ZENDESK, INC., 10-K filed on 2/12/2021
Annual Report
v3.20.4
Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2020
Feb. 11, 2021
Jun. 30, 2020
Cover [Abstract]      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2020    
Current Fiscal Year End Date --12-31    
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 Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Smaller Reporting Company false    
Emerging Growth Company false    
ICFR Auditor Attestation Flag true    
Entity Shell Company false    
Entity Public Float     $ 7.4
Entity Common Stock, Shares Outstanding   117,759,001  
Documents Incorporated by Reference Portions of the Registrant's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2020. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.    
Amendment Flag false    
Document Fiscal Year Focus 2020    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001463172    
v3.20.4
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Current assets:    
Cash and cash equivalents $ 405,430 $ 196,591
Marketable securities 565,593 286,958
Accounts receivable, net of allowance for credit losses of $5,787 and $2,846 as of December 31, 2020 and 2019, respectively 199,243 127,808
Deferred costs 51,878 35,619
Prepaid expenses and other current assets 53,829 45,847
Total current assets 1,275,973 692,823
Marketable securities, noncurrent 428,678 361,948
Property and equipment, net 94,208 102,090
Deferred costs, noncurrent 52,731 35,230
Lease right-of-use assets 84,013 89,983
Goodwill and intangible assets, net 196,218 206,883
Other assets 25,458 25,632
Total assets 2,157,279 1,514,589
Current liabilities:    
Accounts payable 15,428 38,376
Accrued liabilities 38,921 36,347
Accrued compensation and related benefits 103,437 61,512
Deferred revenue 378,935 320,642
Lease liabilities 23,533 21,804
Current portion of convertible senior notes, net 132,388 0
Total current liabilities 692,642 478,681
Convertible senior notes, net 935,576 483,464
Deferred revenue, noncurrent 4,423 3,320
Lease liabilities, noncurrent 85,275 83,478
Other liabilities 7,532 7,662
Total liabilities 1,725,448 1,056,605
Commitments and contingencies (Note 10)
Stockholders’ equity:    
Preferred stock, par value $0.01 per share: no shares issued or outstanding; 10.0 million shares authorized as of December 31, 2020 and 2019 0 0
Common stock, par value $0.01 per share: 400.0 million shares authorized; 117.5 million and 113.1 million shares issued and outstanding as of December 31, 2020 and 2019, respectively 1,174 1,130
Additional paid-in capital 1,344,337 1,155,044
Accumulated other comprehensive income 3,203 591
Accumulated deficit (916,883) (698,781)
Total stockholders’ equity 431,831 457,984
Total liabilities and stockholders’ equity $ 2,157,279 $ 1,514,589
v3.20.4
CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]      
Allowance for doubtful accounts $ 5,787 $ 2,846 $ 2,571
Preferred stock, par value (in USD per share) $ 0.01 $ 0.01  
Preferred stock, shares issued (in shares) 0 0  
Preferred stock, shares outstanding (in shares) 0 0  
Preferred stock, shares authorized (in shares) 10,000,000.0 10,000,000.0  
Common stock, par value (in USD per share) $ 0.01 $ 0.01  
Common stock, shares authorized (in shares) 400,000,000 400,000,000  
Common stock, shares issued (in shares) 117,500,000 113,100,000  
Common stock, shares outstanding (in shares) 117,500,000 113,100,000  
v3.20.4
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Income Statement [Abstract]      
Revenue $ 1,029,564 $ 816,416 $ 598,746
Cost of revenue [1] 251,255 234,282 181,255
Gross profit 778,309 582,134 417,491
Operating expenses:      
Research and development [1] 255,400 207,548 160,260
Sales and marketing [1] 512,339 396,514 291,668
General and administrative [1] 166,469 141,076 103,491
Total operating expenses [1] 934,208 745,138 555,419
Operating loss (155,899) (163,004) (137,928)
Other income (expense), net      
Interest expense (43,319) (26,708) (19,882)
Loss on early extinguishment of debt (25,950) 0 0
Interest and other income (expense), net 12,751 21,409 14,619
Total other income (expense), net (56,518) (5,299) (5,263)
Loss before provision for (benefit from) income taxes (212,417) (168,303) (143,191)
Provision for (benefit from) income taxes 5,761 1,350 (12,107)
Net loss $ (218,178) $ (169,653) $ (131,084)
Net loss per share, basic and diluted (in USD per share) $ (1.89) $ (1.53) $ (1.24)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 115,240 110,606 105,567
[1] Includes share-based compensation expense as follows:
Year Ended December 31,
202020192018
Cost of revenue$20,068 $20,858 $14,835 
Research and development53,967 46,965 41,365 
Sales and marketing74,796 53,964 37,882 
General and administrative33,373 34,943 25,401 
v3.20.4
CONSOLIDATED STATEMENTS OF OPERATIONS (PARENTHETICAL) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Share-based compensation $ 182,204 $ 156,730 $ 119,483
Cost of revenue      
Share-based compensation 20,068 20,858 14,835
Research and development      
Share-based compensation 53,967 46,965 41,365
Sales and marketing      
Share-based compensation 74,796 53,964 37,882
General and administrative      
Share-based compensation $ 33,373 $ 34,943 $ 25,401
v3.20.4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Statement of Comprehensive Income [Abstract]      
Net loss $ (218,178) $ (169,653) $ (131,084)
Other comprehensive income (loss), before tax:      
Net unrealized gain (loss) on available-for-sale investments 1,765 5,473 (620)
Net unrealized gain (loss) on derivative instruments 847 2,836 (2,732)
Other comprehensive income (loss), before tax 2,612 8,309 (3,352)
Tax effect 0 (1,994) 0
Other comprehensive income (loss), net of tax 2,612 6,315 (3,352)
Comprehensive loss $ (215,566) $ (163,338) $ (134,436)
v3.20.4
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, 2017   103,121      
Beginning balance at Dec. 31, 2017 $ 354,183 $ 1,031 $ 753,568 $ (2,372) $ (398,044)
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Issuance of common stock upon exercise of stock options (in shares)   1,024      
Issuance of common stock upon exercise of stock options 16,150 $ 10 16,140    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   3,165      
Issuance of common stock for settlement of RSUs (5,213) $ 32 (5,245)    
Issuance of common stock in connection with employee stock purchase plan (in shares)   728      
Issuance of common stock in connection with employee stock purchase plan 19,773 $ 7 19,766    
Share-based compensation 122,160   122,160    
Equity component of 2023 convertible senior notes 44,304   44,304    
Other comprehensive income, net of income taxes (3,352)     (3,352)  
Net loss (131,084)       (131,084)
Ending balance (in shares) at Dec. 31, 2018   108,038      
Ending 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)   1,297      
Issuance of common stock upon exercise of stock options 26,495 $ 13 26,482    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   3,099      
Issuance of common stock for settlement of RSUs $ (9,574) $ 31 (9,605)    
Issuance of common stock in connection with employee stock purchase plan (in shares) 600 647      
