ZENDESK, INC., 10-Q filed on 8/2/2019
Quarterly Report
v3.19.2
Cover Page - shares
6 Months Ended
Jun. 30, 2019
Jul. 31, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2019  
Document Transition Report false  
Entity File Number 001-36456  
Entity Registrant Name ZENDESK, INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 26-4411091  
Entity Address, Address Line One 1019 Market Street  
Entity Address, City or Town San Francisco  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94103  
City Area Code 415  
Local Phone Number 418-7506  
Title of 12(b) Security Common Stock, par value $0.01 per share  
Trading Symbol ZEN  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   110,983,797
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001463172  
Current Fiscal Year End Date --12-31  
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 171,218 $ 126,518
Marketable securities 255,930 300,213
Accounts receivable, net of allowance for doubtful accounts of $3,252 and $2,571 as of June 30, 2019 and December 31, 2018, respectively 105,806 85,280
Deferred costs 30,259 24,712
Prepaid expenses and other current assets 45,697 35,873
Total current assets 608,910 572,596
Marketable securities, noncurrent 371,245 393,671
Property and equipment, net 87,520 75,654
Deferred costs, noncurrent 31,805 26,914
Lease right-of-use assets 102,702  
Goodwill and intangible assets, net 212,436 146,327
Other assets 24,379 22,717
Total assets 1,438,997 1,237,879
Current liabilities:    
Accounts payable 38,887 16,820
Accrued liabilities 36,598 34,097
Accrued compensation and related benefits 51,955 46,603
Deferred revenue 286,552 245,243
Lease liabilities 22,784  
Convertible senior notes, net 470,641 0
Total current liabilities 907,417 342,763
Convertible senior notes, net 0 458,176
Deferred revenue, noncurrent 797 2,719
Lease liabilities, noncurrent 97,860  
Other liabilities 5,946 17,300
Total liabilities 1,012,020 820,958
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock 0 0
Common stock 1,106 1,080
Additional paid-in capital 1,053,488 950,693
Accumulated other comprehensive gain (loss) 772 (5,724)
Accumulated deficit (628,389) (529,128)
Total stockholders’ equity 426,977 416,921
Total liabilities and stockholders’ equity $ 1,438,997 $ 1,237,879
v3.19.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 3,252 $ 2,571
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Income Statement [Abstract]        
Revenue $ 194,583 $ 141,882 $ 376,068 $ 271,673
Cost of revenue [1] 57,670 44,160 113,324 83,216
Gross profit 136,913 97,722 262,744 188,457
Operating expenses:        
Research and development [1] 50,510 37,624 97,301 74,708
Sales and marketing 94,746 [1] 69,450 [1] 186,447 [1] 134,508
General and administrative [1] 43,019 24,245 74,271 46,452
Total operating expenses [1] 188,275 131,319 358,019 255,668
Operating loss (51,362) (33,597) (95,275) (67,211)
Other income (expense), net:        
Interest income 5,294 3,826 10,766 5,344
Interest expense (6,614) (6,289) (13,158) (7,053)
Other income (expense), net (1,268) 27 (570) 272
Total other income (expense), net (2,588) (2,436) (2,962) (1,437)
Loss before provision for (benefit from) income taxes (53,950) (36,033) (98,237) (68,648)
Provision for (benefit from) income taxes 591 (1,667) 1,024 (4,957)
Net loss $ (54,541) $ (34,366) $ (99,261) $ (63,691)
Net loss per share, basic and diluted (usd per share) $ (0.50) $ (0.33) $ (0.91) $ (0.61)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 109,986 105,000 109,312 104,350
[1] Includes share-based compensation expense as follows:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Cost of revenue
$
5,246

