ZENDESK, INC., 10-Q filed on 5/4/2020
Quarterly Report
v3.20.1
Cover Page - shares
3 Months Ended
Mar. 31, 2020
Apr. 30, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Mar. 31, 2020  
Document Transition Report false  
Entity File Number 001-36456  
Entity Registrant Name ZENDESK, INC.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 26-4411091  
Entity Address, Address Line One 1019 Market Street  
Entity Address, City or Town San Francisco  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94103  
City Area Code 415  
Local Phone Number 418-7506  
Title of 12(b) Security Common Stock, par value $0.01 per share  
Trading Symbol ZEN  
Security Exchange Name NYSE  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Smaller Reporting Company false  
Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   114,225,954
Amendment Flag false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q1  
Entity Central Index Key 0001463172  
Current Fiscal Year End Date --12-31  
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 199,092 $ 196,591
Marketable securities 269,003 286,958
Accounts receivable, net of allowance for doubtful accounts of $5,796 and $2,846 as of March 31, 2020 and December 31, 2019, respectively 101,027 127,808
Deferred costs 38,215 35,619
Prepaid expenses and other current assets 45,785 45,847
Total current assets 653,122 692,823
Marketable securities, noncurrent 369,091 361,948
Property and equipment, net 103,017 102,090
Deferred costs, noncurrent 36,520 35,230
Lease right-of-use assets 96,307 89,983
Goodwill and intangible assets, net 204,093 206,883
Other assets 26,640 25,632
Total assets 1,488,790 1,514,589
Current liabilities:    
Accounts payable 26,227 38,376
Accrued liabilities 42,629 36,347
Accrued compensation and related benefits 61,996 61,512
Deferred revenue 301,402 320,642
Lease liabilities 21,253 21,804
Total current liabilities 453,507 478,681
Convertible senior notes, net 490,014 483,464
Deferred revenue, noncurrent 1,941 3,320
Lease liabilities, noncurrent 86,535 83,478
Other liabilities 6,850 7,662
Total liabilities 1,038,847 1,056,605
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock 0 0
Common stock 1,139 1,130
Additional paid-in capital 1,200,521 1,155,044
Accumulated other comprehensive income (loss) (10,152) 591
Accumulated deficit (741,565) (698,781)
Total stockholders’ equity 449,943 457,984
Total liabilities and stockholders’ equity $ 1,488,790 $ 1,514,589
v3.20.1
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 5,796 $ 2,846
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Income Statement [Abstract]    
Revenue $ 237,475 $ 181,484
Cost of revenue [1] 59,702 55,654
Gross profit 177,773 125,830
Operating expenses:    
Research and development [1] 60,421 46,791
Sales and marketing [1] 124,310 91,700
General and administrative [1] 34,326 31,253
Total operating expenses [1] 219,057 169,744
Operating loss (41,284) (43,914)
Other income (expense), net:    
Interest income 4,570 5,472
Interest expense (6,887) (6,544)
Other income, net 2,334 700
Total other income (expense), net 17 (372)
Loss before provision for income taxes (41,267) (44,286)
Provision for income taxes 1,516 434
Net loss $ (42,783) $ (44,720)
Net loss per share, basic and diluted (usd per share) $ (0.38) $ (0.41)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 113,538 108,630
[1] Includes share-based compensation expense as follows:
 
