ZENDESK, INC., 10-Q filed on 11/6/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 31, 2014
Document And Entity Information [Abstract]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
ZEN 
 
Entity Registrant Name
Zendesk, Inc. 
 
Entity Central Index Key
0001463172 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
72,834,725 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current Assets:
 
 
Cash and cash equivalents
$ 80,436 
$ 53,725 
Marketable securities
29,858 
9,889 
Accounts receivable, net of allowance for doubtful accounts of $355 and $282 as of September 30, 2014 and December 31, 2013, respectively
12,858 
7,237 
Prepaid expenses and other current assets
5,255 
3,008 
Total current assets
128,407 
73,859 
Marketable securities, noncurrent
18,007 
2,225 
Property and equipment, net
40,864 
15,431 
Goodwill and intangible assets, net
15,158 
 
Other assets
1,545 
1,221 
Total assets
203,981 
92,736 
Current liabilities:
 
 
Accounts payable
5,501 
3,988 
Accrued liabilities
10,224 
4,737 
Accrued compensation and related benefits
9,661 
4,226 
Deferred revenue
45,412 
28,473 
Current portion of credit facility
3,022 
365 
Current portion of capital leases
103 
364 
Total current liabilities
73,923 
42,153 
Deferred revenue, noncurrent
1,219 
575 
Credit facility, noncurrent
4,678 
23,395 
Other liabilities
9,539 
1,520 
Total liabilities
89,359 
67,643 
Commitments and contingencies (Note 7)
   
   
Redeemable convertible preferred stock, par value $0.01 per share, issuable in series: no shares and 24.0 million shares authorized; no shares and 23.6 million shares issued and outstanding as of September 30, 2014 and December 31, 2013, respectively
 
71,369 
Stockholders’ equity (deficit):
 
 
Preferred stock, par value $0.01 per share: 5.0 million and no shares authorized as of September 30, 2014 and December 31, 2013, respectively; no shares issued and outstanding as of September 30, 2014 and December 31, 2013
   
   
Common stock, par value $0.01 per share: 400.0 million and 125.0 million shares authorized; 73.3 million and 23.7 million shares issued; 72.8 million and 23.2 million shares outstanding as of September 30, 2014 and December 31, 2013, respectively (including 0.7 million and 0.8 million shares subject to repurchase, legally issued and outstanding, as of September 30, 2014 and December 31, 2013, respectively)
721 
229 
Additional paid-in capital
228,968 
18,591 
Accumulated other comprehensive income
(39)
10 
Accumulated deficit
(114,376)
(64,454)
Treasury stock at cost (0.5 million shares as of September 30, 2014 and December 31, 2013)
(652)
(652)
Total stockholders’ equity (deficit)
114,622 
(46,276)
Total liabilities, redeemable convertible preferred stock, and stockholders’ equity (deficit)
$ 203,981 
$ 92,736 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Statement Of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 355 
$ 282 
Redeemable convertible preferred stock, par value
$ 0.01 
$ 0.01 
Redeemable convertible preferred stock, shares authorized
24,000,000 
Redeemable convertible preferred stock, shares issued
23,600,000 
Redeemable convertible preferred stock, shares outstanding
23,600,000 
Preferred stock, par value
$ 0.01 
$ 0.01 
Preferred stock, shares authorized
5,000,000 
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
400,000,000 
125,000,000 
Common stock, shares issued
73,300,000 
23,700,000 
Common stock, shares outstanding
72,800,000 
23,200,000 
Common stock shares outstanding, subject to repurchase
700,000 
800,000 
Treasury stock, shares
500,000 
500,000 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Income Statement [Abstract]
 
 
 
 
Revenue
$ 33,910 
$ 19,237 
$ 88,508 
$ 49,544 
Cost of revenue
11,684 1
6,327 1
32,410 1
16,878 1
Gross profit
22,226 
12,910 
56,098 
32,666 
Operating expenses:
 
 
 
 
Research and development
9,550 1
3,860 1
25,227 1
10,737 1
Sales and marketing
21,548 1
10,015 1
56,174 1
26,218 1
General and administrative
8,940 1
3,646 1
23,639 1
11,744 1
Total operating expenses
40,038 1
17,521 1
105,040 1
48,699 1
Operating loss
(17,812)
(4,611)
(48,942)
(16,033)
Other expense, net
(343)
(102)
(1,252)
(312)
Loss before provision for income taxes
(18,155)
(4,713)
(50,194)
(16,345)
Provision for (benefit from) income taxes
(236)
42 
(272)
120 
Net loss
(17,919)
(4,755)
(49,922)
(16,465)
Accretion of redeemable convertible preferred stock
 