 
$
3,474

 
$
10,183

 
$
6,572

Research and development
11,911

 
9,529

 
23,548

 
19,758

Sales and marketing
13,575

 
9,178

 
25,973

 
17,186

General and administrative
13,019

 
5,967

 
20,704

 
11,619

v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Share-based compensation     $ 80,408 $ 55,135
Cost of revenue        
Share-based compensation $ 5,246 $ 3,474 10,183 6,572
Research and development        
Share-based compensation 11,911 9,529 23,548 19,758
Sales and marketing        
Share-based compensation 13,575 9,178 25,973 17,186
General and administrative        
Share-based compensation $ 13,019 $ 5,967 $ 20,704 $ 11,619
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Jun. 30, 2019
Jun. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (54,541) $ (34,366) $ (99,261) $ (63,691)
Other comprehensive gain (loss), before tax:        
Net unrealized gain (loss) on available-for-sale investments 2,291 13 5,633 (623)
Foreign currency translation loss 0 0 0 (12)
Net unrealized gain (loss) on derivative instruments 1,452 (3,132) 2,576 (3,874)
Other comprehensive gain (loss), before tax 3,743 (3,119) 8,209 (4,509)
Tax effect (641) 1,082 (1,713) 1,082
Other comprehensive gain (loss), net of tax 3,102 (2,037) 6,496 (3,427)
Comprehensive loss $ (51,439) $ (36,403) $ (92,765) $ (67,118)
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Gain (Loss)
Accumulated Deficit
Beginning balance (in shares) at Dec. 31, 2017   103,121      
Beginning balance at Dec. 31, 2017 $ 354,184 $ 1,031 $ 753,568 $ (2,372) $ (398,043)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   674      
Issuance of common stock upon exercise of stock options 9,747 $ 7 9,740    
Issuance of common stock for settlement of RSUs (in shares)   1,498      
Issuance of common stock for settlement of RSUs (2,148) $ 14 (2,162)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   390      
Issuance of common stock in connection with employee stock purchase plan 9,474 $ 4 9,470    
Share-based compensation 56,440   56,440    
Equity component of convertible senior notes 44,304   44,304    
Other comprehensive gain (loss), net of tax (3,427)     (3,427)  
Net loss (63,691)       (63,691)
Other (17)   (17)    
Ending balance (in shares) at Jun. 30, 2018   105,683      
Ending balance at Jun. 30, 2018 404,866 $ 1,056 871,343 (5,799) (461,734)
Beginning balance (in shares) at Mar. 31, 2018   104,263      
Beginning balance at Mar. 31, 2018 400,653 $ 1,042 830,741 (3,762) (427,368)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   220      
Issuance of common stock upon exercise of stock options 3,553 $ 2 3,551    
Issuance of common stock for settlement of RSUs (in shares)   810      
Issuance of common stock for settlement of RSUs (1,413) $ 8 (1,421)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   390      
Issuance of common stock in connection with employee stock purchase plan 9,474 $ 4 9,470    
Share-based compensation 28,953   28,953    
Equity component of convertible senior notes 49   49    
Other comprehensive gain (loss), net of tax (2,037)     (2,037)  
Net loss (34,366)       (34,366)
Ending balance (in shares) at Jun. 30, 2018   105,683      
Ending balance at Jun. 30, 2018 404,866 $ 1,056 871,343 (5,799) (461,734)
Beginning balance (in shares) at Dec. 31, 2018   108,037      
Beginning balance at Dec. 31, 2018 $ 416,921 $ 1,080 950,693 (5,724) (529,128)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares) 626 626      
Issuance of common stock upon exercise of stock options $ 13,209 $ 5 13,204    
Issuance of common stock for settlement of RSUs (in shares)   1,661      
Issuance of common stock for settlement of RSUs (5,079) $ 17 (5,096)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   374      
Issuance of common stock in connection with employee stock purchase plan 15,312 $ 4 15,308    
Share-based compensation 79,379   79,379    
Equity component of convertible senior notes 0        
Other comprehensive gain (loss), net of tax 6,496     6,496  
Net loss (99,261)       (99,261)
Other 0        
Ending balance (in shares) at Jun. 30, 2019   110,698      
Ending balance at Jun. 30, 2019 426,977 $ 1,106 1,053,488 772 (628,389)
Beginning balance (in shares) at Mar. 31, 2019   109,260      
Beginning balance at Mar. 31, 2019 418,945 $ 1,092 994,031 (2,330) (573,848)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   250      
Issuance of common stock upon exercise of stock options 4,772 $ 2 4,770    
Issuance of common stock for settlement of RSUs (in shares)   814      
Issuance of common stock for settlement of RSUs (2,663) $ 8 (2,671)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   374      
Issuance of common stock in connection with employee stock purchase plan 15,312 $ 4 15,308    
Share-based compensation 42,050   42,050    
Equity component of convertible senior notes 0        
Other comprehensive gain (loss), net of tax 3,102     3,102  
Net loss (54,541)       (54,541)
Ending balance (in shares) at Jun. 30, 2019   110,698      
Ending balance at Jun. 30, 2019 $ 426,977 $ 1,106 $ 1,053,488 $ 772 $ (628,389)
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Cash flows from operating activities    
Net loss $ (99,261) $ (63,691)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 17,701 18,663
Share-based compensation 80,408 55,135
Amortization of deferred costs 14,540 9,530
Amortization of debt discount and issuance costs 12,465 6,650
Other 846 2,299
Changes in operating assets and liabilities:    
Accounts receivable (22,867) (13,896)
Prepaid expenses and other current assets (9,154) (7,425)
Deferred costs (24,313) (17,579)
Lease right-of-use assets 9,107  
Other assets and liabilities (1,740) (9,311)
Accounts payable 21,333 10,266
Accrued liabilities 455 11,576
Accrued compensation and related benefits 4,258 4,120
Deferred revenue 39,443 33,601
Lease liabilities (6,394)  
Net cash provided by operating activities 36,827 39,938
Cash flows from investing activities    
Purchases of property and equipment (14,154) (20,036)
Internal-use software development costs (2,966) (4,161)
Purchases of marketable securities (270,823) (249,011)
Proceeds from maturities of marketable securities 100,296 94,580
Proceeds from sales of marketable securities 243,112 8,848
Cash paid for the acquisition of Smooch, net of cash acquired (70,794) 0
Purchase of strategic investment (500) 0
Net cash used in investing activities (15,829) (169,780)
Cash flows from financing activities    
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $13,506 0 561,493
Purchase of capped call related to convertible senior notes 0 (63,940)
Proceeds from exercises of employee stock options 13,210 9,747
Proceeds from employee stock purchase plan 15,310 9,949
Taxes paid related to net share settlement of share-based awards (5,079) (2,146)
Other 0 (1,716)
Net cash provided by financing activities 23,441 513,387
Effect of exchange rate changes on cash, cash equivalents and restricted cash 66 (36)
Net increase in cash, cash equivalents and restricted cash 44,505 383,509
Cash, cash equivalents and restricted cash at beginning of period 128,876 110,888
Cash, cash equivalents and restricted cash at end of period 173,381 494,397
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets    
Total cash, cash equivalents and restricted cash 128,876 110,888
Supplemental cash flow data    
Cash paid for interest 719 0
Cash paid for taxes 2,219 1,545
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses 12,636 4,921
Asset retirement obligations incurred 1,196 200
Property and equipment acquired through tenant improvement allowances 414 4,261
Estimated convertible senior notes offering costs incurred but not yet paid 0 55
Internal-Use Software Development Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs 800 1,499
Deferred Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs $ 666 $ 370
v3.19.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (PARENTHETICAL) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2019
Jun. 30, 2018
Statement of Cash Flows [Abstract]    
Payments of debt issuance costs $ 0 $ 13,506
v3.19.2
Overview and Basis of Presentation
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Overview and Basis of Presentation Overview and Basis of Presentation
Company and Background
Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.
We are a software development company that provides software as a service, or SaaS, products that are intended to help organizations and their customers build better experiences. Our product family is built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to a family of products and platform that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it’s needed most.
References to Zendesk, the “Company,” “our,” or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with 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 audited consolidated financial statements and notes included in our Annual Report on Form 10-K, for the year ended December 31, 2018, filed with the SEC on February 14, 2019. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.
The consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our 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 ending December 31, 2019.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, 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, as well as the reported amounts of revenue and expenses during the reported periods.
Significant items subject to such estimates and assumptions include:
the estimate of variable consideration related to revenue recognition;
the fair value and useful lives of acquired intangible assets;
the capitalization and useful life of capitalized costs to obtain customer contracts;
the valuation of strategic investments;
the useful lives of property and equipment;
the capitalization and useful lives of internal-use software;
the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
the fair value of asset retirement obligations;
the fair value and expense recognition for certain share-based awards;
the preparation of financial forecasts used in currency hedging; and
the recognition of tax benefits.
These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
Concentrations of Risk
As of June 30, 2019 and December 31, 2018, no customers represented 10% or greater of our total accounts receivable balance. There were no customers that individually exceeded 10% of our revenue during the three and six months ended June 30, 2019 or 2018.
Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, regarding ASC Topic 350 “Simplifying the Test for Goodwill Impairment,” which simplifies the required methodology to calculate an impairment charge for goodwill. The standard is effective for fiscal years beginning after December 15, 2019, however early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, regarding ASC Topic 820 “Fair Value Measurement,” which modifies the disclosure requirements for fair value measurements for certain types of investments. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, regarding ASC Topic 842 “Leases,” including subsequent amendments. We refer to the new guidance as “ASC 842.” This new guidance requires lessees to recognize most leases on their balance sheets as lease right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.
We adopted ASC 842 in the first quarter of 2019 and applied the following practical expedients:

