ZENDESK, INC., 10-Q filed on 10/30/2020
Quarterly Report
v3.20.2
Cover Page - shares
9 Months Ended
Sep. 30, 2020
Oct. 29, 2020
Entity Addresses [Line Items]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 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 989 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 $0.01 per share  
Trading Symbol ZEN  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   116,676,682
Amendment Flag false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Entity Central Index Key 0001463172  
Current Fiscal Year End Date --12-31  
Former Address    
Entity Addresses [Line Items]    
Entity Address, Address Line One 1019 Market Street  
Entity Address, City or Town San Francisco  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94103  
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 383,318 $ 196,591
Marketable securities 559,682 286,958
Accounts receivable, net of allowance for doubtful accounts of $9,322 and $2,846 as of September 30, 2020 and December 31, 2019, respectively 151,160 127,808
Deferred costs 44,722 35,619
Prepaid expenses and other current assets 50,047 45,847
Total current assets 1,188,929 692,823
Marketable securities, noncurrent 407,141 361,948
Property and equipment, net 102,098 102,090
Deferred costs, noncurrent 42,256 35,230
Lease right-of-use assets 89,477 89,983
Goodwill and intangible assets, net 199,607 206,883
Other assets 24,731 25,632
Total assets 2,054,239 1,514,589
Current liabilities:    
Accounts payable 10,237 38,376
Accrued liabilities 33,720 36,347
Accrued compensation and related benefits 89,179 61,512
Deferred revenue 324,766 320,642
Lease liabilities 22,300 21,804
Convertible senior notes, net 130,615 0
Total current liabilities 610,817 478,681
Convertible senior notes, net 925,007 483,464
Deferred revenue, noncurrent 2,885 3,320
Lease liabilities, noncurrent 80,507 83,478
Other liabilities 4,904 7,662
Total liabilities 1,624,120 1,056,605
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock 0 0
Common stock 1,164 1,130
Additional paid-in capital 1,273,242 1,155,044
Accumulated other comprehensive income 2,560 591
Accumulated deficit (846,847) (698,781)
Total stockholders’ equity 430,119 457,984
Total liabilities and stockholders’ equity $ 2,054,239 $ 1,514,589
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 9,322 $ 2,846
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Income Statement [Abstract]        
Revenue $ 261,926 $ 210,477 $ 746,066 $ 586,545
Cost of revenue [1] 62,819 59,210 184,036 172,534
Gross profit 199,107 151,267 562,030 414,011
Operating expenses:        
Research and development [1] 64,842 54,528 184,266 151,829
Sales and marketing [1] 123,737 99,303 369,442 285,750
General and administrative [1] 38,854 32,864 109,427 107,135
Total operating expenses [1] 227,433 186,695 663,135 544,714
Operating loss (28,326) (35,428) (101,105) (130,703)
Other income (expense), net:        
Interest expense (14,087) (6,727) (29,060) (19,885)
Loss on early extinguishment of debt 0 0 (25,950) 0
Interest and other income, net 3,683 7,567 12,750 17,764
Total other income (expense), net (10,404) 840 (42,260) (2,121)
Loss before provision for (benefit from) income taxes (38,730) (34,588) (143,365) (132,824)
Provision for (benefit from) income taxes 1,973 (364) 4,777 661
Net loss $ (40,703) $ (34,224) $ (148,142) $ (133,485)
Net loss per share, basic and diluted (usd per share) $ (0.35) $ (0.31) $ (1.29) $ (1.21)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 115,809 111,261 114,653 109,969
[1] Includes share-based compensation expense as follows:
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Cost of revenue$4,831 $5,397 $15,077 $15,580 
Research and development13,921 12,169 39,076 35,717 
Sales and marketing19,335 13,839 53,467 39,813 
General and administrative8,176 7,244 24,437 27,948 
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Share-based compensation     $ 132,057 $ 119,058
Cost of revenue        
Share-based compensation $ 4,831 $ 5,397 15,077 15,580
Research and development        
Share-based compensation 13,921 12,169 39,076 35,717
Sales and marketing        
Share-based compensation 19,335 13,839 53,467 39,813
General and administrative        
Share-based compensation $ 8,176 $ 7,244 $ 24,437 $ 27,948
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Statement of Comprehensive Income [Abstract]        
Net loss $ (40,703) $ (34,224) $ (148,142) $ (133,485)
Other comprehensive income (loss), before tax:        
Net unrealized gain (loss) on available-for-sale investments (1,361) 161 2,817 5,794
Net unrealized gain (loss) on derivative instruments 388 (2,216) (848) 360
Other comprehensive income (loss), before tax (973) (2,055) 1,969 6,154
Tax effect 699 236 0 (1,477)
Other comprehensive income (loss), net of tax (274) (1,819) 1,969 4,677
Comprehensive loss $ (40,977) $ (36,043) $ (146,173) $ (128,808)
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)   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    
Other comprehensive income (loss), net of tax 4,677     4,677  
Net loss (133,485)       (133,485)
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 income (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)
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) 912 911      
Issuance of common stock upon exercise of stock options $ 24,591 $ 9 24,582    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   2,118      
Issuance of common stock for settlement of RSUs and PRSUs (6,129) $ 21 (6,150)    
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 135,326   135,326    
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 (loss), net of tax 1,969     1,969  
Net loss (148,142)       (148,142)
Stockholders' Equity, Other 90   15   75
Ending balance (in shares) at Sep. 30, 2020   116,463      
Ending balance at Sep. 30, 2020 430,119 $ 1,164 1,273,242 2,560 (846,848)
Beginning balance (in shares) at Jun. 30, 2020   115,186      
