TWILIO INC, 10-Q filed on 5/7/2020
Quarterly Report
v3.20.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2020
Apr. 30, 2020
Entity Information [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
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  
Title of 12(b) Security Class A Common Stock, par value $0.001 per share  
Trading Symbol TWLO  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Central Index Key 0001447669  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus FY  
Common Class A    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   128,731,012
Common Class B    
Entity Information [Line Items]    
Entity Common Stock, Shares Outstanding   11,321,940
v3.20.1
Condensed Consolidated Balance Sheets (Unaudited) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 345,518 $ 253,660
Short-term marketable securities 1,497,869 1,599,033
Accounts receivable, net 172,865 154,067
Prepaid expenses and other current assets 61,405 54,571
Total current assets 2,077,657 2,061,331
Restricted cash 0 75
Property and equipment, net 150,944 141,256
Operating right-of-use asset 159,439 156,741
Intangible assets, net 445,153 460,849
Goodwill 2,291,637 2,296,784
Other long-term assets 41,435 33,480
Total assets 5,166,265 5,150,516
Current liabilities:    
Accounts payable 18,450 39,099
Accrued expenses and other current liabilities 195,393 147,681
Deferred revenue and customer deposits 26,706 26,362
Operating lease liability, current 29,949 27,156
Finance lease liability, current 6,539 6,924
Total current liabilities 277,037 247,222
Operating lease liability, noncurrent 140,120 139,200
Finance lease liability, noncurrent 7,250 8,746
Convertible senior notes, net 464,367 458,190
Other long-term liabilities 20,966 17,747
Total liabilities 909,740 871,105
Commitments and contingencies (Note 11)
Stockholders’ equity:    
Preferred stock 0 0
Class A and Class B common stock 139 138
Additional paid-in capital 5,034,278 4,952,999
Accumulated other comprehensive (loss) income (4,289) 5,086
Accumulated deficit (773,603) (678,812)
Total stockholders’ equity 4,256,525 4,279,411
Total liabilities and stockholders’ equity $ 5,166,265 $ 5,150,516
v3.20.1
Condensed Consolidated Statements of Operations (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Revenues:    
Revenue $ 364,868 $ 233,139
Cost of revenue 171,333 107,089
Gross profit 193,535 126,050
Operating expenses:    
Research and development 114,339 77,855
Sales and marketing 116,722 71,607
General and administrative 55,170 64,176
Total operating expenses 286,231 213,638
Loss from operations (92,696) (87,588)
Other expenses, net (1,118) (636)
Loss before (provision) benefit for income taxes (93,814) (88,224)
(Provision) benefit for income taxes (977) 51,721
Net loss attributable to common stockholders $ (94,791) $ (36,503)
Net loss per share attributable to common stockholders, basic and diluted (in dollars per share) $ (0.68) $ (0.31)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted (in shares) 139,231,594 116,590,513
v3.20.1
Condensed Consolidated Statements of Comprehensive Loss (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net loss $ (94,791) $ (36,503)
Other comprehensive income (loss):    
Net unrealized (loss) gain on marketable securities, net of tax (9,375) 1,041
Comprehensive loss attributable to common stockholders $ (104,166) $ (35,462)
v3.20.1
Condensed Consolidated Statements of Stockholders Equity (Unaudited) - 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, 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)
Exercises of stock options (in shares)   748,679 1,023,984      
Exercises of 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)      
Equity awards assumed in acquisition 191,620     191,620    
Net unrealized (loss) gain on marketable securities, net of tax 1,041       1,041  
Shares issued in acquisition (in shares)   23,555,081        
Shares issued in acquisition 2,658,898 $ 24   2,658,874    
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, 2019   126,882,172 11,530,627      
Balance at Dec. 31, 2019 4,279,411 $ 124 $ 14 4,952,999 5,086 (678,812)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net loss (94,791)         (94,791)
Exercises of stock options (in shares)   243,029 426,001      
Exercises of stock options 8,231     8,231    
Vesting of restricted stock units (in shares)   849,763 23,107      
Vesting of restricted stock units 1 $ 1        
Value of equity awards withheld for tax liability (in shares)   (8,726) (4,692)      
Value of equity awards withheld for tax liability (1,674)     (1,674)    
Conversion of shares of Class B common stock into shares of Class A common stock (in shares)   618,103 (618,103)      
Conversion of shares of Class B common stock into shares of Class A common stock   $ 1 $ (1)      
Donated common stock (in shares)   22,102        
Donated common stock 2,701     2,701    
Net unrealized (loss) gain on marketable securities, net of tax (9,375)       (9,375)  
Stock-based compensation 72,021     72,021    
Balance (in shares) at Mar. 31, 2020   128,606,443 11,356,940      
Balance at Mar. 31, 2020 $ 4,256,525 $ 126 $ 13 $ 5,034,278 $ (4,289) $ (773,603)
