10-Q 1 zen-10q_20160331.htm 10-Q zen-10q_20160331.htm

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to       

Commission File Number: 001-36456

 

ZENDESK, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

26-4411091

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1019 Market Street

San Francisco, California 94103

(Address of principal executive offices)

415.418.7506

(Registrant’s Telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

¨  (do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 30, 2016 there were 91,743,091 shares of the registrant’s common stock outstanding.

 

 

 

 

 


 

ZENDESK, INC.

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

 

Item 1

Financial Statements (unaudited):

4

 

 

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

4

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

5

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015

6

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

7

 

 

Notes to Condensed Consolidated Financial Statements

8

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

Item 4

 

Controls and Procedures

28

 

PART II — OTHER INFORMATION 

 

 

Item 1

Legal Proceedings

29

 

Item 1A

Risk Factors

29

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

Item 6

Exhibits

52

 

SIGNATURES

52

 

 

 

2


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;

 

the sufficiency of our cash and cash equivalents, and marketable securities to meet our liquidity needs;

 

our ability to attract and retain customers to use our customer service platform, live chat software, and analytics software, and to optimize the pricing for such software;

 

the evolution of technology affecting our platform, services, and markets;

 

our ability to innovate and provide a superior customer experience;

 

our ability to successfully expand in our existing markets and into new markets;

 

the attraction and retention of qualified employees and key personnel;

 

worldwide economic conditions and their impact on information technology spending;

 

our ability to effectively manage our growth and future expenses;

 

our ability to successfully offer our live chat software and our analytics software as standalone services or further integrate such software with our customer service platform;

 

our ability to maintain, protect, and enhance our intellectual property;

 

our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations;

 

our ability to securely maintain customer data;

 

our ability to maintain and enhance our brand; and

 

the increased expenses and administrative workload associated with being a public company.

We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

 

 

 

3


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ZENDESK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and shares)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

217,791

 

 

$

216,226

 

Marketable securities

 

 

36,531

 

 

 

29,414

 

Accounts receivable, net of allowance for doubtful accounts of $900 and

   $763 as of March 31, 2016 and December 31, 2015, respectively

 

 

24,094

 

 

 

26,168

 

Prepaid expenses and other current assets

 

 

11,984

 

 

 

11,423

 

Total current assets

 

 

290,400

 

 

 

283,231

 

Marketable securities, noncurrent

 

 

18,387

 

 

 

22,336

 

Property and equipment, net

 

 

55,543

 

 

 

56,540

 

Goodwill and intangible assets, net

 

 

56,746

 

 

 

57,050

 

Other assets

 

 

4,606

 

 

 

3,529

 

Total assets

 

$

425,682

 

 

$

422,686

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,497

 

 

$

9,332

 

Accrued liabilities

 

 

11,626

 

 

 

9,742

 

Accrued compensation and related benefits

 

 

15,193

 

 

 

14,115

 

Deferred revenue

 

 

90,551

 

 

 

84,210

 

Total current liabilities

 

 

123,867

 

 

 

117,399

 

Deferred revenue, noncurrent

 

 

1,434

 

 

 

1,405

 

Other liabilities

 

 

10,530

 

 

 

10,592

 

Total liabilities

 

 

135,831

 

 

 

129,396

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock

 

 

 

 

 

 

Common stock

 

 

917

 

 

 

905

 

Additional paid-in capital

 

 

531,431

 

 

 

511,183

 

Accumulated other comprehensive income (loss)

 

 

1,247

 

 

 

(2,225

)

Accumulated deficit

 

 

(243,092

)

 

 

(215,921

)

Treasury stock at cost (0.5 million shares as of March 31, 2016 and

   December 31, 2015)

 

 

(652

)

 

 

(652

)

Total stockholders’ equity

 

 

289,851

 

 

 

293,290

 

Total liabilities and stockholders’ equity

 

$

425,682

 

 

$

422,686

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

4


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Revenue

 

$

68,459

 

 

$

42,234

 

Cost of revenue (1)

 

 

21,516

 

 

 

14,290

 

Gross profit

 

 

46,943

 

 

 

27,944

 

Operating expenses (1)

 

 

 

 

 

 

 

 

Research and development

 

 

21,597

 

 

 

13,259

 

Sales and marketing

 

 

36,172

 

 

 

23,403

 

General and administrative

 

 

15,861

 

 

 

10,127

 

Total operating expenses

 

 

73,630

 

 