Beginning balance at Jun. 30, 2020 410,310 $ 1,150 1,212,471 2,834 (806,145)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   577      
Issuance of common stock upon exercise of stock options 15,489 $ 6 15,483    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   700      
Issuance of common stock for settlement of RSUs and PRSUs (1,990) $ 8 (1,998)    
Share-based compensation 47,271   47,271    
Other comprehensive income (loss), net of tax (274)     (274)  
Net loss (40,703)       (40,703)
Stockholders' Equity, Other 15   15    
Ending balance (in shares) at Sep. 30, 2020   116,463      
Ending balance at Sep. 30, 2020 $ 430,119 $ 1,164 $ 1,273,242 $ 2,560 $ (846,848)
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Cash flows from operating activities    
Net loss $ (148,142) $ (133,485)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 32,602 27,792
Share-based compensation 132,057 119,058
Amortization of deferred costs 32,390 22,983
Amortization of debt discount and issuance costs 26,230 18,831
Loss on early extinguishment of debt 25,950 0
Repayment of convertible senior notes attributable to debt discount (38,637) 0
Other 6,135 958
Changes in operating assets and liabilities:    
Accounts receivable (33,035) (19,832)
Prepaid expenses and other current assets (3,116) (10,997)
Deferred costs (47,292) (35,257)
Lease right-of-use assets 15,472 14,022
Other assets and liabilities (1,022) (4,141)
Accounts payable (26,208) 22,591
Accrued liabilities 1,569 520
Accrued compensation and related benefits 18,252 3,349
Deferred revenue 4,369 45,683
Lease liabilities (17,503) (15,025)
Net cash provided by (used in) operating activities (19,929) 57,050
Cash flows from investing activities    
Purchases of property and equipment (19,489) (25,628)
Internal-use software development costs (10,901) (5,007)
Purchases of marketable securities (701,367) (374,706)
Proceeds from maturities of marketable securities 281,476 146,171
Proceeds from sales of marketable securities 105,506 300,632
Business combinations, net of cash acquired 0 (70,794)
Purchases of strategic investments (1,500) (500)
Sales of strategic investments 1,577 0
Net cash used in investing activities (344,698) (29,832)
Cash flows from financing activities    
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $21,010 1,128,990 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 24,591 21,977
Proceeds from employee stock purchase plan 28,913 23,057
Taxes paid related to net share settlement of share-based awards (6,127) (7,402)
Net cash provided by financing activities 550,484 37,632
Effect of exchange rate changes on cash, cash equivalents and restricted cash 237 85
Net increase in cash, cash equivalents and restricted cash 186,094 64,935
Cash, cash equivalents and restricted cash at beginning of period 199,905 128,876
Cash, cash equivalents and restricted cash at end of period 385,999 193,811
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets    
Total cash, cash equivalents and restricted cash 385,999 193,811
Supplemental cash flow data    
Cash paid for interest 1,174 1,438
Cash paid for taxes 3,093 4,013
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses 1,642 12,467
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 2,536 1,379
Deferred Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs $ 1,229 $ 1,023
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)
$ in Thousands
9 Months Ended
Sep. 30, 2020
USD ($)
Statement of Cash Flows [Abstract]  
Payments of debt issuance costs associated with convertible notes $ 21,010
v3.20.2
Overview and Basis of Presentation
9 Months Ended
Sep. 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 fiscal year 2020, this uncertainty has 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 variable impact on our revenue from variable consideration and the allowance for credit losses. As of the date of issuance of the financial statements, we are not aware of any specific events or circumstances that would require us to update our estimates, judgments, or to revise the carrying values 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 September 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 nine months ended September 30, 2020 or 2019.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board, or FASB, issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the number of accounting models for convertible instruments and amends the calculation of diluted earnings per share for convertible instruments, among other changes. The guidance is effective for annual reporting periods beginning after December 15, 2021, 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.
Recently Adopted Accounting Pronouncements
In June 2016, the 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
9 Months Ended
Sep. 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
9 Months Ended
Sep. 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
September 30, 2020
Level 1Level 2Total
Description   
U.S. Treasury securities$— $414,594 $414,594 
Corporate bonds— 368,935 368,935 
Money market funds175,750 — 175,750 
Asset-backed securities— 92,099 92,099 
Commercial paper— 49,786 49,786 
Agency securities— 81,003 81,003 
Certificates of deposit— 5,500 5,500 
Total$175,750 $1,011,917 $1,187,667 
Included in cash and cash equivalents  $220,844 
Included in marketable securities  $966,823 
 Fair Value Measurement at
December 31, 2019
Level 1Level 2Total
Description   
Corporate bonds$— $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 September 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 nine months ended September 30, 2020.
As of September 30, 2020, gross unrealized gains and losses for marketable securities were $7 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,181 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $147 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 September 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):
 