(12)
(18)
(36)
Net loss attributable to common stockholders
$ (17,919)
$ (4,767)
$ (49,940)
$ (16,501)
Net loss per share attributable to common stockholders, basic and diluted
$ (0.25)
$ (0.22)
$ (1.08)
$ (0.77)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted
71,732 
22,024 
46,110 
21,486 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Cost of Revenue
 
 
 
 
Share-based compensation expense
$ 591 
$ 77 
$ 1,691 
$ 177 
Research and Development
 
 
 
 
Share-based compensation expense
3,052 
196 
7,530 
422 
Sales and Marketing
 
 
 
 
Share-based compensation expense
4,877 
338 
8,635 
726 
General and Administrative
 
 
 
 
Share-based compensation expense
$ 2,298 
$ 264 
$ 5,769 
$ 2,419 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (17,919)
$ (4,755)
$ (49,922)
$ (16,465)
Other comprehensive loss, net of tax:
 
 
 
 
Net change in unrealized gain (loss) on available-for-sale investments
(58)
21 
(66)
 
Foreign currency translation gain (loss)
(303)
 
17 
 
Comprehensive loss
$ (18,280)
$ (4,734)
$ (49,971)
$ (16,465)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities
 
 
Net loss
$ (49,922,000)
$ (16,465,000)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
7,673,000 
3,591,000 
Share-based compensation
23,625,000 
3,744,000 
Other
331,000 
144,000 
Changes in operating assets and liabilities:
 
 
Accounts receivable
(5,104,000)
(3,122,000)
Prepaid expenses and other current assets
(1,960,000)
(1,504,000)
Other assets and liabilities
1,321,000 
268,000 
Accounts payable
591,000 
955,000 
Accrued liabilities
922,000 
963,000 
Accrued compensation and related benefits
5,215,000 
1,812,000 
Deferred revenue
17,290,000 
10,537,000 
Net cash provided (used) in operating activities
(18,000)
923,000 
Cash flows from investing activities
 
 
Purchases of property and equipment
(19,121,000)
(5,650,000)
Internal-use software development costs
(6,268,000)
(3,556,000)
Purchases of marketable securities
(43,006,000)
(12,409,000)
Proceeds from maturities of marketable securities
6,950,000 
 
Cash paid for the acquisition of Zopim, net of cash acquired
(1,896,000)
 
Net cash used in investing activities
(63,341,000)
(21,615,000)
Cash flows from financing activities
 
 
Proceeds from initial public offering, net of issuance costs
103,110,000 
 
Proceeds from exercise of employee stock options
5,091,000 
628,000 
Proceeds from issuance of debt
3,940,000 
1,000,000 
Principal payments on debt
(20,000,000)
 
Taxes paid related to net share settlement of equity awards
(1,750,000)
 
Principal payments on capital lease obligations
(271,000)
(251,000)
Net cash provided by financing activities
90,120,000 
1,377,000 
Effect of exchange rate changes on cash and cash equivalents
(50,000)
(7,000)
Net increase (decrease) in cash and cash equivalents
26,711,000 
(19,322,000)
Cash and cash equivalents at the beginning of period
53,725,000 
48,688,000 
Cash and cash equivalents at the end of period
80,436,000 
29,366,000 
Supplemental cash flow data:
 
 
Cash paid for interest and income taxes
930,000 
142,000 
Non-cash investing and financing activities:
 
 
Issuance of common stock for the acquisition of Zopim
10,893,000 
 
Purchases of property and equipment in accounts payable and accrued expenses
998,000 
13,000 
Property and equipment acquired through tenant improvement allowances
3,932,000 
 
Share-based compensation capitalized in internal-use software development costs
1,856,000 
118,000 
Vesting of early exercised stock options
$ 1,196,000 
$ 680,000 
Overview and Basis of Presentation
Overview and Basis of Presentation

Note 1. Overview and Basis of Presentation

Company and Background

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

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

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

Basis of Presentation

These unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our final prospectus filed with the SEC on May 16, 2014 pursuant to Rule 424(b) of the Securities Act of 1933, as amended. There have been no changes to our significant accounting policies described in the prospectus that have had a material impact on our condensed consolidated financial statements and related notes.

The consolidated balance sheet as of December 31, 2013 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly the financial position, results of operations, our comprehensive loss and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2014.

Initial Public Offering and Share-based Compensation

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.

All restricted stock units, or 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 the Performance Awards is satisfied over three or four years. The performance condition was satisfied upon the effectiveness of the registration statement related to our IPO. No share-based compensation expense had been recognized for the Performance Awards prior to the IPO. 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 three and nine months ended September 30, 2014, share-based compensation expense related to the Performance Awards recognized was $2.9 million and $9.0 million, respectively, 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 September 30, 2014, we had a total of $74.5 million future period share-based compensation expense related to all equity awards, net of estimated forfeitures, to be recognized over a weighted average period of 3.6 years.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of acquired intangible assets, goodwill, unrecognized tax benefits, useful lives of 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.