comparative periods prior to the adoption date are not adjusted to reflect the new guidance (the modified retrospective method of transition); and
the historical determination as to the existence and classification of leases is carried forward for existing contracts as of the adoption date.
The effect of adopting ASC 842 resulted in the recognition of lease right-of-use assets and corresponding lease liabilities on our condensed consolidated balance sheets. As of March 31, 2019, the first quarter of adoption, the aggregate balance of lease right-of-use assets and lease liabilities was $99 million and $114 million, respectively. The standard did not affect our consolidated statement of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12, regarding ASC Topic 815 “Derivatives and Hedging.” This guidance simplifies various aspects of hedge accounting, including the measurement and presentation of hedge ineffectiveness and certain documentation and assessment requirements. The guidance also makes more hedging strategies eligible for hedge
accounting. We adopted this standard in the first quarter of 2019. Upon adoption, we no longer recognize hedge ineffectiveness immediately in our consolidated statements of operations, but we instead recognize the entire change in the fair value of the hedge contract in other comprehensive income. The cumulative-effect adjustment to eliminate ineffectiveness was not material. The presentation and disclosures have been modified on a prospective basis, as required by the guidance.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income,” which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. We have elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings, therefore the adoption did not have an effect on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, regarding ASC Topic 718 “Compensation - Stock Compensation,” which largely aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-08, regarding ASC Topic 958 “Not-for-Profit Entities,” which clarified the guidance on how entities determine whether to account for a transfer of assets as an exchange transaction or a contribution. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, regarding ASC Topic 350-40 “Intangibles - Internal-Use Software,” which 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 guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. We early adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.
v3.19.2
Business Combinations
6 Months Ended
Jun. 30, 2019
Business Combinations [Abstract]  
Business Combinations Business Combinations
Smooch Technologies Holdings ULC
On May 14, 2019, we completed the acquisition of Smooch Technologies Holdings ULC, or Smooch, a developer of messaging technology. We acquired Smooch for purchase consideration of $72 million in cash. In connection with the acquisition, we incurred transaction costs of $3 million within general and administrative expenses and share-based compensation expense of $5 million, primarily within general and administrative expenses, resulting from the accelerated vesting of certain unvested Smooch stock options because post-combination service requirements were eliminated.
The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary area that remains preliminary relates to the evaluation of certain tax-related items. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands).
The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from the expansion of the scope of and market opportunity for our products. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is deductible in the U.S. over 15 years for income tax purposes.
Net tangible assets
$
2,053

Net deferred tax liability
(1,326
)
Identifiable intangible assets:
 
Developed technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,245

Total purchase consideration
$
71,872



The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 5.5, 8.0, and 2.0 years, respectively.

In connection with the acquisition, we granted cash-based retention awards to certain employees of Smooch, which vest over a required service period. The awards will be recorded as expense and were not included in the total purchase consideration.
From the date of the acquisition, the results of operations of Smooch have been included in and are immaterial to our consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of Smooch are not material to our consolidated financial statements in any period presented.
FutureSimple Inc.
On September 10, 2018, we completed the acquisition of FutureSimple Inc., or FutureSimple, the developer of Base, a sales force automation software product. We acquired FutureSimple for purchase consideration of $81 million in cash. We incurred transaction costs of $2 million in connection with the acquisition, which were included within general and administrative expenses.
The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary areas that remain preliminary relate to the evaluation of certain tax-related items. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands). During the three months ended June 30, 2019, we made certain immaterial adjustments to the preliminary purchase price allocation, which are reflected in the table below.
The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from the expansion of the scope of and market opportunity for our products. Goodwill is not deductible for income tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.
Net tangible liabilities
$
(2,966
)
Identifiable intangible assets:
 
Developed technology
19,000

Customer relationships
10,400

Backlog
2,200

Goodwill
52,389

Total purchase consideration
$
81,023



The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 6.5, 5.0, and 2.0 years, respectively.

