TWILIO INC, 10-Q filed on 5/9/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 30, 2019
Entity Registrant Name TWILIO INC  
Entity Central Index Key 0001447669  
Document Type 10-Q  
Document Period End Date Mar. 31, 2019  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Common Class A    
Entity Common Stock, Shares Outstanding   110,265,143
Common Class B    
Entity Common Stock, Shares Outstanding   16,001,547
v3.19.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 377,730 $ 487,215
Short-term marketable securities 541,167 261,128
Accounts receivable, net 105,149 97,712
Prepaid expenses and other current assets 39,081 26,893
Total current assets 1,063,127 872,948
Restricted cash 1,101 18,119
Property and equipment, net 105,158 63,534
Operating right of use asset 156,511 0
Intangible assets, net 503,947 27,558
Goodwill 2,277,220 38,165
Other long-term assets 13,009 8,386
Total assets 4,120,073 1,028,710
Current liabilities:    
Accounts payable 22,418 18,495
Accrued expenses and other current liabilities 107,295 96,343
Deferred revenue and customer deposits 23,348 22,972
Operating lease liability, current 21,147 0
Financing lease liability, current 6,044 0
Note payable, current 2,087 0
Total current liabilities 182,339 137,810
Operating lease liability, noncurrent 143,950 0
Financing lease liability, noncurrent 9,124 0
Note payable, noncurrent 2,773 0
Convertible senior notes, net 440,337 434,496
Other long-term liabilities 14,037 18,169
Total liabilities 792,560 590,475
Commitments and contingencies (Note 12)
Stockholders’ equity:    
Preferred stock 0 0
Class A and Class B common stock 126 100
Additional paid-in capital 3,733,241 808,527
Accumulated other comprehensive income 2,323 1,282
Accumulated deficit (408,177) (371,674)
Total stockholders’ equity 3,327,513 438,235
Total liabilities and stockholders’ equity $ 4,120,073 $ 1,028,710
v3.19.1
Condensed Consolidated Statements of Operations - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Revenues:    
Revenue $ 233,139 $ 129,116
Cost of revenue 107,089 59,582
Gross profit 126,050 69,534
Operating expenses:    
Research and development 77,855 37,576
Sales and marketing 71,607 32,822
General and administrative 64,176 23,393
Total operating expenses 213,638 93,791
Loss from operations (87,588) (24,257)
Other (expenses) income, net (636) 665
Loss before benefit (provision) for income taxes (88,224) (23,592)
Benefit (provision) for income taxes 51,721 (137)
Net loss attributable to common stockholders $ (36,503) $ (23,729)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.31) $ (0.25)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 116,590,513 94,673,557
v3.19.1
Condensed Consolidated Statements of Comprehensive Loss - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net loss $ (36,503) $ (23,729)
Other comprehensive (loss) income:    
Unrealized gain (loss) on marketable securities 1,041 (317)
Foreign currency translation 0 731
Total other comprehensive (loss) income 1,041 414
Comprehensive loss attributable to common stockholders $ (35,462) $ (23,315)
v3.19.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (36,503) $ (23,729)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 21,248 5,631
Right-of-use asset amortization 4,854 0
Net amortization of investment premium and discount (1,359) 28
Amortization of debt discount and issuance costs 5,841 0
Stock-based compensation 58,324 17,540
Amortization of deferred commissions 670 0
Provision for doubtful accounts 11 375
Tax benefit related to release of valuation allowance (51,644) 0
Write-off of internally developed software and intangible assets 245 182
Changes in operating assets and liabilities:    
Accounts receivable (206) (14,612)
Prepaid expenses and other current assets (9,479) 2,512
Other long-term assets (2,959) (1,169)
Accounts payable 1,161 6,703
Accrued expenses and other current liabilities 4,348 22,789
Deferred revenue and customer deposits 377 1,185
Operating right of use liability (1,784) 0
Long-term liabilities (2,258) (499)
Net cash (used in) provided by operating activities (9,113) 16,936
CASH FLOWS FROM INVESTING ACTIVITIES:    
Purchases of marketable securities (419,498) (42,693)
Proceeds from sale of marketable securities 13,708 0
Maturities of marketable securities 126,810 27,600
Capitalized software development costs (5,351) (4,795)
Purchases of property and equipment (2,653) (940)
Purchases of intangible assets 0 (112)
Acquisitions, net of cash acquired 156,783 0
Net cash used in investing activities (130,201) (20,940)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Principal payments on notes payable (494) 0
Principal payments on financing leases (961) 0
Proceeds from exercises of stock options 15,328 6,678
Value of equity awards withheld for tax liabilities (1,062) (371)
Net cash provided by financing activities 12,811 6,307
Effect of exchange rate changes on cash, cash equivalents and restricted cash 0 148
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (126,503) 2,451
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 505,334 120,788
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period 378,831 123,239
Cash paid for income taxes, net (34) 18
Cash paid on finance leases 148 0
NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Purchases of property, equipment and intangible assets, accrued but not paid 1,821 473
Purchases of property and equipment through finance leases 13,616 0
Value of common stock issued and equity awards assumed in acquisition 2,850,518 0
Stock-based compensation capitalized in software development costs $ 1,623 $ 1,428
v3.19.1
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
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)    
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 (loss) on marketable securities (317)       (317)  
Foreign currency translation 731       731  
Stock-based compensation 18,968     18,968    
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, 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 relation to SendGrid (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 (loss) on marketable securities 1,041       1,041  
Foreign currency translation 0          
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)
v3.19.1
Organization and Description of Business
3 Months Ended
Mar. 31, 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, Germany, Hong Kong, Ireland, Japan, the Netherlands, Singapore, Spain, Sweden, United Kingdom and the United States.
v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 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 returns; 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, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, marketable securities and restricted cash 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 ongoing 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 months ended March 31, 2019 and 2018, respectively, there was no customer organization that accounted for more than 10% of the Company’s total revenue.
As of March 31, 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 months ended March 31, 2019 and 2018, the Company recognized $10.8 million and $3.6 million of revenue that was included in the deferred revenue and customer deposits balance as of January 1, 2019 and 2018, respectively.
(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 March 31, 2019 and December 31, 2018 were $13.3 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 $0.7 million and $0.2 million in the three months ended March 31, 2019 and 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 by ASU 2018‑10, “Codification Improvements to Topic 842, Leases”, and ASU 2018‑11, “Leases-Targeted Improvements”, both issued in July 2018. ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard and ASU 2018-11 and 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 and as a change within operating cash flows. 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 lease costs on a straight-line basis and presents these costs as operating expenses within the consolidated statements of operations and comprehensive loss. The Company presents lease payments within the cash flows from operations within the consolidated statements of cash flows.