 
Three Months Ended
March 31,
2020
 
2019
Cost of revenue
$
5,059

 
$
4,937

Research and development
12,626

 
11,636

Sales and marketing
16,559

 
12,399

General and administrative
7,838

 
7,685

v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Share-based compensation $ 42,082 $ 36,657
Cost of revenue    
Share-based compensation 5,059 4,937
Research and development    
Share-based compensation 12,626 11,636
Sales and marketing    
Share-based compensation 16,559 12,399
General and administrative    
Share-based compensation $ 7,838 $ 7,685
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Statement of Comprehensive Income [Abstract]    
Net loss $ (42,783) $ (44,720)
Other comprehensive income (loss), before tax:    
Net unrealized gain (loss) on available-for-sale investments (3,395) 3,342
Net unrealized gain (loss) on derivative instruments (7,348) 1,124
Other comprehensive income (loss), before tax (10,743) 4,466
Tax effect 0 (1,072)
Other comprehensive income (loss), net of tax (10,743) 3,394
Comprehensive loss $ (53,526) $ (41,326)
v3.20.1
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)   376      
Issuance of common stock upon exercise of stock options 8,438 $ 4 8,434    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   847      
Issuance of common stock for settlement of RSUs and PRSUs (2,417) $ 8 (2,425)    
Share-based compensation 37,329   37,329    
Other comprehensive income (loss), net of tax 3,394     3,394  
Net loss (44,720)       (44,720)
Ending balance (in shares) at Mar. 31, 2019   109,260      
Ending balance at Mar. 31, 2019 418,945 $ 1,092 994,031 (2,330) (573,848)
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) 175 175      
Issuance of common stock upon exercise of stock options $ 4,001 $ 2 3,999    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   720      
Issuance of common stock for settlement of RSUs and PRSUs (1,897) $ 7 (1,904)    
Share-based compensation 43,382   43,382    
Other comprehensive income (loss), net of tax (10,743)     (10,743)  
Net loss (42,783)       (42,783)
Ending balance (in shares) at Mar. 31, 2020   113,976      
Ending balance at Mar. 31, 2020 $ 449,943 $ 1,139 $ 1,200,521 $ (10,152) $ (741,565)
v3.20.1
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2020
Mar. 31, 2019
Cash flows from operating activities    
Net loss $ (42,783) $ (44,720)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    
Depreciation and amortization 11,240 8,732
Share-based compensation 42,082 36,657
Amortization of deferred costs 9,965 6,918
Amortization of debt discount and issuance costs 6,549 6,188
Other 2,061 394
Changes in operating assets and liabilities:    
Accounts receivable 26,023 (6,966)
Prepaid expenses and other current assets 1,743 (3,774)
Deferred costs (13,448) (10,190)
Lease right-of-use assets 4,975 4,373
Other assets and liabilities (232) (498)
Accounts payable (10,323) 15,655
Accrued liabilities (662) 2,512
Accrued compensation and related benefits (9,541) (4,629)
Deferred revenue (21,464) 12,149
Lease liabilities (8,794) (3,832)
Net cash provided by (used in) operating activities (2,609) 18,969
Cash flows from investing activities    
Purchases of property and equipment (9,938) (9,258)
Internal-use software development costs (3,058) (1,213)
Purchases of marketable securities (121,430) (145,142)
Proceeds from maturities of marketable securities 74,231 47,265
Proceeds from sales of marketable securities 54,784 91,562
Purchases of strategic investments (1,500) (500)
Net cash used in investing activities (6,911) (17,286)
Cash flows from financing activities    
Proceeds from exercises of employee stock options 4,001 8,437
Proceeds from employee stock purchase plan 10,115 8,415
Taxes paid related to net share settlement of share-based awards (1,897) (2,416)
Net cash provided by financing activities 12,219 14,436
Effect of exchange rate changes on cash, cash equivalents and restricted cash 16 33
Net increase in cash, cash equivalents and restricted cash 2,715 16,152
Cash, cash equivalents and restricted cash at beginning of period 199,897 128,876
Cash, cash equivalents and restricted cash at end of period 202,612 145,028
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets    
Total cash, cash equivalents and restricted cash 202,612 145,028
Supplemental cash flow data    
Cash paid for interest 719 719
Cash paid for taxes 657 700
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses 4,801 2,411
Property and equipment acquired through tenant improvement allowances 0 349
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 850 375
Deferred Costs    
Non-cash investing and financing activities    
Share-based compensation capitalized in deferred costs and in internal-use software development costs $ 404 $ 297
v3.20.1
Overview and Basis of Presentation
3 Months Ended
Mar. 31, 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. 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 the Overview section. During the quarter, this uncertainty resulted in a higher level of judgment related to our estimates and assumptions concerning variable consideration related to revenue recognition, the estimate of credit losses for accounts receivable, and impairment of strategic investments. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments, or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. The allowance also reflects current market conditions and reasonable and supportable forecasts of future economic conditions. As of March 31, 2020, our allowance reflects increased collectibility concerns stemming from the COVID-19 pandemic and may increase in future periods as we ascertain further impacts to our customers and business. The allowance for doubtful accounts was $6 million and $3 million as of March 31, 2020 and December 31, 2019, respectively.
Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.