In connection with the acquisition, we granted cash and share-based retention awards to certain employees of FutureSimple. The cash awards vest over a required service period and the share-based awards vest upon fulfillment of certain service and performance conditions. Each retention award will be recorded as expense based on the fulfillment of such service and performance conditions, as applicable, and is not included in the total purchase consideration.
From the date of the acquisition, the results of operations of FutureSimple have been included in and are immaterial to our consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of FutureSimple are not material to our consolidated financial statements in any period presented.
v3.19.2
Financial Instruments
6 Months Ended
Jun. 30, 2019
Fair Value Disclosures [Abstract]  
Financial Instruments Financial Instruments

Investments
The following tables present information about our financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
 
Fair Value Measurement at
June 30, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
436,124

 
$
436,124

Asset-backed securities

 
130,291

 
130,291

Money market funds
63,341

 

 
63,341

U.S. treasury securities

 
55,932

 
55,932

Commercial paper

 
6,927

 
6,927

Certificates of deposit

 
650

 
650

Total
$
63,341

 
$
629,924

 
$
693,265

Included in cash and cash equivalents
 
 
 
 
$
66,090

Included in marketable securities
 
 
 
 
$
627,175

 
Fair Value Measurement at
December 31, 2018
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
460,210

 
$
460,210

Asset-backed securities

 
127,078

 
127,078

U.S. treasury securities

 
58,039

 
58,039

Money market funds
57,758

 

 
57,758

Commercial paper

 
38,900

 
38,900

Agency securities

 
11,256

 
11,256

Certificates of deposit and time deposits

 
3,200

 
3,200

Total
$
57,758

 
$
698,683

 
$
756,441

Included in cash and cash equivalents
 
 
 
 
$
62,557

Included in marketable securities
 
 
 
 
$
693,884


 
As of June 30, 2019 and December 31, 2018, there were no securities within Level 3 of the fair value hierarchy. There were no transfers between fair value measurement levels during the three and six months ended June 30, 2019. Gross unrealized gains and losses for cash equivalents and marketable securities as of June 30, 2019 were $5 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities as of June 30, 2019 was $689 million. Gross unrealized gains and losses for cash equivalents and marketable securities as of December 31, 2018 were not material. Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of June 30, 2019 and December 31, 2018 were not material.
The following table classifies our marketable securities by contractual maturity (in thousands):
 
 
June 30,
2019
 
December 31,
2018
Due in one year or less
$
255,930

 
$
300,213

Due after one year and within five years
371,245

 
393,671

Total
$
627,175

 
$
693,884


 
As of June 30, 2019 and December 31, 2018, the balance of strategic investments without readily determinable fair values was $11 million and $10 million, respectively. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes.
For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
Derivative Instruments and Hedging
Our foreign currency exposures typically arise from expenditures associated with foreign operations and sales in foreign currencies of our products. To mitigate the effect of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts with certain financial institutions and designate those contracts as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
Upon the adoption of ASU 2017-12 in the first quarter of 2019, we include time value related to our cash flow hedges for effectiveness testing purposes and the entire change in the unrecognized value of our hedge contracts is recorded in accumulated other comprehensive income (loss), or AOCI. Prior to adoption, we excluded time value for effectiveness testing purposes and we recognized changes in time value immediately in other income (expense), net.
As of June 30, 2019, the balance of AOCI included an unrecognized net gain of $1 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net gain of $1 million into earnings over the next 12 months associated with our cash flow hedges.
The following tables present information about our derivative instruments on our consolidated balance sheets (in thousands):
 
 
June 30, 2019
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
1,905

 
Accrued liabilities
 
$
2,500

Total
 
 
$
1,905

 
 
 
$
2,500

 
December 31, 2018
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
2,047

 
Accrued liabilities
 
$
4,862

Total
 
 
$
2,047

 
 
 
$
4,862


 
Our foreign currency forward contracts had a total notional value of $227 million and $200 million as of June 30, 2019 and December 31, 2018, respectively. We have a master netting arrangement with each of our counterparties, which permit net settlement of multiple, separate derivative contracts with a single payment. We may also be required to exchange cash collateral with certain of our counterparties on a regular basis. GAAP permits companies to present the fair value of derivative instruments on a net basis according to master netting arrangements. We have elected to present our derivative instruments on a gross basis in our consolidated financial statements. We do not enter into any derivative contracts for trading or speculative purposes. As of June 30, 2019 and December 31, 2018, there was no cash collateral posted with counterparties. All derivatives have been designated as hedging instruments.
The following table presents information about our foreign currency forward contracts on our condensed consolidated statements of operations for the three and six months ended June 30, 2019 (in thousands):
 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Classification
Gain (Loss) Reclassified from AOCI into Earnings
 
Gain (Loss) Reclassified from AOCI into Earnings
Revenue
$
589

 
$
1,032

Cost of revenue
(393
)
 
(867
)
Research and development
(331
)
 
(765
)
Sales and marketing
(630
)
 
(1,420
)
General and administrative
(221
)
 
(497
)
 Total
$
(986
)
 
$
(2,517
)

The gain recognized in AOCI related to foreign currency forward contracts was not material for the three and six months ended June 30, 2019.
The loss recognized in AOCI related to foreign currency forward contracts was $3 million for both the three and six months ended June 30, 2018. The gain reclassified from AOCI into earnings related to foreign currency forward contracts was not material and $1 million for the three and six months ended June 30, 2018, which was included within revenue, cost of revenue and operating expenses on our consolidated statements of operations.