The financial results for the quarter ended March 31, 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 material impact on the Company's 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 currently evaluating the impact of the adoption of this standard on its consolidated 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 reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new standard will have on its 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 does not expect the adoption of this guidance to 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 will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s 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. These ASUs are effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements
v3.19.1
Fair Value Measurements
3 Months Ended
Mar. 31, 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 March 31, 2019 and December 31, 2018 (in thousands):
 
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
March 31, 2019
 
Aggregate
Fair Value
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
287,941

 
$

 
$

 
$

 
287,941

 
$

 
$

 
$
287,941

Reverse repurchase agreements
25,000

 
 
 
 
 
 
 
 
 
25,000

 
 
 
25,000

Commercial paper
29,336

 

 

 

 
 
 
29,336

 
 
 
29,336

Total included in cash and cash equivalents
342,277

 

 

 

 
287,941

 
54,336

 

 
342,277

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
154,173

 
79

 
(2
)
 
 
 
154,250

 

 

 
154,250

Corporate debt securities, commercial paper, and certificates of deposit
386,293

 
729

 
(20
)
 
(85
)
 
5,000

 
381,917

 

 
386,917

Total marketable securities
540,466

 
808

 
(22
)
 
(85
)
 
159,250

 
381,917

 

 
541,167

Total financial assets
$
882,743

 
$
808

 
$
(22
)
 
