ZENDESK, INC., 10-Q filed on 7/31/2020
Quarterly Report
v3.20.2
Cover Page - shares
6 Months Ended
Jun. 30, 2020
Jul. 30, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
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 $0.01 per share  
Trading Symbol ZEN  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   115,426,049
Amendment Flag false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001463172  
Current Fiscal Year End Date --12-31  
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 700,457 $ 196,591
Marketable securities 296,829 286,958
Accounts receivable, net of allowance for doubtful accounts of $7,914 and $2,846 as of June 30, 2020 and December 31, 2019, respectively 143,017 127,808
Deferred costs 40,939 35,619
Prepaid expenses and other current assets 50,210 45,847
Total current assets 1,231,452 692,823
Marketable securities, noncurrent 303,861 361,948
Property and equipment, net 102,601 102,090
Deferred costs, noncurrent 38,192 35,230
Lease right-of-use assets 93,523 89,983
Goodwill and intangible assets, net 201,804 206,883
Other assets 24,585 25,632
Total assets 1,996,018 1,514,589
Current liabilities:    
Accounts payable 13,793 38,376
Accrued liabilities 35,904 36,347
Accrued compensation and related benefits 64,270 61,512
Deferred revenue 314,179 320,642
Lease liabilities 23,309 21,804
Total current liabilities 451,455 478,681
Convertible senior notes, net 1,043,365 483,464
Deferred revenue, noncurrent 1,934 3,320
Lease liabilities, noncurrent 83,495 83,478
Other liabilities 5,460 7,662
Total liabilities 1,585,709 1,056,605
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock 0 0
Common stock 1,151 1,130
Additional paid-in capital 1,212,469 1,155,044
Accumulated other comprehensive income 2,834 591
Accumulated deficit (806,145) (698,781)
Total stockholders’ equity 410,309 457,984
Total liabilities and stockholders’ equity $ 1,996,018 $ 1,514,589
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 7,914 $ 2,846
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Statement [Abstract]        
Revenue $ 246,664 $ 194,583 $ 484,140 $ 376,068
Cost of revenue [1] 61,515 57,670 121,217 113,324
Gross profit 185,149 136,913 362,923 262,744
Operating expenses:        
Research and development [1] 59,003 50,510 119,424 97,301
Sales and marketing [1] 121,397 94,746 245,707 186,447
General and administrative [1] 36,247 43,019 70,573 74,271
Total operating expenses [1] 216,647 188,275 435,704 358,019
Operating loss (31,498) (51,362) (72,781) (95,275)
Other expense, net:        
Interest expense (8,086) (6,614) (14,973) (13,158)
Loss on early extinguishment of debt (25,950) 0 (25,950) 0
Interest and other income, net 2,166 4,026 9,068 10,196
Total other expense, net (31,870) (2,588) (31,855) (2,962)
Loss before provision for income taxes (63,368) (53,950) (104,636) (98,237)
Provision for income taxes 1,288 591 2,804 1,024
Net loss $ (64,656) $ (54,541) $ (107,440) $ (99,261)
Net loss per share, basic and diluted (usd per share) $ (0.56) $ (0.50) $ (0.94) $ (0.91)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 114,600 109,986 114,069 109,312
[1] Includes share-based compensation expense as follows:
 