v3.20.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net loss $ (94,791) $ (36,503)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 32,239 21,248
Non-cash reduction to the right-of-use asset 8,023 4,854
Amortization of debt discount and issuance costs 6,178 5,841
Stock-based compensation 69,025 58,324
Tax benefit related to release of valuation allowance (162) (51,644)
Allowance for credit losses 4,170 11
Value of donated common stock 2,701 0
Other adjustments 4,352 (444)
Changes in operating assets and liabilities:    
Accounts receivable (23,123) (206)
Prepaid expenses and other current assets (8,130) (9,479)
Other long-term assets (5,759) (2,959)
Accounts payable (20,803) 1,161
Accrued expenses and other current liabilities 44,840 4,348
Deferred revenue and customer deposits 589 377
Operating right of use liability (7,008) (1,784)
Long-term liabilities 3,194 (2,258)
Net cash provided by (used in) operating activities 15,535 (9,113)
CASH FLOWS FROM INVESTING ACTIVITIES:    
Acquisitions, net of cash acquired, and other related payments (2,377) 156,783
Purchases of marketable securities and other investments (228,025) (419,498)
Proceeds from sales and maturities of marketable securities 316,992 140,518
Capitalized software development costs (8,626) (5,351)
Purchases of long-lived assets (6,319) (2,653)
Net cash provided by (used in) investing activities 71,645 (130,201)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Principal payments on finance leases and notes payable (1,954) (1,455)
Proceeds from exercises of stock options 8,231 15,328
Value of equity awards withheld for tax liabilities (1,674) (1,062)
Net cash provided by financing activities 4,603 12,811
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 91,783 (126,503)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period 253,735 505,334
CASH, CASH EQUIVALENTS AND RESTRICTED CASH —End of period 345,518 378,831
Cash paid for income taxes, net 257 (34)
Cash paid for interest 198 148
NON-CASH INVESTING AND FINANCING ACTIVITIES:    
Purchases of property, equipment and intangible assets, accrued but not paid 5,510 1,821
Purchases of property and equipment through finance leases 0 13,616
Value of common stock issued and stock awards assumed in acquisition 0 2,850,518
Stock-based compensation capitalized in software development costs $ 3,418 $ 1,623
v3.20.1
Organization and Description of Business
3 Months Ended
Mar. 31, 2020
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, Brazil, Colombia, Czech Republic, Estonia, France, Germany, Hong Kong, India, Ireland, Japan, the Netherlands, Singapore, Spain, Sweden, the United Kingdom and the United States.
v3.20.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2020
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 the Company's Annual Report on Form 10-K filed with the SEC on March 2, 2020 (“Annual Report”).
The condensed consolidated balance sheet as of December 31, 2019, 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, stockholders' equity and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year 2020 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, 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 deteriorates 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 months ended March 31, 2020 and 2019, no customer organization accounted for more than 10% of the Company’s total revenue.
As of March 31, 2020 and December 31, 2019, 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, 2020 and 2019, the Company recognized $12.8 million and $10.8 million of revenue, respectively, that was included in the deferred revenue and customer deposits balance as of the end of the prior 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 March 31, 2020 and December 31, 2019 were $36.8 million and $30.4 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 $2.0 million and $0.7 million in the three months ended March 31, 2020 and 2019, respectively, and is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.
(g)Recently Adopted Accounting Guidance
In August 2018, the Financial Accounting Standards Board ("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 guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing costs incurred to develop or obtain internal-use software. The guidance is effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance effective January 1, 2020. The adoption of this guidance did not 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. 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. In November 2019, the FASB issued ASU
2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses", which clarifies the accounting treatment and disclosure requirements for assets purchased with credit deterioration, troubled debt restructurings, and certain other investments. In February 2020, the FASB issued ASU 2020-02, "Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842)." This standard provides guidance regarding methodologies, documentation, and internal controls related to expected credit losses. These ASUs are effective for interim and annual periods beginning after December 15, 2019, and the Company adopted them effective January 1, 2020. As of the date of adoption, this guidance did not have a material impact on the Company's consolidated financial statements.