 September 30,
2020
December 31,
2019
Due in one year or less$559,682 $286,958 
Due after one year and within five years407,141 361,948 
Total$966,823 $648,906 
 
As of September 30, 2020 and December 31, 2019, the balance of strategic investments without readily determinable fair values was $11 million. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes. During the three months ended September 30, 2020, we received proceeds of approximately $2 million on the sale of a strategic investment and realized a gain of approximately $1 million, which was recorded in interest and other income, net.
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, or AOCI. As of September 30, 2020, the balance of AOCI included an immaterial unrecognized net gain related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify an immaterial net gain 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, 2020
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$4,042 Accrued liabilities$3,882 
Total$4,042  $3,882 
 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 $280 million and $260 million as of September 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 September 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 nine months ended September 30, 2020 and 2019 (in thousands):
 
Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended September 30,Nine Months Ended September 30,
Classification2020201920202019
Revenue$100 $652 $1,222 $1,684 
Cost of revenue163 (274)(701)(1,141)
Research and development174 (280)(671)(1,045)
Sales and marketing366 (519)(1,350)(1,939)
General and administrative108 (226)(374)(723)
 Total$911 $(647)$(1,874)$(3,164)
The gain recognized in AOCI related to foreign currency forward contracts was $1 million for the three months ended September 30, 2020. The loss recognized in AOCI related to foreign currency forward contracts was $3 million for the nine months ended September 30, 2020. 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, 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 September 30, 2020, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $254 million and $1,366 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 $102.92 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 $94 million as of September 30, 2020.
v3.20.2
Costs to Obtain Customer Contracts
9 Months Ended
Sep. 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 $87 million and $71 million as of September 30, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $12 million and $8 million for the three months ended September 30, 2020 and 2019, respectively and $32 million and $23 million for the nine months ended September 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 September 30,Nine Months Ended September 30,
2020201920202019
Balance, beginning of period$316,113 $287,349 $323,962 $247,962 
Billings273,464 216,075 749,755 631,530 
Subscription and services revenue(249,052)(201,498)(707,715)(559,911)
Other revenue*(12,874)(8,979)(38,351)(26,634)
Balance, end of period$327,651 $292,947 $327,651 $292,947 
*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended September 30, 2020 and 2019, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the nine months ended September 30, 2020 and 2019, 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, 2020 was $800 million. We expect to recognize $560 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
9 Months Ended
Sep. 30, 2020
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 September 30,
2020
December 31,
2019
Leasehold improvements$91,323 $83,968 
Capitalized internal-use software49,056 38,437 
Computer equipment and licensed software and patents30,837 27,309 
Furniture and fixtures16,777 16,332 
Construction in progress10,442 8,647 
Total198,435 174,693 
Less: accumulated depreciation and amortization(96,337)(72,603)
Property and equipment, net$102,098 $102,090 
 
