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Note 1. Organization
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 software-as-a-service, or SaaS, customer service platform. Our platform helps organizations engage with people in new ways that foster long-term customer loyalty and satisfaction. We empower organizations to better answer customers’ questions, and to solve their problems through the channels that people use every day when seeking help, such as email, chat, voice, social media and websites. Our customer service platform also helps people find answers on their own through knowledge bases and communities, capitalizing on the increasing customer preference for self-service. Our customer engagement capabilities allow organizations to proactively serve their customers, reaching out to those who may need help and soliciting feedback about their experience. The openness of our customer service platform makes it easy for organizations to integrate with their other applications. Our customer service platform consolidates the data from customer interactions and provides organizations with powerful analytics and performance benchmarking.
References to Zendesk or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
|
Note 2. 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 upon consolidation.
Initial Public Offering
In May 2014, we completed our initial public offering, or IPO, in which we issued and sold 12.8 million shares of common stock at a public offering price of $9.00 per share. We received net proceeds of $103.1 million after deducting underwriting discounts and commissions of $8.1 million and other offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 34.3 million shares of common stock.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
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 our common stock and share-based awards, fair value of purchased intangible assets, goodwill, unrecognized tax benefits, useful lives of purchased 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.
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 our customer service platform and, to a lesser extent, live chat software. Arrangements with customers do not provide the customer with the right to take possession of the software supporting our customer service platform or live chat software at any time, and are therefore accounted for as service contracts. 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 commence revenue recognition when all of the following conditions are met:
· |
There is persuasive evidence of an arrangement; |
· |
The service has been or is being provided to the customer; |
· |
The collection of the fees is reasonably assured; and |
· |
The amount of fees to be paid by the customer is fixed or determinable. |
Subscription revenue is recognized on a straight-line basis over the contractual 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 and recognized on a straight-line basis over the requisite service period.
Certain customers have arrangements that provide for a maximum number of users over the contract term, with usage measured monthly. Revenue for these arrangements is recognized ratably over the contract terms. Incremental fees are incurred when the maximum number of users is exceeded, and any incremental fees are recognized as revenue ratably over the remaining contractual term.
We derive an immaterial amount of revenue from implementation, voice, and training services, for which we recognize revenue upon completion.
Deferred Revenue
Deferred revenue consists primarily of customer billings in advance of revenue being recognized. We invoice customers for subscriptions to our customer service platform or live chat software in monthly, quarterly, or annual installments. Deferred revenue that is anticipated to be 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, voice, and training services was immaterial as of December 31, 2014 and 2013.
Cost of Revenue
Cost of revenue consists primarily of personnel costs (including salaries, benefits, and share-based compensation) for employees associated with our platform infrastructure and our product support organizations, data center costs related to hosting our platform, depreciation and other expenses associated with our self-managed colocation data centers, amortization expense associated with capitalized internal-use software, payment processing fees, amortization expense associated with purchased intangible assets, and allocated shared 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.
There was no restricted cash as of December 31, 2014 as compared to $0.2 million as of December 31, 2013. As of December 31, 2014, the certificate of deposit pledged as collateral on credit cards had been refunded.
Marketable Securities
Marketable securities consist of corporate bonds and auto and credit card asset backed 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 value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. 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 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 allowance for doubtful accounts consists of the following activity (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Allowance for doubtful accounts, beginning balance |
|
$ |
282 |
|
|
$ |
173 |
|
Additions |
|
|
843 |
|
|
|
301 |
|
Write-offs |
|
|
(861 |
) |
|
|
(192 |
) |
Allowance for doubtful accounts, ending balance |
|
$ |
264 |
|
|
$ |
282 |
|
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 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 software |
|
|
3 years |
Leasehold improvements |
|
|
Shorter of the lease term or estimated useful life |
Depreciation expense of assets acquired through capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
Fair Value Measurements
We measure certain financial assets 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 in either Level 1 or Level 2 and we have no financial assets or liabilities measured using Level 3 inputs. The fair value of our Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of our Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including readily available pricing sources for identical underlying securities that may not be actively traded.
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. Based on borrowing rates available to us for loans with similar terms and maturities, the carrying value of borrowings approximates fair value or Level 2 within the fair value hierarchy.
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. The weighted-average useful life of our capitalized internal-use software was 3.2 years as of December 31, 2014.
Business Combination
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, Purchased 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 year ended December 31, 2014. No goodwill was recorded prior to December 31, 2013.
Purchased Intangible Assets. Purchased intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisition. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated economic lives following the pattern in which the economic benefits of the assets will be consumed, generally straight-line.
Impairment of Long-Lived Assets. The carrying amounts of our long-lived assets, including property and equipment, capitalized internal-use software, and purchased intangible assets, are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is 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. No impairment of any long-lived assets was identified for the years ended December 31, 2014 and 2013.
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). 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, 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.
All RSUs and certain options granted to employees prior to the IPO vest upon the satisfaction of both a service condition and a performance condition. These RSUs and stock options with both a service condition and performance condition are collectively referred to as “Performance Awards” in the following discussion. The service condition for substantially all of these awards is satisfied over four years. The performance condition was satisfied upon the occurrence of a qualifying liquidity event which occurred upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense was recognized for the Performance Awards prior to the IPO as the performance condition had not been deemed probable to have been met. Upon the satisfaction of the performance condition, we recognized a cumulative share-based compensation expense for the portion of the Performance Awards that had met the service condition. For the year ended December 31, 2014, share-based compensation expense related to the Performance Awards recognized was $12.7 million, using the accelerated attribution method. The remaining unrecognized share-based compensation expense related to the Performance Awards will be recorded over the remaining requisite service period using the accelerated attribution method, net of estimated forfeitures.
As of December 31 2014, we had a total of $74.5 million in future period share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.5 years.
Advertising Expense
Advertising is expensed as incurred. For the years ended December 31, 2014, 2013, and 2012, advertising expense was $12.7 million, $6.5 million, and $3.5 million, respectively.
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 tax 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 the financial statements as a component of provision for income taxes.
Foreign Currency
The functional currency of our foreign subsidiaries, with the exception of our Singapore subsidiary, 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 expense, net on the statements of operations and were not material for the periods presented. The functional currency of our Singapore subsidiary is the Singapore dollar. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet dates. Revenue and expenses are translated at the average exchange rates for the period. Amounts classified in stockholders’ equity (deficit) are translated at historical exchange rates.
Concentrations of Risk
Financial instruments potentially exposing us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable securities and accounts receivable. 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.
At December 31, 2014 and 2013, there were no customers that represented more than 10% of the accounts receivable balance. There were no customers that individually exceeded 10% of our revenue in any of the periods presented.