Concentrations of Risk

At September 30, 2014, there was one customer represented 17% of our total accounts receivable balance.  At December 31, 2013, there were no customers that represented more than 10% of our accounts receivable balance.  There were no customers that individually exceeded 10% of our revenue during the three and nine months ended September 30, 2014.

Recently Issued and Adopted Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. 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.

 

Acquisition
Acquisition

Note 2. Acquisition

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. The fair value of assets acquired and liabilities assumed was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. The primary areas of those preliminary estimates that are not yet finalized relate to accrued liabilities and income and non-income based tax liabilities. During the nine months ended September 30, 2014, we made adjustments of $0.2 million to the preliminary purchase price allocation related to final working capital acquired.  No adjustments were made to the preliminary purchase price during the three months ended September 30, 2014.  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.  Of the total purchase price, $9.6 million was allocated to goodwill, $6.6 million to identifiable intangible assets, and $0.4 million to net liabilities assumed. 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.  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.  

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, and 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.

 

 

Fair Value Measurements
Fair Value Measurements

Note 3. Fair Value Measurements

The following tables present information about our financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):

 

 

Fair Value Measurement at

 

 

September 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

 

41,140

 

 

$

41,140

 

Money market funds

 

24,820

 

 

 

 

 

 

24,820

 

U.S. treasury securities

 

 

 

 

2,998

 

 

 

2,998

 

Asset-backed securities

 

 

 

 

2,026

 

 

 

2,026

 

U.S. agency obligations

 

 

 

 

1,002

 

 

 

1,002

 

Commercial paper

 

 

 

 

699

 

 

 

699

 

Total

$

24,820

 

 

$

47,865

 

 

$

72,685

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

$

24,820

 

Included in marketable securities

 

 

 

 

 

 

 

 

$

47,865

 

 

 

 

 

Fair Value Measurement at

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

$

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

 

 

Gross unrealized gains or losses for cash equivalents and available-for-sale marketable securities as of September 30, 2014 and December 31, 2013 were not material. As of September 30, 2014 and December 31, 2013, there were no securities that were in an unrealized loss position for more than 12 months.

The following table classifies our available-for-sale marketable securities by contractual maturities as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Due in one year

$

29,858

 

 

$

9,889

 

Due in one to five years

 

18,007

 

 

 

2,225

 

Total

$

47,865

 

 

$

12,114

 

 

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.

There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2014.

 

Property and Equipment
Property and Equipment

Note 4. Property and Equipment

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

 

 

September 30,

2014

 

 

December 31,

2013

 

Capitalized internal-use software

$

14,453

 

 

$

11,104

 

Furniture and fixtures

 

4,440

 

 

 

1,383

 

Hosting equipment

 

12,423

 

 

 

7,931

 

Computer equipment and software

 

3,898

 

 

 

1,680

 

Leasehold improvements

 

14,871

 

 

 

1,717

 

Construction in progress

 

6,198

 

 

 

341

 

Total

 

56,283

 

 

 

24,156

 

Less accumulated depreciation and amortization

 

(15,419

)

 

 

(8,725

)

Property and equipment, net

$

40,864

 

 

$

15,431

 

 

Depreciation expense was $1.7 million and $0.8 million for the three months ended September 30, 2014 and 2013, respectively, and $4.0 million and $1.9 million for the nine months ended September 30, 2014 and 2013, respectively.

We capitalized $3.1 million and $1.3 million in internal-use software during the three months ended September 30, 2014 and 2013, respectively, and $8.1 million and $3.7 million during the nine months ended September 30, 2014 and 2013, respectively. Included in the capitalized development costs are $0.8 million and $33,000 in share-based compensation costs for the three months ended September 30, 2014 and 2013, respectively, and $1.9 and $0.1 million for the nine months ended September 30, 2014 and 2013, respectively. Amortization expense of capitalized internal-use software totaled $0.9 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and $2.6 million and $1.6 million for the nine months ended September 30, 2014 and 2013, respectively. The net carrying value of capitalized internal-use software at September 30, 2014 and December 31, 2013 was $12.3 million and $6.8 million, respectively, including $5.1 million and $0.3 million in construction in progress, respectively.

Goodwill and Purchased Intangible Assets
Goodwill and Purchased Intangible Assets

Note 5. Goodwill and Purchased Intangible Assets

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows (in thousands):

 

Balance as of December 31, 2013

$

 

Goodwill acquired

 

9,373

 

Goodwill adjustments

 

216

 

Balance as of September 30, 2014

$

9,589

 

 

Purchased intangible assets subject to amortization as of September 30, 2014 consist of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

$

5,200

 

 

$

(787

)

 

$

4,413

 

 

 

3.0

 

Customer relationships

 

1,300

 

 

 

(172

)

 

 

1,128

 

 

 

3.5

 

Trade name

 

60

 

 

 

(32

)

 

 

28

 

 

 

0.5

 

 

$

6,560

 

 

$

(991

)

 

$

5,569

 

 

 

 

 

 

Amortization expense of purchased intangible assets for the three and nine months ended September 30, 2014 was $0.5 million and $1.0 million, respectively. No amortization expense was recorded for the three and nine months ended September 30, 2013.