Issuance of common stock in connection with employee stock purchase plan $ 29,491 $ 6 29,485    
Share-based compensation 157,989   157,989    
Other comprehensive income, net of income taxes 6,315     6,315  
Net loss (169,653)       (169,653)
Ending balance (in shares) at Dec. 31, 2019   113,081      
Ending 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) 1,074 1,074      
Issuance of common stock upon exercise of stock options $ 29,123 $ 11 29,112    
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   2,705      
Issuance of common stock for settlement of RSUs $ (8,847) $ 27 (8,874)    
Issuance of common stock in connection with employee stock purchase plan (in shares) 600 629      
Issuance of common stock in connection with employee stock purchase plan $ 38,066 $ 6 38,060    
Share-based compensation 186,506   186,506    
Equity component of 2023 convertible senior notes 216,026   216,026    
Purchase of capped calls related to 2025 convertible senior notes (129,950)   (129,950)    
Equity component of partial repurchase of 2023 convertible senior notes (224,639)   (224,639)    
Proceeds from capped calls related to 2023 convertible senior notes 83,040   83,040    
Other comprehensive income, net of income taxes 2,612     2,612  
Net loss (218,178)       (218,178)
Other 88   12   76
Ending balance (in shares) at Dec. 31, 2020   117,489      
Ending balance at Dec. 31, 2020 $ 431,831 $ 1,174 $ 1,344,337 $ 3,203 $ (916,883)
v3.20.4
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2020
Dec. 31, 2019
Dec. 31, 2018
Cash flows from operating activities      
Net loss $ (218,178) $ (169,653) $ (131,084)
Adjustments to reconcile net loss to net cash provided by operating activities      
Depreciation and amortization 42,247 38,602 36,520
Share-based compensation 182,204 156,730 119,483
Amortization of deferred costs 45,426 32,116 21,304
Amortization of debt discount and issuance costs 38,588 25,288 18,766
Loss on early extinguishment of debt 25,950 0 0
Real estate impairments 14,975 0 0
Repayment of convertible senior notes attributable to debt discount (38,637) 0 0
Allowance for credit losses on accounts receivable 10,136 5,061 3,111
Income tax benefit related to convertible senior notes 0 0 (13,784)
Other, net 5,602 (4,321) (263)
Changes in operating assets and liabilities:      
Accounts receivable (80,945) (50,061) (30,007)
Prepaid expenses and other current assets (1,909) (8,349) (10,620)
Deferred costs (77,380) (49,922) (40,898)
Lease right-of-use assets 20,372 18,940 0
Other assets and liabilities 799 (1,081) 6,635
Accounts payable (20,804) 22,128 7,534
Accrued liabilities 4,800 3,259 3,844
Accrued compensation and related benefits 38,458 11,282 15,026
Deferred revenue 59,397 78,110 73,053
Lease liabilities (24,673) (18,868) 0
Net cash provided by operating activities 26,428 89,261 78,620
Cash flows from investing activities      
Purchases of property and equipment (22,877) (39,140) (35,323)
Internal-use software development costs (15,646) (7,841) (7,005)
Purchases of marketable securities (849,656) (454,649) (700,226)
Proceeds from maturities of marketable securities 375,686 177,376 170,882
Proceeds from sales of marketable securities 130,087 328,921 71,359
Business combinations, net of cash acquired 0 (70,919) (79,363)
Purchases of strategic investments (1,500) (500) (10,000)
Proceeds from sales of strategic investments 1,577 0 0
Net cash used in investing activities (382,329) (66,752) (589,676)
Cash flows from financing activities      
Payments for 2023 convertible senior notes partial repurchase (578,973) 0 0
Proceeds from capped calls related to 2023 convertible senior notes 83,040 0 0
Proceeds from exercises of employee stock options 29,123 26,495 16,150
Proceeds from employee stock purchase plan 40,454 31,490 21,440
Taxes paid related to net share settlement of share-based awards (8,847) (9,574) (5,213)
Other 0 0 (813)
Net cash provided by financing activities 563,817 48,411 529,063
Effect of exchange rate changes on cash, cash equivalents and restricted cash 46 101 (19)
Net increase in cash, cash equivalents and restricted cash 207,962 71,021 17,988
Cash, cash equivalents and restricted cash at beginning of period 199,897 128,876 110,888
Cash, cash equivalents and restricted cash at end of period 407,859 199,897 128,876
Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets      
Total cash, cash equivalents and restricted cash 407,859 128,876 128,876
Supplemental cash flow data      
Cash paid for interest 4,748 1,438 699
Cash paid for taxes 5,884 5,381 2,524
Non-cash investing and financing activities      
Share-based compensation capitalized in internal-use software development costs 2,992 2,176 2,414
Balance of property and equipment in accounts payable and accrued expenses 1,005 9,139 5,582
Asset retirement obligations incurred 0 1,809 0
Property and equipment acquired through tenant improvement allowances 110 414 5,640
Share-based compensation capitalized in deferred costs 1,807 1,417 866
Convertible senior notes due 2025      
Cash flows from financing activities      
Proceeds from issuance of convertible senior notes, net of issuance costs paid 1,128,970 0 0
Payments For Capped Call (129,950) 0 0
Convertible senior notes due 2023      
Cash flows from financing activities      
Proceeds from issuance of convertible senior notes, net of issuance costs paid 0 0 561,439
Payments For Capped Call $ 0 $ 0 $ (63,940)
v3.20.4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical)
$ in Thousands
12 Months Ended
Dec. 31, 2020
USD ($)
Convertible senior notes due 2025  
Issuance costs paid $ 21,030
Convertible senior notes due 2023  
Issuance costs paid $ 13,561
v3.20.4
Organization
12 Months Ended
Dec. 31, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization Organization
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.
v3.20.4
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles, or GAAP. The consolidated financial statements include the accounts of Zendesk, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had an immaterial effect on our reported results of operations.
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 fair value and 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 resulted in a higher level of judgment related to our estimates and assumptions concerning variable consideration for revenue recognition, the estimate of credit losses for accounts receivable, and the valuation 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.
Segment 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 operating segment.
Revenue Recognition
We generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on Zendesk Support and, to a lesser extent, Chat, Talk, Guide, Sell, Explore, Gather and Sunshine and includes related support services. We also derive revenue from Zendesk Suite, which provides a subset of these product solutions for a single price. In addition, we generate revenue by providing additional features to certain of our subscription plans for a fee that is incremental to the base subscription rate for such plans. Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations or any other right of return. We record revenue net of sales or excise taxes.
We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