Recently Issued Accounting Standards
In February 2013, the Financial Accounting Statements Board, or FASB, issued Accounting Standards Update No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the statement of operations or as a separate disclosure in the notes. The guidance became effective for reporting periods beginning after December 15, 2012 and is applied prospectively. We adopted this standard for the year ended December 31, 2013, and the adoption did not have any impact on our financial position, results of operations, or cash flows, as the amounts reclassified out of accumulated other comprehensive loss are not significant.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” or ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss, or NOL, carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 supports the approach for companies to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This approach requires companies to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. We adopted this standard for the year ended December 31, 2014, and the adoption did not have a material effect on our financial position, results of operations, or cash flows.
On May 28, 2014, the Financial Accounting Statements Board, or FASB, issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU will be effective for our fiscal year beginning January 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
|
Note 3. Acquisition of Zopim Technologies
On March 21, 2014, we completed the acquisition of Zopim Technologies Pte Ltd., or Zopim, a software development company that provides a SaaS live chat service. During the three months ended December 31, 2014, we finalized our purchase accounting after adjustments were made to the preliminary purchase price allocation. The total adjusted acquisition date fair value of consideration transferred was $15.8 million ($4.9 million of cash and $10.9 million of our common stock), which included $1.1 million of cash and $2.4 million of common stock consideration held back between 12 and 18 months as partial security for standard indemnification obligations. The total adjusted purchase price was allocated to assets acquired and liabilities assumed as set forth below (in thousands). The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is attributable to expected synergies from future growth and potential future monetization opportunities, and is not deductible for tax purpose.
|
|
|
|
|
Net tangible liabilities assumed |
|
$ |
(385 |
) |
Intangible assets |
|
|
6,560 |
|
Goodwill |
|
|
9,594 |
|
Total purchase price |
|
$ |
15,769 |
|
In connection with the acquisition, we also established a retention plan pursuant to which we issued RSUs for 0.9 million shares of our common stock, which vest in three annual installments from the date of acquisition. In addition, we agreed to pay cash in an aggregate amount of $3.0 million in two annual installments from the date of acquisition to Zopim employees in connection with their continued employment, which is recorded as compensation expense over the associated service periods of such employees.
Pro forma revenue and results of operations have not been presented because the historical results of Zopim were not material to our consolidated financial statements in any period presented.
|
Note 4. Fair Value Measurements
The following tables present information about our financial assets measured at fair value on a recurring basis as of December 31, 2014 and 2013 based on the three-tier fair value hierarchy (in thousands):
|
|
Fair Value Measurement at |
|
|||||||||
|
|
December 31, 2014 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
— |
|
|
|
40,345 |
|
|
$ |
40,345 |
|
Money market funds |
|
|
21,382 |
|
|
|
— |
|
|
|
21,382 |
|
Asset-backed securities |
|
|
— |
|
|
|
5,080 |
|
|
|
5,080 |
|
Commercial paper |
|
|
— |
|
|
|
3,993 |
|
|
|
3,993 |
|
U.S. treasury securities |
|
|
— |
|
|
|
1,991 |
|
|
|
1,991 |
|
Total |
|
$ |
21,382 |
|
|
$ |
51,409 |
|
|
$ |
72,791 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
$ |
21,382 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
|
$ |
51,409 |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
December 31, 2013 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
— |
|
|
$ |
12,114 |
|
|
$ |
12,114 |
|
Money market funds |
|
|
10,836 |
|
|
|
— |
|
|
|
10,836 |
|
Total |
|
$ |
10,836 |
|
|
$ |
12,114 |
|
|
$ |
22,950 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
$ |
10,836 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
|
$ |
12,114 |
|
There were no transfers between fair value measurement levels during the years ended December 31, 2014 or 2013.
Gross unrealized gains or losses for cash equivalent and marketable securities as of December 31, 2014 and 2013 were not material. As of December 31, 2014 and 2013, 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 maturities as of December 31, 2014 and 2013 (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
Due in one year |
|
$ |
42,204 |
|
|
$ |
9,889 |
|
Due in one to five years |
|
|
9,205 |
|
|
|
2,225 |
|
Total |
|
$ |
51,409 |
|
|
$ |
12,114 |
|
|
Note 5. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
Capitalized internal-use software |
|
$ |
18,541 |
|
|
$ |
11,104 |
|
Furniture and fixtures |
|
|
4,524 |
|
|
|
1,383 |
|
Hosting equipment |
|
|
14,085 |
|
|
|
7,931 |
|
Computer equipment and software |
|
|
4,310 |
|
|
|
1,680 |
|
Leasehold improvements |
|
|
15,144 |
|
|
|
1,717 |
|
Construction in progress |
|
|
3,546 |
|
|
|
341 |
|
Total |
|
|
60,150 |
|
|
|
24,156 |
|
Less accumulated depreciation and amortization |
|
|
(18,255 |
) |
|
|
(8,725 |
) |
Property and equipment, net |
|
$ |
41,895 |
|
|
$ |
15,431 |
|
Depreciation expense was $6.1 million, $2.9 million, and $1.1 million for the years ended December 31, 2014, 2013, and 2012, respectively. We capitalized $10.5 million, $4.8 million, and $3.6 million in costs associated with internal-use software during the years ended December 31, 2014, 2013, and 2012, respectively. Included in the capitalized internal-use software costs are $2.5 million, $0.1 million, and $0.1 million in share-based compensation costs for the years ended December 31, 2014, 2013, and 2012, respectively. Amortization expense of capitalized internal-use software totaled $3.8 million, $2.3 million, and $1.4 million during the years ended December 31, 2014, 2013, and 2012, respectively. The carrying value of capitalized internal-use software at December 31, 2014 and 2013 was $13.6 million and $6.8 million, respectively, including $3.5 million and $0.3 million in construction in progress, respectively.
|
Note 6. Goodwill and Purchased Intangibles Assets
The changes in the carrying amount of goodwill for the year ended December 31, 2014 are as follows (in thousands):
Balance as of December 31, 2013 |
|
$ |
— |
|
Goodwill acquired |
|
|
9,373 |
|
Goodwill adjustments |
|
|
221 |
|
Foreign currency translation adjustments |
|
|
(354 |
) |
Balance as of December 31, 2014 |
|
$ |
9,240 |
|
Purchased intangible assets related to the Zopim acquisition subject to amortization as of December 31, 2014 consist of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Foreign |
|
|
Net |
|
|
Remaining |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
|
Developed technology |
|
$ |
5,200 |
|
|
$ |
(1,118 |
) |
|
$ |
(191 |
) |
|
$ |
3,891 |
|
|
|
2.7 |
|
Customer relationships |
|
|
1,300 |
|
|
|
(244 |
) |
|
|
(48 |
) |
|
|
1,008 |
|
|
|
3.2 |
|
Trade name |
|
|
60 |
|
|
|
(45 |
) |
|
|
(2 |
) |
|
|
13 |
|
|
|
0.2 |
|
|
|
$ |
6,560 |
|
|
$ |
(1,407 |
) |
|
$ |
(241 |
) |
|
$ |
4,912 |
|
|
|
|
|
Amortization expense of purchased intangible assets related to the Zopim acquisition for the year ended December 31, 2014 was $1.4 million. No amortization expense was recorded for the year ended December 31, 2013.