Concentrations of Risk
As of March 31, 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 months ended March 31, 2020 or 2019.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, regarding ASC Topic 740 “Income Taxes,” which simplifies certain aspects of accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, 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 Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. 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.
v3.20.1
Business Combinations
3 Months Ended
Mar. 31, 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.
The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary area that remains preliminary relates to the evaluation of certain tax-related items. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands). During the three months ended March 31, 2020, we made certain immaterial adjustments to the preliminary purchase price allocation, which are reflected in the table below.
The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from the expansion of the scope of and market opportunity for our products. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is deductible in the U.S. over 15 years for income tax purposes.
Net tangible assets
$
1,974

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

Customer relationships
3,900

Backlog
1,000

Goodwill
58,317

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.
v3.20.1
Financial Instruments
3 Months Ended
Mar. 31, 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
March 31, 2020
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
401,130

 
$
401,130

Money market funds
125,936

 

 
125,936

Asset-backed securities

 
118,816

 
118,816

U.S. Treasury securities

 
78,854

 
78,854

Agency securities

 
26,670

 
26,670

Commercial paper

 
12,624

 
12,624

Total
$
125,936

 
$
638,094

 
$
764,030

Included in cash and cash equivalents
 
 
 
 
$
125,936

Included in marketable securities
 
 
 
 
$
638,094

 
Fair Value Measurement at
December 31, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
418,005

 
$
418,005

Asset-backed securities

 
124,046

 
124,046

U.S. Treasury securities

 
94,731

 
94,731

Money market funds
70,455

 

 
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 March 31, 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 months ended March 31, 2020.
As of March 31, 2020, gross unrealized gains and losses for marketable securities were $3 million and $2 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $763 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $246 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 as of December 31, 2019 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 March 31, 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):
 
 
March 31,
2020
 
December 31,
2019
Due in one year or less
$
269,003

 
$
286,958

Due after one year and within five years
369,091

 
361,948

Total
$
638,094

 
$
648,906


 
As of March 31, 2020 and December 31, 2019, the balances of strategic investments without readily determinable fair values were $12 million and $11 million, respectively. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes.
For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
Derivative Instruments and Hedging
Our foreign currency exposures typically arise from expenditures associated with foreign operations and sales in foreign currencies of our products. To mitigate the effect of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts with certain financial institutions and designate those contracts as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
We include time value related to our cash flow hedges for effectiveness testing purposes and the entire change in the unrecognized value of our hedge contracts is recorded in accumulated other comprehensive income (loss), or AOCI. As of March 31, 2020, the balance of AOCI included an unrecognized net loss of $6 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net loss of $7 million into earnings over the next 12 months associated with our cash flow hedges.
The following tables present information about our derivative instruments on our consolidated balance sheets (in thousands):
 
 
March 31, 2020
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
3,852

 
Accrued liabilities
 
$
10,751

Total
 
 
$
3,852

 
 
 
$
10,751

 
December 31, 2019
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
2,385

 
Accrued liabilities
 
$
1,975

Total
 
 
$
2,385

 
 
 
$
1,975


 
Our foreign currency forward contracts had a total notional value of $318 million and $260 million as of March 31, 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 March 31, 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 months ended March 31, 2020 and 2019 (in thousands):
 
 
Gain (Loss) Reclassified from AOCI into Earnings
 
Three Months Ended March 31,
Classification
2020
 
2019
Revenue
$
397

 
$
443

Cost of revenue
(321
)
 
(474
)
Research and development
(281
)
 
(434
)
Sales and marketing
(562
)
 
(790
)
General and administrative
(174
)
 
(276
)
 Total
$
(941
)
 
$
(1,531
)

The loss recognized in AOCI related to foreign currency forward contracts was $8 million and not material for the three months ended March 31, 2020 and 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 March 31, 2020, the fair value of our convertible senior notes was $686 million. The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $64.01 on the last trading day of the quarter, the if-converted value of our convertible senior notes exceeded the principal amount of $575 million as of March 31, 2020.
v3.20.1
Costs to Obtain Customer Contracts
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Costs to Obtain Customer Contracts Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $75 million and $71 million as of March 31, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $10 million and $7 million for the three months ended March 31, 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 March 31,
 