Identification of the contract, or contracts, with a customer;
Identification of the performance obligations in the contract;
Determination of the transaction price;
Allocation of the transaction price to the performance obligations in the contract; and
Recognition of revenue when, or as, the performance obligations are satisfied.

Subscription revenue is recognized on a ratable basis over the contractual subscription term of the arrangement, as the underlying service is a stand-ready performance obligation, beginning on the date that our service is made available to the customer. Payments received in advance of services being rendered are recorded as deferred revenue.

Certain customers have arrangements that provide for a maximum number of users over the subscription term, with usage measured monthly, and additional fees are incurred for incremental users above the maximum. In determining the transaction price for these arrangements, we evaluate the expected usage and estimate any additional fees that we are entitled to throughout the subscription term and recognize revenue ratably over the subscription term. In making these assessments, we constrain our estimates based on factors that could lead to a probable significant reversal of cumulative revenue recognized. Additionally, certain customers have arrangements that provide for unlimited users during the subscription term for a fixed fee. We recognize revenue from these arrangements on a ratable basis over the subscription term.
To a lesser extent, we derive revenue through indirect sales channels, including referral partners and resellers, as well as implementation partners, for which we recognize revenue on a gross basis, as we act as the principal in such arrangements.

Certain of our product solutions include service-level agreements warranting defined levels of uptime reliability and performance and permitting 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 material liabilities in our consolidated financial statements as a result of these service-level agreements.
Deferred Revenue
We invoice customers for subscriptions to our solutions in monthly, quarterly, or annual installments. Deferred revenue consists primarily of customer billings made in advance of performance obligations being satisfied and revenue being recognized, and includes an immaterial amount of billings for subscriptions with customer cancellation rights. The term between invoicing and when payment is due is not significant and we do not provide financing arrangements to customers. Deferred revenue associated with performance obligations that are anticipated to be satisfied, and thus revenue recognized, during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue.

We invoice customers based on billing schedules established in our contracts. Accounts receivable are recorded when the right to consideration becomes unconditional.
Cost of Revenue
Cost of revenue consists primarily of personnel costs (primarily including salaries, share-based compensation, and benefits) for employees associated with our infrastructure, product support, and professional service organizations, and expenses for hosting capabilities, primarily for third-party managed hosting services and costs associated with our self-managed colocation data centers. Cost of revenue also includes third-party license fees, payment processing fees, amortization expense associated with acquired intangible assets, amortization expense associated with capitalized internal-use software, and allocated shared costs, primarily including facilities, information technology, and security costs.
Cash, Cash Equivalents, and Restricted Cash
We consider all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at fair value and consist primarily of bank deposits and money market funds.
As of December 31, 2020, our restricted cash balance was $2 million, consisting primarily of cash pledged for charitable donation. As of December 31, 2019, our restricted cash balance was $3 million, consisting of $2 million pledged for charitable donation and $1 million related to a deposit for leased office space. Restricted cash is included within prepaid expenses and other current assets and other assets on our consolidated balance sheets.
Marketable Securities
Marketable securities consist of U.S. Treasury securities, corporate bonds, money market funds, asset-backed securities, agency securities, commercial paper, certificates of deposit, and time deposits. We classify marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All marketable securities are recorded at their estimated fair values. When the fair value of a marketable security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to be nonrecoverable before the sale of the security, is recognized in our consolidated statement of operations. When the fair value of the security declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in accumulated other comprehensive income (loss), or AOCI, and are recognized in our consolidated statement of operations only if we sell or intend to sell the security before recovery of its cost basis. Realized gains and losses are determined based on the specific identification method and are reported in interest and other income (expense), net in our consolidated statements of operations.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoiced amount, net of allowance for credit losses. 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, including reasonable and supportable forecasts of future economic conditions. Accounts receivable
deemed uncollectible are charged against the allowance for credit losses when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.
Our allowance for credit losses for accounts receivable consists of the following activity (in thousands):
 Year Ended December 31,
20202019
Allowance for credit losses, beginning balance$2,846 $2,571 
Additions14,015 8,172 
Write-offs(11,074)(7,897)
Allowance for credit losses, ending balance$5,787 $2,846 
The activity for the year ended December 31, 2019 has been restated from the previously reported amounts to correct an immaterial calculation error.
Costs to Obtain Customer Contracts
Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over their anticipated period of benefit, which we have estimated to be three years. We determined the period of benefit by taking into consideration the length of our customer contracts, our technology lifecycle, and other factors. Amortization expense is recorded in sales and marketing expense within our consolidated statement of operations. Sales commissions paid for contract renewals are not material.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred. The estimated useful lives of our property and equipment are as follows:
 