(h)Recently Issued Accounting Guidance, Not yet Adopted
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes", which simplifies the accounting for income taxes by removing certain exceptions to the general principles for income taxes. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact of this guidance on its consolidated financial statements
v3.20.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2020
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:

Amortized
Cost or
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value Hierarchy as of March 31, 2020Aggregate
Fair Value
Level 1Level 2Level 3
Financial Assets:(In thousands)
Cash and cash equivalents:
Money market funds$275,948  $—  $—  $275,948  $—  $—  $275,948  
Total included in cash and cash equivalents275,948  —  —  275,948  —  —  275,948  
Marketable securities:
U.S. Treasury securities193,234  1,927  —  195,161  —  —  195,161  
Corporate debt securities and commercial paper1,311,047  2,556  (10,895) 11,000  1,291,708  —  1,302,708  
Total marketable securities1,504,281  4,483  (10,895) 206,161  1,291,708  —  1,497,869  
Strategic investments5,750  1,944  —  —  —  7,694  7,694  
Total financial assets$1,785,979  $6,427  $(10,895) $482,109  $1,291,708  $7,694  $1,781,511  
Amortized
Cost or
Carrying
Value
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value Hierarchy as of December 31, 2019Aggregate
Fair Value
Level 1Level 2Level 3
Financial Assets:(In thousands)
Cash and cash equivalents:
Money market funds $153,252  $—  $—  $153,252  $—  $—  $153,252  
Reverse repurchase agreements35,800  —  —  —  35,800  —  35,800  
Total included in cash and cash equivalents189,052  —  —  153,252  35,800  —  189,052  
Marketable securities:
U.S. Treasury securities215,847  241  (3) 216,085  —  —  216,085  
Corporate debt securities and commercial paper1,378,487  4,516  (55) 5,000  1,377,948  —  1,382,948  
Total marketable securities1,594,334  4,757  (58) 221,085  1,377,948  —  1,599,033  
Strategic investments5,500  —  —  —  —  5,500  5,500  
Total financial assets$1,788,886  $4,757  $(58) $374,337  $1,413,748  $5,500  $1,793,585  
The Company's primary objective when investing excess cash is preservation of capital, hence the Company's marketable securities consist primarily of US Treasury securities, high credit quality corporate debt securities and commercial paper. As the Company views its marketable securities as available to support its current operations, it has classified all available for sale securities as short-term. As of March 31, 2020 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, 2020, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities before maturity.
The Company regularly reviews the changes to the rating of its debt securities by rating agencies as well as reasonably monitors the surrounding economic conditions to assess the risk of expected credit losses. As of March 31, 2020, the risk of expected credit losses was insignificant.
Interest earned on marketable securities was $8.8 million and $1.5 million in the three months ended March 31, 2020 and 2019, respectively. The interest is recorded as other expense, net, in the accompanying condensed consolidated statements of operations.
The following table summarizes the contractual maturities of marketable securities:
As of March 31, 2020As of December 31, 2019
Amortized
Cost
Aggregate
Fair Value
Amortized
Cost
Aggregate
Fair Value
Financial Assets:(In thousands)
Less than one year$787,710  $788,246  $859,996  $861,181  
One to three years716,571  709,623  734,338  737,852  
Total$1,504,281  $1,497,869  $1,594,334  $1,599,033  
The Company holds strategic investments with a fair value of $7.7 million in debt and equity securities of privately held companies in which the Company does not have a controlling interest or significant influence. These securities are recorded as other long-term assets in the accompanying condensed consolidated balance sheets. 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.