2020
 
2019
Balance, beginning of period
$
323,962

 
$
247,962

Billings
216,856

 
193,118

Subscription and services revenue
(224,059
)
 
(172,852
)
Other revenue*
(13,416
)
 
(8,632
)
Balance, end of period
$
303,343

 
$
259,596

*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended March 31, 2020 and 2019, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate balance of remaining performance obligations as of March 31, 2020 was $673 million. We expect to recognize $489 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.
v3.20.1
Property and Equipment
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 
March 31,
2020
 
December 31,
2019
Leasehold improvements
$
86,593

 
$
83,968

Capitalized internal-use software
40,647

 
38,437

Computer equipment and licensed software and patents
28,539

 
27,309

Furniture and fixtures
17,072

 
16,332

Construction in progress
10,337

 
8,647

Total
183,188

 
174,693

Less: accumulated depreciation and amortization
(80,171
)
 
(72,603
)
Property and equipment, net
$
103,017

 
$
102,090


 
Depreciation expense was $7 million and $5 million for the three months ended March 31, 2020 and 2019, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended March 31, 2020 and 2019. The carrying values of capitalized internal-use software as of March 31, 2020 and December 31, 2019 were $25 million and $23 million, respectively, including $9 million and $8 million in construction in progress, respectively.
v3.20.1
Leases
3 Months Ended
Mar. 31, 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):
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Lease right-of-use assets
$
96,307

 
$
89,983

Liabilities
 
 
 
Lease liabilities
21,253

 
21,804

Lease liabilities, noncurrent
86,535

 
83,478



As of March 31, 2020, the weighted average remaining lease term was 6.2 years and the weighted average discount rate was 4.9%.
The following table presents information about leases on our consolidated statement of operations (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Operating lease expense
$
6,343

 
$
5,045

Short-term lease expense
185

 
874

Variable lease expense
1,543

 
885

Sublease income
(464
)
 
(401
)


The following table presents supplemental cash flow information about our leases (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities
$
9,552

 
$
4,176

Operating lease assets obtained in exchange for new lease liabilities
11,316

 
19,550



As of March 31, 2020, remaining maturities of lease liabilities are as follows:
Remainder of 2020
$
18,460

2021
26,074

2022
23,744

2023
16,079

2024
7,357

Thereafter
32,748

Total lease payments
124,462

Less imputed interest
16,674

Total
$
107,788



The table above excludes future payments of $10 million related to signed leases that have not yet commenced.
v3.20.1
Goodwill and Acquired Intangible Assets
3 Months Ended
Mar. 31, 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 three months ended March 31, 2020 are as follows (in thousands):
Balance as of December 31, 2019
$
169,647

Goodwill adjustments
15

Balance as of March 31, 2020
$
169,662


Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 
As of March 31, 2020
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(16,197
)
 
$
22,803

 
4.7
Customer relationships
15,210

 
(4,582
)
 
10,628

 
4.6
Backlog
3,200

 
(2,200
)
 
1,000

 
0.8
 
$
57,410

 
$
(22,979
)
 
$
34,431

 
 
 
 
As of December 31, 2019
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(14,492
)
 
$
24,508

 
4.9
Customer relationships
15,210

 
(3,882
)
 
11,328

 
4.8
Backlog
3,200

 
(1,800
)
 
1,400

 
1.0
 
$
57,410

 
$
(20,174
)
 
$
37,236

 
 

 
Amortization expense of acquired intangible assets was $3 million and $2 million for the three months ended March 31, 2020 and 2019, respectively.     
Estimated future amortization expense as of March 31, 2020 is as follows (in thousands):
Remainder of 2020
$
6,505

2021
7,600

2022
7,435

2023
6,656

2024
4,615

Thereafter
1,620

 
$
34,431

v3.20.1
0.25% Convertible Senior Notes and Capped Call
3 Months Ended
Mar. 31, 2020
Debt Disclosure [Abstract]  
0.25% Convertible Senior Notes and Capped Call 0.25% Convertible Senior Notes and Capped Call

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

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

During the three months ended March 31, 2020, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not convertible during the three months ending June 30, 2020, and are classified as a noncurrent liability as of March 31, 2020. To-date, we have received one request for conversion for an immaterial amount of Notes.