Estimated future amortization expense as of December 31, 2014 is as follows (in thousands):
2015 |
|
$ |
1,757 |
|
2016 |
|
|
1,744 |
|
2017 |
|
|
1,342 |
|
2018 |
|
|
69 |
|
|
|
$ |
4,912 |
|
|
Note 7. Credit Facility
We have 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. As of December 31, 2013, outstanding balance under the revolving line of credit was $20.0 million. In June 2014 we repaid all outstanding principal and accrued interest under the revolving line of credit and as of December 31, 2014 there was no balance outstanding. As of December 31, 2014 and 2013, outstanding balance under the equipment line of credit was $7.0 million and $3.8 million, respectively.
Prior to our IPO, borrowings on the revolving line of credit bore interest at the Prime Rate plus 2.0% per annum. Upon the consummation of the IPO, the interest rate was reduced to the Prime Rate. Borrowings on the revolving line of credit are subject to a borrowing base limit determined monthly based on our recurring revenue metrics from previous months and the ratio of certain current assets to current liabilities as of the previous month end. To the extent we borrow funds on the revolving line of credit, we are entitled to make interest-only payments until January 1, 2016, when the outstanding balance is due in full.
Borrowings on the equipment line of credit bear interest of 2.5% per annum. For each equipment advance, we were entitled to make interest-only payments until September 14, 2014, when the last draw against the equipment line of credit could be made. The outstanding balance as of September 14, 2014 is payable in 30 equal monthly installments, with the last payment due on March 14, 2017. We are also required to make a final payment fee of $0.3 million on March 14, 2017.
The credit facility is collateralized by substantially all of our assets, excluding our intellectual property. Our domestic subsidiary is a guarantor of the credit facility and we have pledged up to 65% of the equity in our international subsidiaries as collateral. The credit facility also imposes various covenants on us, including the delivery of financial and other information, the maintenance of our primary operating and securities accounts with the lender, the maintenance of minimum revenue targets and an agreed ratio of certain current assets to current liabilities, as well as limitations on dispositions, changes in business or management, certain mergers or consolidations, dividends and other corporate activities. As of December 31, 2014 and 2013, we were in compliance with all of the covenants contained in the credit facility.
Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):
2015 |
|
$ |
3,041 |
|
2016 |
|
|
3,118 |
|
2017 |
|
|
793 |
|
|
|
$ |
6,952 |
|
In June 2012, in connection with the credit facility, we issued a non-refundable, fully earned warrant to Silicon Valley Bank to purchase 125,000 shares of common stock at $1.92 per share with an expiration date of June 2019. The fair value of the warrant on issuance is being accreted to interest expense using the effective interest rate method over the life of the credit facility. This warrant was exercised in the three months ended June 30, 2014.
|
Note 8. 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. In 2013, we renewed the lease of our office in San Francisco through October 2019, with an option to renew for an additional 7 years and 8 months. We also entered into a lease for additional office space in San Francisco with an 8-year term, renewable for an additional period of 5 years. For the years ended December 31, 2014, 2013, and 2012, rent expense was $6.8 million, $2.3 million, and $1.6 million, respectively.
We lease computer equipment from various parties under capital lease agreements that expire through March 2015. The total outstanding balance financed under capital leases was immaterial at December 31, 2014 and $0.4 million at December 31, 2013. Accumulated depreciation on the leased assets was $1.0 million and $0.7 million at December 31, 2014 and 2013, respectively. Depreciation of assets recorded under capital leases is included in depreciation expense.
As of December 31, 2014, the future minimum lease payments by year under noncancelable leases are as follows for the year ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2015 |
|
$ |
7,025 |
|
2016 |
|
|
7,067 |
|
2017 |
|
|
6,935 |
|
2018 |
|
|
6,936 |
|
2019 |
|
|
6,672 |
|
Thereafter |
|
|
12,707 |
|
Total minimum lease payments |
|
$ |
47,342 |
|
Letters of Credit
As of December 31, 2014 and 2013, we had a total of $3.7 million and $3.8 million, respectively, in letters of credit outstanding primarily related to our leased office space in San Francisco. The letters of credit are collateralized by substantially all of our assets, excluding our intellectual property. 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. 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 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, 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 consolidated financial statements, as a result of these obligations.
We have entered into service-level agreements with certain customers 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 experienced any significant failures to meet the defined levels of reliability and performance warranted by those agreements and, as a result, we have not accrued any liabilities related to these agreements in the accompanying consolidated financial statements.
|
Note 9. Common Stock and Stockholders’ Equity (Deficit)
Convertible Preferred Stock
Upon the completion of the IPO, all outstanding convertible preferred stock was converted into 34.3 million shares of common stock.
Reverse Stock Split
In April 2014, our board of directors and stockholders approved a one-for-two reverse stock split of our common stock. All share and per share information throughout the consolidated financial statements and notes to the consolidated financial statements have been retroactively adjusted to reflect this reverse stock split.
Common Stock Authorized
At December 31, 2013, there were 80.0 million and 30.0 million shares authorized for Series A and Series B common stock, respectively, and there were 9.9 million and 13.3 million shares outstanding of Series A and Series B common stock, respectively, of which 0.8 million shares of Series B common stock were unvested resulting from employees exercising stock options prior to vesting. Upon the completion of our IPO, each share of Series B common stock was converted into Series A common stock on a one-for-one basis, and the Series A common stock was redesignated as common stock. In addition, we increased the amount of common stock authorized for issuance to 400.0 million common shares with a par value of $0.01 per share.
Employee Equity Plans
Employee Stock Purchase Plan
Our board of directors adopted the Employee Stock Purchase Plan, or ESPP, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. The ESPP initially reserved and authorized the issuance of up to 3.6 million shares of common stock. The ESPP provides that the number of shares reserved and available for issuance under the plan automatically increases each January, beginning on January 1, 2015, by the lesser of 1.5 million shares, 1% of the number of shares issued and outstanding on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.