$
(85
)
 
$
447,191

 
$
436,253

 
$

 
$
883,444

 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 March 31, 2019 and 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 March 31, 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 associated with credit losses were required to be recognized during the three months ended March 31, 2019. Interest earned on marketable securities was $1.5 million and $0.7 million in the three months ended March 31, 2019 and 2018, respectively.  The interest is recorded as other income (expense), net, in the accompanying condensed consolidated statements of operations.
The following table summarizes the contractual maturities of marketable securities as of March 31, 2019 and December 31, 2018 (in thousands):
 
As of March 31, 2019
 
As of December 31, 2018
 
Amortized
Cost
 
Aggregate
Fair Value
 
Amortized
Cost
 
Aggregate
Fair Value
Financial Assets:
 
 
 
 
 
 
 
Less than one year
$
420,271

 
$
420,342

 
$
261,468

 
$
261,128

One to two years
120,195

 
120,825

 

 

Total
$
540,466

 
$
541,167

 
$
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 March 31, 2019 and December 31, 2018, the Company was party to reverse repurchase agreements totaling $25.0 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.
As of March 31, 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 $1,060.5 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 considered as Level 2 in the fair value hierarchy.
As of March 31, 2019, the note payable is recorded at its carrying amount, which approximates its fair value based on the proximity of its effective interest rate to the current market rates. The note payable is considered as Level 2 in the fair value hierarchy.
v3.19.1
Property and Equipment
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment
Property and Equipment
Property and equipment consisted of the following (in thousands):
 
 
As of
March 31,
2019
 
As of
December 31,
2018
Capitalized internal-use software development costs
 
$
78,950

 
$
72,647

Data center equipment (1)
 
15,151

 

Leasehold improvements
 
31,799

 
15,293

Office equipment
 
18,458

 
13,563

Furniture and fixtures (1)
 
6,661

 
4,918

Software
 
6,067

 
1,849

Total property and equipment
 
157,086

 
108,270

Less: accumulated depreciation and amortization
 
(51,928
)
 
(44,736
)
Total property and equipment, net
 
$
105,158

 
$
63,534

_______________
(1) 
Data center equipment and furniture and fixtures contain assets under finance leases. See Note 5 below for further detail.
Depreciation and amortization expense was $7.6 million and $4.2 million for the three months ended March 31, 2019 and 2018, respectively.
The Company capitalized $7.0 million and $6.4 million in internal-use software development costs in the three months ended March 31, 2019 and 2018, respectively of which $1.6 million and $1.4 million was stock-based compensation expense for each respective period. Amortization of capitalized software development costs was $3.8 million and $2.7 million in the three months ended March 31, 2019 and 2018, respectively.
v3.19.1
Right-of-Use Asset and Lease Liabilities
3 Months Ended
Mar. 31, 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 March 31, 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 generally 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. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of twelve 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 March 31, 2019, the Company had 20 leased properties, with remaining lease terms of less than one year to 10 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows (in thousands):

 
Three Months Ended
March 31, 2019
Operating lease cost
 
$
7,173

Finance lease cost:
 

   Amortization of assets
 
1,163

   Interest on lease liabilities
 
148

Short-term lease cost
 
1,435

Variable lease cost
 
487

Total net lease cost
 
$
10,406


Supplemental balance sheet information related to leases was as follows (in thousands):
Leases
 
Classification
 
As of
March 31,
2019
Assets:
 

 

Operating lease assets
 
Operating right of use asset (a)
 
$
156,511

Finance lease assets
 
Property and equipment, net of accumulated depreciation (b)
 
15,476

Total leased assets
 

 
$
171,987


 

 
 
Liabilities:
 

 
 
Current
 

 
 
   Operating
 
Operating lease liability, current
 
$
21,147

   Finance
 
Financing lease liability, current
 
6,044

Noncurrent
 

 
 
