt securities and commercial paper
 
1,341,337

 
4,023

 
(146
)
 
5,000

 
1,340,214

 

 
1,345,214

Total marketable securities
 
1,547,155

 
4,226

 
(206
)
 
210,961

 
1,340,214

 

 
1,551,175

Strategic investments
 
5,500

 

 

 

 

 
5,500

 
5,500

Total financial assets
 
$
1,808,519

 
$
4,226

 
$
(206
)
 
$
395,841

 
$
1,411,198

 
$
5,500

 
$
1,812,539



 
 
Amortized Cost or Carrying Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
Less Than
12 Months
 
Gross
Unrealized
Losses More
Than
12 Months
 
Fair Value Hierarchy as of
December 31, 2018
 
Aggregate
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
(in thousands)
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
$
420,234

 
$

 
$

 
$

 
$
420,234

 
$

 
$

 
$
420,234

Reverse repurchase agreements
 
35,000

 

 

 

 

 
35,000

 

 
35,000

Commercial paper
 
9,983

 

 

 

 

 
9,983

 

 
9,983

Total included in cash and cash equivalents
 
465,217

 

 

 

 
420,234

 
44,983

 

 
465,217

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
59,785

 

 
(7
)
 
(9
)
 
59,769

 

 

 
59,769

Corporate debt securities and commercial paper
 
201,683

 
23

 
(123
)
 
(224
)
 

 
201,359

 

 
201,359

Total marketable securities
 
261,468

 
23

 
(130
)
 
(233
)
 
59,769

 
201,359

 

 
261,128

Total financial assets
 
$
726,685

 
$
23

 
$
(130
)
 
$
(233
)
 
$
480,003

 
$
246,342

 
$

 
$
726,345


As the Company views its marketable securities as available to support current operations, it has classified all available for sale securities as short-term. As of September 30, 2019, the Company had no securities that were in unrealized loss position for over 12 months. As of December 31, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of September 30, 2019, and December 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments were required to be recognized during the three and nine months ended September 30, 2019 and 2018.
Interest earned on marketable securities was $7.7 million and $11.8 million in the three and nine months ended September 30, 2019, respectively, and $0.8 million and $2.2 million in the three and nine months ended September 30, 2018, respectively. The interest is recorded as other income (expense), net financial statement caption in the accompanying condensed consolidated statements of operations.
The following table summarizes the contractual maturities of marketable securities as of September 30, 2019, and December 31, 2018:
 
 
As of September 30, 2019
 
As of December 31, 2018
 
 
Amortized
Cost
 
Aggregate
Fair Value
 
Amortized
Cost
 
Aggregate
Fair Value
Financial Assets:
 
(in thousands)
Less than one year
 
$
844,301

 
$
845,578

 
$
261,468

 
$
261,128

One to two years
 
702,854

 
705,597

 

 

Total
 
$
1,547,155

 
$
1,551,175

 
$
261,468

 
$
261,128



The Company enters into reverse securities repurchase agreements, primarily for short-term investments with maturities of 90 days or less. As of September 30, 2019, and December 31, 2018, the Company was party to reverse repurchase agreements totaling $57.5 million and $35.0 million, respectively, which were reported in cash and equivalents in the accompanying condensed consolidated balance sheets. Under these reverse securities repurchase agreements, the Company
typically lends available cash at a specified rate of interest and holds U.S. government securities as collateral during the term of the agreement. Collateral value is in excess of the amounts loaned under these agreements.
In May and August 2019, the Company made strategic investments totaling $5.5 million into privately held debt securities in which the Company does not have a controlling interest or significant influence. These securities are recorded at fair value in other long-term assets in the condensed consolidated balance sheet. The Company classifies its strategic investments as Level 3 within the fair value hierarchy based on the nature of the fair value inputs and judgment involved in the valuation process. There were no material changes to fair value of these securities during the three and nine months ended September 30, 2019.
As of September 30, 2019, and December 31, 2018, the fair value of the 0.25% convertible senior notes due 2023 (the “Notes”), as further described in Note 9 below, was approximately $908.6 million and $743.4 million, respectively. The fair value of the Notes is determined based on the closing price on the last trading day of the reporting period and is classified as a Level 2 security within the fair value hierarchy.
v3.19.3
Property and Equipment
9 Months Ended
Sep. 30, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment consisted of the following:
 