 Three Months Ended
June 30,
Six Months Ended
June 30,
2020201920202019
Cost of revenue$5,187  $5,246  $10,246  $10,183  
Research and development12,529  11,911  25,155  23,548  
Sales and marketing17,573  13,575  34,132  25,973  
General and administrative8,423  13,019  16,261  20,704  
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Share-based compensation     $ 85,794 $ 80,408
Cost of revenue        
Share-based compensation $ 5,187 $ 5,246 10,246 10,183
Research and development        
Share-based compensation 12,529 11,911 25,155 23,548
Sales and marketing        
Share-based compensation 17,573 13,575 34,132 25,973
General and administrative        
Share-based compensation $ 8,423 $ 13,019 $ 16,261 $ 20,704
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Statement of Comprehensive Income [Abstract]        
Net loss $ (64,656) $ (54,541) $ (107,440) $ (99,261)
Other comprehensive income, before tax:        
Net unrealized gain on available-for-sale investments 7,573 2,291 4,178 5,633
Net unrealized gain (loss) on derivative instruments 6,112 1,452 (1,236) 2,576
Other comprehensive income, before tax 13,685 3,743 2,942 8,209
Tax effect (699) (641) (699) (1,713)
Other comprehensive income, net of tax 12,986 3,102 2,243 6,496
Comprehensive loss $ (51,670) $ (51,439) $ (105,197) $ (92,765)
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
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      
Issuance of common stock upon exercise of stock options 13,209 $ 5 13,204    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   1,661      
Issuance of common stock for settlement of RSUs and PRSUs (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    
Other comprehensive income, net of tax 6,496     6,496  
Net loss (99,261)       (99,261)
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 and PRSUs (in shares)   814      
Issuance of common stock for settlement of RSUs and PRSUs (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    
Other comprehensive income, 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)
Beginning balance (in shares) at Dec. 31, 2019   113,081      
Beginning balance at Dec. 31, 2019 $ 457,984 $ 1,130 1,155,044 591 (698,781)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares) 334 334      
Issuance of common stock upon exercise of stock options $ 9,102 $ 3 9,099    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   1,418      
Issuance of common stock for settlement of RSUs and PRSUs (4,138) $ 14 (4,152)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   353      
Issuance of common stock in connection with employee stock purchase plan 19,952 $ 4 19,948    
Share-based compensation 88,053   88,053    
Equity component of 2025 convertible senior notes 216,026   216,026    
Purchase of capped calls related to 2025 convertible senior notes (129,950)   (129,950)    
Equity component of partial repurchase of 2023 convertible senior notes (224,639)   (224,639)    
Proceeds from capped calls related to 2023 convertible senior notes 83,040   83,040    
Other comprehensive income, net of tax 2,243     2,243  
Net loss (107,440)       (107,440)
Stockholders' Equity, Other 76       76
Ending balance (in shares) at Jun. 30, 2020   115,186      
Ending balance at Jun. 30, 2020 410,309 $ 1,151 1,212,469 2,834 (806,145)
Beginning balance (in shares) at Mar. 31, 2020   113,976      
Beginning balance at Mar. 31, 2020 449,943 $ 1,139 1,200,521 (10,152) (741,565)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   159      
Issuance of common stock upon exercise of stock options 5,103 $ 2 5,101    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   698      
Issuance of common stock for settlement of RSUs and PRSUs (2,241) $ 7 (2,248)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   353      
Issuance of common stock in connection with employee stock purchase plan 19,952 $ 4 19,948    
Share-based compensation 44,670   44,670    
Equity component of 2025 convertible senior notes 216,026   216,026    
Purchase of capped calls related to 2025 convertible senior notes (129,950)   (129,950)    
Equity component of partial repurchase of 2023 convertible senior notes (224,639)   (224,639)    
Proceeds from capped calls related to 2023 convertible senior notes 83,040   83,040    
Other comprehensive income, net of tax 12,986     12,986  
Net loss (64,656)       (64,656)
Stockholders' Equity, Other 76       76
Ending balance (in shares) at Jun. 30, 2020   115,186      
Ending balance at Jun. 30, 2020 $ 410,309 $ 1,151 $ 1,212,469 $ 2,834 $ (806,145)
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash flows from operating activities    
Net loss $ (107,440) $ (99,261)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 21,989 17,701
Share-based compensation 85,794 80,408
Amortization of deferred costs 20,730 14,540
Amortization of debt discount and issuance costs 14,036 12,465
Loss on early extinguishment of debt 25,950 0
Repayment of convertible senior notes attributable to debt discount (38,637) 0
Other 5,152 846
Changes in operating assets and liabilities:    
Accounts receivable (20,643) (22,867)
Prepaid expenses and other current assets (3,216) (9,154)
Deferred costs (28,315) (24,313)
Lease right-of-use assets 10,247 9,107
Other assets and liabilities (540) (1,740)
Accounts payable (23,015) 21,333
Accrued liabilities 976 455
Accrued compensation and related benefits 3,788 4,258
Deferred revenue (7,848) 39,443
Lease liabilities (12,328) (6,394)
Net cash provided by (used in) operating activities (53,320) 36,827
Cash flows from investing activities    
Purchases of property and equipment (15,560) (14,154)
Internal-use software development costs (6,283) (2,966)
Purchases of marketable securities (233,336) (270,823)
Proceeds from maturities of marketable securities 191,983 100,296
Proceeds from sales of marketable securities 94,598 243,112
Business combinations, net of cash acquired 0 (70,794)
Purchases of strategic investments (1,500) (500)
Net cash provided by (used in) investing activities 29,902 (15,829)
Cash flows from financing activities    
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $20,400 1,129,600 0
Purchase of capped calls related to 2025 convertible senior notes (129,950) 0
Payments for 2023 convertible senior notes partial repurchase (578,973) 0
Proceeds from capped calls related to 2023 convertible senior notes 83,040 0
Proceeds from exercises of employee stock options 9,102 13,210
Proceeds from employee stock purchase plan 18,917 15,310
Taxes paid related to net share settlement of share-based awards (4,138) (5,079)
Net cash provided by financing activities 527,598 23,441
Effect of exchange rate changes on cash, cash equivalents and restricted cash 31 66
Net increase in cash, cash equivalents and restricted cash 504,211 44,505
Cash, cash equivalents and restricted cash at beginning of period 199,905 128,876
Cash, cash equivalents and restricted cash at end of period 704,116 173,381
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets    
Total cash, cash equivalents and restricted cash 704,116 173,381
Supplemental cash flow data    
Cash paid for interest 988 719
Cash paid for taxes 1,949 2,219
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses 2,979 12,636
Estimated convertible notes offering costs incurred but not yet paid 688 0
Property and equipment acquired through tenant improvement allowances 110 414
Asset retirement obligations incurred 0 1,196
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 1,608 800
Deferred Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs $ 697 $ 666
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)
$ in Thousands
6 Months Ended
Jun. 30, 2020
USD ($)
Statement of Cash Flows [Abstract]  
Payments of debt issuance costs associated with convertible notes $ 20,400
v3.20.2
Overview and Basis of Presentation
6 Months Ended
Jun. 30, 2020
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, solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are 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 product and platform solutions 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, 2019, filed with the SEC on February 13, 2020. Other than described below, 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.
The consolidated balance sheet as of December 31, 2019 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, 2020.
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 estimate of credit losses for accounts receivable and marketable securities;
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;
the recognition and measurement of legal contingencies; and
the recognition of tax benefits and forecasts used to determine our effective tax rate.