   Operating
 
Operating lease liability, noncurrent
 
143,950

   Finance
 
Finance lease liability, noncurrent
 
9,124

Total lease liabilities
 

 
$
180,265

(a)
Operating lease assets are recorded net of accumulated amortization of $4.9 million as of March 31, 2019.
(b)
Finance lease assets are recorded net of accumulated depreciation of $1.2 million as of March 31, 2019.
Supplemental cash flow and other information related to leases was as follows (in thousands):

 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 

Operating cash flows from operating leases
 
$
3,994

Operating cash flows from finance leases
 
$
148

Financing cash flows from finance leases
 
$
961


 

Weighted average remaining lease term (in years):
 

Operating leases
 
7.1

Finance leases
 
3.3


 

Weighted average discount rate:
 

Operating leases
 
5.8
%
Finance leases
 
5.2
%

Maturities of lease liabilities were as follows (in thousands):

 
As of March 31, 2019

 
Operating Leases
 
Finance Leases
2019 (remaining nine months)
 
$
23,869

 
$
4,962

2020
 
29,848

 
6,015

2021
 
28,062

 
3,130

2022
 
27,602

 
807

2023
 
27,127

 
413

Thereafter
 
68,033

 
1,354

Total lease payments
 
204,541

 
16,681

Less: imputed interest
 
(39,444
)
 
(1,513
)
Total lease obligations
 
165,097

 
15,168

Less: current obligations
 
(21,147
)
 
(6,044
)
Long-term lease obligations
 
$
143,950

 
$
9,124


Disclosures related to periods prior to adoption of the New Lease Standard
Rent expense was $2.1 million for the three months ended March 31, 2018. As of March 31, 2019, the Company had additional operating and finance lease obligations of $43.1 million and $1.1 million, respectively, related to a lease that will commence during the second quarter of fiscal year 2020 with a lease term of 6.8 years.
Future minimum lease payment obligations under noncancelable operating and finance leases were as follows (in thousands):

 
As of December 31, 2018

 
Operating Leases
 
Finance Leases
2019 (remaining nine months)
 
$
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 March 31, 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 generally 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. The Company’s lease agreements do not contain any residual value guarantees. Leases with an initial term of twelve 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 March 31, 2019, the Company had 20 leased properties, with remaining lease terms of less than one year to 10 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows (in thousands):

 
Three Months Ended
March 31, 2019
Operating lease cost
 
$
7,173

Finance lease cost:
 

   Amortization of assets
 
1,163

   Interest on lease liabilities
 
148

Short-term lease cost
 
1,435

Variable lease cost
 
487

Total net lease cost
 
$
10,406


Supplemental balance sheet information related to leases was as follows (in thousands):
Leases
 
Classification
 
As of
March 31,
2019
Assets:
 

 

Operating lease assets
 
Operating right of use asset (a)
 
$
156,511

Finance lease assets
 
Property and equipment, net of accumulated depreciation (b)
 
15,476

Total leased assets
 

 
$
171,987


 

 
 
Liabilities:
 

 
 
Current
 

 
 
   Operating
 
Operating lease liability, current
 
$
21,147

   Finance
 
Financing lease liability, current
 
6,044

Noncurrent
 

 
 
   Operating
 
Operating lease liability, noncurrent
 
143,950

   Finance
 
Finance lease liability, noncurrent
 
9,124

Total lease liabilities
 

 
$
180,265

(a)
Operating lease assets are recorded net of accumulated amortization of $4.9 million as of March 31, 2019.
(b)
Finance lease assets are recorded net of accumulated depreciation of $1.2 million as of March 31, 2019.
Supplemental cash flow and other information related to leases was as follows (in thousands):

 
Three Months Ended
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 

Operating cash flows from operating leases
 
$
3,994

Operating cash flows from finance leases
 
$
148

Financing cash flows from finance leases
 
$
961


 

Weighted average remaining lease term (in years):
 

Operating leases
 
7.1

Finance leases
 
3.3


 

Weighted average discount rate:
 

Operating leases
 
5.8
%
Finance leases
 
5.2
%

Maturities of lease liabilities were as follows (in thousands):

 
As of March 31, 2019

 
Operating Leases
 
Finance Leases
2019 (remaining nine months)
 