In accounting for the transaction, the Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the Conversion Option was $125 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, the “Debt Discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 5.26%.

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

The net carrying amount of the liability component of the Notes is as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Principal
$
575,000

 
$
575,000

Unamortized Debt Discount
(77,979
)
 
(84,037
)
Unamortized issuance costs
(7,007
)
 
(7,499
)
Net carrying amount
$
490,014

 
$
483,464


The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Debt Discount for Conversion Option
$
124,976

 
$
124,976

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

 
$
122,028



Interest expense related to the Notes is as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Contractual interest expense
$
359

 
$
356

Amortization of Debt Discount
6,057

 
5,751

Amortization of issuance costs
492

 
437

Total interest expense
$
6,908

 
$
6,544



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

Conversion Option
 
$
124,976

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


v3.20.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Commitments
As of March 31, 2020, 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.
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. The class action is still in the preliminary stages, and it is not possible for the Company to quantify the extent of potential liability to the individual defendants, if any. Management believes that the lawsuit lacks merit and intends to vigorously defend the actions. We cannot predict the outcome of or estimate the possible loss or range of loss from the above described matter.

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

The outcomes of legal proceedings and other contingencies are inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our products or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary. To date, we have not incurred any material costs, and we have not accrued any liabilities in our consolidated financial statements, as a result of these obligations.
Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance, which permit those customers to receive credits for future services in the event that we fail to meet those levels. To date, we have not accrued for any significant liabilities in our consolidated financial statements as a result of these service-level agreements.
v3.20.1
Common Stock and Stockholders' Equity
3 Months Ended
Mar. 31, 2020
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of March 31, 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 114.0 million and 113.1 million shares were issued and outstanding, respectively.
Preferred Stock
As of each of March 31, 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 months ended March 31, 2020, no shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.1 million shares on January 1, 2020. As of March 31, 2020, 5.5 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 March 31, 2020, we had 15.7 million shares of common stock available for future grants under the 2014 Plan.
On May 6, 2016, the compensation committee of our board of directors granted equity awards representing 1.2 million shares of common stock. These awards were granted outside of the 2014 Plan pursuant to an exemption provided for “employment inducement awards” within the meaning of Section 303A.08 of the New York Stock Exchange Listed Company Manual and accordingly did not require approval from our stockholders.
A summary of our share-based award activity for the three months ended March 31, 2020 is as follows (in thousands, except per share information):
 
 
 
 
Options Outstanding
 
RSUs Outstanding
Shares
Available
for Grant
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding
RSUs
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate Intrinsic Value
 
 
 
 
 
 
(In years)
 
 
 
 
 
 
 
 
Outstanding — January 1, 2020
11,613

 
4,860

 
$
24.08

 
5.85
 
$
255,536

 
5,361

 
$
55.00

 
$
410,804

Increase in authorized shares
5,654

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options granted
(456
)
 
456

 
88.73

 
 
 
 
 
 
 
 
 
 
RSUs granted
(1,398
)
 
 
 
 
 
 
 
 
 
1,398

 
83.85

 
 
Stock options exercised
 
 
(175
)
 
22.93

 
 
 
 
 
 
 
 
 
 
RSUs vested
 
 
 
 
 
 
 
 
 
 
(694
)
 
49.96

 
 
Stock options forfeited or canceled
12

 
(12
)
 
30.18

 
 
 
 
 
 
 
 
 
 
RSUs forfeited or canceled
212

 
 
 
 
 
 
 
 
 
(212
)
 
55.23

 
 
RSUs forfeited or canceled and unavailable for grant
 
 
 
 
 
 
 
 
 
 
(7
)
 
23.44

 
 
PRSUs forfeited
25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding — March 31, 2020
15,662

 
5,129

 
$
29.85

 
5.97
 
$
189,715

 
5,846

 
$
62.53

 
$
374,201


 
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 three months ended March 31, 2020 and 2019 was $10 million and $21 million, respectively. The intrinsic value for options exercised represents the difference between the exercise price and the market value on the date of exercise. The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2020 and 2019 was $31.63 and $28.65, respectively.