Furniture and fixtures5 years
Computer equipment and licensed software and patents
3 to 5 years
Leasehold improvementsShorter of the lease term or estimated useful life
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 estimate 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 sheets; we recognize lease expense for these leases on a straight-line basis over the lease term.
Derivative Instruments and Hedging
We enter into foreign currency forward contracts with certain financial institutions to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings. All of our foreign currency forward contracts are designated as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
We recognize all forward contracts on our balance sheet at fair value as either assets or liabilities. The effective portion of the gain or loss on each forward contract is reported as a component of AOCI, and reclassified into earnings, into revenue, cost of revenue or operating expense in the same period, or periods, during which the hedged transaction affects earnings. The ineffective portion of the gains or losses, if any, is recorded immediately in interest and other income (expense), net. 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 AOCI. We evaluate the effectiveness of our cash flow hedges on a quarterly basis.

We have a master netting agreement with each of our counterparties, which permits net settlement of multiple, separate derivative contracts with a single payment. We do not have collateral requirements with any of our counterparties. 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.
Fair Value Measurements
We measure certain financial instruments at fair value using a fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:
Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2—Other inputs that are directly or indirectly observable in the marketplace.
Level 3—Unobservable inputs that are supported by little or no market activity.
Our marketable securities are classified within either Level 1 or Level 2, and our foreign currency forward contracts and convertible senior notes are classified within Level 2. We have no financial assets or liabilities measured using Level 3 inputs. The fair values of our Level 1 marketable securities are based on quoted market prices of identical underlying securities. The fair values of our Level 2 marketable securities are based on indirect or directly observable market data, including readily available pricing sources for identical underlying securities that may not be actively traded. The fair values of our foreign currency forward contracts are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot rates, forward rates, and LIBOR. The fair value of our convertible senior notes is determined based on the quoted price of the convertible senior notes in an inactive market.
For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these instruments.
Capitalized Internal-Use Software Costs
We capitalize certain development costs incurred in connection with software development for our platform and software used in operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once software has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred.
Capitalized internal-use software is amortized on a straight-line basis over its estimated useful life and is typically recorded in cost of revenue within the consolidated statements of operations.
Business Combinations
When we acquire businesses, we allocate the purchase price to the net tangible and identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable.
Goodwill, Acquired Intangible Assets, and Impairment Assessment of Long-Lived Assets
Goodwill. Goodwill represents the excess purchase consideration of an acquired business over the fair value of the net tangible and identifiable intangible assets. Goodwill is evaluated for impairment annually in the third quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. No impairment charges were recorded for the years ended December 31, 2020, 2019, or 2018.
Acquired Intangible Assets. Acquired intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisitions. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives.
Impairment of Long-Lived Assets. The carrying amounts of our long-lived assets, including property and equipment, lease right-of-use assets, capitalized internal-use software, costs to obtain customer contracts, and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful lives are shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future undiscounted net cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life. There were no material impairments for the years ended December 31, 2020, 2019, and 2018, other than those disclosed in Note 6, Note 7, and Note 8.
Strategic Investments
Strategic investments consist of non-controlling equity investments in privately-held companies. We have elected to apply the measurement alternative for these investments as they do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when events or circumstances indicate a decline in value has occurred. We include strategic investments in other assets in our consolidated balance sheets.
Share-Based Compensation
Share-based compensation expense to employees is measured based on the fair value of the awards on the grant date and recognized in our consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award, which is typically four years). The contractual term of our stock options is typically ten years. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We measure the fair value of Restricted Stock Units, or RSUs, and Performance Restricted Stock Units, or PRSUs, based on the fair value of the underlying shares on the date of grant. Compensation expense for awards with only service conditions is recognized over the vesting period of the applicable award using the straight-line method. We record share-based compensation expense for performance-based equity awards using the accelerated attribution method. Share-based compensation expense for our Employee Stock Purchase Plan, or ESPP, is recognized over each 18-month offering period using the straight-line method.
Advertising Expense
Advertising costs are expensed as incurred. For the years ended December 31, 2020, 2019, and 2018, advertising expense was $52 million, $57 million, and $48 million, respectively.
Government Grants
We have obtained government grants in certain jurisdictions where we operate. We receive the grant funds as we meet certain commitments, including targeted levels of employment and/or spending within the local jurisdictions. If we fail to maintain these commitments, we may be required to repay grant funds received or be ineligible to receive future funding. We recognize grant proceeds to offset costs to which the grants relate on a straight-line basis when it is reasonably assured that the applicable commitments have been met. For the years ended December 31, 2020, 2019, and 2018, we recognized grant proceeds of $4 million, $4 million, and $2 million, respectively, in our consolidated statements of operations.