$
23,869

 
$
4,962

2020
 
29,848

 
6,015

2021
 
28,062

 
3,130

2022
 
27,602

 
807

2023
 
27,127

 
413

Thereafter
 
68,033

 
1,354

Total lease payments
 
204,541

 
16,681

Less: imputed interest
 
(39,444
)
 
(1,513
)
Total lease obligations
 
165,097

 
15,168

Less: current obligations
 
(21,147
)
 
(6,044
)
Long-term lease obligations
 
$
143,950

 
$
9,124


Disclosures related to periods prior to adoption of the New Lease Standard
Rent expense was $2.1 million for the three months ended March 31, 2018. As of March 31, 2019, the Company had additional operating and finance lease obligations of $43.1 million and $1.1 million, respectively, related to a lease that will commence during the second quarter of fiscal year 2020 with a lease term of 6.8 years.
Future minimum lease payment obligations under noncancelable operating and finance leases were as follows (in thousands):

 
As of December 31, 2018

 
Operating Leases
 
Finance Leases
2019 (remaining nine months)
 
$
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

v3.19.1
Business Combinations
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Business Combinations
Business Combinations
Fiscal 2019 Acquisitions
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 ("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 assets and intellectual property assets.
The acquisition was accounted for as a business combination and the total 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. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of March 31, 2019, the primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities include purchase consideration and purchase price, including related tax impact, and valuation of tangible and intangible assets.
The purchase price of $2,850.5 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 $191.6 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 fair value of the unvested stock awards, for which post-combination service is required, will be recorded as share-based compensation expense over the respective vesting period of each award.
The purchase price components are summarized in the following table (in thousands):
 
 
Total
Fair value of Class A common stock transferred
 
$
2,658,898

Fair value of the pre-combination service through equity awards
 
191,620

Total purchase price
 
$
2,850,518


The following table presents the preliminary purchase price allocation recorded in the Company's condensed consolidated balance sheet as of March 31, 2019 (in thousands). The Company expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period:
 
 
Total
Cash and cash equivalents
 
$
156,783

Accounts receivable and other current assets
 
11,635

Property and equipment, net
 
39,188

Operating right of use asset
 
33,742

Intangible assets
 
490,000

Other assets
 
1,664

Goodwill
 
2,239,055

Accounts payable and other liabilities
 
(11,114
)
Operating lease liability
 
(32,568
)
Financing lease liability
 
(13,616
)
Note payable
 
(5,387
)
Deferred tax liability
 
(58,864
)
Total purchase price
 
$
2,850,518

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 $49.2 million.
Identifiable intangible assets are comprised of the following (in thousands):
 
 
Total
 
Estimated life
(in years)
Developed technology and software
 
$
301,000

 
7
Customer relationships
 
169,000

 
7
Trade names
 
20,000

 
5
Total intangible assets acquired
 
$
490,000

 
 

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.
The goodwill is primarily attributable to the future cash flows to be realized from the acquired platform technology, acquired intangibles, assembled workforce and operational synergies. 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 period from February 1, 2019, through March 31, 2019, SendGrid contributed net operating revenue of $28.6 million which is reflected in the accompanying condensed consolidated statement of operations for the three month ended March 31, 2019. 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 months ended March 31, 2019, the Company incurred costs related to this acquisition of $12.4 million 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. The Company's and SendGrid's direct and incremental transaction costs of $39.4 million are excluded from pro forma condensed combined net loss for the three month period ended March 31, 2019, presented below. The Company's direct and incremental transaction costs of $12.4 million are included in the pro forma condensed combined net loss for the three month period ended March 31, 2018, presented below. The pro forma condensed combined net loss includes reversal of the valuation allowance release of $49.2 million in the three month period ended March 31, 2019, and a tax benefit of $56.1 million that would have resulted from the acquisition in the three month period ended March 31, 2018. The pro forma condensed combined financial information is presented for informational purposes only. The pro forma condensed combined financial information 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, and 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 (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Revenue
 
$
246,885

 
$
161,685

Net loss attributable to common stockholders
 
$
(72,960
)
 