As of March 31, 2020, and December 31, 2019, the fair value of the 0.25% convertible senior notes due 2023 (the “Notes”), as further described in Note 8 below, was approximately $768.2 million and $841.3 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.
v3.20.1
Property and Equipment
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment consisted of the following:
As ofAs of
March 31,December 31,
20202019
(In thousands)
Capitalized internal-use software development costs$110,918  $100,155  
Data center equipment (1)
22,018  22,009  
Leasehold improvements63,961  55,886  
Office equipment27,001  25,083  
Furniture and fixtures (1)
10,253  10,095  
Software9,676  9,176  
Total property and equipment243,827  222,404  
Less: accumulated depreciation and amortization(92,883) (81,148) 
Total property and equipment, net$150,944  $141,256  
____________________
(1) Data center equipment and furniture and fixtures contain assets under finance leases. See Note 5 for further detail.
Depreciation and amortization expense was $11.9 million and $7.6 million for the three months ended March 31, 2020 and 2019, respectively.
The Company capitalized $12.0 million and $7.0 million in internal-use software development costs in the three months ended March 31, 2020 and 2019, respectively, of which $3.4 million and $1.6 million, respectively, was stock-based compensation expense. Amortization of capitalized software development costs was $4.6 million and $3.8 million in the three months ended March 31, 2020 and 2019, respectively.
v3.20.1
Right-of-Use Asset and Lease Liabilities
3 Months Ended
Mar. 31, 2020
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 sheets.
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. When estimating the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain such options will be exercised. 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 March 31, 2020, the Company had 23 leased properties with remaining lease terms from less than one year to slightly over nine years, some of which include options to extend the leases for up to 5.0 years.
The components of the lease expense recorded in the accompanying condensed consolidated statements of operations were as follows:
Three Months Ended
March 31,
20202019
(In thousands)
Operating lease cost$10,424  $7,173  
Finance lease cost:
   Amortization of assets1,904  1,163  
   Interest on lease liabilities198  148  
Short-term lease cost1,412  1,435  
Variable lease cost1,296  487  
Total net lease cost$15,234  $10,406  
Supplemental balance sheet information related to leases was as follows:
As ofAs of
March 31,December 31,
LeasesClassification20202019
Assets:(In thousands)
Operating lease assets
Operating right-of-use asset, net of accumulated amortization (1)
$159,439  $156,741  
Finance lease assets
Property and equipment, net of accumulated depreciation (2)
12,866  14,770  
Total leased assets$172,305  $171,511  
Liabilities:
Current
   OperatingOperating lease liability, current$29,949  $27,156  
   FinanceFinancing lease liability, current6,539  6,924  
Noncurrent
   OperatingOperating lease liability, noncurrent140,120  139,200  
   FinanceFinance lease liability, noncurrent7,250  8,746  
Total lease liabilities$183,858  $182,026  
____________________
(1) Operating lease assets are recorded net of accumulated amortization of $31.2 million and $23.2 million as of March 31, 2020 and December 31, 2019, respectively.
(2) Finance lease assets are recorded net of accumulated depreciation of $7.9 million and $6.0 million as of March 31, 2020 and December 31, 2019, respectively.
Supplemental cash flow and other information related to leases was as follows:
Three Months Ended
March 31,
20202019
Cash paid for amounts included in the measurement of lease liabilities:(In thousands)
Operating cash flows from operating leases$9,953  $3,994  
Operating cash flows from finance leases (interest)$198  $148  
Financing cash flows from finance leases$1,881  $961  
Weighted average remaining lease term (in years):
Operating leases5.87.1
Finance leases2.93.3
Weighted average discount rate:
Operating leases5.7 %5.8 %
Finance leases5.3 %5.2 %
Maturities of lease liabilities were as follows:
As of March 31, 2020
Operating
Leases
Finance
Leases
Year ended December 31,  (In thousands)
2020 (remaining nine months)$29,148  $5,507  
2021  38,190  4,659  
2022  37,145  2,333  
2023  29,378  1,581  
2024  25,549  315  
Thereafter43,126  581  
Total lease payments202,536  14,976  
Less: imputed interest(32,467) (1,187) 
Total lease obligations170,069  13,789  
Less: current obligations(29,949) (6,539) 
Long-term lease obligations$140,120  $7,250  
As of March 31, 2020, the Company had an additional operating lease obligation totaling $43.5 million related to a lease that will commence in the second quarter of 2020 with a lease term of 6.8 years. The Company had an additional finance lease obligation of $0.7 million related to a lease that will commence in the second quarter of 2020 with a lease term of 6.8 years.
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 sheets.