The total fair value of RSUs vested during the three months ended March 31, 2020 and 2019 was $55 million and $63 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 three months ended March 31, 2020 and 2019 was $83.85, and $64.88, respectively.
As of March 31, 2020, we had a total of $385 million in future expense related to our stock options and RSUs to be recognized over a weighted average period of 2.9 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 each of the three months ended March 31, 2020 and 2019, we recorded $1 million of share-based compensation expense related to the PRSUs. For the three months ended March 31, 2020 and 2019, 26 thousand and no PRSUs were vested, respectively. 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.
v3.20.1
Deferred Revenue and Performance Obligations
3 Months Ended
Mar. 31, 2020
Revenue from Contract with Customer [Abstract]  
Deferred Revenue and Performance Obligations Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $75 million and $71 million as of March 31, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $10 million and $7 million for the three months ended March 31, 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 March 31,
 
2020
 
2019
Balance, beginning of period
$
323,962

 
$
247,962

Billings
216,856

 
193,118

Subscription and services revenue
(224,059
)
 
(172,852
)
Other revenue*
(13,416
)
 
(8,632
)
Balance, end of period
$
303,343

 
$
259,596

*Other revenue primarily includes implementation and training services, Talk usage, and amounts from contract assets.
For the three months ended March 31, 2020 and 2019, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate balance of remaining performance obligations as of March 31, 2020 was $673 million. We expect to recognize $489 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.
v3.20.1
Net Loss Per Share
3 Months Ended
Mar. 31, 2020
Earnings Per Share [Abstract]  
Net Loss Per Share Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 
Three Months Ended
March 31,
2020
 
2019
Net loss
$
(42,783
)
 
$
(44,720
)
Weighted-average shares used to compute basic and diluted net loss per share
113,538


108,630

Net loss per share, basic and diluted
$
(0.38
)
 
$
(0.41
)

 
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
 
As of March 31,
2020
 
2019
Shares subject to outstanding common stock options and employee stock purchase plan
5,429

 
6,167

Restricted stock units
5,846

 
7,028

Shares related to convertible senior notes
1,749

 
1,283

 
13,024

 
14,478

 

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 March 31, 2020 and 2019, respectively.

We expect to settle the principal amount of the convertible senior notes in cash and therefore use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread has a dilutive impact on diluted net income per share when the average market price of our common stock for a given reporting period exceeds the initial conversion price of $63.07 per share for the convertible senior notes. Based on
the initial conversion price, potential dilution related to the convertible senior notes is approximately 9.1 million shares. The convertible senior notes will not be convertible during the three months ending June 30, 2020.
v3.20.1
Income Taxes
3 Months Ended
Mar. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
We reported $2 million and immaterial income tax expense for the three months ended March 31, 2020 and 2019, 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.
v3.20.1
Geographic Information
3 Months Ended
Mar. 31, 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
March 31,
2020
 
2019
United States
$
124,037

 
$
94,901

EMEA
67,919

 
52,075

APAC
25,575

 
19,476

Other
19,944

 
15,032

Total
$
237,475

 
$
181,484


Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
 
As of
March 31, 2020
 
As of
December 31, 2019
United States
$
98,152

 
$
91,532

EMEA:
 
 
 
Republic of Ireland
41,210

 
42,500

Other EMEA
3,274

 
3,725

Total EMEA
44,484

 
46,225

APAC:
 
 
 
Singapore
24,393

 
25,988

Other APAC
7,119

 
5,362

Total APAC
31,512

 
31,350

Other
471

 
417

Total
$
174,619

 
$
169,524


 
The table above includes property and equipment and lease right-of-use assets and excludes capitalized internal-use software and intangible assets.
v3.20.1
Overview and Basis of Presentation (Policies)
3 Months Ended
Mar. 31, 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. 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 the Overview section. During the quarter, this uncertainty resulted in a higher level of judgment related to our estimates and assumptions concerning variable consideration related to revenue recognition, the estimate of credit losses for accounts receivable, and impairment of strategic investments. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments, or revise the carrying value of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. The allowance also reflects current market conditions and reasonable and supportable forecasts of future economic conditions. As of March 31, 2020, our allowance reflects increased collectibility concerns stemming from the COVID-19 pandemic and may increase in future periods as we ascertain further impacts to our customers and business. The allowance for doubtful accounts was $6 million and $3 million as of March 31, 2020 and December 31, 2019, respectively.
Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.