Depreciation expense was $7 million and $5 million for the three months ended September 30, 2020 and 2019, respectively, and $20 million and $15 million for the nine months ended September 30, 2020 and 2019, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended September 30, 2020 and 2019, and $5 million for each of the nine months ended September 30, 2020 and 2019. The carrying values of capitalized internal-use software as of September 30, 2020 and December 31, 2019 were $30 million and $23 million, respectively, including $10 million and $8 million in construction in progress, respectively.
v3.20.2
Leases
9 Months Ended
Sep. 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):
September 30, 2020December 31, 2019
Assets
Lease right-of-use assets$89,477 $89,983 
Liabilities
Lease liabilities22,300 21,804 
Lease liabilities, noncurrent80,507 83,478 

As of September 30, 2020, the weighted average remaining lease term was 5.9 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 September 30,Nine Months Ended September 30,
2020201920202019
Operating lease expense$6,573 $6,382 $19,590 $17,221 
Short-term lease expense128 168 451 2,037 
Variable lease expense1,412 1,607 4,614 4,835 
Sublease income(422)(560)(1,281)(1,353)
The following table presents supplemental cash flow information about our leases (in thousands):
Nine Months Ended September 30,
20202019
Cash paid for amounts included in the measurement of lease liabilities$24,029 $15,197 
Operating lease assets obtained in exchange for new lease liabilities14,960 27,559 
As of September 30, 2020, remaining maturities of lease liabilities are as follows:
Remainder of 2020$4,897 
202128,183 
202225,877 
202317,088 
20247,667 
Thereafter33,892 
Total lease payments117,604 
Less imputed interest14,797 
Total$102,807 

The table above excludes future payments of $9 million related to signed leases that have not yet commenced.
v3.20.2
Goodwill and Acquired Intangible Assets
9 Months Ended
Sep. 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 nine months ended September 30, 2020 are as follows (in thousands):
Balance as of December 31, 2019$169,647 
Goodwill adjustments15 
Balance as of September 30, 2020$169,662 
Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 As of September 30, 2020
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$30,200 $(9,833)$20,367 4.3
Customer relationships14,710 (5,424)9,286 4.2
Backlog3,200 (2,908)292 0.6
 $48,110 $(18,165)$29,945  
 
 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 September 30, 2020 and 2019, respectively, and $7 million and $8 million for the nine months ended September 30, 2020 and 2019, respectively.
Estimated future amortization expense as of September 30, 2020 is as follows (in thousands):
Remainder of 2020$2,011 
20217,603 
20227,437 
20236,658 
20244,616 
Thereafter1,620 
$29,945 
v3.20.2
Convertible Senior Notes
9 Months Ended
Sep. 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 $1,129 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 September 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):
September 30,
2020
December 31,
2019
Principal$1,150,000 $— 
Unamortized Debt Discount(208,764)— 
Unamortized issuance costs(16,241)— 
Net carrying amount$924,995 $— 

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

September 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 September 30,Nine Months Ended September 30,
2020201920202019
Contractual interest expense$1,797 $— $2,076 $— 
Amortization of Debt Discount9,785 — 11,297 — 
Amortization of issuance costs660 — 761 — 
Total interest expense$12,242 $— $14,134 $— 