 
As of
September 30,
2019
 
As of
December 31,
2018
 
 
(in thousands)
Capitalized internal-use software development costs
 
$
93,823

 
$
72,647

Data center equipment (1)
 
19,241

 

Leasehold improvements
 
38,572

 
15,293

Office equipment
 
22,720

 
13,563

Furniture and fixtures (1)
 
7,865

 
4,918

Software
 
6,586

 
1,849

Total property and equipment
 
188,807

 
108,270

Less: accumulated depreciation and amortization
 
(70,326
)
 
(44,736
)
Total property and equipment, net
 
$
118,481

 
$
63,534

_______________
(1) 
Data center equipment and furniture and fixtures contain assets under finance leases. See Note 5 for further detail.
Depreciation and amortization expense was $9.7 million and $26.4 million for the three and nine months ended September 30, 2019, respectively, and $5.0 million and $13.5 million for the three and nine months ended September 30, 2018, respectively.
The Company capitalized $8.8 million and $22.5 million in internal-use software development costs in the three and nine months ended September 30, 2019, respectively, and $6.7 million and $19.8 million in the three and nine months ended September 30, 2018, respectively. Of this amount, stock-based compensation expense was $2.5 million and $5.7 million in the three and nine months ended September 30, 2019, respectively, and $1.5 million and $4.4 million in the three and nine months ended September 30, 2018, respectively.
Amortization of capitalized software development costs was $4.4 million and $12.5 million in the three and nine months ended September 30, 2019, respectively, and $3.6 million and $9.3 million in the three and nine months ended September 30, 2018, respectively.

v3.19.3
Right-of-Use Asset and Lease Liabilities
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Right-of-Use Asset and Lease Liabilities Right-of-Use Asset and Lease Liabilities
The Company determines if an arrangement is a lease at inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2019.
Right-of-use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease agreements may have lease and non-lease components, which the Company accounts for as a single lease component. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term, and variable payments are recognized in the period they are incurred. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company has entered into various operating lease agreements for data centers and office space, and various financing leases agreements for data center and office equipment and furniture.
As of September 30, 2019, the Company had 21 leased properties, with remaining lease terms of 0.1 years to 9.6 years, some of which include options to extend the leases for up to 5.0 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows:

 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
 
(in thousands)
Operating lease cost
 
$
8,336

 
$
23,782

Finance lease cost:
 

 
 
   Amortization of assets
 
1,610

 
4,299

   Interest on lease liabilities
 
175

 
512

Short-term lease cost
 
1,748

 
5,088

Variable lease cost
 
1,002

 
2,569

Total net lease cost
 
$
12,871

 
$
36,250


Supplemental balance sheet information related to leases was as follows:
Leases
 
Classification
 
As of
September 30,
2019
Assets:
 

 
(in thousands)
Operating lease assets
 
Operating right-of-use asset, net of accumulated amortization (a)
 
$
148,069

Finance lease assets
 
Property and equipment, net of accumulated depreciation (b)
 
13,855

Total leased assets
 

 
$
161,924


 

 
 
Liabilities:
 

 
 
Current
 

 
 
   Operating
 
Operating lease liability, current
 
$
22,211

   Finance
 
Financing lease liability, current
 
6,509

Noncurrent
 

 
 