Under the 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. We commenced our first purchase period under the ESPP on May 15, 2014. For the year ended December 31, 2014, 0.4 million shares of common stock were purchased under the ESPP at $7.65 per share, resulting in cash proceeds of $3.3 million. As of December 31, 2014, 3.2 million shares of common stock were available for issuance under the ESPP.
Stock Option and Grant Plan
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, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.
Our board of directors adopted the 2014 Stock Option and Incentive Plan, or the 2014 Plan, in February 2014, which became effective in May 2014 upon the effectiveness of the registration statement related to our IPO. The 2014 Plan serves as the successor to our 2009 Plan. The 2014 Plan initially reserved and authorized the issuance of 7.5 million shares of our common stock. Additionally, shares not issued or subject to outstanding grants under the 2009 Plan rolled into the 2014 Plan, resulting in a total of 8.3 million available shares under the 2014 Plan as of the effective date. The 2014 Plan provides that the number of shares reserved and available for issuance under the plan automatically increases each January 1, beginning on January 1, 2015, by 5% of the outstanding number of shares of our common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee.
A summary of our stock option and RSU activity for the year ended December 31, 2014 is as follows (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, 2014 |
|
|
1,854 |
|
|
|
10,134 |
|
|
$ |
2.82 |
|
|
|
8.15 |
|
|
$ |
50,185 |
|
|
|
811 |
|
|
$ |
6.76 |
|
Increase in authorized shares |
|
|
13,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted |
|
|
(6,308 |
) |
|
|
6,308 |
|
|
|
11.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs granted |
|
|
(3,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,030 |
|
|
|
14.44 |
|
Stock options exercised |
|
|
|
|
|
|
(3,516 |
) |
|
|
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370 |
) |
|
|
9.56 |
|
Unvested shares repurchased |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options forfeited or canceled |
|
|
883 |
|
|
|
(883 |
) |
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs forfeited or cancelled |
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407 |
) |
|
|
9.31 |
|
Outstanding — December 31, 2014 |
|
|
7,560 |
|
|
|
12,043 |
|
|
$ |
7.39 |
|
|
|
8.29 |
|
|
$ |
204,467 |
|
|
|
3,064 |
|
|
$ |
13.69 |
|
Options vested and expected to vest as of December 31, 2014 |
|
|
|
|
|
|
10,742 |
|
|
$ |
7.07 |
|
|
|
8.21 |
|
|
$ |
185,866 |
|
|
|
|
|
|
|
|
|
Options vested and exercisable as of December 31, 2014 |
|
|
|
|
|
|
4,293 |
|
|
$ |
3.87 |
|
|
|
7.34 |
|
|
$ |
88,025 |
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the year ended December 31, 2014, 2013, 2012 was $66.2 million, $4.6 million, and $1.8 million, respectively. Aggregate 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, 2014, 2013, and 2012 was $7.22, $1.62, and $0.56, respectively.
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. Zendesk’s closing stock price as reported on the New York Stock Exchange as of December 31, 2014 was $24.37.
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). 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 assumptions, 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 estimates 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.
These assumptions are estimated as follows:
· |
Fair Value of Common Stock. Prior to our IPO in May 2014, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant. These factors included, but were not limited to: (i) contemporaneous valuations performed by unrelated third-party specialists, (ii) rights, preferences, and privileges of our redeemable convertible preferred stock relative to those of our common stock, (iii) actual operating and financial performance, (iv) relevant precedent transactions involving our capital stock, (v) likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business, (vi) market multiples of comparable companies in our industry, (vii) stage of development, (viii) industry information such as market size and growth, (ix) illiquidity of share-based awards involving securities in a private company, and (x) macroeconomic conditions. |
Since our IPO, we have used the market closing price for our common stock as reported on the New York Stock Exchange.
· |
Expected Term. We determine the expected term based on the average period the stock options are expected to remain outstanding generally calculated as the midpoint of the stock options vesting term and contractual expiration period, as we do not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior. |
· |
Expected Volatility. We determine the price volatility factor based on the historical volatility of publicly traded industry peers. To determine our peer group of companies, we consider public companies in the technology industry and select those that are similar to us in size, stage of life cycle, and financial leverage. We do not rely on implied volatilities of traded options in our industry peers’ common stock because the volume of activity is relatively low. We intend to continue to consistently apply this methodology using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation. |
· |
Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes valuation model 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 granted to employees are as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Expected volatility |
|
54% - 56% |
|
|
50% - 63% |
|
|
57% - 59% |
|
|||
Dividend rate |
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Risk-free interest rate |
|
1.75% - 2.02% |
|
|
0.63% - 2.02% |
|
|
0.68% - 1.47% |
|
|||
Expected term (in years) |
|
6.02 - 6.50 |
|
|
4.47 - 6.27 |
|
|
5.28 - 6.27 |
|
The assumptions used to estimate the fair value of ESPP awards are as follows:
|
|
Year Ended December 31, 2014 |
|
|
Expected volatility |
|
45% - 49% |
|
|
Dividend rate |
|
|
0% |
|
Risk-free interest rate |
|
0.05% - 0.35% |
|
|
Expected term (in years) |
|
0.50 - 1.5 |
|
In addition to the assumptions used in the Black-Scholes option valuation model, we must also estimate a forfeiture rate to calculate the share-based compensation expense for our awards. Our forfeiture rate is based on an analysis of our actual forfeitures. We will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover, and other factors. Changes in the estimated forfeiture rate can have a significant impact on our share-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the share-based compensation expense recognized in our financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the share-based compensation expense recognized in our financial statements.
We will continue to use judgment in evaluating the expected volatility, expected term, and forfeiture rate utilized in our share-based compensation expense calculations on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility, expected term, and forfeiture rates, which could materially impact our future share-based compensation expense.
In the years ended December 31, 2014 and 2013 we recorded $4.3 million and $1.7 million share-based compensation expense related to the accelerated vesting of certain stock options resulting from employee terminations, respectively. No such expense was recorded in the year ended December 31, 2012.
In September 2012, in connection with our sale of the Series D redeemable convertible preferred stock, the purchasers of the Series D redeemable convertible preferred stock conducted a tender offer to acquire approximately 8.0 million shares of common stock from employees, former employees, and other existing investors. In connection with the tender offer, we waived any rights of first refusal or other transfer restrictions applicable to such shares. The shares were repurchased from the stockholders at a purchase price of $9.62 per share. As a result of this transaction, we recorded a total of $8.6 million in share-based compensation expense in the year ended December 31, 2012 for the difference between the price paid for shares held by our employees and former employee stockholders and the estimated fair market value on the date of the transaction. Of the total share-based compensation expense, we recorded $20,000, $3.9 million, $1.0 million, and $3.7 million in cost of revenue, research and development, sales and marketing, and general and administrative expenses, respectively.