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 September 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 September 30, 2020, the conditions allowing holders of the 2023 Notes to convert were met. The 2023 Notes are therefore convertible during the three months ending December 31, 2020, and are classified as a current liability as of September 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):
September 30,
2020
December 31,
2019
Principal$149,194 $575,000 
Unamortized Debt Discount(17,028)(84,037)
Unamortized issuance costs(1,551)(7,499)
Net carrying amount$130,615 $483,464 


The net carrying amount of the equity component of the 2023 Notes is as follows (in thousands):
September 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 September 30,Nine Months Ended September 30,
2020201920202019
Contractual interest expense$93 $359 $770 $1,078 
Amortization of Debt Discount1,614 5,902 13,097 17,479 
Amortization of issuance costs135 464 1,075 1,352 
Total interest expense$1,842 $6,725 $14,942 $19,909 

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 September 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
9 Months Ended
Sep. 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 opposed that motion and it is set for hearing on November 12, 2020.
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
9 Months Ended
Sep. 30, 2020
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of September 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 116.4 million and 113.1 million shares were issued and outstanding, respectively.
Preferred Stock
As of each of September 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 nine months ended September 30, 2020, 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, 2020. As of September 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 September 30, 2020, we had 15.0 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, 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(572)572 87.65 — — — — — 
RSUs granted(2,435)— — — — 2,435 83.65 
Stock options exercised (912)26.97 — — — — — 
RSUs vested— — — — — (2,057)53.67 — 
Stock options forfeited or canceled144 (144)54.27 — — — — — 
RSUs forfeited or canceled555 — — — — (555)61.19 — 
RSUs forfeited or canceled and unavailable for grant— — — — — (13)23.44 — 
PRSUs forfeited35 — — — — — — — 
Outstanding — September 30, 202014,994 4,376 $30.79 5.45$315,837 5,171 $68.44 $532,210 
 
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, 2020 and 2019 was $54 million and $63 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, 2020 and 2019 was $31.41 and $28.65, respectively.

The total fair value of RSUs vested during the nine months ended September 30, 2020 and 2019 was $168 million and $191 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, 2020 and 2019 was $83.65, and $74.39, respectively.
As of September 30, 2020, we had a total of $373 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 nine months ended September 30, 2020, we recorded $3 million and $5 million of share-based compensation expense related to the PRSUs, respectively. For the three and nine months ended September 30, 2019, we recorded $2 million and $6 million of share-based compensation expense related to PRSUs, respectively, including a one-time charge related to accelerated retention compensation. For the three and nine months ended September 30, 2020, 36 thousand and 62 thousand PRSUs were vested, respectively. 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.
v3.20.2
Deferred Revenue and Performance Obligations
9 Months Ended
Sep. 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 $87 million and $71 million as of September 30, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $12 million and $8 million for the three months ended September 30, 2020 and 2019, respectively and $32 million and $23 million for the nine months ended September 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 September 30,Nine Months Ended September 30,
2020201920202019
Balance, beginning of period$316,113 $287,349 $323,962 $247,962 
Billings273,464 216,075 749,755 631,530 
Subscription and services revenue(249,052)(201,498)(707,715)(559,911)
Other revenue*(12,874)(8,979)(38,351)(26,634)
Balance, end of period$327,651 $292,947 $327,651 $292,947 
*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended September 30, 2020 and 2019, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the nine months ended September 30, 2020 and 2019, 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, 2020 was $800 million. We expect to recognize $560 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized, including contracted revenue from renewals, and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.20.2
Net Loss Per Share
9 Months Ended
Sep. 30, 2020
Earnings Per Share [Abstract]  
Net Loss Per Share Net Loss Per ShareBasic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and
diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss$(40,703)$(34,224)$(148,142)$(133,485)
Weighted-average shares used to compute basic and diluted net loss per share115,809 111,261 114,653 109,969 
Net loss per share, basic and diluted$(0.35)$(0.31)$(1.29)$(1.21)
 