   Operating
 
Operating lease liability, noncurrent
 
134,755

   Finance
 
Finance lease liability, noncurrent
 
8,174

Total lease liabilities
 

 
$
171,649

(a)
Operating lease assets are recorded net of accumulated amortization of $16.8 million as of September 30, 2019.
(b)
Finance lease assets are recorded net of accumulated depreciation of $4.7 million as of September 30, 2019.
Supplemental cash flow and other information related to leases was as follows:

 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
 

Operating cash flows from operating leases
 
$
20,316

Operating cash flows from finance leases
 
$
491

Financing cash flows from finance leases
 
$
3,927


 

Weighted average remaining lease term (in years):
 

Operating leases
 
6.6

Finance leases
 
2.9


 

Weighted average discount rate:
 

Operating leases
 
5.8
%
Finance leases
 
5.2
%

Maturities of lease liabilities were as follows:

 
As of September 30, 2019

 
Operating
Leases
 
Finance
Leases
 
 
(in thousands)
2019 (remaining 3 months)
 
$
6,539

 
$
1,892

2020
 
31,524

 
6,793

2021
 
29,385

 
3,905

2022
 
28,327

 
1,579

2023
 
27,843

 
890

Thereafter
 
68,521

 
897

Total lease payments
 
192,139

 
15,956

Less: imputed interest
 
(35,173
)
 
(1,273
)
Total lease obligations
 
156,966

 
14,683

Less: current obligations
 
(22,211
)
 
(6,509
)
Long-term lease obligations
 
$
134,755

 
$
8,174


Disclosures related to periods prior to adoption of the New Lease Standard
Rent expense was $2.2 million and $6.4 million in the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, the Company had additional operating lease obligations totaling $58.9 million related to leases that will commence between the fourth quarter of 2019 and the second quarter of 2020 with a lease terms ranging from 1.8 to 6.8 years. The Company had an additional finance lease obligation of $0.7 million related to a lease that will commence during the second quarter of 2020 with a lease term of 6.8 years.
Future minimum lease payment obligations under noncancelable operating and finance leases were as follows:

 
As of December 31, 2018

 
Operating
Leases
 
Finance
Leases
 
 
(in thousands)
2019
 
$
24,128

 
$
306

2020
 
29,527

 
512

2021
 
30,898

 
573

2022
 
30,492

 
590

2023
 
30,122

 
608

Thereafter
 
81,316

 
1,939

Total lease payments
 
$
226,483

 
$
4,528


Right-of-Use Asset and Lease Liabilities Right-of-Use Asset and Lease Liabilities
The Company determines if an arrangement is a lease at inception. The Company presents the operating leases in long-term assets and current and long-term liabilities. Finance lease assets are included in property and equipment, net, and finance lease liabilities are presented in current and long-term liabilities in the accompanying condensed consolidated balance sheet as of September 30, 2019.
Right-of-use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not generally provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company’s lease agreements may have lease and non-lease components, which the Company accounts for as a single lease component. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term, and variable payments are recognized in the period they are incurred. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Company has entered into various operating lease agreements for data centers and office space, and various financing leases agreements for data center and office equipment and furniture.
As of September 30, 2019, the Company had 21 leased properties, with remaining lease terms of 0.1 years to 9.6 years, some of which include options to extend the leases for up to 5.0 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows:

 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
 
 
(in thousands)
Operating lease cost
 
$
8,336

 
$
23,782

Finance lease cost:
 

 
 
   Amortization of assets
 
1,610

 
4,299

   Interest on lease liabilities
 
175

 
512

Short-term lease cost
 
1,748

 
5,088

Variable lease cost
 
1,002

 
2,569

Total net lease cost
 
$
12,871

 
$
36,250


Supplemental balance sheet information related to leases was as follows:
Leases
 
Classification
 
As of
September 30,
2019
Assets:
 

 
(in thousands)
Operating lease assets
 
Operating right-of-use asset, net of accumulated amortization (a)
 
$
148,069

Finance lease assets
 
Property and equipment, net of accumulated depreciation (b)
 