In connection with the tender offer, we recorded $8.3 million in deemed dividends, within additional paid-in capital, for the difference between the price paid for shares held by stockholders that were not employees or former employees and the estimated fair market value on the date of the transaction.
Early Exercise of Stock Options and Purchase of Unvested Stock Awards
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 December 31, 2014 and 2013 there were 0.6 million and 0.8 million shares outstanding as a result of 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 $2.1 million and $1.4 million, respectively.
Treasury Stock
We repurchased 0.5 million shares of common stock in the year ended December 31, 2011 and recorded the repurchased shares as treasury shares in the stockholders’ equity (deficit) section of the balance sheet at cost.
|
Note 11. Income Taxes
The components of loss before provision for income taxes are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
U.S. |
|
$ |
(66,755 |
) |
|
$ |
(23,117 |
) |
|
$ |
(24,739 |
) |
Foreign |
|
|
(923 |
) |
|
|
767 |
|
|
|
495 |
|
Total |
|
$ |
(67,678 |
) |
|
$ |
(22,350 |
) |
|
$ |
(24,244 |
) |
The income tax provision is composed of the following (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Current tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
1 |
|
|
|
37 |
|
|
|
2 |
|
Foreign |
|
|
567 |
|
|
|
189 |
|
|
|
126 |
|
|
|
|
570 |
|
|
|
226 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign |
|
|
(833 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
Total provision for (benefit from) income taxes |
|
$ |
(263 |
) |
|
$ |
221 |
|
|
$ |
121 |
|
Significant components of deferred tax assets are as follows (in thousands):
|
|
As of December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Tax credit carryforward |
|
$ |
197 |
|
|
$ |
15 |
|
Net operating loss carryforward |
|
|
33,878 |
|
|
|
19,278 |
|
Share-based compensation |
|
|
5,311 |
|
|
|
771 |
|
Accrued liabilities and reserves |
|
|
3,710 |
|
|
|
1,316 |
|
Other |
|
|
600 |
|
|
|
677 |
|
Total deferred tax assets |
|
|
43,696 |
|
|
|
22,057 |
|
Less: valuation allowance |
|
|
(39,496 |
) |
|
|
(19,837 |
) |
Deferred tax assets, net of valuation allowance |
|
|
4,200 |
|
|
|
2,220 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(4,597 |
) |
|
|
(2,207 |
) |
Net deferred tax assets (liabilities) |
|
$ |
(397 |
) |
|
$ |
13 |
|
The following is a reconciliation of the statutory federal income tax rate and the effective tax rates:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Tax at federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State tax provision, net of federal benefit |
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
Share-based compensation |
|
|
(5.5 |
) |
|
|
(4.4 |
) |
|
|
(11.1 |
) |
Valuation allowance |
|
|
(27.9 |
) |
|
|
(30.4 |
) |
|
|
(23.3 |
) |
Other |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.1 |
) |
Effective tax rate |
|
|
0.4 |
% |
|
|
(1.0 |
%) |
|
|
(0.5 |
%) |
We have not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2014 because we intend to permanently reinvest such earnings outside of the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2014, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $2.4 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.
As of December 31, 2014, we had net operating loss carryforwards of approximately $133.0 million for federal income taxes and $47.5 million for state income taxes. If not utilized, these carryforwards will begin to expire in 2029 for federal purposes and 2031 for state purposes.
We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws.
As of December 31, 2014, we had research and development credit carryforwards of approximately, $2.5 million and $2.7 million for federal and state income taxes, respectively. If not utilized, the federal carryforwards will begin to expire in 2029. The state tax credit can be carried forward indefinitely.
A share option exercise may result in a tax deduction prior to the actual recognition of the related excess tax benefit because we have a net operating loss carryforward. Our net operating losses include $40.9 million of excess stock option benefits that will be creditable to additional paid in capital when realized.
Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be restricted.
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):
Balance at December 31, 2012 |
|
$ |
1,939 |
|
Additions for tax positions related to the prior year |
|
|
— |
|
Additions for tax positions related to the current year |
|
|
1,978 |
|
Lapse of statutes of limitations |
|
|
— |
|
Balance at December 31, 2013 |
|
|
3,917 |
|
Additions for tax positions related to the prior year |
|
|
(32 |
) |
Additions for tax positions related to the current year |
|
|
2,070 |
|
Lapse of statutes of limitations |
|
|
— |
|
Balance at December 31, 2014 |
|
$ |
5,955 |
|
As of December 31, 2014, we had $0.3 million of interest and penalties related to the uncertain tax positions. We have elected to record interest and penalties in the financial statements as a component of income taxes. Included in the balance of unrecognized tax benefits at December 31, 2014 and 2013 are potential benefits of $0.9 million and $0.5 million, respectively, which if recognized, would affect the effective tax rate.
We are currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate over the next 12 months.
Our 2009-2013 tax years remain subject to examination by the taxing authorities for U.S. federal, state, and foreign tax purposes.
|
Note 12. Geographic Information
Revenue
The following table presents our revenue by geographic areas as determined based on the billing address of our customers (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
United States |
|
$ |
72,217 |
|
|
$ |
42,415 |
|
|
$ |
22,445 |
|
EMEA |
|
|
35,856 |
|
|
|
19,125 |
|
|
|
10,257 |
|
Other |
|
|
18,976 |
|
|
|
10,505 |
|
|
|
5,526 |
|
Total |
|
$ |
127,049 |
|
|
$ |
72,045 |
|
|
$ |
38,228 |
|
Long-Lived Assets
The following table presents our long-lived assets by geographic areas (in thousands):
|
|
As of |
|
|
As of |
|
||
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
United States |
|
$ |
22,817 |
|
|
$ |
6,466 |
|
EMEA |
|
|
4,373 |
|
|
|
2,054 |
|
Other |
|
|
1,096 |
|
|
|
135 |
|
Total |
|
$ |
28,286 |
|
|
$ |
8,655 |
|
The carrying value of capitalized internal-use software is excluded from the balance of long-lived assets presented in the table above.
|
Note 13. Retirement Plans
We have a 401(k) retirement and savings plan made available to all United States employees. The 401(k) plan allows each participant to contribute up to an amount not to exceed an annual statutory maximum. We may, at our discretion, make matching contributions to the 401(k) plan. We are responsible for the administrative costs of the 401(k) plan. We have not made any contributions to the 401(k) plan since inception.
|
Note 14. Subsequent Events
In January 2015, we changed the time-off policy for U.S. employees. Under the new policy, salaried employees no longer accrue paid time off and a one-time payment of $2.4 million was made in January 2015 to U.S. salaried employees for the amount accrued as of such date.
|
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 upon consolidation.