Income Taxes
We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income
for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
We recognize tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.
We have elected to record interest accrued and penalties related to unrecognized tax benefits in our consolidated statements of operations within provision for (benefit from) income taxes.
Foreign Currency
The functional currency of our foreign subsidiaries is the U.S. dollar. Accordingly, monetary balance sheet accounts are remeasured using exchange rates in effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates. Expenses are generally remeasured at the average exchange rates for the period. Foreign currency remeasurement and transaction gains and losses are included in interest and other income (expense), net and were not material for the years ended December 31, 2020, 2019, and 2018, respectively.
Concentrations of Risk
Financial instruments potentially exposing us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable securities, accounts receivable, and derivative instruments, including the capped calls associated with our convertible senior notes. We place our cash and cash equivalents with high-credit-quality financial institutions. However, we maintain balances in excess of the FDIC insurance limits. We do not require our customers to provide collateral to support accounts receivable and maintain an allowance for credit losses for accounts receivable balances. We seek to mitigate counterparty credit risk related to our derivative instruments by transacting with major financial institutions with high credit ratings.
At December 31, 2020 and 2019, no customers represented 10% or greater of our total accounts receivable balance. There were no customers that individually exceeded 10% of our revenue in any of the periods presented.
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, including amending the calculation of diluted earnings per share and the balance sheet presentation of those instruments, as well as the resulting recognition of interest expense, 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 February 2016, the FASB issued ASU 2016-02, regarding ASC Topic 842 “Leases,” including subsequent amendments. We refer to the new guidance as “ASC 842.” This new guidance requires lessees to recognize most leases on their balance sheets as lease right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.
We adopted ASC 842 in the first quarter of 2019 and applied the following practical expedients:

comparative periods prior to the adoption date are not adjusted to reflect the new guidance (the modified retrospective method of transition); and
the historical determination as to the existence and classification of leases is carried forward for existing contracts as of the adoption date.
The adoption of ASC 842 resulted in the recognition of lease right-of-use assets and corresponding lease liabilities on our consolidated balance sheet. As of March 31, 2019, the first quarter of adoption, the aggregate balance of lease right-of-use
assets and lease liabilities was $99 million and $114 million, respectively. The standard did not affect our consolidated statements of operations or cash flows.
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.
v3.20.4
Business Combinations
12 Months Ended
Dec. 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. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands):
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.
FutureSimple Inc.
On September 10, 2018, we completed the acquisition of FutureSimple Inc., or FutureSimple, the developer of Base, a sales force automation product solution. We acquired FutureSimple for purchase consideration of $81 million in cash. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands):
Net tangible liabilities acquired$(2,791)
Identifiable intangible assets:
Developed technology19,000 
Customer relationships10,400 
Backlog2,200 
Goodwill52,214 
Total purchase consideration$81,023 

The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 6.5, 5.0, and 2.0 years, respectively.
v3.20.4
Financial Instruments
12 Months Ended
Dec. 31, 2020
Financial Instruments, Owned, at Fair Value [Abstract]  
Financial Instruments Financial Instruments
Investments
The following tables present information about our financial assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 based on the three-tier fair value hierarchy (in thousands):
 Fair Value Measurement at
December 31, 2020
Level 1Level 2Total
U.S. Treasury securities$— $431,087 $431,087 
Corporate bonds— 366,638 366,638 
Money market funds162,156 — 162,156 
Asset-backed securities— 101,239 101,239 
Agency securities— 80,394 80,394 
Commercial paper— 36,954 36,954 
Certificates of deposit and time deposits— 10,657 10,657 
Total$162,156 $1,026,969 $1,189,125 
Included in cash and cash equivalents  $194,854 
Included in marketable securities  $994,271 
 Fair Value Measurement at
December 31, 2019
Level 1Level 2Total
Corporate bonds$— $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 December 31, 2020 and 2019, there were no securities within Level 3 of the fair value hierarchy. There were no transfers between fair value measurement levels during the years ended December 31, 2020 or 2019.
    
Gross unrealized gains and losses for marketable securities as of December 31, 2020 were $6 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities as of December 31, 2020 was $1,183 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $107 million.

Gross unrealized gains and losses for marketable securities as of December 31, 2019 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.

As of December 31, 2020 and 2019, there were no securities that were in an unrealized loss position for more than twelve months. 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 as of December 31, 2020 and 2019 (in thousands):
 December 31,
2020
December 31,
2019
Due in one year or less$565,593 $286,958 
Due after one year and within five years428,678 361,948 
Total$994,271 $648,906 
 
As of December 31, 2020 and 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 year ended December 31, 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 (expense), net in our consolidated statements of operations.

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
 
As of December 31, 2020, the balance of AOCI included an unrecognized net gain of $2 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net gain of $3 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 as of December 31, 2020 and 2019 (in thousands):
 December 31, 2020
Asset DerivativesLiability Derivatives
Balance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$7,922 Accrued liabilities$5,768 
Total $7,922  $5,768 
 December 31, 2019
Asset DerivativesLiability Derivatives
Balance 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 $345 million and $260 million as of December 31, 2020 and 2019, respectively.
 