$
(19,481
)


v3.19.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and intangible assets
Goodwill and Intangible Assets
Goodwill
Goodwill balance as of March 31, 2019 and December 31, 2018 was as follows (in thousands):
 
 
Total
Balance as of December 31, 2018
 
$
38,165

Goodwill additions related to 2019 acquisition
 
2,239,055

Balance as of March 31, 2019
 
$
2,277,220



Intangible assets
Intangible assets consisted of the following (in thousands):
 
 
As of
March 31, 2019
 
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
 
Developed technology
 
$
329,209

 
$
(18,806
)
 
$
310,403

Customer relationships
 
177,154

 
(6,889
)
 
170,265

Supplier relationships
 
2,696

 
(1,107
)
 
1,589

Trade names
 
20,060

 
(727
)
 
19,333

Patent
 
2,262

 
(200
)
 
2,062

Total amortizable intangible assets
 
531,381

 
(27,729
)
 
503,652

Non-amortizable intangible assets:
 
 
 
 
 
 
Domain names
 
32

 

 
32

Trademarks
 
263

 

 
263

Total
 
$
531,676

 
$
(27,729
)
 
$
503,947


 
 
As of
December 31, 2018
 
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
 
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 $13.6 million and $1.4 million in the three months ended March 31, 2019 and 2018, respectively.
Total estimated future amortization expense was as follows (in thousands):
 
 
As of
March 31, 2019
2019 (remaining nine months)
 
$
56,796

2020
 
83,027

2021
 
81,516

2022
 
80,123

2023
 
68,435

Thereafter
 
133,755

Total
 
$
503,652

v3.19.1
Accrued Expenses and Other Liabilities
3 Months Ended
Mar. 31, 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 (in thousands):
 
 
As of
March 31, 2019
 
As of
December 31, 2018
Accrued payroll and related
 
$
16,858

 
$
9,886

Accrued bonus and commission
 
8,130

 
8,564

Accrued cost of revenue
 
27,554

 
29,901

Sales and other taxes payable
 
26,578

 
23,631

ESPP contributions
 
6,501

 
2,672

Deferred rent
 

 
1,418

VAT liability
 
2,129

 
2,217

Acquisition holdback
 
2,000

 

Accrued other expense
 
17,545

 
18,054

Total accrued expenses and other current liabilities
 
$
107,295

 
$
96,343


Other long-term liabilities consisted of the following (in thousands):
 
 
As of
March 31, 2019
 
As of
December 31, 2018
Deferred rent
 
$

 
$
7,569

Deferred tax liability
 
11,734

 
5,181

Acquisition holdback
 
290

 
2,290

Capital lease obligation
 

 
2,170

Accrued other expense
 
2,013

 
959

Total other long-term liabilities
 
$
14,037

 
$
18,169

v3.19.1
Notes Payable
3 Months Ended
Mar. 31, 2019
Long-term Debt, Unclassified [Abstract]  
Notes Payable
Notes Payable
(a) Convertible Senior Notes and Capped Call Transactions
In May 2018, the Company issued $550.0 million aggregate principal amount of 0.25% convertible senior notes due 2023 in a private placement, including $75.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.
The Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture relating to the issuance of Notes (the “indenture”) or if the Notes are not freely tradeable as required by the indenture. The Notes will mature on June 1, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were approximately $537.0 million.
Each $1,000 principal amount of the Notes is initially convertible into 14.1040 shares of the Company’s Class A common stock par value $0.001, which is equivalent to an initial conversion price of approximately $70.90 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.
Prior to the close of business on the business day immediately preceding March 1, 2023, the Notes may be convertible at the option of the holders only under the following circumstances:
(1) during any calendar quarter commencing after September 30, 2018, and only during such calendar quarter, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130% of the conversion price on each applicable trading day;
(2) during the five business days period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Class A common stock and the conversion rate on each such trading day;
(3) upon the Company’s notice that it is redeeming any or all of the Notes; or
(4) upon the occurrence of specified corporate events.
On or after March 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or a portion of their Notes regardless of the foregoing conditions.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election.  It is the Company’s current intent to settle the principal amount of the Notes with cash.
During the three months ended March 31, 2019, the conditional conversion feature of the Notes was triggered as the last reported sale price of the Company's Class A common stock was more than or equal to 130% of the conversion price for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on March 29, 2019 (the last trading day of the calendar quarter), and therefore the Notes are currently convertible, in whole or in part, at the option of the holders between April 1, 2019 through June 30, 2019. Whether the Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future. The Company may redeem the Notes, in whole or in part, at its option, on or after June 1, 2021 but before the 35th scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.
No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.
The foregoing description is qualified in its entirety by reference to the text of the indenture and the form of 0.25% convertible senior notes due 2023, which were filed as exhibits to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and are incorporated herein by reference.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components.  The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $119.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate of 5.7% over the contractual terms of the Notes.
In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $10.2 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The net carrying amount of the liability component of the Notes was as follows (in thousands):
 