13,855

Total leased assets
 

 
$
161,924


 

 
 
Liabilities:
 

 
 
Current
 

 
 
   Operating
 
Operating lease liability, current
 
$
22,211

   Finance
 
Financing lease liability, current
 
6,509

Noncurrent
 

 
 
   Operating
 
Operating lease liability, noncurrent
 
134,755

   Finance
 
Finance lease liability, noncurrent
 
8,174

Total lease liabilities
 

 
$
171,649

(a)
Operating lease assets are recorded net of accumulated amortization of $16.8 million as of September 30, 2019.
(b)
Finance lease assets are recorded net of accumulated depreciation of $4.7 million as of September 30, 2019.
Supplemental cash flow and other information related to leases was as follows:

 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities (in thousands):
 

Operating cash flows from operating leases
 
$
20,316

Operating cash flows from finance leases
 
$
491

Financing cash flows from finance leases
 
$
3,927


 

Weighted average remaining lease term (in years):
 

Operating leases
 
6.6

Finance leases
 
2.9


 

Weighted average discount rate:
 

Operating leases
 
5.8
%
Finance leases
 
5.2
%

Maturities of lease liabilities were as follows:

 
As of September 30, 2019

 
Operating
Leases
 
Finance
Leases
 
 
(in thousands)
2019 (remaining 3 months)
 
$
6,539

 
$
1,892

2020
 
31,524

 
6,793

2021
 
29,385

 
3,905

2022
 
28,327

 
1,579

2023
 
27,843

 
890

Thereafter
 
68,521

 
897

Total lease payments
 
192,139

 
15,956

Less: imputed interest
 
(35,173
)
 
(1,273
)
Total lease obligations
 
156,966

 
14,683

Less: current obligations
 
(22,211
)
 
(6,509
)
Long-term lease obligations
 
$
134,755

 
$
8,174


Disclosures related to periods prior to adoption of the New Lease Standard
Rent expense was $2.2 million and $6.4 million in the three and nine months ended September 30, 2018, respectively.
As of September 30, 2019, the Company had additional operating lease obligations totaling $58.9 million related to leases that will commence between the fourth quarter of 2019 and the second quarter of 2020 with a lease terms ranging from 1.8 to 6.8 years. The Company had an additional finance lease obligation of $0.7 million related to a lease that will commence during the second quarter of 2020 with a lease term of 6.8 years.
Future minimum lease payment obligations under noncancelable operating and finance leases were as follows:

 
As of December 31, 2018

 
Operating
Leases
 
Finance
Leases
 
 
(in thousands)
2019
 
$
24,128

 
$
306

2020
 
29,527

 
512

2021
 
30,898

 
573

2022
 
30,492

 
590

2023
 
30,122

 
608

Thereafter
 
81,316

 
1,939

Total lease payments
 
$
226,483

 
$
4,528


v3.19.3
Business Combinations
9 Months Ended
Sep. 30, 2019
Business Combinations [Abstract]  
Business Combinations Business Combinations
Fiscal 2019 Acquisitions
Capio, Inc.
In June 2019, the Company acquired all outstanding shares of Capio, Inc. ("Capio"), a developer and provider of an automatic speech recognition technology based in Sunnyvale, California, for a total purchase price of $14.4 million, paid in cash, of which $4.0 million was withheld by the Company for a period of 18 months and an additional $0.2 million was withheld for certain tax liabilities to be settled in the near term. These amounts are recorded in the long-term and short-term liabilities, respectively, in the accompanying condensed consolidated balance sheet.

Additionally, the Company granted 43,556 restricted stock units of the Company's Class A common stock to former Capio stockholders that had a value of $5.9 million and are subject to vesting over a period of three years. The Company is recording stock-based compensation expense as the shares vest.