In December 2019, the novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020 the World Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, as discussed in more detail in the Overview section. During the quarter, this uncertainty resulted in a higher level of judgment related to our estimates and assumptions concerning variable consideration related to revenue recognition, the estimate of credit losses for accounts receivable, and impairment of strategic investments. For example, the uncertainty around our customers who have faced continued cash flow pressure and decreased demand for their products and services had a negative impact on our revenue from variable consideration and allowance for credit losses. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments, or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Concentrations of Risk
As of June 30, 2020 and December 31, 2019, 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, 2020 or 2019.
Recently 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, including reasonable and supportable forecasts of future economic conditions. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. We adopted this standard in the first quarter of 2020. The adoption did not have a material effect on our consolidated financial statements.
In connection with the adoption, for purposes of identifying and measuring impairment, the policy election was made to exclude accrued interest from both the fair value and amortized cost basis of our available-for-sale debt securities. Such accrued interest is recorded in prepaid expenses and other current assets.

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. We adopted this standard in the first quarter of 2020. The adoption did not have an 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. We adopted this standard in the first quarter of 2020. The adoption did not have an effect on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12 “Simplifying the Accounting for Income Taxes,” which simplifies certain aspects of accounting for income taxes. ASU 2019-12 removes certain exceptions related to the approach for intraperiod tax allocation and clarifies the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We early adopted ASU 2019-12 in the second quarter of 2020 on a prospective basis. As a result of the adoption, we did not record an income tax benefit from the release of our valuation allowance due to the issuance of our 2025 convertible senior notes.
v3.20.2
Business Combinations
6 Months Ended
Jun. 30, 2020
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 in the second quarter of 2019, 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.
As of June 30, 2020, we finalized our purchase accounting for the acquisition. 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$1,974  
Net deferred tax liability(1,194) 
Identifiable intangible assets:
Developed technology8,000  
Customer relationships3,900  
Backlog1,000  
Goodwill58,317  
Total purchase consideration$71,997  