Concentrations of Risk
As of March 31, 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 months ended March 31, 2020 or 2019.
Recently Issued and Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, regarding ASC Topic 740 “Income Taxes,” which simplifies certain aspects of accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, 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 Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. 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.
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.
v3.20.1
Business Combinations (Tables)
3 Months Ended
Mar. 31, 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 technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,317

Total purchase consideration
$
71,997


v3.20.1
Financial Instruments (Tables)
3 Months Ended
Mar. 31, 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
March 31, 2020
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
401,130

 
$
401,130

Money market funds
125,936

 

 
125,936

Asset-backed securities

 
118,816

 
118,816

U.S. Treasury securities

 
78,854

 
78,854

Agency securities

 
26,670

 
26,670

Commercial paper

 
12,624

 
12,624

Total
$
125,936

 
$
638,094

 
$
764,030

Included in cash and cash equivalents
 
 
 
 
$
125,936

Included in marketable securities
 
 
 
 
$
638,094

 
Fair Value Measurement at
December 31, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
418,005

 
$
418,005

Asset-backed securities

 
124,046

 
124,046

U.S. Treasury securities

 
94,731

 
94,731

Money market funds
70,455

 

 
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


Schedule of Marketable Securities Classified by Contractual Maturity
The following table classifies our marketable securities by contractual maturity (in thousands):
 
 
March 31,
2020
 
December 31,
2019
Due in one year or less
$
269,003

 
$
286,958

Due after one year and within five years
369,091

 
361,948

Total
$
638,094

 
$
648,906


Schedule of Derivative Instruments on Consolidated Balance Sheets
The following tables present information about our derivative instruments on our consolidated balance sheets (in thousands):
 
 
March 31, 2020
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
3,852

 
Accrued liabilities
 
$
10,751

Total
 
 
$
3,852

 
 
 
$
10,751

 
December 31, 2019
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
2,385

 
Accrued liabilities
 
$
1,975

Total
 
 
$
2,385

 
 
 
$
1,975


Schedule of Derivative Instruments on Statement of Operations
The following table presents information about our foreign currency forward contracts on our condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 (in thousands):
 
 
Gain (Loss) Reclassified from AOCI into Earnings
 
Three Months Ended March 31,
Classification
2020
 
2019
Revenue
$
397

 
$
443

Cost of revenue
(321
)
 
(474
)
Research and development
(281
)
 
(434
)
Sales and marketing
(562
)
 
(790
)
General and administrative
(174
)
 
(276
)
 Total
$
(941
)
 
$
(1,531
)

v3.20.1
Property and Equipment (Tables)
3 Months Ended
Mar. 31, 2020
Property, Plant and Equipment [Abstract]  
Components of Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 
March 31,
2020
 
December 31,
2019
Leasehold improvements
$
86,593

 
$
83,968

Capitalized internal-use software
40,647

 
38,437

Computer equipment and licensed software and patents
28,539

 
27,309

Furniture and fixtures
17,072

 
16,332

Construction in progress
10,337

 
8,647

Total
183,188

 
174,693

Less: accumulated depreciation and amortization
(80,171
)
 
(72,603
)
Property and equipment, net
$
103,017

 
$
102,090


v3.20.1
Leases (Tables)
3 Months Ended
Mar. 31, 2020
Leases [Abstract]  
Schedule of Lease Impact on Balance Sheet
The following tables present information about leases on our consolidated balance sheet (in thousands):
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Lease right-of-use assets
$
96,307

 
$
89,983

Liabilities
 
 
 
Lease liabilities
21,253

 
21,804

Lease liabilities, noncurrent
86,535

 
83,478


Schedule of Lease Cost and Supplemental Cash Flow Information
The following table presents information about leases on our consolidated statement of operations (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Operating lease expense
$
6,343