The acquisition was accounted for as a business combination and the total preliminary purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity's results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the preliminary purchase price allocation recorded in the Company's condensed consolidated balance sheet as of September 30, 2019:
 
 
Total
 
 
(in thousands)
Net tangible liabilities assumed
 
$
(542
)
Intangible assets (1)
 
7,610

Goodwill (2)
 
7,343

Total preliminary purchase price
 
$
14,411

_________________
(1) Identifiable finite-lived intangible assets were comprised of the following:
 
 
Total
 
Estimated life
 
 
(in thousands)
 
(in years)
Developed technology and software
 
$
6,390

 
6
Customer relationships
 
1,220

 
4
Total intangible assets acquired
 
$
7,610

 
 

(2) Goodwill generated from this acquisition is primarily attributable to future cash flows to be realized from the acquired technology. The goodwill is not deductible for U.S. tax purposes.
The Company acquired a net deferred tax liability of $0.8 million in this business combination that is included in the long-term liabilities in the accompanying condensed consolidated balance sheet.
The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered and relied in part upon a valuation report of a third-party expert. The Company used an income approach to estimate the fair values of the identifiable intangible assets.
During the three and nine months ended September 30, 2019, the Company incurred none and $0.8 million of costs related to this acquisition that were expensed as incurred and recorded in general and administrative expenses in the accompanying condensed consolidated statement of operation.
Pro forma results of operations for this acquisition are not presented as the financial impact to the Company's consolidated financial statements is immaterial.
SendGrid, Inc.
In February 2019, the Company acquired all outstanding shares of SendGrid, Inc. ("SendGrid"), the leading email API platform, by issuing 23.6 million shares of its Class A common stock with a total value of $2,658.9 million. The Company also assumed all of the outstanding stock options and restricted stock units of SendGrid as converted into stock options and restricted stock units, respectively, of the Company based on the conversion ratio provided in the Agreement and Plan of Merger and Reorganization, as amended (the "Merger Agreement").
The acquisition added additional products and services to the Company's offerings for its customers. With these additional products, the Company now offers an Email API and Marketing Campaigns product leveraging the Email API. The acquisition has also added new customers, new employees, technology and intellectual property assets.
The acquisition was accounted for as a business combination and the total preliminary purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Quarterly Report on Form 10-Q and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Subsequent to the acquisition date of February 1, 2019, the Company recorded a total of $9.0 million of measurement period adjustments to reduce its preliminary purchase price estimate, of which $7.1 million and $1.9 million were recorded in the second and third quarters of 2019, respectively. In the second quarter of 2019, the Company also recorded a $7.0 million adjustment to its preliminary estimate of the acquired intangible assets. These adjustments originated as a result of further refinement of the assumptions used in the process of valuation of the acquired intangible assets and the pre-combination services of SendGrid employees reflected in the assumed equity awards. The cumulative net reduction to goodwill from these adjustments and their related tax impact in the nine months ended September 30, 2019, was $1.2 million.
As of September 30, 2019, the primary areas that are still not finalized due to information that may become available and may result in further changes in the values assigned to various assets and liabilities include purchase consideration and purchase price, including related tax impact, and valuation of intangible assets.
The adjusted purchase price of $2,841.5 million reflects the $2,658.9 million fair value of 23.6 million shares of the Company's Class A common stock transferred as consideration for all outstanding shares of SendGrid, and the $182.6 million fair value of the pre-combination services of SendGrid employees reflected in the equity awards assumed by the Company on the acquisition date.
The fair value of the 23.6 million shares transferred as consideration was determined on the basis of the closing market price of the Company's Class A common stock on the acquisition date. The fair value of the equity awards was determined (a) for options, by using a Black-Scholes option pricing model with the applicable assumptions as of the acquisition date, and (b) for restricted stock units, by using the closing market price of the Company's Class A common stock on the acquisition date.
The unvested stock awards assumed on the acquisition date will continue to vest as the SendGrid employees continue to provide services in the post-acquisition period. The fair value of these awards is recorded as share-based compensation expense over the respective vesting period of each award.
The preliminary purchase price components, as adjusted, are summarized in the following table:
 