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.
v3.20.2
Financial Instruments
6 Months Ended
Jun. 30, 2020
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, 2020
Level 1Level 2Total
Description   
Money market funds$479,357  $—  $479,357  
Corporate bonds—  380,497  380,497  
U.S. Treasury securities—  122,773  122,773  
Asset-backed securities—  93,737  93,737  
Commercial paper—  47,440  47,440  
Agency securities—  31,925  31,925  
Certificates of deposit—  997  997  
Total$—  $677,369  $1,156,726  
Included in cash and cash equivalents  $556,036  
Included in marketable securities  $600,690  
 Fair Value Measurement at
December 31, 2019
Level 1Level 2Total
Description   
Corporate bonds$—  $418,005  $418,005  
Asset-backed securities—  124,046  124,046  
U.S. Treasury securities—  94,731  94,731  
Money market funds70,455  —  70,455  
Commercial paper—  13,548  13,548  
Certificates of deposit and time deposits—  1,144  1,144  
Agency securities—  920  920  
Total$70,455  $652,394  $722,849  
Included in cash and cash equivalents  $73,943  
Included in marketable securities  $648,906  
 
As of June 30, 2020 and December 31, 2019, 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, 2020.
As of June 30, 2020, gross unrealized gains and losses for marketable securities were $9 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,148 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $58 million.
As of December 31, 2019, gross unrealized gains and losses for marketable securities were $4 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $719 million and excludes accrued interest of $4 million. The aggregate fair value of securities with unrealized losses was $45 million.
Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of June 30, 2020 and December 31, 2019 were not material. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our marketable securities as of the end of each period. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered.
The following table classifies our marketable securities by contractual maturity (in thousands):
 
 June 30,
2020
December 31,
2019
Due in one year or less$296,829  $286,958  
Due after one year and within five years303,861  361,948  
Total$600,690  $648,906  
 
As of June 30, 2020 and December 31, 2019, the balances of strategic investments without readily determinable fair values were $12 million and $11 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.
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. As of June 30, 2020, the balance of AOCI included an immaterial unrecognized net loss related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net loss 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, 2020
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$3,126  Accrued liabilities$4,262  
Total$3,126   $4,262  
 December 31, 2019
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$2,385  Accrued liabilities$1,975  
Total $2,385   $1,975  
 
Our foreign currency forward contracts had a total notional value of $292 million and $260 million as of June 30, 2020 and December 31, 2019, 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. 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, 2020 and December 31, 2019, 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, 2020 and 2019 (in thousands):
 
Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended June 30,Six Months Ended June 30,
Classification2020201920202019
Revenue$725  $589  $1,122  $1,032  
Cost of revenue(543) (393) (864) (867) 
Research and development(564) (331) (845) (765) 
Sales and marketing(1,154) (630) (1,716) (1,420) 
General and administrative(308) (221) (482) (497) 
 Total$(1,844) $(986) $(2,785) $(2,517) 
The gain recognized in AOCI related to foreign currency forward contracts was $4 million for the three months ended June 30, 2020. The loss recognized in AOCI related to foreign currency forward contracts was $4 million for the six months ended June 30, 2020. The gain recognized in AOCI related to foreign currency forward contracts was not material for the three and six months ended June 30, 2019, respectively.

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, 2020, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $222 million and $1,228 million, respectively. The fair values were determined based on the quoted price of the convertible senior notes in an inactive market on the last traded day of the quarter and have been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $88.53 on the last trading day of the quarter, the if-converted value of the 2025 convertible senior notes did not exceed the principal amount of $1,150 million, and the if-converted value of the 2023 convertible senior notes exceeded the remaining principal amount by $60 million as of June 30, 2020.
v3.20.2
Costs to Obtain Customer Contracts
6 Months Ended
Jun. 30, 2020
Revenue from Contract with Customer [Abstract]  
Costs to Obtain Customer Contracts Costs to Obtain Customer ContractsThe balances of deferred costs to obtain customer contracts were $79 million and $71 million as of June 30, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $11 million and $8 million for the three months ended June 30, 2020 and 2019, respectively and $21 million and $15 million for the six months ended June 30, 2020 and 2019, respectively. There were no impairment losses related to these deferred costs for the periods presented.Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Balance, beginning of period$303,343  $259,596  $323,962  $247,962  
Billings259,434  222,336  476,291  415,455  
Subscription and services revenue(234,604) (185,560) (458,663) (358,413) 
Other revenue*(12,060) (9,023) (25,477) (17,655) 
Balance, end of period$316,113  $287,349  $316,113  $287,349  
*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended June 30, 2020 and 2019, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the six months ended June 30, 2020 and 2019, approximately half of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate balance of remaining performance obligations as of June 30, 2020 was $713 million. We expect to recognize $508 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, including contracted revenue from renewals, and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.20.2
Property and Equipment
6 Months Ended
Jun. 30, 2020
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 June 30,
2020
December 31,
2019
Leasehold improvements$86,168  $83,968  
Capitalized internal-use software41,438  38,437  
Computer equipment and licensed software and patents29,850  27,309  
Furniture and fixtures16,874  16,332  
Construction in progress16,137  8,647  
Total190,467  174,693  
Less: accumulated depreciation and amortization(87,866) (72,603) 
Property and equipment, net$102,601  $102,090  
 