 

46,789

 

Operating loss

 

 

(26,687

)

 

 

(18,845

)

Other expense, net

 

 

(70

)

 

 

(230

)

Loss before provision for income taxes

 

 

(26,757

)

 

 

(19,075

)

Provision for income taxes

 

 

414

 

 

 

93

 

Net loss

 

 

(27,171

)

 

 

(19,168

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.30

)

 

$

(0.25

)

Weighted-average shares used to compute net loss per

   share, basic and diluted

 

 

90,519

 

 

 

76,338

 

(1) Includes share-based compensation expense as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Cost of revenue

 

$

1,633

 

 

$

891

 

Research and development

 

 

6,627

 

 

 

4,064

 

Sales and marketing

 

 

5,439

 

 

 

2,432

 

General and administrative

 

 

3,996

 

 

 

2,842

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

 

5


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Net loss

 

$

(27,171

)

 

$

(19,168

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

Net change in unrealized gain on available-for-sale investments

 

 

129

 

 

 

40

 

Foreign currency translation gain (loss)

 

 

733

 

 

 

(440

)

Net change in unrealized gain on derivative instruments

 

 

2,610

 

 

 

 

Comprehensive loss

 

$

(23,699

)

 

$

(19,568

)

See Notes to Condensed Consolidated Financial Statements.

 

 

 

6


 

ZENDESK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(27,171

)

 

$

(19,168

)

Adjustments to reconcile net loss to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,526

 

 

 

4,223

 

Share-based compensation

 

 

17,695

 

 

 

10,229

 

Other

 

 

403

 

 

 

172

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,898

 

 

 

(635

)

Prepaid expenses and other current assets

 

 

862

 

 

 

(793

)

Other assets and liabilities

 

 

(383

)

 

 

(638

)

Accounts payable

 

 

(1,851

)

 

 

(1,012

)

Accrued liabilities

 

 

2,307

 

 

 

1,323

 

Accrued compensation and related benefits

 

 

(2,066

)

 

 

(2,837

)

Deferred revenue

 

 

6,369

 

 

 

3,941

 

Net cash provided by (used in) operating activities

 

 

4,589

 

 

 

(5,195

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,249

)

 

 

(3,356

)

Internal-use software development costs

 

 

(1,351

)

 

 

(1,317

)

Purchases of marketable securities

 

 

(20,795

)

 

 

(14,801

)

Proceeds from maturities of marketable securities

 

 

10,051

 

 

 

7,520

 

Proceeds from sale of marketable securities

 

 

7,604

 

 

 

6,141

 

Cash paid for the acquisition of Zopim, net of cash acquired

 

 

 

 

 

(548

)

Net cash used in investing activities

 

 

(7,740

)

 

 

(6,361

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from follow-on public offering, net of issuance costs

 

 

 

 

 

190,794

 

Proceeds from exercise of employee stock options

 

 

1,915

 

 

 

2,938

 

Taxes paid related to net share settlement of equity awards

 

 

(189

)

 

 

(82

)

Proceeds from employee stock purchase plan

 

 

3,144

 

 

 

2,468

 

Principal payments on debt

 

 

 

 

 

(753

)

Principal payments on capital lease obligations

 

 

 

 

 

(10

)

Net cash provided by financing activities

 

 

4,870

 

 

 

195,355

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(154

)

 

 

158

 

Net increase in cash and cash equivalents

 

 

1,565

 

 

 

183,957

 

Cash and cash equivalents at the beginning of period

 

 

216,226

 

 

 

80,265

 

Cash and cash equivalents at the end of period

 

$

217,791

 

 

$

264,222

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow data:

 

 

 

 

 

 

 

 

Cash paid for interest and income taxes

 

$

168

 

 

$

122

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Balance of property and equipment in accounts payable and accrued expenses

 

$

2,345

 

 

$

497

 

Share-based compensation capitalized in internal-use software development costs

 

$

563

 

 

$

545

 

Vesting of early exercised stock options

 

$

232

 

 

$

311

 

Property and equipment acquired through tenant improvement allowances

 

$

 

 

$

174

 

Follow-on offering related costs not yet paid for

 

$

 

 

$

605

 

See Notes to Condensed Consolidated Financial Statements.

 

 

7


 

ZENDESK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Overview and Basis of Presentation

Company and Background

Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.