 
Total
 
 
(in thousands)
Fair value of Class A common stock transferred
 
$
2,658,898

Fair value of the pre-combination service through equity awards
 
182,554

Total preliminary purchase price, as adjusted
 
$
2,841,452


The following table presents the preliminary purchase price allocation, as adjusted, recorded in the Company's condensed consolidated balance sheet as of September 30, 2019. The Company expects to continue to obtain information to assist it in determining the fair values of the net assets acquired on the acquisition date during the measurement period:
 
 
Total
 
 
(in thousands)
Cash and cash equivalents
 
$
156,783

Accounts receivable and other current assets
 
11,635

Property and equipment, net
 
38,350

Operating right of use asset
 
33,742

Intangible assets
 
483,000

Other assets
 
1,664

Goodwill
 
2,237,879

Accounts payable and other liabilities
 
(11,114
)
Operating lease liability
 
(32,568
)
Financing lease liability
 
(13,616
)
Note payable
 
(5,387
)
Deferred tax liability
 
(58,916
)
Total purchase price
 
$
2,841,452

The Company acquired a net deferred tax liability of $58.9 million in this business combination that is included in long-term liabilities in the accompanying condensed consolidated balance sheet. This amount was offset by a release of a valuation allowance on deferred tax assets of $50.0 million.
Identifiable intangible assets are comprised of the following:
 
 
Total
 
Estimated life
 
 
(in thousands)
 
(in years)
Developed technology and software
 
$
294,000

 
7
Customer relationships
 
169,000

 
7
Trade names
 
20,000

 
5
Total intangible assets acquired
 
$
483,000

 
 

Developed technology consists of software products and domain knowledge around email delivery developed by SendGrid, which enables the delivery of email reliably and at scale. Customer relationships consists of contracts with platform users that purchase SendGrid’s products and services that carry distinct value. Trade names represent the Company’s right to the SendGrid trade names and associated design, as it exists as of the acquisition closing date.
Goodwill generated from this acquisition primarily represents the value that is expected from the increased scale and synergies as a result of the integration of both businesses. Goodwill is not deductible for tax purposes.
The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third‑party expert. The Company used an income approach to estimate the fair values of the developed technology, an incremental income approach to estimate the value of the customer relationships and a relief from royalty method to estimate the fair value of the trade name.

Net tangible assets were valued at their respective carrying amounts as of the acquisition date, as the Company believes that these amounts approximate their current fair values.
The acquired entity's results of operations were included in the Company's condensed consolidated financial statements from the date of acquisition, February 1, 2019. For the three and nine months ended September 30, 2019, SendGrid contributed net operating revenue of $48.7 million and $123.2 million, respectively, which is reflected in the accompanying condensed consolidated statement of operations. Due to the integrated nature of the Company's operations, the Company believes that it is not practicable to separately identify earnings of SendGrid on a stand-alone basis.
During the three and nine months ended September 30, 2019, the Company incurred costs related to this acquisition of $0.3 million and $13.2 million, respectively, that were expensed as incurred and recorded in general and administrative expenses in the accompanying condensed consolidated statement of operations.
The following pro forma condensed combined financial information gives effect to the acquisition of SendGrid as if it were consummated on January 1, 2018 (the beginning of the comparable prior reporting period), and includes pro forma adjustments related to the amortization of acquired intangible assets, share-based compensation expense and direct and incremental transaction costs reflected in the historical financial statements. Specifically, the following adjustments were made:     
For the three and nine months ended September 30, 2019, the Company's and SendGrid's direct and incremental transaction costs of $0.3 million and $40.2 million, respectively, are excluded from pro forma condensed combined net loss.
For the three and nine months ended September 30, 2018, the Company's direct and incremental transaction costs of $0.3 million and $13.2 million, respectively, are included in the pro forma condensed combined net loss.
In the three and nine months ended September 30, 2019, the pro forma condensed combined net loss includes a reversal of the valuation allowance release of $1.4 million and $50.0 million, respectively.
In the nine months ended September 30, 2018, the pro forma condensed combined net loss includes a one-time tax benefit of $53.5 million that would have resulted from the acquisition. There was no one-time tax benefit in the three months ended September 30, 2018. In the three and nine months ended September 30, 2018, the pro forma condensed combined net loss also includes an ongoing tax benefit of $1.4 million and $21.1 million, respectively.
This data is presented for informational purposes only and is not intended to represent or be indicative of the results of operations that would have been reported had the acquisition occurred on January 1, 2018. It should not be taken as representative of future results of operations of the combined company.
The following table presents the pro forma condensed combined financial information:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Revenue
 