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. When estimating the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain such options will be exercised. 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 March 31, 2020, the Company had 23 leased properties with remaining lease terms from less than one year to slightly over nine years, some of which include options to extend the leases for up to 5.0 years.
The components of the lease expense recorded in the accompanying condensed consolidated statements of operations were as follows:
Three Months Ended
March 31,
20202019
(In thousands)
Operating lease cost$10,424  $7,173  
Finance lease cost:
   Amortization of assets1,904  1,163  
   Interest on lease liabilities198  148  
Short-term lease cost1,412  1,435  
Variable lease cost1,296  487  
Total net lease cost$15,234  $10,406  
Supplemental balance sheet information related to leases was as follows:
As ofAs of
March 31,December 31,
LeasesClassification20202019
Assets:(In thousands)
Operating lease assets
Operating right-of-use asset, net of accumulated amortization (1)
$159,439  $156,741  
Finance lease assets
Property and equipment, net of accumulated depreciation (2)
12,866  14,770  
Total leased assets$172,305  $171,511  
Liabilities:
Current
   OperatingOperating lease liability, current$29,949  $27,156  
   FinanceFinancing lease liability, current6,539  6,924  
Noncurrent
   OperatingOperating lease liability, noncurrent140,120  139,200  
   FinanceFinance lease liability, noncurrent7,250  8,746  
Total lease liabilities$183,858  $182,026  
____________________
(1) Operating lease assets are recorded net of accumulated amortization of $31.2 million and $23.2 million as of March 31, 2020 and December 31, 2019, respectively.
(2) Finance lease assets are recorded net of accumulated depreciation of $7.9 million and $6.0 million as of March 31, 2020 and December 31, 2019, respectively.
Supplemental cash flow and other information related to leases was as follows:
Three Months Ended
March 31,
20202019
Cash paid for amounts included in the measurement of lease liabilities:(In thousands)
Operating cash flows from operating leases$9,953  $3,994  
Operating cash flows from finance leases (interest)$198  $148  
Financing cash flows from finance leases$1,881  $961  
Weighted average remaining lease term (in years):
Operating leases5.87.1
Finance leases2.93.3
Weighted average discount rate:
Operating leases5.7 %5.8 %
Finance leases5.3 %5.2 %
Maturities of lease liabilities were as follows:
As of March 31, 2020
Operating
Leases
Finance
Leases
Year ended December 31,  (In thousands)
2020 (remaining nine months)$29,148  $5,507  
2021  38,190  4,659  
2022  37,145  2,333  
2023  29,378  1,581  
2024  25,549  315  
Thereafter43,126  581  
Total lease payments202,536  14,976  
Less: imputed interest(32,467) (1,187) 
Total lease obligations170,069  13,789  
Less: current obligations(29,949) (6,539) 
Long-term lease obligations$140,120  $7,250  
As of March 31, 2020, the Company had an additional operating lease obligation totaling $43.5 million related to a lease that will commence in the second quarter of 2020 with a lease term of 6.8 years. The Company had an additional finance lease obligation of $0.7 million related to a lease that will commence in the second quarter of 2020 with a lease term of 6.8 years.
v3.20.1
Goodwill and Intangible Assets
3 Months Ended
Mar. 31, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets Goodwill and Intangible Assets
Goodwill
Changes in Goodwill balance were as follows:
Total
(In thousands)
Balance as of December 31, 2019$2,296,784  
Measurement period adjustments(5,147) 
Balance as of March 31, 2020$2,291,637  
Intangible assets
Intangible assets consisted of the following:
As of March 31, 2020
GrossAccumulated
Amortization
Net
Amortizable intangible assets:(In thousands)
Developed technology$334,599  $(67,259) $267,340  
Customer relationships185,594  (33,296) 152,298  
Supplier relationships4,356  (2,006) 2,350  
Trade names20,060  (4,727) 15,333  
Patent2,905  (288) 2,617  
Total amortizable intangible assets547,514  (107,576) 439,938  
Non-amortizable intangible assets:
Telecommunication licenses4,920  —  4,920  
Domain names32  —  32  
Trademarks and other263  —  263  
Total$552,729  $(107,576) $445,153  

As of December 31, 2019
GrossAccumulated
Amortization
Net
Amortizable intangible assets:(In thousands)
Developed technology$333,980  $(55,390) $278,590  
Customer relationships182,339  (26,347) 155,992  
Supplier relationships4,356  (1,532) 2,824  
Trade name20,060  (3,727) 16,333  
Patent2,707  (262) 2,445  
Total amortizable intangible assets543,442  (87,258) 456,184  
Non-amortizable intangible assets:
Telecommunication licenses4,370  —  4,370  
Domain names32  —  32  
Trademarks and other263  —  263  
Total$548,107  $(87,258) $460,849  
Amortization expense was $20.3 million and $13.6 million for the three months ended March 31, 2020 and 2019, respectively.