Our mission is to help organizations and their customers build better relationships. We are a software development company that provides a SaaS customer service platform that enables our customers to provide tailored support through multiple channels, establish effective self-service support resources, proactively serve customers through customer engagement capabilities, integrate with other applications, and consolidate and analyze data from customer interactions. We also provide SaaS live chat software that can be utilized independently to facilitate proactive communications between organizations and their customers or integrated easily into our platform.

In October 2015, we completed the acquisition of We Are Cloud SAS, or WAC, the maker of BIME Analytics software.  With the acquisition, we added technology that we anticipate will allow our customers to understand the ever-increasing diversity of data about their end customers. Over time, we expect this analytics software to become a core technology within our customer service platform, enabling us to further integrate data analytics capabilities across our products. We also expect to continue to sell our analytics software on a standalone basis.

References to Zendesk, the “Company”, “our”, or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed on February 26, 2016. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.

The consolidated balance sheet as of December 31, 2015 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2016.

Follow-On Public Offering

In March 2015, we completed a follow-on public offering, in which we issued 8.8 million shares of our common stock at a public offering price of $22.75 per share. We received net proceeds of $190.1 million after deducting underwriting discounts and commissions of $8.7 million and other offering expenses of $0.9 million.

Use of Estimates

The preparation of 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 fair value of share-based awards, acquired intangible assets and goodwill, unrecognized tax benefits, the useful lives of acquired intangible assets and property and equipment, and the capitalization and estimated useful life of our capitalized internal-use software.

These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

8


 

Concentrations of Risk

As of March 31, 2016, no customers represented 10% or greater of our total accounts receivable balance. There were no customers that individually exceeded 10% of our revenue during the three months ended March 31, 2016 or 2015.

Recently Issued and Adopted Accounting Pronouncements

In May 2014, the FASB issued new revenue guidance that provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. In August 2015, the FASB deferred the effective date of adoption by one year. As currently issued and amended, the new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, though early adoption is permitted for annual reporting periods beginning after December 15, 2016. The amendment may be applied retrospectively to each prior period presented, or with the cumulative effect recognized as of the date of initial adoption. We have not yet selected a transition method and continue to evaluate the effect of the standard on our consolidated financial statements, including revenue and commissions.

In September 2015, the FASB issued ASU 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments,” which requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The new standard is required to be applied prospectively. We adopted this guidance in the first quarter of 2016.  The adoption of this standard did not have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 regarding ASC Topic 842 "Leases." This new standard requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets 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. Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09 regarding Topic 718 "Compensation - Stock Compensation." This amendment changes certain aspects of accounting for share-based compensation to employees, including the recognition of income tax effects of awards when the awards vest or are settled, requirements on net share settlement to cover tax withholding, and accounting for forfeitures. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early adoption is permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

Note 2. Business Combination

On October 13, 2015, we completed the acquisition of WAC, the maker of BIME Analytics software. We acquired 100 percent of the outstanding shares of WAC in exchange for purchase consideration of $46.4 million in cash, including working capital adjustments. As partial security for standard indemnification obligations, $7.0 million of the consideration will be held in escrow for a period of up to 18 months, with a portion to be released 12 months following the closing of the acquisition. We incurred transaction costs of $1.0 million in connection with the acquisition. The transaction costs were expensed as incurred and recognized within general and administrative expenses.

9


 

The fair value of assets acquired and liabilities assumed was based on a preliminary valuation and purchase price, and our estimates and assumptions are subject to change within the measurement period. The primary areas that remain preliminary relate to the fair values of certain tangible assets and liabilities acquired and residual goodwill.  The total purchase price was allocated to assets acquired and liabilities assumed as set forth below (in thousands).  During the three months ended March 31, 2016, we made adjustments of $37,000 to the preliminary purchase price allocation related to certain tangible assets and liabilities acquired. The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to expected synergies, including cost savings from integrating the analytics technology with our customer service platform and the opportunity to sell the analytics software alongside our existing products. Goodwill is not expected to be deductible for income tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.

 

Net tangible assets acquired

 

$

2,269

 

Net deferred tax liability recognized

 

 

(1,979

)

Identifiable intangible assets:

 

 

 

 

Developed technology

 

 

8,800

 

Customer relationships

 

 

500

 

Goodwill

 

 

36,767

 

Total purchase price

 

$

46,357

 

 

The developed technology and customer relationship intangible assets were each assigned useful lives of 4.5 years.