Depreciation expense was $6 million and $5 million for the three months ended June 30, 2020 and 2019, respectively, and $13 million and $10 million for the six months ended June 30, 2020 and 2019, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended June 30, 2020 and 2019, and $4 million and $3 million for the six months ended June 30, 2020 and 2019, respectively. The carrying values of capitalized internal-use software as of June 30, 2020 and December 31, 2019 were $27 million and $23 million, respectively, including $12 million and $8 million in construction in progress, respectively.
v3.20.2
Leases
6 Months Ended
Jun. 30, 2020
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, 2020December 31, 2019
Assets
Lease right-of-use assets$93,523  $89,983  
Liabilities
Lease liabilities23,309  21,804  
Lease liabilities, noncurrent83,495  83,478  
As of June 30, 2020, the weighted average remaining lease term was 6.0 years and the weighted average discount rate was 4.8%.
The following table presents information about leases on our consolidated statement of operations (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Operating lease expense$6,674  $5,797  $13,017  $10,839  
Short-term lease expense138  995  323  1,869  
Variable lease expense1,659  2,343  3,202  3,228  
Sublease income(395) (392) (859) (793) 
The following table presents supplemental cash flow information about our leases (in thousands):
Six Months Ended June 30,
20202019
Cash paid for amounts included in the measurement of lease liabilities$15,910  $8,343  
Operating lease assets obtained in exchange for new lease liabilities13,803  27,541  
As of June 30, 2020, remaining maturities of lease liabilities are as follows:
Remainder of 2020$13,022  
202127,282  
202224,924  
202316,704  
20247,459  
Thereafter33,124  
Total lease payments122,515  
Less imputed interest15,711  
Total$106,804  
The table above excludes future payments of $7 million related to signed leases that have not yet commenced.
v3.20.2
Goodwill and Acquired Intangible Assets
6 Months Ended
Jun. 30, 2020
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, 2020 are as follows (in thousands):
Balance as of December 31, 2019$169,647  
Goodwill adjustments15  
Balance as of June 30, 2020$169,662  
Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 As of June 30, 2020
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$30,200  $(8,615) $21,585  4.5
Customer relationships14,710  (4,753) 9,957  4.4
Backlog3,200  (2,600) 600  0.6
 $48,110  $(15,968) $32,142   
 
 As of December 31, 2019
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$39,000  $(14,492) $24,508  4.9
Customer relationships15,210  (3,882) 11,328  4.8
Backlog3,200  (1,800) 1,400  1.0
 $57,410  $(20,174) $37,236   
 
During the second quarter of 2020, we removed developed technology and customer relationship intangible assets from our consolidated balance sheet, which had become fully amortized. Amortization expense of acquired intangible assets was $2 million and $3 million for the three months ended June 30, 2020 and 2019, respectively, and $5 million for each of the six months ended June 30, 2020 and 2019.  
Estimated future amortization expense as of June 30, 2020 is as follows (in thousands):
Remainder of 2020$4,222  
20217,598  
20227,434  
20236,655  
20244,614  
Thereafter1,619  
$32,142  
v3.20.2
Convertible Senior Notes
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Convertible Senior Notes Convertible Senior Notes
2025 Convertible Senior Notes

In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due June 15, 2025 in a private offering, the “2025 Notes.” The 2025 Notes are senior unsecured obligations and bear interest at a fixed rate of 0.625% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $1,126 million.

Each $1,000 principal amount of the 2025 Notes will initially be convertible into 9.1944 shares of our common stock, which is equivalent to an initial conversion price of approximately $108.76 per share, subject to adjustment upon the occurrence of specified events.