The cash flow effects related to foreign currency forward contracts are included within operating activities on our consolidated statements of cash flows.
Convertible Senior Notes
As of June 30, 2019, the fair value of our convertible senior notes was $877 million. The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $89.03 on the last trading day of the quarter, the if-converted value of our convertible senior notes exceeded the principal amount of $575 million as of June 30, 2019.
v3.19.2
Costs to Obtain Customer Contracts
6 Months Ended
Jun. 30, 2019
Revenue from Contract with Customer [Abstract]  
Costs to Obtain Customer Contracts Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $62 million and $52 million as of June 30, 2019 and December 31, 2018, respectively. Amortization expense for these deferred costs was $8 million and $5 million for the three months ended June 30, 2019 and 2018, respectively, and $15 million and $10 million for the six months ended June 30, 2019 and 2018, respectively. There were no impairment losses related to these deferred costs for the periods presented.
Deferred Revenue and Performance Obligations
During the three months ended June 30, 2019 and 2018, $126 million and $93 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively. During the six months ended June 30, 2019 and 2018, $189 million and $139 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively.
The aggregate balance of remaining performance obligations as of June 30, 2019 was $526 million. We expect to recognize $390 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.19.2
Property and Equipment
6 Months Ended
Jun. 30, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 
June 30,
2019
 
December 31,
2018
Leasehold improvements
$
58,844

 
$
51,832

Capitalized internal-use software
39,264

 
36,444

Computer equipment and licensed software and patents
23,345

 
21,100

Furniture and fixtures
12,055

 
11,550

Construction in progress
19,026

 
10,538

Hosting equipment

 
34,105

Total
152,534

 
165,569

Less: accumulated depreciation and amortization
(65,014
)
 
(89,915
)
Property and equipment, net
$
87,520

 
$
75,654


 
Depreciation expense was $5 million and $7 million for the three months ended June 30, 2019 and 2018, respectively, and $10 million and $13 million for the six months ended June 30, 2019 and 2018, respectively.
Amortization expense of capitalized internal-use software was $2 million and $1 million for the three months ended June 30, 2019 and 2018, respectively, and $3 million for each of the six months ended June 30, 2019 and 2018. The carrying value of capitalized internal-use software as of June 30, 2019 and December 31, 2018 was $20 million and $19 million, respectively, including $3 million in construction in progress for both periods.

During the first quarter of 2019, we completed the transition from our self-managed colocation data centers to third-party managed hosting services, at which time, we concluded that these assets met the criteria to be classified as held for sale. Accordingly, these assets were written down to their estimated salvage value and reclassified from property and equipment to other current assets, with $34 million and $33 million being reclassified from hosting equipment and accumulated depreciation respectively, for a net amount of $1 million.
v3.19.2
Leases
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
Leases Leases
We lease office space under noncancelable operating leases with various expiration dates. Additionally, we are the sublessor for certain office space. All of our office leases are classified as operating leases with lease expense recognized on a straight-line basis over the lease term.

Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that we will exercise the extension option.
Our operating leases typically include non-lease components such as common-area maintenance costs. We have elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
Leases with a term of one year or less are not recognized on our consolidated balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The following tables present information about leases on our consolidated balance sheet (in thousands):
 
June 30, 2019
Assets
 
Lease right-of-use assets
$
102,702

Liabilities
 
Lease liabilities
22,784

Lease liabilities, noncurrent
97,860


    
As of June 30, 2019, the weighted average remaining lease term was 6.1 years and the weighted average discount rate was 5.3%.
The following table presents information about leases on our consolidated statement of operations (in thousands):
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease expense
$
5,794

 
$
10,839

Short-term lease expense
995

 
1,869

Variable lease expense
2,343

 
3,228

Sublease income
392

 
793



The following table presents supplemental cash flow information about our leases (in thousands):
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
8,343

Operating lease assets obtained in exchange for new lease liabilities
27,541



As of June 30, 2019, remaining maturities of lease liabilities are as follows:
Remainder of 2019
$
13,474

2020
27,741

2021
25,263

2022
23,768

2023
17,137

Thereafter
33,076

Total lease payments
140,459

Less imputed interest
19,815

Total
$
120,644



The table above excludes future payments of $3 million related to signed leases that have not yet commenced.
v3.19.2
Goodwill and Acquired Intangible Assets
6 Months Ended
Jun. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Acquired Intangible Assets Goodwill and Acquired Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2019 are as follows (in thousands):
Balance as of December 31, 2018
$
111,584

Goodwill acquired
58,245

Goodwill adjustments
(240
)
Balance as of June 30, 2019
$
169,589


Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 
As of June 30, 2019
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(11,078
)
 
$
27,922

 
5.2
Customer relationships
15,210

 
(2,485
)
 
12,725

 
5.2
Backlog
3,200

 
(1,000
)
 
2,200

 
1.5
 
$
57,410

 
$
(14,563
)
 
$
42,847

 
 
 
 
As of December 31, 2018
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
31,000

 
$
(8,151
)
 
$
22,849

 
5.5
Customer relationships
11,310

 
(1,249
)
 
10,061

 
4.6
Backlog
2,200

 
(367
)
 
1,833

 
1.7
 
$
44,510

 
$
(9,767
)
 
$
34,743

 
 

 
Amortization expense of acquired intangible assets was $3 million and $1 million for the three months ended June 30, 2019 and 2018, respectively, and $5 million and $1 million for the six months ended June 30, 2019 and 2018, respectively.     
Estimated future amortization expense as of June 30, 2019 is as follows (in thousands):
Remainder of 2019
$
5,647

2020
9,270

2021
7,596

2022
7,430

2023
6,659

Thereafter
6,245

 
$
42,847

v3.19.2
0.25% Convertible Senior Notes and Capped Call
6 Months Ended
Jun. 30, 2019
Debt Disclosure [Abstract]  
0.25% Convertible Senior Notes and Capped Call 0.25% Convertible Senior Notes and Capped Call

In March 2018, we issued $575 million aggregate principal amount of 0.25% convertible senior notes due March 15, 2023 in a private offering (the “Notes”). The Notes are unsecured obligations and bear interest at a fixed rate of 0.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2018. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $561 million.