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,
20202019
Shares subject to outstanding common stock options and employee stock purchase plan4,607 5,323 
Restricted stock units5,171 5,908 
Shares related to convertible senior notes770 2,138 
 10,548 13,369 

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, 2020 and 2019, respectively.
We expect to settle the principal amount of both the 2023 Notes and 2025 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 prices of $63.07 and $108.76 per share for the 2023 Notes and 2025 Notes, respectively. Based on the initial conversion price, potential dilution related to the 2023 Notes and 2025 Notes is approximately 2.4 million and 10.6 million shares, respectively.
v3.20.2
Income Taxes
9 Months Ended
Sep. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income TaxesWe reported income tax expense of $2 million for the three months ended September 30, 2020 and an immaterial benefit from income taxes in the three months ended September 30, 2019. For the nine months ended September 30, 2020 and 2019, we reported income tax expense of $5 million and $1 million, respectively. 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.
v3.20.2
Geographic Information
9 Months Ended
Sep. 30, 2020
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,
2020201920202019
United States$136,491 $110,964 $391,025 $306,880 
EMEA73,798 59,196 210,487 166,728 
APAC28,954 22,981 81,105 63,715 
Other22,683 17,336 63,449 49,222 
Total$261,926 $210,477 $746,066 $586,545 
Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
As of
September 30, 2020
As of
December 31, 2019
United States$90,113 $91,532 
EMEA:
Republic of Ireland38,724 42,500 
Other EMEA3,531 3,725 
Total EMEA42,255 46,225 
APAC:
Singapore21,114 25,988 
Other APAC7,218 5,362 
Total APAC28,332 31,350 
Other414 417 
Total$161,114 $169,524 
 
The table above includes property and equipment and lease right-of-use assets and excludes capitalized internal-use software and intangible assets.
v3.20.2
Subsequent Events
9 Months Ended
Sep. 30, 2020
Subsequent Events [Abstract]  
Subsequent Event Subsequent Event In October 2020, our board of directors determined that the Company will no longer continue to occupy the leased premises located at 1019 Market Street and 988 Market Street, San Francisco, California 94103. As a result, we expect to record an impairment charge of approximately $13 to $17 million, primarily related to lease right-of-use assets and leasehold improvements. We intend to pay all rental payments due and payable by us pursuant to the lease, which total approximately $12 million, plus additional operating costs. The actual amount and timing of the impairments and the cash outflows are dependent on the outcome of negotiations with landlords and potential subtenants, and the timing of completion of lease decommissioning activities, which we expect to complete on or before March 31, 2021.
v3.20.2
Overview and Basis of Presentation (Policies)
9 Months Ended
Sep. 30, 2020
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, 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 fiscal year 2020, this uncertainty has 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 variable impact on our revenue from variable consideration and the allowance for credit losses. As of the date of issuance of the financial statements, we are not aware of any specific events or circumstances that would require us to update our estimates, judgments, or to revise the carrying values 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 September 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 nine months ended September 30, 2020 or 2019.
Recently Issued and Adopted Accounting Pronouncements
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board, or FASB, issued ASU 2020-06, regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the number of accounting models for convertible instruments and amends the calculation of diluted earnings per share for convertible instruments, among other changes. The guidance is effective for annual reporting periods beginning after December 15, 2021, 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.
Recently Adopted Accounting Pronouncements
In June 2016, the 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.
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.
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.
v3.20.2
Business Combinations (Tables)
9 Months Ended
Sep. 30, 2020
Business Combinations [Abstract]  
Summary of Assets Acquired and Liabilities Assumed
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$71,997 
v3.20.2
Financial Instruments (Tables)
9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Schedule of Assets Measured at Fair Value on Recurring Basis The following tables present information about our financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
Fair Value Measurement at
September 30, 2020
Level 1Level 2Total
Description   
U.S. Treasury securities$— $414,594 $414,594 
Corporate bonds— 368,935 368,935 
Money market funds175,750 — 175,750 
Asset-backed securities— 92,099 92,099 
Commercial paper— 49,786 49,786 
Agency securities— 81,003 81,003 
Certificates of deposit— 5,500 5,500 
Total$175,750 $1,011,917 $1,187,667 <