The 2025 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 March 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (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, and including, 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 ten consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2025 Notes for such trading day 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; (3) if we call any or all of the 2025 Notes for redemption, at any time prior to the close of business on the second business day immediately prior to the redemption date as discussed further below, but only with respect to the 2025 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events (as set forth in the indenture).

On or after March 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes, in minimum denominations of $1,000 or an integral multiple in excess thereof, at the option of the holders 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) prior to the maturity date, holders of the 2025 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 2025 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 or if we deliver a notice of redemption, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event or converts its notes called (or deemed called) for redemption in connection with such notice of redemption 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 2025 Notes.

During the three months ended June 30, 2020, the conditions allowing holders of the 2025 Notes to convert were not met.
We may not redeem the 2025 Notes prior to June 20, 2023. We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after June 20, 2023 and on or prior to the 41st scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.

In accounting for the transaction, the 2025 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 convertible feature. The carrying amount of the equity component representing the conversion option was $220 million and was determined by deducting the fair value of the liability component from the par value of the 2025 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 is amortized to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 5.00%.

In accounting for the debt issuance costs of $21 million related to the 2025 Notes, we allocated the total amount incurred to the liability and equity components of the 2025 Notes based on their relative values. Issuance costs attributable to the liability component were $17 million and will be amortized to interest expense using the effective interest method over the contractual term of the 2025 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 2025 Notes is as follows (in thousands):
June 30,
2020
December 31,
2019
Principal$1,150,000  $—  
Unamortized Debt Discount(218,550) —  
Unamortized issuance costs(16,951) —  
Net carrying amount$914,499  $—  

The net carrying amount of the equity component of the 2025 Notes is as follows (in thousands):

June 30,
2020
December 31,
2019
Debt Discount for Conversion Option$220,061  $—  
Issuance costs(4,035) —  
Net carrying amount$216,026  $—  

Interest expense related to the 2025 Notes is as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Contractual interest expense$280  $—  $280  $—  
Amortization of Debt Discount1,511  —  1,511  —  
Amortization of issuance costs101  —  101  —  
Total interest expense$1,892  $—  $1,892  $—  


The difference between the book and tax treatment of the debt discount and debt issuance costs of the 2025 Notes resulted in a difference between the carrying amount and tax basis of the 2025 Notes. This taxable temporary difference resulted in the recognition of a $51 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital. The creation of the deferred tax liability represents a source of future taxable income which supports realization of deferred tax assets. As we continue to maintain a full valuation allowance against its deferred tax assets, this additional source of income resulted in the release of a portion of its valuation allowance. Consistent with the adoption of ASU 2019-12, the release of the valuation allowance of $51 million was recorded as an adjustment to additional paid-in capital.
2025 Capped Calls

In connection with the pricing of the 2025 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “2025 Capped Calls.” The 2025 Capped Calls each have an initial strike price of approximately $108.76 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $164.17 per share, subject to certain adjustments. The 2025 Capped Calls cover, subject to anti-dilution adjustments, approximately 11 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the 2025 Capped Calls are similar to the conditions that result in corresponding adjustments for the 2025 Notes. The 2025 Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the 2025 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the 2025 Capped Calls are separate transactions, and not part of the terms of the 2025 Notes. As these transactions meet certain accounting criteria, the 2025 Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $130 million incurred in connection with the 2025 Capped Calls was recorded as a reduction to additional paid-in capital.

2023 Convertible Senior Notes

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 “2023 Notes.” The 2023 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.

In connection with the offering of the 2025 Notes, we used $618 million of the net proceeds from the offering of the 2025 Notes to repurchase $426 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions (the “2023 Notes Partial Repurchase”). Of the $618 million consideration, $393 million and $225 million were allocated to the debt and equity components on our consolidated balance sheets, respectively, utilizing an effective interest rate to determine the fair value of the liability component. The fair value of the liability component is estimated by calculating the present value of expected cash flows using an interest rate that reflects our incremental borrowing rate, with an estimated adjustment for our credit standing on nonconvertible debt with similar maturity. As of the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Notes Partial Repurchase, net of unamortized debt discount and issuance costs, was $367 million. The 2023 Notes Partial Repurchase resulted in a $26 million loss on early debt extinguishment. Additionally, $39 million of the total consideration was related to repayment of the debt discount and reflected as a cash outflow from operating activities. As of June 30, 2020, $149 million of principal remains outstanding on the 2023 Notes.