The following table presents information about our foreign currency forward contracts on our consolidated statements of operations for the years ended December 31, 2020 and 2019 (in thousands):

Gain (Loss) Reclassified from AOCI into Earnings
Year Ended December 31,
Classification20202019
Revenue$1,117 $2,247 
Cost of revenue(515)(1,445)
Research and development(485)(1,334)
Sales and marketing(987)(2,479)
General and administrative(264)(894)
 Total$(1,134)$(3,905)
The loss recognized in AOCI related to foreign currency forward contracts was not material for the year ended December 31, 2020. The loss recognized in AOCI related to foreign currency forward contracts was $1 million for the year ended December 31, 2019.

The cash flow effects related to foreign currency forward contracts are included within operating activities on our consolidated statements of cash flows.

Amounts recognized in earnings related to hedge ineffectiveness for the years ended December 31, 2020 and 2019 were not material.
Convertible Senior Notes
As of December 31, 2020, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $349 million and $1,685 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 $143.12 on the last trading day of the quarter, the if-converted values of the 2023 and 2025 convertible senior notes exceeded the remaining principal amounts by $189 million and $363 million, respectively, as of December 31, 2020.
v3.20.4
Costs to Obtain Customer Contracts
12 Months Ended
Dec. 31, 2020
Revenue from Contract with Customer [Abstract]  
Costs to Obtain Customer Contracts Costs to Obtain Customer ContractsThe balance of deferred costs to obtain customer contracts was $105 million and $71 million as of December 31, 2020 and 2019, respectively. Amortization expense for these deferred costs was $45 million, $32 million, and $21 million for the years ended December 31, 2020, 2019, and 2018, respectively. There were no impairment losses related to these deferred costs for the periods presented.Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Year Ended December 31,
202020192018
Balance, beginning of period$323,962 $247,962 $174,360 
Billings1,088,960 892,416 672,348 
Subscription and service revenue(977,311)(776,610)(574,517)
Other revenue*(52,253)(39,806)(24,229)
Balance, end of period$383,358 $323,962 $247,962 
*Other revenue primarily includes implementation and training services, Talk usage and amounts from contract assets.
For the years ended December 31, 2020, 2019, and 2018, less than half of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate balance of remaining performance obligations as of December 31, 2020 was $925 million. We expect to recognize $627 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 cancellable by the customer and amounts associated with optional renewal periods.
v3.20.4
Property and Equipment
12 Months Ended
Dec. 31, 2020
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and EquipmentProperty and equipment, net consists of the following (in thousands):
 December 31, 2020December 31, 2019
Leasehold improvements$91,205 $83,968 
Capitalized internal-use software48,730 38,437 
Computer equipment and licensed software and patents30,725 27,309 
Furniture and fixtures13,759 16,332 
Construction in progress13,222 8,647 
Total197,641 174,693 
Less accumulated depreciation and amortization(103,433)(72,603)
Property and equipment, net$94,208 $102,090 

Depreciation expense was $26 million, $21 million, and $24 million for the years ended December 31, 2020, 2019, and 2018, respectively.
Amortization expense of capitalized internal-use software was $8 million, $6 million, and $6 million for the years ended December 31, 2020, 2019, and 2018, respectively. We recorded impairment losses for capitalized internal-use software of $3 million and $2 million in the years ended December 31, 2020 and 2018, respectively. The impairments were recorded primarily to construction in progress and were included primarily within research and development expenses on our consolidated statements of operations. The carrying values of capitalized internal-use software at December 31, 2020 and 2019 were $32 million and $23 million, respectively, including $13 million and $8 million in construction in progress, respectively.
v3.20.4
Leases
12 Months Ended
Dec. 31, 2020
Leases [Abstract]  
Leases Leases
    The following tables present information about leases on our consolidated balance sheets (in thousands):
December 31, 2020December 31, 2019
Assets
Lease right-of-use assets$84,013 $89,983 
Liabilities
Lease liabilities23,533 21,804 
Lease liabilities, noncurrent85,275 83,478 
    
As of December 31, 2020 and 2019, the weighted average remaining lease term was 6.0 years and 5.7 years, respectively. As of December 31, 2020 and 2019, the weighted average discount rate was 4.7% and 5.3%, respectively.
The following table presents information about leases on our consolidated statements of operations (in thousands):
Year Ended December 31,
20202019
Operating lease expense$25,575 $23,540 
Short-term lease expense577 2,293 
Variable lease expense6,161 6,607 
Sublease income(1,822)(1,968)
    
The following table presents supplemental cash flow information about our leases (in thousands):
Year Ended December 31,
20202019
Cash paid for amounts included in the measurement of lease liabilities$31,254 $22,333 
Operating lease assets obtained in exchange for new lease liabilities23,394 27,559 
    
As of December 31, 2020, remaining maturities of lease liabilities are as follows:
2021$27,479 
202228,015 
202319,108 
20249,563 
20258,275 
Thereafter32,213 
Total lease payments124,653 
Less: imputed interest15,845 
Total$108,808 
    In the fourth quarter of 2020, we determined that we would no longer occupy the leased premises located at 1019 Market Street and 988 Market Street, San Francisco, California 94103. As a result, we assessed these lease right-of-use assets and leasehold improvements for impairment and determined that the carrying values were not recoverable. We recorded an aggregate impairment charge of $15 million, which is the amount that the carrying value of the asset groups exceeded their estimated fair values. The estimated fair values were based on the present value of the estimated cash flows that could be generated from subleasing each property for the remaining lease term. The impairment charge was recorded in general and administrative expenses on our consolidated statement of operations.
v3.20.4
Goodwill and Acquired Intangible Assets
12 Months Ended
Dec. 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 two years ended December 31, 2020 are as follows (in thousands):
Balance as of December 31, 2018$111,584 
Goodwill acquired58,245 
Goodwill adjustments(182)
Balance as of December 31, 2019169,647 
Goodwill adjustments15 
Balance as of December 31, 2020$169,662 
Acquired intangible assets subject to amortization consist of the following (in thousands):
 As of December 31, 2020
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$30,200 $(12,445)$17,755 4.1
Customer relationships14,710 (6,076)8,634 4.0
Backlog3,200 (3,033)167 0.3
 $48,110 $(21,554)$26,556  
 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  
    