Each $1,000 principal amount of the Notes will initially be convertible into 15.8554 shares of our common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $63.07 per share, subject to adjustment upon the occurrence of specified events. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, the “Measurement Period,” in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events (as set forth in the indenture). On or after December 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless
of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. If certain specified fundamental changes occur (as set forth in the indenture governing the Notes) prior to the maturity date, holders of the Notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. It is our current intent and policy to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes.

For more than 20 trading days during the 30 consecutive trading days ended June 30, 2019, the last reported sale price of our common stock was equal to or exceeded 130% of the conversion price of the Notes. As a result, the Notes will be convertible at the option of the holders during the quarter ending September 30, 2019 and were classified as current liabilities on our consolidated balance sheet as of June 30, 2019. As of the date of this filing, none of the holders of the Notes have submitted requests for conversion.

In accounting for the transaction, the Notes were separated 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 conversion feature. The carrying amount of the equity component representing the Conversion Option was $125 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was recorded in additional paid-in capital and 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, the “Debt Discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 5.26%.

In accounting for the debt issuance costs of $14 million related to the Notes, we allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $11 million and are amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

The net carrying amount of the liability component of the Notes is as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
Principal
$
575,000

 
$
575,000

Unamortized Debt Discount
(95,917
)
 
(107,494
)
Unamortized issuance costs
(8,442
)
 
(9,330
)
Net carrying amount
$
470,641

 
$
458,176


The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
Debt Discount for Conversion Option
$
124,976

 
$
124,976

Issuance costs
(2,948
)
 
(2,948
)
Net carrying amount
$
122,028

 
$
122,028



Interest expense related to the Notes is as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
359

 
$
359

 
$
719

 
$
403

Amortization of Debt Discount
5,826

 
5,531

 
11,577

 
6,202

Amortization of issuance costs
451

 
399

 
888

 
448

Total interest expense
$
6,636

 
$
6,289

 
$
13,184

 
$
7,053



In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $63.07 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $95.20 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 9.1 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to our 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. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $64 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
  
The net impact to our stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows (in thousands):

Conversion Option
 
$
124,976

Purchase of Capped Calls
 
(63,940
)
Issuance costs
 
(2,948
)
Net deferred tax liability
 
(13,784
)
Total
 
$
44,304


v3.19.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Commitments
As of June 30, 2019, there were no material changes in our commitments under contractual obligations, as disclosed in our audited consolidated financial statements for the year ended December 31, 2018.
Litigation and Loss Contingencies
We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims that arise in the ordinary course of business, including intellectual property claims, labor and employment claims, threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.
We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our products or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary. To date, we have not incurred any material costs, and we have not accrued any liabilities in our consolidated financial statements, as a result of these obligations.
Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance, which permit those customers to receive credits for future services in the event that we fail to meet those levels. To date, we have not accrued for any significant liabilities in our consolidated financial statements as a result of these service-level agreements.
v3.19.2
Common Stock and Stockholders' Equity
6 Months Ended
Jun. 30, 2019
Equity [Abstract]  
Common Stock and Stockholders' Equity 10. Common Stock and Stockholders’ Equity
Common Stock
As of June 30, 2019 and December 31, 2018, there were 400 million shares of common stock authorized for issuance with a par value of $0.01 per share and 110.7 million and 108.0 million shares were issued and outstanding, respectively.
Preferred Stock
As of each of June 30, 2019 and December 31, 2018, there were 10 million shares of preferred stock authorized for issuance with a par value of $0.01 per share and no shares of preferred stock were issued or outstanding.
Employee Equity Plans
Employee Stock Purchase Plan
Under our Employee Stock Purchase Plan, or ESPP, eligible employees are granted options to purchase shares of our common stock through payroll deductions. The ESPP provides for 18-month offering periods, which include three six-month purchase periods. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock at the beginning of an offering period or the fair market value of our common stock at the end of the purchase period. During the three and six months ended June 30, 2019, 0.4 million shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.1 million shares on January 1, 2019. As of June 30, 2019, 4.6 million shares of common stock were available for issuance under the ESPP.
Stock Option and Grant Plans
Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our initial public offering in May 2014, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.
Our 2014 Stock Option and Incentive Plan, or the 2014 Plan, serves as the successor to our 2009 Plan. Pursuant to the terms of the 2014 Plan, the number of shares reserved for issuance under the 2014 Plan increased by 5.4 million shares on January 1, 2019. As of June 30, 2019, we had 11.8 million shares of common stock available for future grants under the 2014 Plan.
On May 6, 2016, the compensation committee of our board of directors granted equity awards representing 1.2 million shares of common stock. These awards were granted outside of the 2014 Plan pursuant to an exemption provided for “employment inducement awards” within the meaning of Section 303A.08 of the New York Stock Exchange Listed Company Manual and accordingly did not require approval from our stockholders.
A summary of our share-based award activity for the six months ended June 30, 2019 is as follows (in thousands, except per share information):
 
 
 
 
Options Outstanding
 
RSUs Outstanding
Shares
Available
for Grant
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding
RSUs
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(In years)
 
 
 
 
 
 
 
 
Outstanding — January 1, 2019
8,232

 
5,938

 
$
20.85

 
6.58
 
$
222,959

 
6,611

 
$
37.77

 
$
385,891

Increase in authorized shares
5,402

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options granted
(336
)
 
336

 
73.27

 
 
 
 
 
 
 
 
 
 
RSUs granted
(2,003
)
 
 
 
 
 
 
 
 
 
2,003

 
69.61

 
 
Stock options exercised
 
 
(626
)
 
21.09

 
 
 
 
 
 
 
 
 
 
RSUs vested
 
 
 
 
 
 
 
 
 
 
(1,661
)
 
36.06

 
 
Stock options forfeited or canceled
81

 
(81
)
 
42.48

 
 
 
 
 
 
 
 
 
 
RSUs forfeited or canceled
476

 
 
 
 
 
 
 
 
 
(476
)
 
41.95

 
 
RSUs forfeited or canceled and unavailable for grant
 
 
 
 
 
 
 
 
 
 
(15
)
 
23.44

 
 
Outstanding — June 30, 2019
11,852

 
5,567

 
$
23.67

 
6.29
 
$
363,982

 
6,462

 
$
47.80

 
$
575,132


 
The restricted stock units, or RSUs, forfeited or canceled and unavailable for grant relate to our employment inducement awards. The aggregate intrinsic value for options outstanding represents the difference between the closing market price of our common stock on the last trading day of the reporting period and the exercise price of outstanding, in-the-money options.