In connection with the acquisition, we entered into retention arrangements with certain employees of WAC, pursuant to which we issued RSUs for approximately 0.5 million shares of our common stock, most of which vest in three annual installments from the date of acquisition. The expense related to the RSUs is accounted for as share-based compensation expense over the required service periods and was not included in the purchase consideration.

The results of operations of WAC have been included in our consolidated financial statements from the date of the acquisition.        

 

 

Note 3. Financial Instruments

Investments

The following tables present information about our cash equivalents and marketable securities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 based on the three-tier fair value hierarchy (in thousands):

 

 

 

Fair Value Measurement at

 

 

 

March 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

 

$

29,696

 

 

$

29,696

 

Money market funds

 

 

18,556

 

 

 

 

 

 

18,556

 

Asset-backed securities

 

 

 

 

 

10,025

 

 

 

10,025

 

U.S. treasury securities

 

 

 

 

 

9,211

 

 

 

9,211

 

Commercial paper

 

 

 

 

 

3,985

 

 

 

3,985

 

Agency securities

 

 

 

 

 

2,001

 

 

 

2,001

 

Total

 

$

18,556

 

 

$

54,918

 

 

$

73,474

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

18,556

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

54,918

 

 

 

10


 

 

 

Fair Value Measurement at

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

 

$

31,761

 

 

$

31,761

 

Money market funds

 

 

21,338

 

 

 

 

 

 

21,338

 

Asset-backed securities

 

 

 

 

 

7,998

 

 

 

7,998

 

Commercial paper

 

 

 

 

 

5,992

 

 

 

5,992

 

U.S. treasury securities

 

 

 

 

 

4,001

 

 

 

4,001

 

Agency securities

 

 

 

 

 

1,998

 

 

 

1,998

 

Total

 

$

21,338

 

 

$

51,750

 

 

$

73,088

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

 

$

21,338

 

Included in marketable securities

 

 

 

 

 

 

 

 

 

$

51,750

 

 

As of March 31, 2016 and December 31, 2015, there were no securities within Level 3 of the fair value hierarchy.  There were no transfers between fair value measurement levels during the three months ended March 31, 2016.  Gross unrealized gains or losses for cash equivalents and marketable securities as of March 31, 2016 and December 31, 2015 were not material. As of March 31, 2016 and December 31, 2015, there were no securities that were in an unrealized loss position for more than 12 months.

The following table classifies our marketable securities by contractual maturity as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Due in one year or less

 

$

36,531

 

 

$

29,414

 

Due after one year

 

 

18,387

 

 

 

22,336

 

Total

 

$

54,918

 

 

$

51,750

 

 

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 balances.

Derivative Instruments and Hedging

Our foreign currency exposures typically arise from foreign operations and sales in foreign currencies for subscriptions to our customer service platform. In September 2015, we implemented a hedging program to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings. We enter into foreign currency forward contracts with certain financial institutions and designate those hedges as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less but can extend up to 24 months. As of March 31, 2016, the balance of other accumulated comprehensive income included an unrealized gain of $1.9 million related to the effective portion of changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify $1.1 million from accumulated other comprehensive income into earnings over the next 12 months associated with our cash flow hedges.

The following tables present information about derivative instruments on our consolidated balance sheets as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

March 31, 2016

 

 

 

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

 

 

1,867

 

 

Accrued liabilities

 

 

740

 

Foreign currency forward contracts

 

Other assets

 

 

719

 

 

Other

liabilities

 

 

6

 

Total

 

 

 

$

2,586

 

 

 

 

$

746

 

 

11


 

 

 

December 31, 2015

 

 

 

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

 

 

408

 

 

Accrued liabilities

 

 

1,081

 

Total

 

 

 

$

408

 

 

 

 

$

1,081

 

 

Our foreign currency forward contracts had a total notional value of $99.9 million and $60.8 million as of March 31, 2016 and December 31, 2015, respectively. 

The following table presents information about our derivative instruments on the statement of operations for the three months ended March 31, 2016 (in thousands):

 

 

 

 

 

Three Months Ended March 31, 2016

 

Hedging Instrument

 

Location of Gain (Loss) Reclassified into Earnings

 

Gain Recognized in AOCI

 

 

Loss Reclassified from AOCI into Earnings

 

Foreign currency forward contracts

 

Revenue, cost of revenue, operating expenses

 

 

2,348

 

 

 

(262

)

Total

 

 

 

$

2,348

 

 

$

(262

)

 

There were no gains or losses on derivative instruments for the three months ended March 31, 2015.