 
As of
March 31, 2019
 
As of December 31, 2018
Principal
 
$
550,000

 
$
550,000

Unamortized discount
 
(101,101
)
 
(106,484
)
Unamortized issuance costs
 
(8,562
)
 
(9,020
)
Net carrying amount
 
$
440,337

 
$
434,496

The net carrying amount of the equity component of the Notes was as follows (in thousands):
 
 
As of
March 31, 2019
 
As of December 31, 2018
Proceeds allocated to the conversion options (debt discount)
 
$
119,435

 
$
119,435

Issuance costs
 
(2,819
)
 
(2,819
)
Net carrying amount
 
$
116,616

 
$
116,616


The following table sets forth the interest expense recognized related to the Notes (in thousands):
 
 
Three Months Ended
March 31, 2019
Contractual interest expense
 
$
344

Amortization of debt issuance costs
 
458

Amortization of debt discount
 
5,383

Total interest expense related to the Notes
 
$
6,185


In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock. The capped calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) June 1, 2023, subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, insolvency filings, and hedging disruptions. The capped call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $58.5 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying condensed consolidated balance sheet.
(b) Note Payable
In connection with the SendGrid acquisition, the Company assumed a note payable that was an arrangement of SendGrid with a financing company to acquire software and related professional services in exchange for a note payable. As of March 31, 2019, the outstanding balance on the note payable was $4.9 million and is recorded in the current and long term liabilities and the related software is included in property and equipment, net, in the accompanying condensed consolidated balance sheet. The note payable bears effective interest at 6.6% per annum compounded monthly and matures in August 2021. Principal and interest payments of are as follows:
Year Ending December 31:
 
Principal
 
Interest
2019 (remaining nine months)
 
$
1,533

 
$
214

2020
 
2,165

 
165

2021
 
1,162

 
28

Total minimum payments
 
$
4,860

 
$
407

v3.19.1
Supplemental Balance Sheet Information
3 Months Ended
Mar. 31, 2019
Receivables [Abstract]  
Supplemental Balance Sheet Information
Supplemental Balance Sheet Information
A roll‑forward of the Company’s reserves for the three months ended March 31, 2019 and 2018 is as follows (in thousands):
(a)Allowance for doubtful accounts:
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
4,945

 
$
1,033

Additions
 
(304
)
 
375

Assumed in acquisition
 
59

 

Write-offs
 
(419
)
 
(4
)
Balance, end of period
 
$
4,281

 
$
1,404


(b)Sales credit reserve:
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Balance, beginning of period
 
$
3,015

 
$
1,761

Additions
 
2,404

 
1,107

Assumed in acquisition
 
277

 

Deductions against reserve
 
(2,865
)
 
(1,166
)
Balance, end of period
 
$
2,831

 
$
1,702

v3.19.1
Revenue by Geographic Area
3 Months Ended
Mar. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue by Geographic Area
Revenue by Geographic Area
Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (in thousands):
 
 
Three Months Ended
March 31,
 
 
2019
 
2018
Revenue by geographic area:
 
 
 
 
United States
 
$
166,553

 
$
98,635

International