Initial Public Offering
In May 2014, we completed our initial public offering, or IPO, in which we issued and sold 12.8 million shares of common stock at a public offering price of $9.00 per share. We received net proceeds of $103.1 million after deducting underwriting discounts and commissions of $8.1 million and other offering expenses of $3.8 million. Upon the closing of the IPO, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into an aggregate of 34.3 million shares of common stock.
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
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 our common stock and share-based awards, fair value of purchased intangible assets, goodwill, unrecognized tax benefits, useful lives of purchased 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.
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 our customer service platform and, to a lesser extent, live chat software. Arrangements with customers do not provide the customer with the right to take possession of the software supporting our customer service platform or live chat software at any time, and are therefore accounted for as service contracts. 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 commence revenue recognition when all of the following conditions are met:
· |
There is persuasive evidence of an arrangement; |
· |
The service has been or is being provided to the customer; |
· |
The collection of the fees is reasonably assured; and |
· |
The amount of fees to be paid by the customer is fixed or determinable. |
Subscription revenue is recognized on a straight-line basis over the contractual 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 and recognized on a straight-line basis over the requisite service period.
Certain customers have arrangements that provide for a maximum number of users over the contract term, with usage measured monthly. Revenue for these arrangements is recognized ratably over the contract terms. Incremental fees are incurred when the maximum number of users is exceeded, and any incremental fees are recognized as revenue ratably over the remaining contractual term.
We derive an immaterial amount of revenue from implementation, voice, and training services, for which we recognize revenue upon completion.
Deferred Revenue
Deferred revenue consists primarily of customer billings in advance of revenue being recognized. We invoice customers for subscriptions to our customer service platform or live chat software in monthly, quarterly, or annual installments. Deferred revenue that is anticipated to be 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, voice, and training services was immaterial as of December 31, 2014 and 2013.
Cost of Revenue
Cost of revenue consists primarily of personnel costs (including salaries, benefits, and share-based compensation) for employees associated with our platform infrastructure and our product support organizations, data center costs related to hosting our platform, depreciation and other expenses associated with our self-managed colocation data centers, amortization expense associated with capitalized internal-use software, payment processing fees, amortization expense associated with purchased intangible assets, and allocated shared 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.
There was no restricted cash as of December 31, 2014 as compared to $0.2 million as of December 31, 2013. As of December 31, 2014, the certificate of deposit pledged as collateral on credit cards had been refunded.
Marketable Securities
Marketable securities consist of corporate bonds and auto and credit card asset backed 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 value. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive loss. 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 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 allowance for doubtful accounts consists of the following activity (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Allowance for doubtful accounts, beginning balance |
|
$ |
282 |
|
|
$ |
173 |
|
Additions |
|
|
843 |
|
|
|
301 |
|
Write-offs |
|
|
(861 |
) |
|
|
(192 |
) |
Allowance for doubtful accounts, ending balance |
|
$ |
264 |
|
|
$ |
282 |
|
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 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 software |
|
|
3 years |
Leasehold improvements |
|
|
Shorter of the lease term or estimated useful life |
Depreciation expense of assets acquired through capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations.
Fair Value Measurements
We measure certain financial assets 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 in either Level 1 or Level 2 and we have no financial assets or liabilities measured using Level 3 inputs. The fair value of our Level 1 financial assets is based on quoted market prices of the identical underlying security. The fair value of our Level 2 financial assets is based on inputs that are directly or indirectly observable in the market, including readily available pricing sources for identical underlying securities that may not be actively traded.
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. Based on borrowing rates available to us for loans with similar terms and maturities, the carrying value of borrowings approximates fair value or Level 2 within the fair value hierarchy.
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. The weighted-average useful life of our capitalized internal-use software was 3.2 years as of December 31, 2014.
Business Combination
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, Purchased 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 year ended December 31, 2014. No goodwill was recorded prior to December 31, 2013.
Purchased Intangible Assets. Purchased intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisition. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated economic lives following the pattern in which the economic benefits of the assets will be consumed, generally straight-line.
Impairment of Long-Lived Assets. The carrying amounts of our long-lived assets, including property and equipment, capitalized internal-use software, and purchased intangible assets, are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is 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. No impairment of any long-lived assets was identified for the years ended December 31, 2014 and 2013.
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). 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, 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.
All RSUs and certain options granted to employees prior to the IPO vest upon the satisfaction of both a service condition and a performance condition. These RSUs and stock options with both a service condition and performance condition are collectively referred to as “Performance Awards” in the following discussion. The service condition for substantially all of these awards is satisfied over four years. The performance condition was satisfied upon the occurrence of a qualifying liquidity event which occurred upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense was recognized for the Performance Awards prior to the IPO as the performance condition had not been deemed probable to have been met. Upon the satisfaction of the performance condition, we recognized a cumulative share-based compensation expense for the portion of the Performance Awards that had met the service condition. For the year ended December 31, 2014, share-based compensation expense related to the Performance Awards recognized was $12.7 million, using the accelerated attribution method. The remaining unrecognized share-based compensation expense related to the Performance Awards will be recorded over the remaining requisite service period using the accelerated attribution method, net of estimated forfeitures.
As of December 31 2014, we had a total of $74.5 million in future period share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.5 years.
Advertising Expense
Advertising is expensed as incurred. For the years ended December 31, 2014, 2013, and 2012, advertising expense was $12.7 million, $6.5 million, and $3.5 million, respectively.
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 tax 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 the financial statements as a component of provision for income taxes.
Foreign Currency
The functional currency of our foreign subsidiaries, with the exception of our Singapore subsidiary, 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 expense, net on the statements of operations and were not material for the periods presented. The functional currency of our Singapore subsidiary is the Singapore dollar. Assets and liabilities are translated into U.S. dollars at exchange rates in effect at the balance sheet dates. Revenue and expenses are translated at the average exchange rates for the period. Amounts classified in stockholders’ equity (deficit) are translated at historical exchange rates.
Concentrations of Risk
Financial instruments potentially exposing us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable securities and accounts receivable. 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.
At December 31, 2014 and 2013, there were no customers that represented more than 10% of the accounts receivable balance. There were no customers that individually exceeded 10% of our revenue in any of the periods presented.
Recently Issued Accounting Standards
In February 2013, the Financial Accounting Statements Board, or FASB, issued Accounting Standards Update No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the statement of operations or as a separate disclosure in the notes. The guidance became effective for reporting periods beginning after December 15, 2012 and is applied prospectively. We adopted this standard for the year ended December 31, 2013, and the adoption did not have any impact on our financial position, results of operations, or cash flows, as the amounts reclassified out of accumulated other comprehensive loss are not significant.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” or ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss, or NOL, carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 supports the approach for companies to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This approach requires companies to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. We adopted this standard for the year ended December 31, 2014, and the adoption did not have a material effect on our financial position, results of operations, or cash flows.