Each $1,000 principal amount of the 2023 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 2023 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 2023 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 2023 Notes) prior to the maturity date, holders of the 2023 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 2023 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 2023 Notes.
During the three months ended June 30, 2020, the conditions allowing holders of the 2023 Notes to convert were not met. The 2023 Notes are therefore not convertible during the three months ending September 30, 2020, and are classified as a noncurrent liability as of June 30, 2020. To-date, we have received one request for conversion for an immaterial amount of 2023 Notes.

In accounting for the issuance of the 2023 Notes, the 2023 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 was determined by deducting the fair value of the liability component from the par value of the 2023 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 is amortized to interest expense over the contractual term of the 2023 Notes at an effective interest rate of 5.26%.

In accounting for the debt issuance costs related to the 2023 Notes, we allocated the total amount incurred to the liability and equity components of the 2023 Notes based on their relative values. Issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the contractual term of the 2023 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 2023 Notes is as follows (in thousands):
June 30,
2020
December 31,
2019
Principal$149,194  $575,000  
Unamortized Debt Discount(18,641) (84,037) 
Unamortized issuance costs(1,687) (7,499) 
Net carrying amount$128,866  $483,464  


The net carrying amount of the equity component of the 2023 Notes is as follows (in thousands):
June 30,
2020
December 31,
2019
Debt Discount for Conversion Option$32,427  $124,976  
Issuance costs(765) (2,948) 
Net carrying amount$31,662  $122,028  

Interest expense related to the 2023 Notes is as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Contractual interest expense$318  $359  $677  $719  
Amortization of Debt Discount5,426  5,826  11,484  11,577  
Amortization of issuance costs448  451  940  888  
Total interest expense$6,192  $6,636  $13,101  $13,184  

2023 Capped Calls
In connection with the pricing of the 2023 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “2023 Capped Calls.” The 2023 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 2023 Notes. The 2023 Capped Calls have initial cap prices of $95.20 per share, subject to certain adjustments. The 2023 Capped Calls covered, 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 2023 Capped Calls mirror conditions that result in corresponding adjustments for the 2023 Notes. The 2023 Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the 2023 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the 2023 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes. As these transactions meet certain accounting criteria, the 2023 Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $64 million incurred in connection with the 2023 Capped Calls was recorded as a reduction to additional paid-in capital.

In June 2020, and in connection with the 2023 Notes Partial Repurchase, we terminated 2023 Capped Calls corresponding to approximately 6.7 million shares for cash proceeds of $83 million. The proceeds were recorded as an increase to additional paid-in capital in the condensed consolidated balance sheets. As of June 30, 2020, there remains outstanding 2023 Capped Calls giving the Company the option to purchase approximately 2.4 million shares (subject to adjustment).

The net impact to our stockholders equity, included in additional paid-in capital, of the above components of the 2023 Notes is as follows (in thousands):
At Issuance
Conversion Option$124,976  
Purchase of Capped Calls (63,940) 
Issuance Costs(2,948) 
Net deferred tax liability (13,784) 
Total$44,304  
v3.20.2
Commitments and Contingencies
6 Months Ended
Jun. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Commitments
Except as discussed below, 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, 2019.

