ZENDESK, INC., 10-Q filed on 11/1/2019
Quarterly Report
v3.19.3
Cover Page - shares
9 Months Ended
Sep. 30, 2019
Oct. 30, 2019
Cover page.    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 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 $0.01 per share  
Trading Symbol ZEN  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   112,175,267
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0001463172  
Current Fiscal Year End Date --12-31  
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 190,892 $ 126,518
Marketable securities 243,846 300,213
Accounts receivable, net of allowance for doubtful accounts of $2,715 and $2,571 as of September 30, 2019 and December 31, 2018, respectively 101,440 85,280
Deferred costs 32,406 24,712
Prepaid expenses and other current assets 48,124 35,873
Total current assets 616,708 572,596
Marketable securities, noncurrent 384,527 393,671
Property and equipment, net 94,851 75,654
Deferred costs, noncurrent 32,516 26,914
Lease right-of-use assets 95,098  
Goodwill and intangible assets, net 209,516 146,327
Other assets 26,242 22,717
Total assets 1,459,458 1,237,879
Current liabilities:    
Accounts payable 43,206 16,820
Accrued liabilities 36,531 34,097
Accrued compensation and related benefits 58,544 46,603
Deferred revenue 290,285 245,243
Lease liabilities 21,398  
Total current liabilities 449,964 342,763
Convertible senior notes, net 477,007 458,176
Deferred revenue, noncurrent 2,662 2,719
Lease liabilities, noncurrent 87,926  
Other liabilities 4,710 17,300
Total liabilities 1,022,269 820,958
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock 0 0
Common stock 1,119 1,080
Additional paid-in capital 1,099,730 950,693
Accumulated other comprehensive loss (1,047) (5,724)
Accumulated deficit (662,613) (529,128)
Total stockholders’ equity 437,189 416,921
Total liabilities and stockholders’ equity $ 1,459,458 $ 1,237,879
v3.19.3
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 2,715 $ 2,571
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Income Statement [Abstract]        
Revenue $ 210,477 $ 154,828 $ 586,545 $ 426,501
Cost of revenue [1] 59,210 46,992 172,534 130,207
Gross profit 151,267 107,836 414,011 296,294
Operating expenses:        
Research and development [1] 54,528 40,410 151,829 115,118
Sales and marketing [1] 99,303 74,270 285,750 208,778
General and administrative [1] 32,864 27,357 107,135 73,809
Total operating expenses [1] 186,695 142,037 544,714 397,705
Operating loss (35,428) (34,201) (130,703) (101,411)
Other income (expense), net:        
Interest income 4,986 4,561 15,752 9,906
Interest expense (6,727) (6,375) (19,885) (13,427)
Other income (expense), net 2,581 (463) 2,012 (194)
Total other income (expense), net 840 (2,277) (2,121) (3,715)
Loss before provision for (benefit from) income taxes (34,588) (36,478) (132,824) (105,126)
Provision for (benefit from) income taxes (364) (2,334) 661 (7,291)
Net loss $ (34,224) $ (34,144) $ (133,485) $ (97,835)
Net loss per share, basic and diluted (usd per share) $ (0.31) $ (0.32) $ (1.21) $ (0.93)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 111,261 106,143 109,969 104,954
[1] Includes share-based compensation expense as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
Cost of revenue
$
5,397