The total intrinsic value of stock options exercised during six months ended June 30, 2019 and 2018 was $38 million and $21 million, respectively. The intrinsic value for options exercised represents the difference between the exercise price and the market value on the date of exercise. The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2019 and 2018 was $28.65 and $17.53, respectively.

The total fair value of RSUs vested during the six months ended June 30, 2019 and 2018 was $132 million and $74 million, respectively. The fair value of RSUs vested represents market value on the vesting date. The weighted-average grant date fair value of RSUs granted during the six months ended June 30, 2019 and 2018 was $69.61, and $39.43, respectively.
As of June 30, 2019, we had a total of $329 million in future expense related to our stock options and RSUs to be recognized over a weighted average period of 2.8 years.
Performance Restricted Stock Units
During the three months ended September 30, 2018, the compensation committee of our board of directors granted performance-based restricted stock units, or PRSUs, representing 0.2 million shares of common stock, the substantial majority of which were granted in connection with the acquisition of FutureSimple. The PRSUs vest in four semi-annual tranches through March 2021. The PRSUs include a service condition and a performance condition related to the attainment of semi-annual performance targets approved and communicated in advance of each performance period. For the three and six months ended June 30, 2019, we recorded $3 million and $4 million of share-based compensation expense, respectively, related to the PRSUs, including a one-time charge related to accelerated retention compensation. For the three and six months ended June 30, 2019, no PRSUs were vested. The total future expense related to the PRSUs will be based on the fair value of the underlying shares on the grant date for each performance tranche.
v3.19.2
Deferred Revenue and Performance Obligations
6 Months Ended
Jun. 30, 2019
Revenue from Contract with Customer [Abstract]  
Deferred Revenue and Performance Obligations Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $62 million and $52 million as of June 30, 2019 and December 31, 2018, respectively. Amortization expense for these deferred costs was $8 million and $5 million for the three months ended June 30, 2019 and 2018, respectively, and $15 million and $10 million for the six months ended June 30, 2019 and 2018, respectively. There were no impairment losses related to these deferred costs for the periods presented.
Deferred Revenue and Performance Obligations
During the three months ended June 30, 2019 and 2018, $126 million and $93 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively. During the six months ended June 30, 2019 and 2018, $189 million and $139 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively.
The aggregate balance of remaining performance obligations as of June 30, 2019 was $526 million. We expect to recognize $390 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.19.2
Net Loss Per Share
6 Months Ended
Jun. 30, 2019
Earnings Per Share [Abstract]  
Net Loss Per Share Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
Net loss
$
(54,541
)
 
$
(34,366
)
 
$
(99,261
)
 
$
(63,691
)
Weighted-average shares used to compute basic and diluted net loss per share
109,986


105,000


109,312


104,350

Net loss per share, basic and diluted
$
(0.50
)
 
$
(0.33
)
 
$
(0.91
)
 
$
(0.61
)

 
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
 
As of June 30,
2019
 
2018
Shares subject to outstanding common stock options and employee stock purchase plan
5,647

 
6,358

Restricted stock units
6,462

 
7,472

Shares related to convertible senior notes
2,426

 

 
14,535

 
13,830

 

The shares related to convertible senior notes calculated in the table above are calculated based on the average market price of our common stock for the three months ended June 30, 2019.

We expect to settle the principal amount of the convertible senior notes in cash and therefore use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread has a dilutive impact on diluted net income per share when the average market price of our common stock for a given reporting period exceeds the initial conversion price of $63.07 per share for the convertible senior notes. Based on the initial conversion price, potential dilution related to the convertible senior notes is approximately 9.1 million shares. The convertible senior notes will be convertible during the quarter ending September 30, 2019.
v3.19.2
Income Taxes
6 Months Ended
Jun. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
We reported income tax expense of $1 million in each of the three and six months ended June 30, 2019. We reported a benefit from income taxes of $2 million and $5 million in the three and six months ended June 30, 2018, primarily due to the recognition of an income tax benefit related to taxable temporary differences of the convertible senior notes and the capped call. The effective tax rate for each period differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.
v3.19.2
Geographic Information
6 Months Ended
Jun. 30, 2019
Segment Reporting [Abstract]  
Geographic Information Geographic Information
Our chief operating decision maker reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reporting segment.
Revenue
The following table presents our revenue by geographic area, as determined based on the billing address of our customers (in thousands):
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
2019
 
2018
 
2019
 
2018
United States
$
101,014

 
$
73,019

 
$
195,916

 
$
141,373

EMEA
55,457

 
41,765

 
107,532

 
79,637

APAC
21,258

 
16,111

 
40,734

 
30,107

Other
16,854

 
10,987

 
31,886

 
20,556

Total
$
194,583

 
$
141,882

 
$
376,068

 
$
271,673


Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
 
As of
June 30, 2019
 
As of
December 31, 2018
United States
$
82,009

 
$
32,351

EMEA:
 
 
 
Republic of Ireland
44,971

 
14,698

Other EMEA
7,171

 
2,450

Total EMEA
52,142

 
17,148

APAC:
 
 
 