On May 28, 2014, the Financial Accounting Statements Board, or FASB, issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU will be effective for our fiscal year beginning January 1, 2017. Early adoption is not permitted. We are currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.
|
The allowance for doubtful accounts consists of the following activity (in thousands):
|
|
Year Ended December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Allowance for doubtful accounts, beginning balance |
|
$ |
282 |
|
|
$ |
173 |
|
Additions |
|
|
843 |
|
|
|
301 |
|
Write-offs |
|
|
(861 |
) |
|
|
(192 |
) |
Allowance for doubtful accounts, ending balance |
|
$ |
264 |
|
|
$ |
282 |
|
Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of 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 software |
|
|
3 years |
Leasehold improvements |
|
|
Shorter of the lease term or estimated useful life |
|
The total adjusted purchase price was allocated to assets acquired and liabilities assumed as set forth below (in thousands).
|
|
|
|
|
Net tangible liabilities assumed |
|
$ |
(385 |
) |
Intangible assets |
|
|
6,560 |
|
Goodwill |
|
|
9,594 |
|
Total purchase price |
|
$ |
15,769 |
|
|
The following tables present information about our financial assets measured at fair value on a recurring basis as of December 31, 2014 and 2013 based on the three-tier fair value hierarchy (in thousands):
|
|
Fair Value Measurement at |
|
|||||||||
|
|
December 31, 2014 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
— |
|
|
|
40,345 |
|
|
$ |
40,345 |
|
Money market funds |
|
|
21,382 |
|
|
|
— |
|
|
|
21,382 |
|
Asset-backed securities |
|
|
— |
|
|
|
5,080 |
|
|
|
5,080 |
|
Commercial paper |
|
|
— |
|
|
|
3,993 |
|
|
|
3,993 |
|
U.S. treasury securities |
|
|
— |
|
|
|
1,991 |
|
|
|
1,991 |
|
Total |
|
$ |
21,382 |
|
|
$ |
51,409 |
|
|
$ |
72,791 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
$ |
21,382 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
|
$ |
51,409 |
|
|
|
Fair Value Measurement at |
|
|||||||||
|
|
December 31, 2013 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|||
Description |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
$ |
— |
|
|
$ |
12,114 |
|
|
$ |
12,114 |
|
Money market funds |
|
|
10,836 |
|
|
|
— |
|
|
|
10,836 |
|
Total |
|
$ |
10,836 |
|
|
$ |
12,114 |
|
|
$ |
22,950 |
|
Included in cash and cash equivalents |
|
|
|
|
|
|
|
|
|
$ |
10,836 |
|
Included in marketable securities |
|
|
|
|
|
|
|
|
|
$ |
12,114 |
|
The following table classifies our marketable securities by contractual maturities as of December 31, 2014 and 2013 (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
Due in one year |
|
$ |
42,204 |
|
|
$ |
9,889 |
|
Due in one to five years |
|
|
9,205 |
|
|
|
2,225 |
|
Total |
|
$ |
51,409 |
|
|
$ |
12,114 |
|
|
Property and equipment consists of the following (in thousands):
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
Capitalized internal-use software |
|
$ |
18,541 |
|
|
$ |
11,104 |
|
Furniture and fixtures |
|
|
4,524 |
|
|
|
1,383 |
|
Hosting equipment |
|
|
14,085 |
|
|
|
7,931 |
|
Computer equipment and software |
|
|
4,310 |
|
|
|
1,680 |
|
Leasehold improvements |
|
|
15,144 |
|
|
|
1,717 |
|
Construction in progress |
|
|
3,546 |
|
|
|
341 |
|
Total |
|
|
60,150 |
|
|
|
24,156 |
|
Less accumulated depreciation and amortization |
|
|
(18,255 |
) |
|
|
(8,725 |
) |
Property and equipment, net |
|
$ |
41,895 |
|
|
$ |
15,431 |
|
|
The changes in the carrying amount of goodwill for the year ended December 31, 2014 are as follows (in thousands):
Balance as of December 31, 2013 |
|
$ |
— |
|
Goodwill acquired |
|
|
9,373 |
|
Goodwill adjustments |
|
|
221 |
|
Foreign currency translation adjustments |
|
|
(354 |
) |
Balance as of December 31, 2014 |
|
$ |
9,240 |
|
Purchased intangible assets related to the Zopim acquisition subject to amortization as of December 31, 2014 consist of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.
|
|
Cost |
|
|
Accumulated Amortization |
|
|
Foreign |
|
|
Net |
|
|
Remaining |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In years) |
|
|
Developed technology |
|
$ |
5,200 |
|
|
$ |
(1,118 |
) |
|
$ |
(191 |
) |
|
$ |
3,891 |
|
|
|
2.7 |
|
Customer relationships |
|
|
1,300 |
|
|
|
(244 |
) |
|
|
(48 |
) |
|
|
1,008 |
|
|
|
3.2 |
|
Trade name |
|
|
60 |
|
|
|
(45 |
) |
|
|
(2 |
) |
|
|
13 |
|
|
|
0.2 |
|
|
|
$ |
6,560 |
|
|
$ |
(1,407 |
) |
|
$ |
(241 |
) |
|
$ |
4,912 |
|
|
|
|
|
Estimated future amortization expense as of December 31, 2014 is as follows (in thousands):
2015 |
|
$ |
1,757 |
|
2016 |
|
|
1,744 |
|
2017 |
|
|
1,342 |
|
2018 |
|
|
69 |
|
|
|
$ |
4,912 |
|
|
Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):
2015 |
|
$ |
3,041 |
|
2016 |
|
|
3,118 |
|
2017 |
|
|
793 |
|
|
|
$ |
6,952 |
|
|
As of December 31, 2014, the future minimum lease payments by year under noncancelable leases are as follows for the year ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
2015 |
|
$ |
7,025 |
|
2016 |
|
|
7,067 |
|
2017 |
|
|
6,935 |
|
2018 |
|
|
6,936 |
|
2019 |
|
|
6,672 |
|
Thereafter |
|
|
12,707 |
|
Total minimum lease payments |
|
$ |
47,342 |
|
|
A summary of our stock option and RSU activity for the year ended December 31, 2014 is as follows (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, 2014 |
|
|
1,854 |
|
|
|
10,134 |
|
|
$ |
2.82 |
|
|
|
8.15 |
|
|
$ |
50,185 |
|
|
|
811 |
|
|
$ |
6.76 |
|
Increase in authorized shares |
|
|
13,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options granted |