In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due June 15, 2025 and used $618 million of the net proceeds from this offering to repurchase $426 million aggregate principal amount of our existing convertible senior notes. Refer to Note 8 for additional information.
Litigation and Loss Contingencies
We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. These estimates are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.
On October 24, 2019 and November 7, 2019, purported stockholders of the Company filed two putative class action complaints in the United States District Court for the Northern District of California, entitled Charles Reidinger v. Zendesk, Inc., et al., 3:19-cv-06968-CRB and Ho v. Zendesk, Inc., et al., No. 3:19-cv-07361-WHA, respectively, against the Company and certain of the Company’s executive officers. The complaints are nearly identical and allege violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, purportedly on behalf of all persons who purchased Zendesk, Inc. common stock between February 6, 2019 and October 1, 2019, inclusive. The claims are based upon allegations that the defendants misrepresented and/or omitted material information in certain of our prior public filings. To this point, no discovery has occurred in these cases. The court has appointed a lead plaintiff and consolidated the various lawsuits into a single action (Case No. 3:19-cv-06968-CRB), and lead plaintiff filed its amended complaint on April 14, 2020 asserting the same alleged violations of securities laws as the initial complaints. On June 29, 2020, Zendesk and the executive officer defendants moved to dismiss the amended complaint. Lead Plaintiff has until August 28, 2020 to file an opposition to the motion to dismiss.
On June 2, 2020, a purported stockholder of the Company filed a derivative complaint in the United States District Court for the Northern District of California, entitled Anderson v. Svane, et al., 3:20-cv-03671, against certain of the Company’s executive officers and directors. The derivative complaint alleges breaches of fiduciary duty against all defendants, and an insider trading claim and violations of Section 10(b) of the Securities Exchange Act of 1934 against the officer defendants, purportedly on behalf of the Company itself. The claims are based on nearly identical allegations as the class action complaints, namely that the defendants misrepresented and/or omitted material information in certain of our prior public filings. On June 29, 2020, the court stayed the derivative action until either the class action is dismissed with prejudice or class action defendants answer the complaint. On July 27, 2020, the court ordered the derivative action related to the class action.

The class action and derivative action are still in the preliminary stages, and it is not possible for the Company to quantify the extent of potential liability to the individual defendants, if any. Management believes that the lawsuits lack merit and intends to vigorously defend the actions. We cannot predict the outcome of or estimate the possible loss or range of loss from the above described matter.

From time to time, we may be subject to other legal proceedings, claims, investigations, and government inquiries in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights, labor and employment rights, defamation, privacy, and contractual rights. In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.

The outcomes of legal proceedings and other contingencies are inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on 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
v3.20.2
Common Stock and Stockholders' Equity
6 Months Ended
Jun. 30, 2020
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of June 30, 2020 and December 31, 2019, there were 400 million shares of common stock authorized for issuance with a par value of $0.01 per share and 115.2 million and 113.1 million shares were issued and outstanding, respectively.
Preferred Stock
As of each of June 30, 2020 and December 31, 2019, 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, 2020, 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, 2020. As of June 30, 2020, 5.1 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 5.7 million shares on January 1, 2020. As of June 30, 2020, we had 15.2 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, 2020 is as follows (in thousands, except per share information):
 
  Options OutstandingRSUs 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, 202011,613  4,860  $24.08  5.85$255,536  5,361  $55.00  $410,804  
Increase in authorized shares5,654        
Stock options granted(520) 520  87.15      
RSUs granted(1,927)     1,927  80.63  
Stock options exercised (334) 27.27      
RSUs vested     (1,392) 53.15  
Stock options forfeited or canceled12  (12) 30.18      
RSUs forfeited or canceled318      (318) 56.87  
RSUs forfeited or canceled and unavailable for grant(13) 23.44  
PRSUs forfeited25  
Outstanding — June 30, 202015,175  5,034  $30.36  5.76$293,261  5,565  $64.30  $492,650  
 
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 the six months ended June 30, 2020 and 2019 was $18 million and $38 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, 2020 and 2019 was $31.15 and $28.65, respectively.

The total fair value of RSUs vested during the six months ended June 30, 2020 and 2019 was $107 million and $132 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, 2020 and 2019 was $80.63, and $69.61, respectively.
As of June 30, 2020, we had a total of $380 million in future expense related to our stock options and RSUs to be recognized over a weighted average period of 2.7 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 Inc. 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, 2020, we recorded $1 million and $3 million of share-based compensation expense related to the PRSUs, respectively. For the three and six months ended June 30, 2019, we recorded $3 million and $4 million of share-based compensation expense related to PRSUs, respectively, including a one-time charge related to accelerated retention compensation. For the three and six months ended June 30, 2020, no and 26 thousand PRSUs were vested, respectively. 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.
v3.20.2
Deferred Revenue and Performance Obligations
6 Months Ended
Jun. 30, 2020
Revenue from Contract with Customer [Abstract]  
Deferred Revenue and Performance Obligations Costs to Obtain Customer ContractsThe balances of deferred costs to obtain customer contracts were $79 million and $71 million as of June 30, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $11 million and $8 million for the three months ended June 30, 2020 and 2019, respectively and $21 million and $15 million for the six months ended June 30, 2020 and 2019, respectively. There were no impairment losses related to these deferred costs for the periods presented.Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Three Months Ended June 30,