Amortization expense of acquired intangible assets for the year ended December 31, 2020 was $11 million, which included a $1 million impairment of developed technology recorded within cost of revenue on our consolidated statement of operations. Amortization expense of acquired intangible assets for the years ended December 31, 2019 and 2018 was $10 million and $5 million, respectively.
Estimated future amortization expense as of December 31, 2020 is as follows (in thousands): 
2021$7,115 
20226,949 
20236,253 
20244,618 
2025972 
Thereafter649 
 $26,556 
v3.20.4
Convertible Senior Notes
12 Months Ended
Dec. 31, 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 December 31, 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 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. 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):

As of December 31, 2020
Principal$1,150,000 
Unamortized Debt Discount(198,857)
Unamortized issuance costs(15,567)
Net carrying amount$935,576 

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

As of December 31, 2020
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):

Year Ended December 31,
2020
Contractual interest expense$3,873 
Amortization of Debt Discount21,204 
Amortization of issuance costs1,439 
Total interest expense$26,516 
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 10.6 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 December 31, 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 December 31, 2020, the conditions allowing holders of the 2023 Notes to convert were met. The 2023 Notes are therefore convertible during the three months ending March 31, 2021 and are classified as a current liability as of December 31, 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):
As of December 31, 2020As of December 31, 2019
Principal$149,194 $575,000 
Unamortized Debt Discount(15,394)(84,037)
Unamortized issuance costs(1,412)(7,499)
Net carrying amount$132,388 $483,464 

The net carrying amount of the equity component of the 2023 Notes is as follows (in thousands):
As of December 31, 2020As of 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):
Year Ended December 31,
202020192018
Contractual interest expense$863 $1,438 $1,116 
Amortization of Debt Discount14,731 23,457 17,482 
Amortization of issuance costs1,214 1,831 1,284 
Total interest expense$16,808 $26,726 $19,882 
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 the 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 consolidated balance sheets. As of December 31, 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 
v3.20.4
Commitments and Contingencies
12 Months Ended
Dec. 31, 2020
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies
Commitments

As of December 31, 2020, our contractual obligations are as follows for the years ending December 31 (in thousands):
Operating Lease Obligations (1)
Purchase Commitments (2)
Convertible Senior Notes (3)
Total
2021$30,186 $83,772 $7,560 $121,518 
202228,849 62,195 7,560 98,604 
202319,178 43,069 156,459 218,706 
20249,563 — 7,188 16,751 
20258,275 — 1,153,294 1,161,569 
Thereafter32,213 — — 32,213 
Total$128,264 $189,036 $1,332,061 $1,649,361 
(1) Represents obligations under non-cancellable lease agreements for our corporate headquarters and worldwide offices.
(2) Primarily relates to third-party managed hosting services.
(3) Consists of principal and interest payments. Principal of $149 million and $1,150 million is due in March 2023 and June 2025, respectively.
Letters of Credit
As of December 31, 2020 and 2019, we had a total of $5 million and $4 million, respectively, in unsecured letters of credit outstanding, including bank guarantees, primarily related to leased office space. The letters of credit renew annually and mature at various dates through October 31, 2023.
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 the 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. On November 9, 2020, the court granted Zendesk's motion to dismiss and granted plaintiff leave to amend its complaint. On January 8, 2021, plaintiff filed its second amended complaint and on January 22, 2021, Zendesk and the executive officer defendants moved to dismiss the second amended complaint which is set for hearing on March 5, 2021.

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 two putative class action complaints described above, 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, defamation, labor and employment rights, 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.
v3.20.4
Common Stock and Stockholders' Equity
12 Months Ended
Dec. 31, 2020
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of December 31, 2020 and 2019, there were 400 million shares of common stock authorized for issuance with a par value of $0.01 per share and 117.5 million and 113.1 million shares were issued and outstanding as of December 31, 2020 and 2019, respectively.
Preferred Stock
As of December 31, 2020 and 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 the 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 the offering period or the fair market value of our common stock at the end of the purchase period. During each of the years ended December 31, 2020 and 2019, 0.6 million shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.2 million shares and 1.1 million shares on January 1, 2021 and 2020, respectively. As of December 31, 2020, 4.8 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 5.9 million and 5.7 million shares on January 1, 2021 and 2020, respectively. As of December 31, 2020, we had 14.4 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 year ended December 31, 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(597)597 89.37     
RSUs granted(3,233)    3,233 89.69 
Stock options exercised (1,074)27.13     
RSUs vested     (2,645)54.37 
Stock options forfeited or canceled148 (148)55.30     
RSUs forfeited or canceled795     (795)63.34 
RSUs forfeited or canceled and unavailable for grant— (13)23.44 
PRSUs forfeited35 
Outstanding — December 31, 202014,415 4,235 $31.42 5.21$473,358 5,141 $75.93 $735,869 
Options vested and exercisable as of December 31, 2020 3,305 $20.59 4.34$404,992   
RSUs expected to vest as of December 31, 20204,144 $593,120 