Total estimated future amortization expense is as follows:
As of
March 31,
2020
Year Ended December 31,(In thousands)
2020 (remaining nine months)$60,796  
202180,480  
202277,865  
202374,583  
202469,304  
Thereafter76,910  
Total$439,938  
v3.20.1
Accrued Expenses and Other Liabilities
3 Months Ended
Mar. 31, 2020
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 ofAs of
March 31,December 31,
20202019
(In thousands)
Accrued payroll and related$30,198  $20,462  
Accrued bonus and commission11,052  12,898  
Accrued cost of revenue71,479  47,563  
Sales and other taxes payable29,758  28,592  
ESPP contributions11,521  4,023  
VAT and other taxes4,152  4,838  
Acquisition holdback4,520  6,520  
Accrued other expense32,713  22,785  
Total accrued expenses and other current liabilities$195,393  $147,681  
Other long-term liabilities consisted of the following:
As ofAs of
March 31,December 31,
20202019
(In thousands)
Deferred tax liability$8,362  $7,535  
Acquisition holdback3,750  3,750  
Accrued other expenses8,854  6,462  
Total other long-term liabilities$20,966  $17,747  
v3.20.1
Notes Payable
3 Months Ended
Mar. 31, 2020
Long-term Debt, Unclassified [Abstract]  
Notes Payable Notes Payable
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 by us were $537.0 million.
Each $1,000 principal amount of the Notes is initially convertible into 14.104 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, 2020, 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 31, 2020 (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, 2020 through June 30, 2020. 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 continues to classify the Notes as a long-term liability in its condensed consolidated balance sheet as of March 31, 2020, based on contractual settlement provisions. 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:
As ofAs of
March 31,December 31,
20202019
(In thousands)
Principal$549,998  $549,999  
Unamortized discount(78,953) (84,647) 
Unamortized issuance costs(6,678) (7,162) 
Net carrying amount$464,367  $458,190  
The net carrying amount of the equity component of the Notes was as follows:
As ofAs of
March 31,December 31,
20202019
(In thousands)
Proceeds allocated to the conversion options (debt discount)$119,434  $119,435  
Issuance costs(2,819) (2,819) 
Net carrying amount$116,615  $116,616  
The following table sets forth the interest expense recognized related to the Notes:
Three Months Ended
March 31,
20202019
(In thousands)
Contractual interest expense$344  $344  
Amortization of debt issuance costs484  458  
Amortization of debt discount5,694  5,383  
Total interest expense related to the Notes$6,522  $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 7,757,158 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.
v3.20.1
Supplemental Balance Sheet Information
3 Months Ended
Mar. 31, 2020
Receivables [Abstract]  
Supplemental Balance Sheet Information Supplemental Balance Sheet Information
A roll-forward of the Company’s reserves is as follows:
(a)Allowance for doubtful accounts:
Three Months Ended
March 31,
20202019
(In thousands)
Balance, beginning of period$6,287  $4,945  
Additions4,261  (245) 
Write-offs(1,463) (419) 
Balance, end of period$9,085  $4,281  

Percentage of revenue%%

(b)Sales credit reserve:
Three Months Ended
March 31,
20202019
(In thousands)
Balance, beginning of period$6,784  $3,015  
Additions8,174  2,681  
Deductions against reserve(5,271) (2,865) 
Balance, end of period$9,687  $2,831  

Percentage of revenue%%
v3.20.1
Revenue by Geographic Area
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Revenue by Geographic Area Revenue by Geographic Area
Revenue by geographic area is based on the IP address or the mailing address at the time of registration. The following table sets forth revenue by geographic area:
Three Months Ended
March 31,
20202019
Revenue by geographic area:(In thousands)
United States$261,813