Singapore
29,326

 
1,117

Other APAC
7,142

 
5,772

Total APAC
36,468

 
6,889

Total
$
170,619

 
$
56,388


 
The carrying values of capitalized internal-use software and intangible assets are excluded from the balance of long-lived assets presented in the table above.
v3.19.2
Overview and Basis of Presentation (Policies)
6 Months Ended
Jun. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with 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 audited consolidated financial statements and notes included in our Annual Report on Form 10-K, for the year ended December 31, 2018, filed with the SEC on February 14, 2019. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes, except as described below.
The consolidated balance sheet as of December 31, 2018 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our 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 ending December 31, 2019.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, 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, as well as the reported amounts of revenue and expenses during the reported periods.
Significant items subject to such estimates and assumptions include:
the estimate of variable consideration related to revenue recognition;
the fair value and useful lives of acquired intangible assets;
the capitalization and useful life of capitalized costs to obtain customer contracts;
the valuation of strategic investments;
the useful lives of property and equipment;
the capitalization and useful lives of internal-use software;
the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
the fair value of asset retirement obligations;
the fair value and expense recognition for certain share-based awards;
the preparation of financial forecasts used in currency hedging; and
the recognition of tax benefits.
These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates
Concentrations of Risk
As of June 30, 2019 and December 31, 2018, no customers represented 10% or greater of our total accounts receivable balance. There were no customers that individually exceeded 10% of our revenue during the three and six months ended June 30, 2019 or 2018.
Recently Issued and Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, regarding ASC Topic 350 “Simplifying the Test for Goodwill Impairment,” which simplifies the required methodology to calculate an impairment charge for goodwill. The standard is effective for fiscal years beginning after December 15, 2019, however early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, regarding ASC Topic 820 “Fair Value Measurement,” which modifies the disclosure requirements for fair value measurements for certain types of investments. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, regarding ASC Topic 842 “Leases,” including subsequent amendments. We refer to the new guidance as “ASC 842.” This new guidance requires lessees to recognize most leases on their balance sheets as lease right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.
We adopted ASC 842 in the first quarter of 2019 and applied the following practical expedients:

comparative periods prior to the adoption date are not adjusted to reflect the new guidance (the modified retrospective method of transition); and
the historical determination as to the existence and classification of leases is carried forward for existing contracts as of the adoption date.
The effect of adopting ASC 842 resulted in the recognition of lease right-of-use assets and corresponding lease liabilities on our condensed consolidated balance sheets. As of March 31, 2019, the first quarter of adoption, the aggregate balance of lease right-of-use assets and lease liabilities was $99 million and $114 million, respectively. The standard did not affect our consolidated statement of operations or cash flows.
In August 2017, the FASB issued ASU 2017-12, regarding ASC Topic 815 “Derivatives and Hedging.” This guidance simplifies various aspects of hedge accounting, including the measurement and presentation of hedge ineffectiveness and certain documentation and assessment requirements. The guidance also makes more hedging strategies eligible for hedge
accounting. We adopted this standard in the first quarter of 2019. Upon adoption, we no longer recognize hedge ineffectiveness immediately in our consolidated statements of operations, but we instead recognize the entire change in the fair value of the hedge contract in other comprehensive income. The cumulative-effect adjustment to eliminate ineffectiveness was not material. The presentation and disclosures have been modified on a prospective basis, as required by the guidance.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income,” which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. We have elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings, therefore the adoption did not have an effect on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, regarding ASC Topic 718 “Compensation - Stock Compensation,” which largely aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-08, regarding ASC Topic 958 “Not-for-Profit Entities,” which clarified the guidance on how entities determine whether to account for a transfer of assets as an exchange transaction or a contribution. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, regarding ASC Topic 350-40 “Intangibles - Internal-Use Software,” which 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 guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. We early adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.
Leases
Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that we will exercise the extension option.
v3.19.2
Business Combinations (Tables)
6 Months Ended
Jun. 30, 2019
Business Combinations [Abstract]  
Summary of Assets Acquired and Liabilities Assumed Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.
Net tangible liabilities
$
(2,966
)
Identifiable intangible assets:
 
Developed technology
19,000

Customer relationships
10,400

Backlog
2,200

Goodwill
52,389

Total purchase consideration
$
81,023


Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is deductible in the U.S. over 15 years for income tax purposes.
Net tangible assets
$
2,053

Net deferred tax liability
(1,326
)
Identifiable intangible assets:
 
Developed technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,245

Total purchase consideration
$
71,872


v3.19.2
Financial Instruments (Tables)
6 Months Ended
Jun. 30, 2019
Fair Value Disclosures [Abstract]  
Assets Measured at Fair Value on Recurring Basis
The following tables present information about our financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
 
 
Fair Value Measurement at
June 30, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
436,124

 
$
436,124

Asset-backed securities

 
130,291

 
130,291

Money market funds
63,341

 

 
63,341

U.S. treasury securities

 
55,932

 
55,932

Commercial paper

 
6,927

 
6,927

Certificates of deposit

 
650

 
650

Total
$
63,341

 
$
629,924

 
$
693,265

Included in cash and cash equivalents
 
 
 
 
$
66,090

Included in marketable securities
 
 
 
 
$
627,175

 
Fair Value Measurement at
December 31, 2018
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
460,210

 
$
460,210

Asset-backed securities

 
127,078

 
127,078

U.S. treasury securities

 
58,039

 
58,039

Money market funds
57,758

 

 
57,758

Commercial paper

 
38,900

 
38,900

Agency securities

 
11,256

 
11,256

Certificates of deposit and time deposits

 
3,200

 
3,200

Total
$
57,758

 
$
698,683

 
$
756,441

Included in cash and cash equivalents
 
 
 
 
$
62,557

Included in marketable securities
 
 
 
 
$
693,884


Schedule of Marketable Securities Classified by Contractual Maturity
The following table classifies our marketable securities by contractual maturity (in thousands):
 
 
June 30,
2019
 
December 31,
2018
Due in one year or less
$