 
$
3,929

 
$
15,580

 
$
10,500

Research and development
12,169

 
10,677

 
35,717

 
30,436

Sales and marketing
13,839

 
10,261

 
39,813

 
27,447

General and administrative
7,244

 
6,579

 
27,948

 
18,198

v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Share-based compensation     $ 119,058 $ 86,581
Cost of revenue        
Share-based compensation $ 5,397 $ 3,929 15,580 10,500
Research and development        
Share-based compensation 12,169 10,677 35,717 30,436
Sales and marketing        
Share-based compensation 13,839 10,261 39,813 27,447
General and administrative        
Share-based compensation $ 7,244 $ 6,579 $ 27,948 $ 18,198
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Net loss $ (34,224) $ (34,144) $ (133,485) $ (97,835)
Other comprehensive gain (loss), before tax:        
Net unrealized gain (loss) on available-for-sale investments 161 (50) 5,794 (673)
Foreign currency translation loss 0 0 0 (12)
Net unrealized gain (loss) on derivative instruments (2,216) 418 360 (3,456)
Other comprehensive gain (loss), before tax (2,055) 368 6,154 (4,141)
Tax effect 236 (366) (1,477) 716
Other comprehensive gain (loss), net of tax (1,819) 2 4,677 (3,425)
Comprehensive loss $ (36,043) $ (34,142) $ (128,808) $ (101,260)
v3.19.3
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)   861      
Issuance of common stock upon exercise of stock options 13,255 $ 9 13,246    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   2,255      
Issuance of common stock for settlement of RSUs and PRSUs (3,766) $ 22 (3,788)    
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 9,473 $ 4 9,469    
Share-based compensation 88,604   88,604    
Equity component of convertible senior notes 44,304   44,304    
Other comprehensive gain (loss), net of tax (3,425)     (3,425)  
Net loss (97,835)       (97,835)
Other (17)   (17)    
Ending balance (in shares) at Sep. 30, 2018   106,627      
Ending balance at Sep. 30, 2018 404,777 $ 1,066 905,386 (5,797) (495,878)
Beginning balance (in shares) at Jun. 30, 2018   105,683      
Beginning balance at Jun. 30, 2018 404,866 $ 1,056 871,343 (5,799) (461,734)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   187      
Issuance of common stock upon exercise of stock options 3,508 $ 2 3,506    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   757      
Issuance of common stock for settlement of RSUs and PRSUs (1,619) $ 8 (1,627)    
Share-based compensation 32,164   32,164    
Other comprehensive gain (loss), net of tax 2     2  
Net loss (34,144)       (34,144)
Ending balance (in shares) at Sep. 30, 2018   106,627      
Ending balance at Sep. 30, 2018 404,777 $ 1,066 905,386 (5,797) (495,878)
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) 1,060 1,060      
Issuance of common stock upon exercise of stock options $ 21,977 $ 11 21,966    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   2,446      
Issuance of common stock for settlement of RSUs and PRSUs (7,402) $ 24 (7,426)    
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 119,189   119,189    
Equity component of convertible senior notes 0        
Other comprehensive gain (loss), net of tax 4,677     4,677  
Net loss (133,485)       (133,485)
Other 0        
Ending balance (in shares) at Sep. 30, 2019   111,917      
Ending balance at Sep. 30, 2019 437,189 $ 1,119 1,099,730 (1,047) (662,613)
Beginning balance (in shares) at Jun. 30, 2019   110,698      
Beginning balance at Jun. 30, 2019 426,977 $ 1,106 1,053,488 772 (628,389)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   433      
Issuance of common stock upon exercise of stock options 8,767 $ 4 8,763    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   786      
Issuance of common stock for settlement of RSUs and PRSUs (2,321) $ 9 (2,330)    
Share-based compensation 39,809   39,809    
Other comprehensive gain (loss), net of tax (1,819)     (1,819)  
Net loss (34,224)       (34,224)
Ending balance (in shares) at Sep. 30, 2019   111,917      
Ending balance at Sep. 30, 2019 $ 437,189 $ 1,119 $ 1,099,730 $ (1,047) $ (662,613)
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Cash flows from operating activities    
Net loss $ (133,485) $ (97,835)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 27,792 27,193
Share-based compensation 119,058 86,581
Amortization of deferred costs 22,983 15,124
Amortization of debt discount and issuance costs 18,831 12,665
Other 958 2,865
Changes in operating assets and liabilities:    
Accounts receivable (19,832) (26,721)
Prepaid expenses and other current assets (10,997) (10,167)
Deferred costs (35,257) (26,716)
Lease right-of-use assets 14,022  
Other assets and liabilities (4,141) (8,026)
Accounts payable 22,591 20,607
Accrued liabilities 520 7,073
Accrued compensation and related benefits 3,349 2,487
Deferred revenue 45,683 50,552
Lease liabilities (15,025)  
Net cash provided by operating activities 57,050 55,682
Cash flows from investing activities    
Purchases of property and equipment (25,628) (27,132)
Internal-use software development costs (5,007) (5,550)
Purchases of marketable securities (374,706) (591,426)
Proceeds from maturities of marketable securities 146,171 131,819
Proceeds from sales of marketable securities 300,632 40,775
Business combinations, net of cash acquired (70,794) (79,363)
Purchase of strategic investment (500) 0
Net cash used in investing activities (29,832) (530,877)
Cash flows from financing activities    
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $13,561 0 561,439
Purchase of capped call related to convertible senior notes 0 (63,940)
Proceeds from exercises of employee stock options 21,977 13,254
Proceeds from employee stock purchase plan 23,057 15,999
Taxes paid related to net share settlement of share-based awards (7,402) (3,766)
Other 0 (41)
Net cash provided by financing activities 37,632 522,945
Effect of exchange rate changes on cash, cash equivalents and restricted cash 85 (55)
Net increase in cash, cash equivalents and restricted cash 64,935 47,695
Cash, cash equivalents and restricted cash at beginning of period 128,876 110,888
Cash, cash equivalents and restricted cash at end of period 193,811 158,583
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 1,438 699
Cash paid for taxes 4,013 2,769
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses 12,467 5,680
Asset retirement obligations incurred 1,196 0
Property and equipment acquired through tenant improvement allowances 414 5,435
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 1,379 1,986
Deferred Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs $ 1,023 $ 602
v3.19.3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (PARENTHETICAL) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Statement of Cash Flows [Abstract]    
Payments of debt issuance costs $ 0 $ 13,561
v3.19.3
Overview and Basis of Presentation
9 Months Ended
Sep. 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 recoverability of accounts receivable;
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 September 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 nine months ended September 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.
v3.19.3
Business Combinations
9 Months Ended
Sep. 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). During the three months ended September 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 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
$
2,036