$
295,066

 
$
206,093

 
$
816,990

 
$
551,207

Net loss attributable to common stockholders
 
$
(81,088
)
 
$
(61,550
)
 
$
(236,928
)
 
$
(134,889
)


v3.19.3
Goodwill and Intangible Assets
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets Goodwill and Intangible Assets
Goodwill
Goodwill balance as of September 30, 2019, and December 31, 2018, was as follows:
 
 
Total
 
 
(in thousands)
Balance as of December 31, 2018
 
$
38,165

Goodwill additions related to 2019 acquisitions
 
2,246,398

Measurement period adjustments
 
(1,176
)
Balance as of September 30, 2019
 
$
2,283,387



Intangible assets
Intangible assets consisted of the following:
 
 
As of
September 30, 2019
 
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
(in thousands)
Developed technology
 
$
328,598

 
$
(43,138
)
 
$
285,460

Customer relationships
 
178,374

 
(19,775
)
 
158,599

Supplier relationships
 
2,696

 
(1,402
)
 
1,294

Trade names
 
20,060

 
(2,727
)
 
17,333

Patent
 
2,525

 
(251
)
 
2,274

Total amortizable intangible assets
 
532,253

 
(67,293
)
 
464,960

Non-amortizable intangible assets:
 
 
 
 
 
 
Domain names
 
32

 

 
32

Trademarks
 
263

 

 
263

Total
 
$
532,548

 
$
(67,293
)
 
$
465,255


 
 
As of
December 31, 2018
 
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
(in thousands)
Developed technology
 
$
28,209

 
$
(10,497
)
 
$
17,712

Customer relationships
 
8,153

 
(2,411
)
 
5,742

Supplier relationships
 
2,696

 
(973
)
 
1,723

Trade name
 
60

 
(60
)
 

Patent
 
2,264

 
(178
)
 
2,086

Total amortizable intangible assets
 
41,382

 
(14,119
)
 
27,263

Non-amortizable intangible assets:
 
 
 
 
 
 
Domain names
 
32

 

 
32

Trademarks
 
263

 

 
263

Total
 
$
41,677

 
$
(14,119
)
 
$
27,558


Amortization expense was $20.0 million and $52.9 million for the three and nine months ended September 30, 2019, respectively, and $1.9 million and $4.7 million for the three and nine months ended September 30, 2018, respectively.
Total estimated future amortization expense was as follows:
 
 
As of
September 30,
2019
 
 
(in thousands)
2019 (remaining three months)
 
$
19,774

2020
 
78,079

2021
 
76,567

2022
 
74,801

2023
 
72,309

Thereafter
 
143,430

Total
 
$
464,960


v3.19.3
Accrued Expenses and Other Liabilities
9 Months Ended
Sep. 30, 2019
Accrued Liabilities and Other Liabilities [Abstract]  
Accrued Expenses and Other Liabilities Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consisted of the following:
 
 
As of
September 30,
2019
 
As of
December 31,
2018
 
 
(in thousands)
Accrued payroll and related
 
$
21,916

 
$
9,886

Accrued bonus and commission
 
10,524