The 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 years ended December 31, 2020, 2019, and 2018 was $70 million, $76 million, and $37 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 years ended December 31, 2020, 2019, and 2018 was $32.03, $28.65, and $17.87, respectively.
The total fair value of RSUs vested during the years ended December 31, 2020, 2019, and 2018 was $241 million, $240 million, and $176 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 years ended December 31, 2020, 2019, and 2018 was $89.69, $73.40, and $44.35, respectively.
Share-Based Compensation Expense
All share-based awards to employees and members of our board of directors are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award, which is typically four years). The contractual term of our stock options is typically ten years. We record share-based compensation expense for service-based equity awards using the straight-line attribution method. We record share-based compensation expense for performance-based equity awards using the accelerated attribution method. Forfeitures are recognized as they occur.
We estimate the fair value of stock options granted using the Black-Scholes option valuation model, which requires inputs, including the fair value of our underlying common stock, expected term, expected volatility, risk-free interest rate and dividend yield of our common stock. These inputs involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.
The inputs are as follows:
Expected Term. We determine the expected term based on the historical exercise activity of our employees.
Expected Volatility. We determine expected volatility based on the historical volatility of our own common stock.
Risk-Free Interest Rate. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the stock options for each stock option group.
Dividend Yield. We have not paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero.
The assumptions used to estimate the fair value of stock options are as follows:
 Year Ended December 31,
202020192018
Expected volatility
40% - 44%
43%
44% - 45%
Dividend yield
0%
0%
0%
Risk-free interest rate
0.3% - 1.4%
2.5%
2.3% - 3.0%
Expected term (in years)4.74.64.9
 The assumptions used to estimate the fair value of ESPP awards are as follows:
Year Ended December 31,
 202020192018
Expected volatility
43% - 60%
39% - 43%
35% - 41%
Dividend yield
0%
0%
0%
Risk-free interest rate
0.1% - 0.2%
1.5% - 2.4%
2.1% - 2.8%
Expected term (in years)
0.5 -1.5
0.5 -1.5
0.5 -1.5
As of December 31, 2020, we had a total of $404 million in future expense related to all equity awards to be recognized over a weighted average period of 2.6 years.
For the year ended December 31, 2020, we recorded $1 million of share-based compensation expense related to accelerated vesting of share-based awards for terminated employees. There were no material share-based award modifications for the years ended December 31, 2019 and 2018.
Performance Restricted Stock Units
In 2018, PRSUs representing 0.2 million shares of common stock 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 years ended December 31, 2020 and 2019, we recorded $6 million and $7 million of share-based compensation expense related to the PRSUs, respectively, including accelerated amounts upon termination. For the years ended December 31, 2020 and 2019, 60 thousand and 48 thousand PRSUs were vested, respectively. For the year ended December 31, 2018, we recorded an immaterial amount of share-based compensation expense related to the PRSUs and no PRSUs were vested.
v3.20.4
Deferred Revenue and Performance Obligations
12 Months Ended
Dec. 31, 2020
Revenue from Contract with Customer [Abstract]  
Deferred Revenue and Performance Obligations Costs to Obtain Customer ContractsThe balance of deferred costs to obtain customer contracts was $105 million and $71 million as of December 31, 2020 and 2019, respectively. Amortization expense for these deferred costs was $45 million, $32 million, and $21 million for the years ended December 31, 2020, 2019, and 2018, respectively. There were no impairment losses related to these deferred costs for the periods presented.Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Year Ended December 31,
202020192018
Balance, beginning of period$323,962 $247,962 $174,360 
Billings1,088,960 892,416 672,348 
Subscription and service revenue(977,311)(776,610)(574,517)
Other revenue*(52,253)(39,806)(24,229)
Balance, end of period$383,358 $323,962 $247,962 
*Other revenue primarily includes implementation and training services, Talk usage and amounts from contract assets.
For the years ended December 31, 2020, 2019, and 2018, less than half of revenue recognized was from the deferred revenue balances at the beginning of each period.
The aggregate balance of remaining performance obligations as of December 31, 2020 was $925 million. We expect to recognize $627 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized, including contracted revenue from renewals, and does not include contract amounts which are cancellable by the customer and amounts associated with optional renewal periods.
v3.20.4
Net Loss Per Share
12 Months Ended
Dec. 31, 2020
Earnings Per Share [Abstract]  
Net Loss Per Share Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 Year Ended December 31,
202020192018
Net loss$(218,178)$(169,653)$(131,084)
Weighted-average shares used to compute basic and diluted net loss per share115,240 110,606 105,567 
Net loss per share, basic and diluted$(1.89)$(1.53)$(1.24)
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
 As of December 31,
202020192018
Shares subject to outstanding common stock options and employee stock purchase plan4,355 4,962 6,041 
Restricted stock units5,141 5,361 6,611 
Shares related to convertible senior notes2,459 1,265 — 
 11,955 11,588 12,652 

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 December 31, 2020.

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 $108.76 per share for the 2023 Notes and 2025 Notes, respectively. Based on the initial conversion price, potential dilution related to the 2023 Notes and 2025 Notes is approximately 2.4 million and 10.6 million shares, respectively.
v3.20.4
Income Taxes
12 Months Ended
Dec. 31, 2020
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes
The components of loss before provision for (benefit from) income taxes are as follows (in thousands):
 Year Ended December 31,
202020192018
U.S.$(232,967)$(186,697)$(151,547)
Foreign20,550 18,394 8,356 
Total$(212,417)$(168,303)$(143,191)
 
The income tax provision (benefit) is composed of the following (in thousands):
 Year Ended December 31,
202020192018
Current tax provision:   
Federal$— $(1,994)$— 
State80 80 80 
Foreign7,941 5,586 3,372 
 8,021 3,672 3,452 
Deferred tax provision: