ZENDESK, INC., 10-K filed on 2/13/2020
Annual Report
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Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Jun. 28, 2019
Cover page.      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 001-36456    
Entity Registrant Name ZENDESK, INC.    
Entity Incorporation, State or Country Code DE    
Entity Tax Identification Number 26-4411091    
Entity Address, Address Line One 1019 Market Street    
Entity Address, City or Town San Francisco    
Entity Address, State or Province CA    
Entity Address, Postal Zip Code 94103    
City Area Code 415    
Local Phone Number 418-7506    
Title of 12(b) Security Common Stock, par value $0.01 per share    
Trading Symbol ZEN    
Security Exchange Name NYSE    
Entity 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    
Entity Shell Company false    
Entity Public Float     $ 7.3
Entity Common Stock, Shares Outstanding   113,351,292  
Documents Incorporated by Reference Portions of the Registrant's definitive Proxy Statement for its 2020 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, 2019. 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 2019    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001463172    
Current Fiscal Year End Date --12-31    
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CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 196,591 $ 126,518
Marketable securities 286,958 300,213
Accounts receivable, net of allowance for doubtful accounts of $2,846 and $2,571 as of December 31, 2019 and 2018, respectively 127,808 85,280
Deferred costs 35,619 24,712
Prepaid expenses and other current assets 45,847 35,873
Total current assets 692,823 572,596
Marketable securities, noncurrent 361,948 393,671
Property and equipment, net 102,090 75,654
Deferred costs, noncurrent 35,230 26,914
Lease right-of-use assets 89,983  
Goodwill and intangible assets, net 206,883 146,327
Other assets 25,632 22,717
Total assets 1,514,589 1,237,879
Current liabilities:    
Accounts payable 38,376 16,820
Accrued liabilities 36,347 34,097
Accrued compensation and related benefits 61,512 46,603
Deferred revenue 320,642 245,243
Lease liabilities 21,804  
Total current liabilities 478,681 342,763
Convertible senior notes, net 483,464 458,176
Deferred revenue, noncurrent 3,320 2,719
Lease liabilities, noncurrent 83,478  
Other liabilities 7,662 17,300
Total liabilities 1,056,605 820,958
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, 2019 and 2018 0 0
Common stock, par value $0.01 per share: 400.0 million shares authorized; 113.1 million and 108.0 million shares issued and outstanding as of December 31, 2019 and 2018, respectively 1,130 1,080
Additional paid-in capital 1,155,044 950,693
Accumulated other comprehensive income (loss) 591 (5,724)
Accumulated deficit (698,781) (529,128)
Total stockholders’ equity 457,984 416,921
Total liabilities and stockholders’ equity $ 1,514,589 $ 1,237,879
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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 2,846 $ 2,571
Preferred stock, par value (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 10,000,000
Common stock, par value (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) 113,100,000 108,000,000.0
Common stock, shares outstanding (in shares) 113,100,000 108,000,000
Treasury stock, shares (in shares) 0 0
v3.19.3.a.u2
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
shares in Thousands, $ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Income Statement [Abstract]      
Revenue $ 816,416 $ 598,746 $ 430,165
Cost of revenue 234,282 181,255 127,422
Gross profit 582,134 417,491 302,743
Operating expenses:      
Research and development [1] 207,548 160,260 115,291
Sales and marketing [1] 396,514 291,668 211,918
General and administrative [1] 141,076 103,491 81,680
Total operating expenses [1] 745,138 555,419 408,889
Operating loss (163,004) (137,928) (106,146)
Other income (expense), net      
Interest income 20,561 15,086 3,542
Interest expense (26,708) (19,882) 0
Other income (expense), net 848 (467) (1,055)
Total other income (expense), net (5,299) (5,263) 2,487
Loss before provision for (benefit from) income taxes (168,303) (143,191) (103,659)
Provision for (benefit from) income taxes 1,350 (12,107) (1,518)
Net loss $ (169,653) $ (131,084) $ (102,141)
Net loss per share, basic and diluted (usd per share) $ (1.53) $ (1.24) $ (1.02)
Weighted-average shares used to compute net loss per share, basic and diluted (in shares) 110,606 105,567 99,918
[1] Includes share-based compensation expense as follows: Year Ended December 31, 2019 2018 2017 Cost of revenue$20,858 $14,835 $9,040Research and development46,965 41,365 29,970Sales and marketing53,964 37,882 24,279General and administrative34,943 25,401 21,263
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CONSOLIDATED STATEMENTS OF OPERATIONS (PARENTHETICAL) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Share-based compensation $ 156,730 $ 119,483 $ 84,553
Cost of revenue      
Share-based compensation 20,858 14,835 9,040
Research and development      
Share-based compensation 46,965 41,365 29,970
Sales and marketing      
Share-based compensation 53,964 37,882 24,279
General and administrative      
Share-based compensation $ 34,943 $ 25,401 $ 21,263
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Comprehensive Income [Abstract]      
Net loss $ (169,653) $ (131,084) $ (102,141)
Other comprehensive income (loss), before tax:      
Net unrealized gain (loss) on available-for-sale investments 5,473 (620) (247)
Foreign currency translation gain 0 0 824
Net unrealized gain (loss) on derivative instruments 2,836 (2,732) 3,888
Other comprehensive income (loss), before tax 8,309 (3,352) 4,465
Tax effect (1,994) 0 (1,640)
Other comprehensive income (loss), net of tax 6,315 (3,352) 2,825
Comprehensive loss $ (163,338) $ (134,436) $ (99,316)
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock
Additional Paid-In Capital
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Beginning balance (in shares) at Dec. 31, 2016   97,195   (535)    
Beginning balance at Dec. 31, 2016 $ 323,474 $ 971 $ 624,026 $ (652) $ (5,197) $ (295,675)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Issuance of common stock upon exercise of stock options (in shares)   2,664        
Issuance of common stock upon exercise of stock options 31,882 $ 27 31,855      
Issuance of common stock for settlement of RSUs and PRSUs (in shares)   3,145        
Issuance of common stock for settlement of RSUs and PRSUs (2,989) $ 31 (3,020)      
Vesting of early exercised stock options 412 $ 1 411      
Issuance of common stock in connection with employee stock purchase plan (in shares)   652        
Issuance of common stock in connection with employee stock purchase plan 12,910 $ 6 12,904      
Share-based compensation 87,546   87,546      
Retirement of treasury stock (in shares)   (535)   (535)    
Retirement of treasury stock   $ (5) (647) $ 652    
Other comprehensive income (loss), net of income taxes 2,825       2,825  
Net loss (102,141)         (102,141)
Ending balance (in shares) at Dec. 31, 2017   103,121   0    
Ending balance at Dec. 31, 2017 354,184 $ 1,031 753,568 $ 0 (2,372) (398,044)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Cumulative-effect adjustment resulting from the adoption of ASUs | Accounting Standards Update 2016-09     493     (493)
Cumulative-effect adjustment resulting from the adoption of ASUs | Accounting Standards Update 2016-16 265         265
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 and PRSUs $ (5,213) $ 32 (5,245)      
Issuance of common stock in connection with employee stock purchase plan (in shares) 700 728        
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 convertible senior notes 44,304   44,304      
Other comprehensive income (loss), net of income taxes (3,352)       (3,352)  
Net loss (131,084)         (131,084)
Ending balance (in shares) at Dec. 31, 2018   108,038   0    
Ending balance at Dec. 31, 2018 $ 416,921 $ 1,080 950,693 $ 0 (5,724) (529,128)
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Issuance of common stock upon exercise of stock options (in shares) 1,297 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 and PRSUs $ (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 (loss), net of income taxes 6,315       6,315  
Net loss (169,653)         (169,653)
Ending balance (in shares) at Dec. 31, 2019   113,081   0    
Ending balance at Dec. 31, 2019 $ 457,984 $ 1,130 $ 1,155,044 $ 0 $ 591 $ (698,781)
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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Cash flows from operating activities      
Net loss $ (169,653) $ (131,084) $ (102,141)
Adjustments to reconcile net loss to net cash provided by operating activities      
Depreciation and amortization 38,602 36,520 31,931
Share-based compensation 156,730 119,483 84,553
Amortization of deferred costs 32,116 21,304 14,434
Amortization of debt discount and issuance costs 25,288 18,766 0
Income tax benefit related to convertible senior notes 0 (13,784) 0
Other 740 2,848 603
Changes in operating assets and liabilities:      
Accounts receivable (50,061) (30,007) (21,201)
Prepaid expenses and other current assets (8,349) (10,620) (5,112)
Deferred costs (49,922) (40,898) (22,762)
Lease right-of-use assets 18,940    
Other assets and liabilities (1,081) 6,635 (5,765)
Accounts payable 22,128 7,534 1,839
Accrued liabilities 3,259 3,844 6,919
Accrued compensation and related benefits 11,282 15,026 7,399
Deferred revenue 78,110 73,053 51,531
Lease liabilities (18,868)    
Net cash provided by operating activities 89,261 78,620 42,228
Cash flows from investing activities      
Purchases of property and equipment (39,140) (35,323) (16,396)
Internal-use software development costs (7,841) (7,005) (7,521)
Purchases of marketable securities (454,649) (700,226) (177,309)
Proceeds from maturities of marketable securities 177,376 170,882 116,735
Proceeds from sales of marketable securities 328,921 71,359 31,090
Business combinations, net of cash acquired (70,919) (79,363) (16,470)
Purchases of strategic investments (500) (10,000) 0
Net cash used in investing activities (66,752) (589,676) (69,871)
Cash flows from financing activities      
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $13,561 0 561,439 0
Purchase of capped call related to convertible senior notes 0 (63,940) 0
Proceeds from exercises of employee stock options 26,495 16,150 31,882
Proceeds from employee stock purchase plan 31,490 21,440 14,248
Taxes paid related to net share settlement of share-based awards (9,574) (5,213) (2,989)
Other 0 (813) 0
Net cash provided by financing activities 48,411 529,063 43,141
Effect of exchange rate changes on cash, cash equivalents and restricted cash 101 (19) 328
Net increase in cash, cash equivalents and restricted cash 71,021 17,988 15,826
Cash, cash equivalents and restricted cash at beginning of period 128,876 110,888 95,062
Cash, cash equivalents and restricted cash at end of period 199,897 128,876 110,888
Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets      
Total cash, cash equivalents and restricted cash 128,876 128,876 110,888
Supplemental cash flow data      
Cash paid for interest 1,438 699 0
Cash paid for taxes 5,381 2,524 1,766
Non-cash investing and financing activities      
Share-based compensation capitalized in internal-use software development costs 2,176 2,414 2,704
Balance of property and equipment in accounts payable and accrued expenses 9,139 5,582 1,837
Asset retirement obligations incurred 1,809 0 0
Property and equipment acquired through tenant improvement allowances 414 5,640 647
Share-based compensation capitalized in deferred costs 1,417 866 497
Vesting of early exercised stock options $ 0 $ 0 $ 411
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Cash Flows [Abstract]      
Issuance costs paid $ 0 $ 13,561 $ 0
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Organization
12 Months Ended
Dec. 31, 2019
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 service-first customer relationship management company, built to give companies of all sizes, in every industry, the ability to deliver a transparent, responsive and empowering customer experience. With solutions designed to address an increasingly broader set of customer interactions, Zendesk allows businesses to deliver omnichannel customer service, customize and build apps across the customer journey, and extend beyond support into sales.
References to Zendesk, the “Company,” “our,” or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
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 recoverability of accounts receivable;
the fair value and useful lives of acquired intangible assets;
the capitalization and useful life of capitalized costs to obtain customer contracts;
the valuation of strategic investments;
the useful lives of property and equipment;
the capitalization and useful lives of internal-use software;
the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
the fair value of asset retirement obligations;
the fair value and expense recognition for certain share-based awards;
the preparation of financial forecasts used in currency hedging;
the recognition of legal contingencies; and
the recognition of tax benefits.
These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.
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, and Sell, and includes related support services. We also derive revenue from 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 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.

In limited circumstances, certain customers have arrangements that provide for a maximum number of users over the subscription term, with usage measured monthly. Incremental fees are incurred when the maximum number of users is exceeded. In determining the transaction price for these arrangements, we evaluate the expected usage and estimate any incremental 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.

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. Deferred revenue associated with implementation, Talk usage, and training services was immaterial as of December 31, 2019 and 2018.

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 (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, 2019, our restricted cash balance was $3 million, consisting of $2 million pledged for charitable donation and $1 million related to deposits for leased office spaces. As of December 31, 2018, our restricted cash balance was $2 million, consisting of $1 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 corporate bonds, asset-backed securities, U.S. Treasury securities, money market funds, commercial paper, certificates of deposit, time deposits, and agency securities. 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. Unrealized gains and losses for available-for-sale securities are recorded in accumulated other comprehensive income (loss), or AOCI. We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value determined to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.
Our allowance for doubtful accounts consists of the following activity (in thousands):
 
Year Ended December 31,
2019
 
2018
Allowance for doubtful accounts, beginning balance
$
2,571

 
$
1,252

Additions
2,328

 
2,667

Write-offs
(2,053
)
 
(1,348
)
Allowance for doubtful accounts, ending balance
$
2,846

 
$
2,571


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 the 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 fixtures
5 years
Hosting equipment
3 years
Computer equipment and licensed software and patents
3 to 5 years
Leasehold improvements
Shorter 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 sheet; 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 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 recorded in cost of revenue within the accompanying 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 during the years ended December 31, 2019, 2018, or 2017.
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, 2019, 2018, and 2017, other than those disclosed in Note 6.
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 is expensed as incurred. For the years ended December 31, 2019, 2018, and 2017, advertising expense was $57 million, $48 million, and $37 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 year ended December 31, 2019, we recognized grant proceeds of $4 million and in each of 2018 and 2017, we recognized grant proceeds of $2 million 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 financial statements as a component of provision for 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 other income (expense), net and were not material for the years ended December 31, 2019, 2018, and 2017, 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 doubtful 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, 2019 and 2018, there were no customers that represented 10% or greater of our 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 June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. This guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, regarding ASC Topic 350 “Simplifying the Test for Goodwill Impairment,” which simplifies the required methodology to calculate an impairment charge for goodwill. The standard is effective for fiscal years beginning after December 15, 2019, however early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, regarding ASC Topic 820 “Fair Value Measurement,” which modifies the disclosure requirements for fair value measurements for certain types of investments. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, regarding ASC Topic 740 “Income Taxes,” which simplifies certain aspects of accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued new revenue guidance under ASU 2014-09 that provides principles for recognizing revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the promised goods or services provided to customers. ASC 606 and ASC 340-40 also require the deferral of incremental costs of obtaining contracts with customers and subsequent amortization of those costs over the period of anticipated benefit. Collectively, we refer to this guidance as “ASC 606.”

We adopted ASC 606 on January 1, 2018, utilizing the full retrospective method of transition. The adoption resulted in changes to our accounting policies for revenue recognition and incremental costs to acquire contracts, as described below. We applied ASC 606 using the following practical expedients:

consideration allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue is not disclosed for comparative periods prior to the adoption date;
completed contracts that included variable consideration utilize the final transaction price rather than an estimation of variable consideration for comparative periods prior to the adoption date; and
costs of obtaining contracts with customers are expensed when the amortization period would have been one year or less.

The effect of adopting ASC 606 on our 2017 and 2016 revenues was not material. The primary effect relates to the deferral of sales commissions and other incremental costs to acquire contracts, which we historically expensed as incurred.
Under ASC 606, all incremental costs to acquire contracts are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have determined to be three years.
In February 2016, the FASB issued ASU 2016-02, regarding ASC Topic 842 “Leases,” including subsequent amendments. We refer to the new guidance as “ASC 842.” This new guidance requires lessees to recognize most leases on their balance sheets as lease right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period.
We adopted ASC 842 in the first quarter of 2019 and applied the following practical expedients:

comparative periods prior to the adoption date are not adjusted to reflect the new guidance (the modified retrospective method of transition); and
the historical determination as to the existence and classification of leases is carried forward for existing contracts as of the adoption date.
The effect of adopting ASC 842 resulted in the recognition of lease right-of-use assets and corresponding lease liabilities on our consolidated balance sheets. As of March 31, 2019, the first quarter of adoption, the aggregate balance of lease right-of-use assets and lease liabilities was $99 million and $114 million, respectively. The standard did not affect our consolidated statement of operations or cash flows.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted this standard in the first quarter of 2018 on a retrospective basis, resulting in an immaterial change to our previously reported statements of cash flows for the years ended December 31, 2017 and 2016.
In August 2017, the FASB issued ASU 2017-12, regarding ASC Topic 815 “Derivatives and Hedging.” This guidance simplifies various aspects of hedge accounting, including the measurement and presentation of hedge ineffectiveness and certain documentation and assessment requirements. The guidance also makes more hedging strategies eligible for hedge accounting. We adopted this standard in the first quarter of 2019. Upon adoption, we no longer recognize hedge ineffectiveness immediately in our consolidated statements of operations, but we instead recognize the entire change in the fair value of the hedge contract in other comprehensive income. The cumulative-effect adjustment to eliminate ineffectiveness was not material. The presentation and disclosures have been modified on a prospective basis, as required by the guidance.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income,” which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. We have elected not to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings, therefore the adoption did not have an effect on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, regarding ASC Topic 718 “Compensation - Stock Compensation,” which largely aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted this standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-08, regarding ASC Topic 958 “Not-for-Profit Entities,” which clarified the guidance on how entities determine whether to account for a transfer of assets as an exchange transaction or a contribution. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, regarding ASC Topic 350-40 “Intangibles - Internal-Use Software,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. We early adopted the standard in the first quarter of 2019. The adoption did not have an effect on our consolidated financial statements.
v3.19.3.a.u2
Business Combinations
12 Months Ended
Dec. 31, 2019
Business Combinations [Abstract]  
Business Combinations Business Combinations
Smooch Technologies Holdings ULC
On May 14, 2019, we completed the acquisition of Smooch Technologies Holdings ULC, or Smooch, a developer of messaging technology. We acquired Smooch for purchase consideration of $72 million in cash. In connection with the acquisition, we incurred transaction costs of $3 million within general and administrative expenses and share-based compensation expense of $5 million, primarily within general and administrative expenses, resulting from the accelerated vesting of certain unvested Smooch stock options because post-combination service requirements were eliminated.
The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary area that remains preliminary relates to the evaluation of certain tax-related items. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands). During the three months ended December 31, 2019, we made certain immaterial adjustments to the preliminary purchase price allocation, which are reflected in the table below.
The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from the expansion of the scope of and market opportunity for our product and platform solutions. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is deductible in the U.S. over 15 years for income tax purposes.
Net tangible assets
$
2,044

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

Customer relationships
3,900

Backlog
1,000

Goodwill
58,247

Total purchase consideration
$
71,997



The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 5.5, 8.0, and 2.0 years, respectively.

In connection with the acquisition, we granted cash-based retention awards to certain employees of Smooch, which vest over a required service period. The awards will be recorded as expense and were not included in the total purchase consideration.
From the date of the acquisition, the results of operations of Smooch have been included in and are immaterial to our consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of Smooch are not material to our consolidated financial statements in any period presented.
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 technology
19,000

Customer relationships
10,400

Backlog
2,200

Goodwill
52,214

Total purchase consideration
$
81,023



The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 6.5, 5.0, and 2.0 years, respectively.
Outbound Solutions, Inc.
On April 27, 2017, we completed the acquisition of Outbound Solutions, Inc., or Outbound, a provider of software that enables companies to deliver intelligent, behavior-based messages across multiple channels. We acquired Outbound for purchase consideration of $17 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 acquired
$
96

Net deferred tax liability recognized
(492
)
Identifiable intangible assets:
 
Developed technology
3,200

Customer relationships
410

Goodwill
13,350

Total purchase consideration
$
16,564



The developed technology and customer relationships intangible assets were assigned useful lives of 6.5 and 3.5 years, respectively.
v3.19.3.a.u2
Financial Instruments
12 Months Ended
Dec. 31, 2019
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, 2019 and 2018 based on the three-tier fair value hierarchy (in thousands):
 
Fair Value Measurement at
December 31, 2019
Level 1
 
Level 2
 
Total
Description
 

 
 

 
 

Corporate bonds
$

 
$
418,005

 
$
418,005

Asset-backed securities

 
124,046

 
124,046

U.S. Treasury securities

 
94,731

 
94,731

Money market funds
70,455

 

 
70,455

Commercial paper

 
13,548

 
13,548

Certificates of deposit and time deposits

 
1,144

 
1,144

Agency securities

 
920

 
920

Total
$
70,455

 
$
652,394

 
$
722,849

Included in cash and cash equivalents
 

 
 

 
$
73,943

Included in marketable securities
 

 
 

 
$
648,906


 
Fair Value Measurement at
December 31, 2018
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
460,210

 
$
460,210

Asset-backed securities

 
127,078

 
127,078

U.S. Treasury securities

 
58,039

 
58,039

Money market funds
57,758

 

 
57,758

Commercial paper

 
38,900

 
38,900

Agency securities

 
11,256

 
11,256

Certificates of deposit and time deposits

 
3,200

 
3,200

Total
$
57,758

 
$
698,683

 
$
756,441

Included in cash and cash equivalents
 
 
 
 
$
62,557

Included in marketable securities
 
 
 
 
$
693,884


As of December 31, 2019 and 2018, 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, 2019 or 2018.
    
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. Gross unrealized gains and losses for marketable securities as of December 31, 2018 were not material. As of December 31, 2019 and 2018, there were no securities that were in an unrealized loss position for more than twelve months.
The following table classifies our marketable securities by contractual maturity as of December 31, 2019 and 2018 (in thousands):
 
December 31,
2019
 
December 31,
2018
Due in one year or less
$
286,958

 
$
300,213

Due after one year and within five years
361,948

 
393,671

Total
$
648,906

 
$
693,884


 
As of December 31, 2019 and 2018, the balance of strategic investments without readily determinable fair values was $11 million and $10 million, respectively. There have been no adjustments to the carrying value of strategic investments resulting from impairments or observable price changes.

For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these instruments.

Derivative Instruments and Hedging
 
As of December 31, 2019, the balance of accumulated other comprehensive loss included an unrecognized net gain of $1 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net gain of $1 million into earnings over the next 12 months associated with our cash flow hedges.
 
The following tables present information about our derivative instruments on our consolidated balance sheet as of December 31, 2019 and 2018 (in thousands):

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

 
Accrued liabilities
 
$
1,975

Total
 
 
$
2,385

 
 
 
$
1,975



 
December 31, 2018
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
2,047

 
Accrued liabilities
 
$
4,862

Total
 
 
$
2,047

 
 
 
$
4,862



Our foreign currency forward contracts had a total notional value of $260 million and $200 million as of December 31, 2019 and 2018, respectively.
 
The following table presents information about our derivative instruments on our statements of operations for the year ended December 31, 2019 (in thousands):


 
Year Ended December 31, 2019
Classification
Gain (Loss) Reclassified from AOCI into Earnings
Revenue
$
2,247

Cost of revenue
(1,445
)
Research and development
(1,334
)
Sales and marketing
(2,479
)
General and administrative
(894
)
 Total
$
(3,905
)

The loss recognized in AOCI related to foreign currency forward contracts was $1 million for the year ended December 31, 2019.
The loss recognized in AOCI related to foreign currency forward contracts was $4 million for the year ended December 31, 2018. The loss reclassified from AOCI into earnings related to foreign currency forward contracts was $1 million for the year ended December 31, 2018, which was included within revenue, cost of revenue, and operating expenses on our consolidated statements of operations.

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

Amounts recognized in earnings related to excluded time value and hedge ineffectiveness for the years ended December 31, 2019 and 2018 were not material.
Convertible Senior Notes
As of December 31, 2019, the fair value of our convertible senior notes was $793 million. The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $76.63 on the last trading day of the quarter, the if-converted value of our convertible senior notes exceeded the principal amount of $575 million as of December 31, 2019.
v3.19.3.a.u2
Costs to Obtain Customer Contracts
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Costs to Obtain Customer Contracts Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $71 million and $52 million as of December 31, 2019 and 2018, respectively. Amortization expense for these deferred costs was $32 million, $21 million, and $14 million for the
years ended December 31, 2019, 2018, and 2017, 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,
 
2019
 
2018
 
2017
Balance, beginning of period
$
247,962

 
$
174,360

 
$
122,829

Billings
892,416

 
672,348

 
481,696

Subscription and service revenue
(776,610
)
 
(574,517
)
 
(417,200
)
Other revenue*
(39,806
)
 
(24,229
)
 
(12,965
)
Balance, end of period
$
323,962

 
$
247,962

 
$
174,360

*Other revenue primarily includes implementation and training services, Talk usage and amounts from contract assets.
For the years ended December 31, 2019, 2018, and 2017, 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, 2019 was $641 million. We expect to recognize $460 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.19.3.a.u2
Property and Equipment
12 Months Ended
Dec. 31, 2019
Property, Plant and Equipment [Abstract]  
Property and Equipment Property and Equipment
Property and equipment, net consists of the following (in thousands):
 
December 31, 2019
 
December 31, 2018
Leasehold improvements
83,968

 
51,832

Capitalized internal-use software
38,437

 
36,444

Hosting equipment

 
34,105

Computer equipment and licensed software and patents
27,309

 
21,100

Furniture and fixtures
16,332

 
11,550

Construction in progress
8,647

 
10,538

Total
174,693

 
165,569

Less accumulated depreciation and amortization
(72,603
)
 
(89,915
)
Property and equipment, net
$
102,090

 
$
75,654



Depreciation expense was $21 million, $24 million, and $20 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Amortization expense of capitalized internal-use software was $6 million, $6 million, and $8 million during the years ended December 31, 2019, 2018, and 2017, respectively. We recorded an impairment loss of $2 million to construction in progress during the year ended December 31, 2018, which was included within research and development expenses on our consolidated statements of operations. The carrying value of capitalized internal-use software at December 31, 2019 and 2018 was $23 million and $19 million, respectively, including $8 million and $3 million in construction in progress, respectively.
During the first quarter of 2019, we completed the transition from our self-managed colocation data centers to third-party managed hosting services, at which time, we concluded that these assets met the criteria to be classified as held for sale. Accordingly, these assets were written down to their estimated salvage value and reclassified from property and equipment to other current assets, with $34 million and $33 million being reclassified from hosting equipment and accumulated depreciation respectively, for a net amount of $1 million. In the year ended December 31, 2019, we received cash for the full estimated salvage value.
v3.19.3.a.u2
Leases
12 Months Ended
Dec. 31, 2019
Leases [Abstract]  
Leases Leases
The following tables present information about leases on our consolidated balance sheet (in thousands):
 
December 31, 2019
Assets
 
Lease right-of-use assets
$
89,983

Liabilities
 
Lease liabilities
21,804

Lease liabilities, noncurrent
83,478



As of December 31, 2019, the weighted average remaining lease term was 5.7 years and the weighted average discount rate was 5.3%.
The following table presents information about leases on our consolidated statement of operations (in thousands):
 
Year Ended December 31, 2019
Operating lease expense
$
23,540

Short-term lease expense
2,293

Variable lease expense
6,607

Sublease income
1,968



The following table presents supplemental cash flow information about our leases (in thousands):
 
Year Ended December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
$
22,333

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



As of December 31, 2019, remaining maturities of lease liabilities are as follows:
2020
$
26,160

2021
24,783

2022
22,823

2023
16,188

2024
7,456

Thereafter
24,299

Total lease payments
121,709

Less imputed interest
16,427

Total
$
105,282



The table above excludes future payments of $4 million related to signed leases that have not yet commenced.
v3.19.3.a.u2
Goodwill and Acquired Intangible Assets
12 Months Ended
Dec. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Acquired Intangible Assets Goodwill and Acquired Intangible Assets
The changes in the carrying amount of goodwill for the two years ended December 31, 2019 are as follows (in thousands):
Balance as of December 31, 2017
$
59,131

Goodwill acquired
52,453

Balance as of December 31, 2018
111,584

Goodwill acquired
58,245

Goodwill adjustments
(182
)
Balance as of December 31, 2019
$
169,647


The following tables present information about our acquired intangible assets subject to amortization as of December 31, 2019 and 2018 (in thousands):
 
As of December 31, 2019
Cost
 
Accumulated
Amortization
 
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(14,492
)
 
 
$
24,508

 
4.9
Customer relationships
15,210

 
(3,882
)
 
 
11,328

 
4.8
Backlog
3,200

 
(1,800
)
 
 
1,400

 
1.0
 
$
57,410

 
$
(20,174
)
 
 
$
37,236

 
 

 
As of December 31, 2018
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
31,000

 
$
(8,151
)
 
$
22,849

 
5.5
Customer relationships
11,310

 
(1,249
)
 
10,061

 
4.6
Backlog
2,200

 
(367
)
 
1,833

 
1.7
 
$
44,510

 
$
(9,767
)
 
$
34,743

 
 

    
Amortization expense of acquired intangible assets for the years ended December 31, 2019, 2018 and 2017 was $10 million, $5 million and $4 million, respectively.
Estimated future amortization expense as of December 31, 2019 is as follows (in thousands): 
2020
$
9,306

2021
7,601

2022
7,436

2023
6,657

2024
4,616

Thereafter
1,620

 
$
37,236


v3.19.3.a.u2
0.25% Convertible Senior Notes and Capped Call
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
0.25% Convertible Senior Notes and Capped Call 0.25% Convertible Senior Notes and Capped Call

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

Each $1,000 principal amount of the Notes will initially be convertible into 15.8554 shares of our common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $63.07 per share, subject to adjustment upon the occurrence of specified events. The Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ended on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, the “Measurement Period,” in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events (as set forth in the indenture). On or after December 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless
of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. If certain specified fundamental changes occur (as set forth in the indenture governing the Notes) prior to the maturity date, holders of the Notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. It is our current intent and policy to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes. During the quarter ended December 31, 2019, the conditions allowing holders of the Notes to convert have not been met. The Notes are therefore not convertible during the quarter ending March 31, 2020 and are classified as a noncurrent liability as of December 31, 2019.

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

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

The net carrying amount of the liability component of the Notes is as follows (in thousands):
 
December 31, 2019
 
December 31, 2018
Principal
$
575,000

 
$
575,000

Unamortized Debt Discount
(84,037
)
 
(107,494
)
Unamortized issuance costs
(7,499
)
 
(9,330
)
Net carrying amount
$
483,464

 
$
458,176


The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
December 31, 2019
 
December 31, 2018
Debt Discount for Conversion Option
$
124,976

 
$
124,976

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

 
$
122,028


Interest expense related to the Notes is as follows (in thousands):
 
Year Ended December 31,
 
2019
 
2018
Contractual interest expense
$
1,438

 
$
1,116

Amortization of Debt Discount
23,457

 
17,482

Amortization of issuance costs
1,831

 
1,284

Total interest expense
$
26,726

 
$
19,882



In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The Capped Calls each have an initial strike price of approximately $63.07 per share, subject to certain adjustments, which correspond to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $95.20 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, approximately 9 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $64 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
 
The net impact to our stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows (in thousands):

Conversion Option
 
$
124,976

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


v3.19.3.a.u2
Commitments and Contingencies
12 Months Ended
Dec. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Commitments and Contingencies

As of December 31, 2019, 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
2020
$
30,543

 
$
91,020

 
$
1,438

 
$
123,001

2021
26,330

 
64,229

 
1,438

 
91,997

2022
24,121

 
56,763

 
1,438

 
82,322

2023
16,846

 
41,250

 
575,299

 
633,395

2024
7,456

 

 

 
7,456

Thereafter
24,299

 


 

 
24,299

Total
$
129,595

 
$
253,262

 
$
579,613

 
$
962,470

(1) Represents obligations to make payments 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. The $575 million in principal is due March 2023.

Letters of Credit
As of December 31, 2019 and 2018, we had a total of $4 million and $1 million, respectively in unsecured letters of credit outstanding primarily related to leased office space in San Francisco. These letters of credit renew annually and mature at various dates through October 31, 2022.
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., Case No. 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 lead plaintiff and has consolidated the various lawsuits into a single action (Case No. 3:19-cv-06968-CRB). It is possible that additional similar complaints or additional amended complaints may be filed. If this occurs, we do not intend to announce the filing of each additional, similar complaint or any amended complaint unless it contains allegations that are substantially distinct from those made in the pending action described above.  These class actions 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 these 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 matters.
    
From time to time, we may be subject to other legal proceedings, claims, investigations, and government inquiries in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights, labor and employment rights, defamation, privacy, and contractual rights. In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.

The outcomes of legal proceedings and other contingencies are inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows.
Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our product and platform solutions 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 solutions 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 material liabilities in our consolidated financial statements as a result of these service-level agreements.
v3.19.3.a.u2
Common Stock and Stockholders' Equity
12 Months Ended
Dec. 31, 2019
Equity [Abstract]  
Common Stock and Stockholders' Equity Common Stock and Stockholders’ Equity
Common Stock
As of December 31, 2019 and 2018, 400 million shares of common stock were authorized for issuance with a par value of $0.01 per share. There were 113.1 million and 108.0 million shares of common stock issued and outstanding as of December 31, 2019 and 2018, respectively.
Preferred Stock
As of December 31, 2019 and 2018, there were 10 million shares of preferred stock authorized for issuance with a par value of $0.01 per share and no shares of preferred stock were issued or outstanding.
Employee Equity Plans
Employee Stock Purchase Plan
Under 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 an offering period or the fair market value of our common stock at the end of the purchase period.
For the years ended December 31, 2019 and 2018, 0.6 million and 0.7 million shares of common stock were purchased under the ESPP, respectively. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.1 million shares on both January 1, 2020 and 2019. As of December 31, 2019, 4.3 million shares of common stock were available for issuance under the ESPP.
Stock Option and Grant Plans
Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our initial public offering in May 2014, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.
Our 2014 Stock Option and Incentive Plan, or the 2014 Plan, serves as the successor to our 2009 Plan. Pursuant to the terms of the 2014 Plan, the number of shares reserved for issuance under the 2014 Plan increased by 5.7 million and 5.4 million shares on January 1, 2020 and 2019, respectively. As of December 31, 2019, we had 11.6 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 shared-based award activity for the year ended December 31, 2019 is as follows (in thousands, except per share information):
 
 
Options Outstanding
 
RSUs Outstanding
Shares
Available
for Grant
 
Number of
Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
Outstanding
RSUs
 
Weighted
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
 
 
 
 
 
 
(In years)
 
 
 
 
 
 
 
 
Outstanding — January 1, 2019
8,232

 
5,938

 
$
20.85

 
6.58
 
$
222,959

 
6,611

 
$
37.77

 
$
385,891

Increase in authorized shares
5,402

 
 

 
 

 
 
 
 

 
 

 
 

 
 
Stock options granted
(336
)
 
336

 
73.27

 
 
 
 

 
 

 
 

 
 
RSUs granted
(2,836
)
 
 

 
 

 
 
 
 

 
2,836

 
73.40

 
 
Stock options exercised
 

 
(1,297
)
 
20.43

 
 
 
 

 
 

 
 

 
 
RSUs vested
 

 
 

 
 

 
 
 
 

 
(3,051
)
 
38.21

 
 
Stock options forfeited or canceled
117

 
(117
)
 
41.91

 
 
 
 

 
 

 
 

 
 
RSUs forfeited or canceled
1,002

 
 

 
 

 
 
 
 

 
(1,002
)
 
45.49

 
 
RSUs forfeited or canceled and unavailable for grant

 
 
 
 
 
 
 
 
 
(33
)
 
23.44

 
 
PRSUs forfeited
32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding — December 31, 2019
11,613

 
4,860

 
$
24.08

 
5.85
 
$
255,536

 
5,361

 
$
55.00

 
$
410,804

Options vested and exercisable as of December 31, 2019
 
 
3,661

 
$
18.30

 
5.21
 
$
213,569

 
 
 
 
 
 
RSUs expected to vest as of December 31, 2019
 
 
 
 
 
 
 
 
 
 
4,302

 
 
 
$
329,655



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, 2019, 2018, and 2017 was $76 million, $37 million, and $47 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, 2019, 2018, and 2017 was $28.65, $17.87, and $13.07, respectively.
The total intrinsic value of RSUs vested during the years ended December 31, 2019, 2018, and 2017 was $240 million, $176 million and $90 million, respectively. The intrinsic value for 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, 2019, 2018, and 2017 was $73.40, $44.35, and $28.09, 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.
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. We applied this methodology beginning in 2018, after having obtained sufficient historical
exercise information. Previously, we determined the expected term based on the average period the stock options were expected to remain outstanding, generally calculated as the midpoint of the vesting term and the contractual expiration period.
Expected Volatility. We determine expected volatility based on the historical volatility of our own common stock. We applied this methodology beginning in 2017, after having obtained sufficient historical information regarding the volatility of our own common stock. Previously, we determined the expected volatility using a combination of the historical volatility of our publicly traded industry peers and 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,
2019
 
2018
 
2017
Expected volatility
43%
 
44% - 45%
 
44% - 48%
Dividend yield
0%
 
0%
 
0%
Risk-free interest rate
2.5%
 
2.3% - 3.0%
 
1.9% - 2.2%
Expected term (in years)
4.6
 
4.9
 
6.0 - 6.1

 
The assumptions used to estimate the fair value of ESPP awards are as follows:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Expected volatility
39% - 43%
 
35% - 41%
 
37% - 44%
Dividend yield
0%
 
0%
 
0%
Risk-free interest rate
1.5% - 2.4%
 
2.1% - 2.8%
 
1.0% - 1.6%
Expected term (in years)
0.5 -1.5
 
0.5 -1.5
 
0.5 -1.5

 
In the first quarter of 2017, we changed our accounting policy for share-based compensation to recognize forfeitures as they occur, as permitted by ASU 2016-09.
As of December 31, 2019, we had a total of $306 million in future period share-based compensation expense related to all equity awards to be recognized over a weighted average period of 2.6 years.
There were no material share-based award modifications in the years ended December 31, 2019 and 2018. In the year ended December 31, 2017, we recorded $2 million of share-based compensation expense related to accelerated vesting of share-based awards for terminated employees.
Performance Restricted Stock Units
During the three months ended September 30, 2018, the compensation committee of our board of directors granted PRSUs representing 0.2 million shares of common stock, the substantial majority of which were granted in connection with our acquisition of FutureSimple. The PRSUs vest in four semi-annual tranches, generally 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. During the year ended December 31, 2019, we recorded $7 million of share-based compensation expense related to the PRSUs, including a one-time charge related to accelerated retention compensation. During the year ended December 31, 2019, 48 thousand PRSUs were vested. During 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. The total future expense related to the PRSUs will be based on the fair value of the underlying shares on the grant date for each performance tranche.
v3.19.3.a.u2
Deferred Revenue and Performance Obligations
12 Months Ended
Dec. 31, 2019
Revenue from Contract with Customer [Abstract]  
Deferred Revenue and Performance Obligations Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $71 million and $52 million as of December 31, 2019 and 2018, respectively. Amortization expense for these deferred costs was $32 million, $21 million, and $14 million for the
years ended December 31, 2019, 2018, and 2017, 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,
 
2019
 
2018
 
2017
Balance, beginning of period
$
247,962

 
$
174,360

 
$
122,829

Billings
892,416

 
672,348

 
481,696

Subscription and service revenue
(776,610
)
 
(574,517
)
 
(417,200
)
Other revenue*
(39,806
)
 
(24,229
)
 
(12,965
)
Balance, end of period
$
323,962

 
$
247,962

 
$
174,360

*Other revenue primarily includes implementation and training services, Talk usage and amounts from contract assets.
For the years ended December 31, 2019, 2018, and 2017, 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, 2019 was $641 million. We expect to recognize $460 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.
v3.19.3.a.u2
Net Loss Per Share
12 Months Ended
Dec. 31, 2019
Earnings Per Share [Abstract]  
Net Loss Per Share Net Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.
The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):
 
Year Ended
December 31,
2019
 
2018
 
2017
Net loss
$
(169,653
)
 
$
(131,084
)
 
$
(102,141
)
Weighted-average shares used to compute basic and diluted net loss per share
110,606

 
105,567

 
99,918

Net loss per share, basic and diluted
$
(1.53
)
 
$
(1.24
)
 
$
(1.02
)

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,
2019
 
2018
 
2017
Shares subject to outstanding common stock options and employee stock purchase plan
4,962

 
6,041

 
6,343

Restricted stock units
5,361

 
6,611