|
|
(6,308 |
) |
|
|
6,308 |
|
|
|
11.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs granted |
|
|
(3,030 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,030 |
|
|
|
14.44 |
|
Stock options exercised |
|
|
|
|
|
|
(3,516 |
) |
|
|
2.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370 |
) |
|
|
9.56 |
|
Unvested shares repurchased |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options forfeited or canceled |
|
|
883 |
|
|
|
(883 |
) |
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs forfeited or cancelled |
|
|
407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407 |
) |
|
|
9.31 |
|
Outstanding — December 31, 2014 |
|
|
7,560 |
|
|
|
12,043 |
|
|
$ |
7.39 |
|
|
|
8.29 |
|
|
$ |
204,467 |
|
|
|
3,064 |
|
|
$ |
13.69 |
|
Options vested and expected to vest as of December 31, 2014 |
|
|
|
|
|
|
10,742 |
|
|
$ |
7.07 |
|
|
|
8.21 |
|
|
$ |
185,866 |
|
|
|
|
|
|
|
|
|
Options vested and exercisable as of December 31, 2014 |
|
|
|
|
|
|
4,293 |
|
|
$ |
3.87 |
|
|
|
7.34 |
|
|
$ |
88,025 |
|
|
|
|
|
|
|
|
|
The assumptions used to estimate the fair value of stock options granted to employees are as follows:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Expected volatility |
|
54% - 56% |
|
|
50% - 63% |
|
|
57% - 59% |
|
|||
Dividend rate |
|
|
0% |
|
|
|
0% |
|
|
|
0% |
|
Risk-free interest rate |
|
1.75% - 2.02% |
|
|
0.63% - 2.02% |
|
|
0.68% - 1.47% |
|
|||
Expected term (in years) |
|
6.02 - 6.50 |
|
|
4.47 - 6.27 |
|
|
5.28 - 6.27 |
|
The assumptions used to estimate the fair value of ESPP awards are as follows:
|
|
Year Ended December 31, 2014 |
|
|
Expected volatility |
|
45% - 49% |
|
|
Dividend rate |
|
|
0% |
|
Risk-free interest rate |
|
0.05% - 0.35% |
|
|
Expected term (in years) |
|
0.50 - 1.5 |
|
|
The components of loss before provision for income taxes are as follows (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
U.S. |
|
$ |
(66,755 |
) |
|
$ |
(23,117 |
) |
|
$ |
(24,739 |
) |
Foreign |
|
|
(923 |
) |
|
|
767 |
|
|
|
495 |
|
Total |
|
$ |
(67,678 |
) |
|
$ |
(22,350 |
) |
|
$ |
(24,244 |
) |
The income tax provision is composed of the following (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Current tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
— |
|
State |
|
|
1 |
|
|
|
37 |
|
|
|
2 |
|
Foreign |
|
|
567 |
|
|
|
189 |
|
|
|
126 |
|
|
|
|
570 |
|
|
|
226 |
|
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
— |
|
|
|
— |
|
|
|
— |
|
State |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Foreign |
|
|
(833 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
Total provision for (benefit from) income taxes |
|
$ |
(263 |
) |
|
$ |
221 |
|
|
$ |
121 |
|
Significant components of deferred tax assets are as follows (in thousands):
|
|
As of December 31, |
|
|||||
|
|
2014 |
|
|
2013 |
|
||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Tax credit carryforward |
|
$ |
197 |
|
|
$ |
15 |
|
Net operating loss carryforward |
|
|
33,878 |
|
|
|
19,278 |
|
Share-based compensation |
|
|
5,311 |
|
|
|
771 |
|
Accrued liabilities and reserves |
|
|
3,710 |
|
|
|
1,316 |
|
Other |
|
|
600 |
|
|
|
677 |
|
Total deferred tax assets |
|
|
43,696 |
|
|
|
22,057 |
|
Less: valuation allowance |
|
|
(39,496 |
) |
|
|
(19,837 |
) |
Deferred tax assets, net of valuation allowance |
|
|
4,200 |
|
|
|
2,220 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(4,597 |
) |
|
|
(2,207 |
) |
Net deferred tax assets (liabilities) |
|
$ |
(397 |
) |
|
$ |
13 |
|
The following is a reconciliation of the statutory federal income tax rate and the effective tax rates:
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
Tax at federal statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State tax provision, net of federal benefit |
|
|
— |
|
|
|
(0.2 |
) |
|
|
— |
|
Share-based compensation |
|
|
(5.5 |
) |
|
|
(4.4 |
) |
|
|
(11.1 |
) |
Valuation allowance |
|
|
(27.9 |
) |
|
|
(30.4 |
) |
|
|
(23.3 |
) |
Other |
|
|
(0.2 |
) |
|
|
— |
|
|
|
(0.1 |
) |
Effective tax rate |
|
|
0.4 |
% |
|
|
(1.0 |
%) |
|
|
(0.5 |
%) |
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows (in thousands):
Balance at December 31, 2012 |
|
$ |
1,939 |
|
Additions for tax positions related to the prior year |
|
|
— |
|
Additions for tax positions related to the current year |
|
|
1,978 |
|
Lapse of statutes of limitations |
|
|
— |
|
Balance at December 31, 2013 |
|
|
3,917 |
|
Additions for tax positions related to the prior year |
|
|
(32 |
) |
Additions for tax positions related to the current year |
|
|
2,070 |
|
Lapse of statutes of limitations |
|
|
— |
|
Balance at December 31, 2014 |
|
$ |
5,955 |
|
|
The following table presents our revenue by geographic areas as determined based on the billing address of our customers (in thousands):
|
|
Year Ended December 31, |
|
|||||||||
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|||
United States |
|
$ |
72,217 |
|
|
$ |
42,415 |
|
|
$ |
22,445 |
|
EMEA |
|
|
35,856 |
|
|
|
19,125 |
|
|
|
10,257 |
|
Other |
|
|
18,976 |
|
|
|
10,505 |
|
|
|
5,526 |
|
Total |
|
$ |
127,049 |
|
|
$ |
72,045 |
|
|
$ |
38,228 |
|
The following table presents our long-lived assets by geographic areas (in thousands):
|
|
As of |
|
|
As of |
|
||
|
|
December 31, 2014 |
|
|
December 31, 2013 |
|
||
United States |
|
$ |
22,817 |
|
|
$ |
6,466 |
|
EMEA |
|
|
4,373 |
|
|
|
2,054 |
|
Other |
|
|
1,096 |
|
|
|
135 |
|
Total |
|
$ |
28,286 |
|
|
$ |
8,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|