All derivatives have been designated as hedging instruments. Amounts recognized in earnings related to excluded time value and hedge ineffectiveness were not material for the three months ended March 31, 2016.

Note 4. Property and Equipment

Property and equipment, net consists of the following (in thousands):  

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Capitalized internal-use software

 

$

24,254

 

 

$

22,418

 

Hosting equipment

 

 

29,107

 

 

 

26,920

 

Leasehold improvements

 

 

20,492

 

 

 

19,577

 

Computer equipment and software

 

 

8,587

 

 

 

7,682

 

Furniture and fixtures

 

 

5,925

 

 

 

5,739

 

Construction in progress

 

 

2,438

 

 

 

4,157

 

Total

 

 

90,803

 

 

 

86,493

 

Less: accumulated depreciation and amortization

 

 

(35,260

)

 

 

(29,953

)

Property and equipment, net

 

$

55,543

 

 

$

56,540

 

 

Depreciation expense was $3.7 million and $2.3 million for the three months ended March 31, 2016 and 2015, respectively. 

 

Amortization expense of capitalized internal-use software totaled $1.7 million and $1.5 million for the three months ended March 31, 2016 and 2015, respectively. The carrying value of capitalized internal-use software at March 31, 2016 and December 31, 2015 was $14.3 million and $14.1 million, respectively, including $1.3 million and $1.5 million in construction in progress, respectively.

 

 

12


 

Note 5. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the three months ended March 31, 2016 are as follows (in thousands):

 

Balance as of December 31, 2015

 

$

45,346

 

Goodwill adjustments

 

 

37

 

Foreign currency translation adjustments

 

 

459

 

Balance as of March 31, 2016

 

$

45,842

 

 

Acquired intangible assets subject to amortization as of March 31, 2016 and December 31, 2015 consist of the following (in thousands).

 

 

 

As of March 31, 2016

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Foreign Currency Translation Adjustments

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

 

$

14,000

 

 

$

(3,991

)

 

$

(147

)

 

$

9,859

 

 

 

3.5

 

Customer relationships

 

 

1,800

 

 

 

(715

)

 

 

(43

)

 

 

1,045

 

 

 

2.8

 

 

 

$

15,800

 

 

$

(4,706

)

 

$

(190

)

 

$

10,904

 

 

 

 

 

 

 

 

As of December 31, 2015

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Foreign Currency Translation Adjustments

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

 

$

14,000

 

 

$

(3,133

)

 

$

(279

)

 

$

10,587

 

 

 

3.7

 

Customer relationships

 

 

1,800

 

 

 

(606

)

 

 

(78

)

 

 

1,117

 

 

 

3.1

 

 

 

$

15,800

 

 

$

(3,739

)

 

$

(357

)

 

$

11,704

 

 

 

 

 

 

Amortization expense of purchased intangible assets for the three months ended March 31, 2016 and 2015 was $0.9 million and $0.4 million, respectively.  

Estimated future amortization expense as of March 31, 2016 is as follows (in thousands):

 

Remainder of 2016

 

$

2,830

 

2017

 

 

3,364

 

2018

 

 

2,132

 

2019

 

 

2,066

 

2020

 

 

512

 

 

 

$

10,904

 

 

Note 6. Credit Facility

Until its termination in June 2015, we had a credit facility with Silicon Valley Bank consisting of a $20.0 million revolving line of credit and a $10.0 million equipment line of credit. The revolving line of credit bore interest at the prime rate plus 2.0% per annum prior to our IPO in May 2014 and was reduced to the prime rate upon the consummation of our IPO.  Borrowings on the equipment line of credit bore interest of 2.5% per annum.  In June 2014, we repaid all outstanding principal and accrued interest under the revolving line of credit. In June 2015, we repaid all outstanding principal and interest under the equipment line of credit and terminated the Silicon Valley Bank credit facility.

 

 

13


 

Note 7. Commitments and Contingencies

Leases

We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Rent expense was $2.2 million and $1.6 million for the three months ended March 31, 2016 and 2015, respectively.    

We leased computer equipment from various parties under capital lease agreements that expired in March 2015.  

Litigation and Loss Contingencies

We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims incident to the ordinary course of business, including intellectual property claims, labor and employment claims, and threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.

We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated financial position, 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 customer service platform, live chat software, analytics software, 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 the accompanying condensed consolidated financial statements, as a result of these obligations.

Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance 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 significant liabilities in the accompanying consolidated financial statements as a result of these service-level agreements.  

 

 

Note 8. Common Stock and Stockholders’ Equity

Common Stock

As of March 31, 2016 and December 31, 2015, there were 400 million shares authorized for issuance with a par value of $0.01 per share.  There were 92.0 million and 90.9 million shares of common stock issued and 91.5 million and 90.3 million shares outstanding as of March 31, 2016 and December 31, 2015, respectively. Included within the number of shares issued and outstanding were 0.2 million and 0.3 million shares of common stock subject to repurchase, as of March 31, 2016 and December 31, 2015, respectively.

 

Preferred Stock

As of March 31, 2016 and December 31, 2015, 10.0 million shares of preferred stock were authorized for issuance with a par value of $0.01 per share and no shares of preferred stock were issued or outstanding.

14


 

Employee Equity Plans

Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan, or ESPP, eligible employees are granted options to purchase shares of our common stock through payroll deductions. The ESPP provides for eighteen-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.  No shares of common stock were purchased under the ESPP during the three months ended March 31, 2016. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 0.9 million shares on January 1, 2016.  As of March 31, 2016, 3.8 million shares of common stock were available for issuance under the ESPP.

Stock Option and Grant Plans

Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our IPO 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 4.5 million shares on January 1, 2016. As of March 31, 2016, we had 7.5 million shares of common stock available for future grants under the 2014 Plan.

The following table summarizes our stock option and RSU award activities for the three months ended March 31, 2016 (in thousands, except per share information):

 

 

 

 

 

 

 

Options Outstanding

 

 

RSUs Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

Shares

 

 

 

 

 

 

Weighted

 

 

Remaining

 

 

Aggregate

 

 

 

 

 

 

Average

 

 

 

Available

 

 

Number of

 

 

Average

 

 

Contractual

 

 

Intrinsic

 

 

Outstanding

 

 

Grant Date

 

 

 

for Grant

 

 

Shares

 

 

Exercise Price

 

 

Term

 

 

Value

 

 

RSUs

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding — January 1, 2016

 

 

4,323

 

 

 

10,778

 

 

$

11.94

 

 

 

7.96

 

 

$

156,262

 

 

 

6,417

 

 

$

19.54

 

Increase in authorized shares

 

 

4,516

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted

 

 

(110

)

 

 

110

 

 

 

18.48

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(1,426

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,426

 

 

 

14.77

 

Stock options exercised

 

 

 

 

 

 

(386

)

 

 

4.96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(785

)

 

 

16.70

 

Stock options forfeited or

   canceled

 

 

72

 

 

 

(72

)

 

 

24.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs forfeited or cancelled

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(91

)

 

 

20.67

 

Outstanding — March 31, 2016

 

 

7,466

 

 

 

10,430

 

 

$

12.18

 

 

 

7.78

 

 

$

91,213

 

 

 

6,967

 

 

$

18.87

 

 

Aggregate intrinsic value for options outstanding represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on the New York Stock Exchange as of March 31, 2016 was $20.93.

As of March 31, 2016, we had a total of $167.8 million in future share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 2.9 years.

Early Exercise of Stock Options and Purchase of Unvested Stock Awards

Certain of our stock options permit early exercise. Common stock purchased pursuant to an early exercise of stock options or unvested stock awards is not deemed to be outstanding for financial reporting purposes until those shares vest. Therefore, cash received in exchange for unvested shares is recorded as a liability and is transferred into common stock and additional paid-in capital as the shares vest. Upon termination of service, we may, at our discretion, repurchase unvested shares acquired through early exercise of stock options or purchase of unvested stock awards at a price equal to the price per share paid upon the exercise of such options or the purchase of such unvested stock awards. As of March 31, 2016 and December 31, 2015, there were 0.2 million and 0.3 million shares, respectively, outstanding as a result of the early exercise of stock options and purchase of unvested stock awards by our employees and directors that were classified as accrued liabilities for an aggregated amount of $0.8 million and $1.0 million, respectively.

15


 

 

 

Note 9. 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 outstanding share-based awards, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

The following table presents the calculation of basic and diluted net loss per share for the periods presented (in thousands, except per share data):

 

 

 

Three Months Ended

March 31,

 

 

 

2016

 

 

2015

 

Net loss

 

$

(27,171

)

 

$

(19,168

)

Basic shares:

 

 

 

 

 

 

 

 

Weighted-average shares used to compute basic net loss per share