Net deferred tax liability
(1,194
)
Identifiable intangible assets:
 
Developed technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,130

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.

As of September 30, 2019, 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 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
$
(2,791
)
Identifiable intangible assets:
 
Developed technology
19,000

Customer relationships
10,400

Backlog
2,200

Goodwill
52,214

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.
v3.19.3
Financial Instruments
9 Months Ended
Sep. 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
September 30, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
428,148

 
$
428,148

Asset-backed securities

 
120,514

 
120,514

U.S. Treasury securities

 
75,826

 
75,826

Money market funds
65,836

 

 
65,836

Commercial paper

 
7,961

 
7,961

Agency securities

 
221

 
221

Total
$
65,836

 
$
632,670

 
$
698,506

Included in cash and cash equivalents
 
 
 
 
$
70,133

Included in marketable securities
 
 
 
 
$
628,373

 
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 September 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 nine months ended September 30, 2019. Gross unrealized gains and losses for cash equivalents and marketable securities as of September 30, 2019 were $5 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities as of September 30, 2019 was $694 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 September 30, 2019 and December 31, 2018 were not material.
The following table classifies our marketable securities by contractual maturity (in thousands):
 
 
September 30,
2019
 
December 31,
2018
Due in one year or less
$
243,846

 
$
300,213

Due after one year and within five years
384,527

 
393,671

Total
$
628,373

 
$
693,884


 
As of September 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 September 30, 2019, the balance of AOCI included an unrecognized net loss 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 loss of $2 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):
 
 
September 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
 
$
2,502

 
Accrued liabilities
 
$
5,129

Total
 
 
$
2,502

 
 
 
$
5,129

 
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 $228 million and $200 million as of September 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. 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 September 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 nine months ended September 30, 2019 (in thousands):
 
 
Three Months Ended September 30, 2019
 
Nine Months Ended September 30, 2019
Classification
Gain (Loss) Reclassified from AOCI into Earnings
 
Gain (Loss) Reclassified from AOCI into Earnings
Revenue
$
652

 
$
1,684

Cost of revenue
(274
)
 
(1,141
)
Research and development
(280
)
 
(1,045
)
Sales and marketing
(519
)
 
(1,939
)
General and administrative
(226
)
 
(723
)
 Total
$
(647
)
 
$
(3,164
)

The loss recognized in AOCI related to foreign currency forward contracts was $3 million for both the three and nine months ended September 30, 2019.
The loss recognized in AOCI related to foreign currency forward contracts was $1 million and $4 million for the three and nine months ended September 30, 2018, respectively. The loss reclassified from AOCI into earnings related to foreign currency forward contracts was $1 million and not material for the three and nine months ended September 30, 2018, respectively, 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 September 30, 2019, the fair value of our convertible senior notes was $757 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 $72.88 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 September 30, 2019.
v3.19.3
Costs to Obtain Customer Contracts
9 Months Ended
Sep. 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 $65 million and $52 million as of September 30, 2019 and December 31, 2018, respectively. Amortization expense for these deferred costs was $8 million and $6 million for the three months ended September 30, 2019 and 2018, respectively, and $23 million and $15 million for the nine months ended September 30, 2019 and 2018, 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
$
287,349

 
$
207,960

 
$
247,962

 
$
174,360

Billings
216,075

 
172,355

 
631,530

 
477,628

Subscription services revenue
(201,498
)
 
(148,100
)
 
(559,911
)
 
(409,673
)
Other revenue*
(8,979
)
 
(6,728
)
 
(26,634
)
 
(16,828
)
Balance, end of period
$
292,947

 
$
225,487

 
$
292,947

 
$
225,487

*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended September 30, 2019 and 2018, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the nine months ended September 30, 2019 and 2018, less than 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 September 30, 2019 was $558 million. We expect to recognize $404 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.
v3.19.3
Property and Equipment
9 Months Ended
Sep. 30, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 
September 30,
2019
 
December 31,
2018
Leasehold improvements
$
76,338

 
$
51,832

Capitalized internal-use software
38,979

 
36,444

Computer equipment and licensed software and patents
26,347

 
21,100

Furniture and fixtures
15,071

 
11,550

Construction in progress
7,431

 
10,538

Hosting equipment

 
34,105

Total
164,166

 
165,569

Less: accumulated depreciation and amortization
(69,315
)
 
(89,915
)
Property and equipment, net
$
94,851

 
$
75,654


 
Depreciation expense was $5 million and $6 million for the three months ended September 30, 2019 and 2018, respectively, and $15 million and $19 million for the nine months ended September 30, 2019 and 2018, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended September 30, 2019 and 2018, and $5 million and $4 million for the nine months ended September 30, 2019 and 2018, respectively. The carrying values of capitalized internal-use software as of September 30, 2019 and December 31, 2018 were $20 million and $19 million, respectively, including $5 million and $3 million in construction in progress, respectively.
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. In the third quarter of 2019, we received cash for substantially all of the estimated salvage value.
v3.19.3
Leases
9 Months Ended
Sep. 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):
 
September 30, 2019
Assets
 
Lease right-of-use assets
$
95,098

Liabilities
 
Lease liabilities
21,398

Lease liabilities, noncurrent
87,926


    
As of September 30, 2019, the weighted average remaining lease term was 5.9 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 September 30, 2019
 
Nine Months Ended September 30, 2019
Operating lease expense
$
6,382

 
$
17,221

Short-term lease expense
168

 
2,037

Variable lease expense
1,607

 
4,835

Sublease income
560

 
1,353



The following table presents supplemental cash flow information about our leases (in thousands):
 
Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
15,197

Operating lease assets obtained in exchange for new lease liabilities
27,559



As of September 30, 2019, remaining maturities of lease liabilities are as follows:
Remainder of 2019
$
5,323

2020
27,390

2021
24,493

2022
22,568

2023
15,962

Thereafter
31,198

Total lease payments
126,934

Less imputed interest
17,610

Total
$
109,324



The table above excludes future payments of $4 million related to signed leases that have not yet commenced.
v3.19.3
Goodwill and Acquired Intangible Assets
9 Months Ended
Sep. 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 nine months ended September 30, 2019 are as follows (in thousands):
Balance as of December 31, 2018
$
111,584

Goodwill acquired
58,245

Goodwill adjustments
(355
)
Balance as of September 30, 2019
$
169,474


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

 
$
(12,785
)
 
$
26,215

 
5.1
Customer relationships
15,210

 
(3,183
)
 
12,027

 
5.0
Backlog
3,200

 
(1,400
)
 
1,800

 
1.2
 
$
57,410

 
$
(17,368
)
 
$
40,042

 
 
 
 
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 September 30, 2019 and 2018, respectively, and $8 million and $3 million for the nine months ended September 30, 2019 and 2018, respectively.     
Estimated future amortization expense as of September 30, 2019 is as follows (in thousands):
Remainder of 2019
$
2,826

2020
9,275

2021
7,599

2022
7,433

2023
6,661

Thereafter
6,248

 
$
40,042

v3.19.3
0.25% Convertible Senior Notes and Capped Call
9 Months Ended
Sep. 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.

As of the quarter ended June 30, 2019, the conditions allowing holders of the Notes to convert were met. As a result, the Notes became convertible at the option of the holders during the quarter ended September 30, 2019. During the quarter ended September 30, 2019, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not convertible during the quarter ending December 31, 2019 and are classified as a noncurrent liability as of September 30, 2019. As of the date of this filing, we have received one request for conversion for an immaterial amount of Notes.

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):
 
September 30,
2019
 
December 31,
2018
Principal
$
575,000

 
$
575,000

Unamortized Debt Discount
(90,015
)
 
(107,494
)
Unamortized issuance costs
(7,978
)
 
(9,330
)
Net carrying amount
$
477,007

 
$
458,176


The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
September 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Contractual interest expense
$
359

 
$
360

 
$
1,078

 
$
762

Amortization of Debt Discount
5,902

 
5,603

 
17,479

 
11,806

Amortization of issuance costs
464

 
412

 
1,352

 
859

Total interest expense
$
6,725

 
$
6,375

 
$
19,909

 
$
13,427



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


v3.19.3
Commitments and Contingencies
9 Months Ended
Sep. 30, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Commitments
As of September 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. 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, a purported stockholder of the Company filed a putative class action complaint 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, against the Company and certain of the Company’s executive officers. The complaint alleges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), 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 defendants misrepresented and/or omitted material information in certain of our prior public filings. To this point, no discovery has occurred in this case. The class action is 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 lawsuit lacks 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.
v3.19.3
Common Stock and Stockholders' Equity
9 Months Ended
Sep. 30, 2019
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of September 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 111.9 million and 108.0 million shares were issued and outstanding, respectively.
Preferred Stock
As of each of September 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 nine months ended September 30, 2019, none and 0.4 million shares of common stock were purchased under the ESPP, respectively. 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 September 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 September 30, 2019, we had 11.7 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 nine months ended September 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
(2,511
)
 
 
 
 
 
 
 
 
 
2,511

 
74.39

 
 
Stock options exercised
 
 
(1,060
)
 
20.74

 
 
 
 
 
 
 
 
 
 
RSUs vested
 
 
 
 
 
 
 
 
 
 
(2,398
)
 
37.21

 
 
Stock options forfeited or canceled
101

 
(101
)
 
43.94

 
 
 
 
 
 
 
 
 
 
RSUs forfeited or canceled
792

 
 
 
 
 
 
 
 
 
(792
)
 
43.44

 
 
RSUs forfeited or canceled and unavailable for grant
 
 
 
 
 
 
 
 
 
 
(24
)
 
23.44

 
 
PRSUs forfeited
30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding — September 30, 2019
11,710

 
5,113

 
$
23.86

 
6.08
 
$
250,894

 
5,908

 
$
52.86

 
$
430,362


 
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 nine months ended September 30, 2019 and 2018 was $63 million and $30 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 nine months ended September 30, 2019 and 2018 was $28.65 and $17.53, respectively.

The total fair value of RSUs vested during the nine months ended September 30, 2019 and 2018 was $191 million and $123 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 nine months ended September 30, 2019 and 2018 was $74.39, and $42.32, respectively.
As of September 30, 2019, we had a total of $325 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 nine months
ended September 30, 2019, we recorded $2 million and $6 million of share-based compensation expense, respectively, related to the PRSUs, including a one-time charge related to accelerated retention compensation during the nine months ended September 30, 2019. For the three and nine months ended September 30, 2019, 48 thousand 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.
v3.19.3
Deferred Revenue and Performance Obligations
9 Months Ended
Sep. 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 $65 million and $52 million as of September 30, 2019 and December 31, 2018, respectively. Amortization expense for these deferred costs was $8 million and $6 million for the three months ended September 30, 2019 and 2018, respectively, and $23 million and $15 million for the nine months ended September 30, 2019 and 2018, 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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
$
287,349

 
$
207,960

 
$
247,962

 
$
174,360

Billings
216,075

 
172,355

 
631,530

 
477,628

Subscription services revenue
(201,498
)
 
(148,100
)
 
(559,911
)
 
(409,673
)
Other revenue*
(8,979
)
 
(6,728
)
 
(26,634
)
 
(16,828
)
Balance, end of period
$
292,947

 
$
225,487

 
$
292,947

 
$
225,487

*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended September 30, 2019 and 2018, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the nine months ended September 30, 2019 and 2018, less than 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 September 30, 2019 was $558 million. We expect to recognize $404 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.
v3.19.3
Net Loss Per Share
9 Months Ended
Sep. 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
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
Net loss
$
(34,224
)
 
$
(34,144
)
 
$
(133,485
)
 
$
(97,835
)
Weighted-average shares used to compute basic and diluted net loss per share
111,261


106,143


109,969


104,954

Net loss per share, basic and diluted
$
(0.31
)
 
$
(0.32
)
 
$
(1.21
)
 
$
(0.93
)

 
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
 
As of September 30,
2019
 
2018
Shares subject to outstanding common stock options and employee stock purchase plan
5,323

 
6,344

Restricted stock units
5,908

 
7,151

Shares related to convertible senior notes
2,138

 
111

 
13,369

 
13,606

 

The shares related to convertible senior notes in the table above are calculated based on the average market price of our common stock for the three months ended September 30, 2019 and 2018, respectively.

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 not be convertible during the three months ending December 31, 2019.
v3.19.3
Income Taxes
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
We reported an income tax benefit that was not material for the three months ended September 30, 2019 and income tax expense of $1 million for the nine months ended September 30, 2019. We reported income tax benefits of $2 million and $7 million for the three and nine months ended September 30, 2018, respectively, 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.
v3.19.3
Geographic Information
9 Months Ended
Sep. 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
September 30,
 
Nine Months Ended
September 30,
2019
 
2018
 
2019
 
2018
United States
$
110,964

 
$
78,848

 
$
306,880

 
$
220,221

EMEA
59,196

 
45,927

 
166,728

 
125,564

APAC
22,981

 
18,107

 
63,715

 
48,214

Other
17,336

 
11,946

 
49,222

 
32,502

Total
$
210,477

 
$
154,828

 
$
586,545

 
$
426,501


Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
 
As of
September 30, 2019
 
As of
December 31, 2018
United States
$
87,315

 
$
32,351

EMEA:
 
 
 
Republic of Ireland
43,668

 
14,698

Other EMEA
4,275

 
2,450

Total EMEA
47,943

 
17,148

APAC:
 
 
 
Singapore
27,889

 
1,117

Other APAC
6,317

 
5,772

Total APAC
34,206

 
6,889

Total
$
169,464

 
$
56,388


 
The table above includes property and equipment and lease right-of-use assets and excludes capitalized internal-use software and intangible assets.
v3.19.3
Overview and Basis of Presentation (Policies)
9 Months Ended
Sep. 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 recoverability of accounts receivable;
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 September 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 nine months ended September 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.
v3.19.3
Business Combinations (Tables)
9 Months Ended
Sep. 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
$
(2,791
)
Identifiable intangible assets:
 
Developed technology
19,000

Customer relationships
10,400

Backlog
2,200

Goodwill
52,214

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
$
2,036

Net deferred tax liability
(1,194
)
Identifiable intangible assets:
 
Developed technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,130

Total purchase consideration
$
71,872


v3.19.3
Financial Instruments (Tables)
9 Months Ended
Sep. 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
September 30, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
428,148

 
$
428,148

Asset-backed securities

 
120,514

 
120,514

U.S. Treasury securities

 
75,826

 
75,826

Money market funds
65,836

 

 
65,836

Commercial paper

 
7,961

 
7,961

Agency securities</