Estimated future amortization expense as of September 30, 2014 is as follows (in thousands):

 

Remainder of 2014

$

471

 

2015

 

1,823

 

2016

 

1,810

 

2017

 

1,393

 

2018

 

72

 

2019 and thereafter

 

 

 

$

5,569

 

 

 

Credit Facility
Credit Facility

Note 6. 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 September 30, 2014 there was no balance outstanding.  As of September 30, 2014 and December 31, 2013, outstanding balance under the equipment line of credit was $7.7 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 of 3.25% as of September 30, 2014. 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 pursuant to 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 September 30, 2014 and December 31, 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):

 

2014 (remaining 3 months)

$

749

 

2015

 

3,041

 

2016

 

3,118

 

2017

 

792

 

2018 and thereafter

 

 

 

$

7,700

 

 

Commitments and Contingencies
Commitments and Contingencies

Note 7. Commitments and Contingencies

Leases

We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Rent expense was $1.7 million and $0.6 million for the three months ended September 30, 2014 and 2013, respectively, and $5.2 million and $1.5 million for the nine months ended September 30, 2014 and 2013, respectively. Deferred rent of $7.4 million and $1.0 million as of September 30, 2014 and December 31, 2013, respectively, is included in other liabilities.  

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 $0.1 million and $0.4 million as of September 30, 2014 and December 31, 2013, respectively. Accumulated depreciation on the leased assets was $0.9 million and $0.7 million as of September 30, 2014 and December 31, 2013, respectively. Depreciation of assets recorded under the capital leases is included in depreciation expense.

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.

Common Stock and Stockholders' Equity (Deficit)
Common Stock and Stockholders' Equity (Deficit)

Note 8. 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 an amendment of our sixth amended and restated certificate of incorporation, as amended to effect a one-for-two reverse stock split of our common stock and a corresponding adjustment to the conversion prices of our redeemable convertible preferred stock. All share and per share information and the conversion prices of each outstanding series of our redeemable convertible preferred stock referenced throughout the condensed consolidated financial statements and notes to the condensed consolidated financial statements have been retroactively adjusted to reflect this stock split.

Common Stock Authorized

Upon the completion of the IPO, we increased the amount of common stock authorized for issuance from 125 million to 400 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 will automatically increase 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.

2009 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.

2014 Stock Option and Grant Plan

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 will automatically increase 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.

The following table summarizes our stock option and RSU award activities for the nine months ended September 30, 2014 (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

 

 

 

 

 

 

 

 

 

 

 

811

 

 

$

6.76

 

Increase in authorized shares

 

13,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted

 

(6,008

)

 

 

6,008

 

 

 

10.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

(2,643

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,643

 

 

 

13.24

 

Stock options exercised

 

 

 

 

(1,264

)

 

 

2.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(234

)

 

 

8.64

 

Stock options forfeited or canceled

 

664

 

 

 

(664

)

 

 

3.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs forfeited or cancelled

 

276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(276

)

 

 

8.37

 

Outstanding —September 30, 2014

 

7,893

 

 

 

14,214

 

 

$

6.24

 

 

 

8.30

 

 

$

218,185

 

 

 

2,944

 

 

$

12.29

 

 

Aggregate intrinsic value represents the difference between the Company's closing stock price of its common stock and the exercise price of outstanding, in-the-money options. The Company’s closing stock price as reported on the New York Stock Exchange as of September 30, 2014 was $21.59.

During the three and nine months ended September 30, 2014 we recorded $2.8 million and $4.3 million share-based compensation expense, respectively, related to the accelerated vesting of certain stock options and RSUs.

Early Exercise of Stock Options and Purchase of Unvested Stock Awards

Certain of our stock options permit early exercise. Common stock purchased pursuant to an early exercise of stock options or unvested stock awards is not deemed to be outstanding for financial reporting purposes until those shares vest. Therefore, cash received in exchange for unvested shares is recorded as a liability and is transferred into common stock and additional paid-in capital as the shares vest. Upon termination of service, we may, at our discretion, repurchase unvested shares acquired through early exercise of stock options or purchase of unvested stock awards at a price equal to the price per share paid upon the exercise of such options or the purchase of such unvested stock awards. As of September 30, 2014 and December 31, 2013, there were 0.7 million and 0.8 million shares, respectively, outstanding as a result of the early exercise of stock options and purchase of unvested stock awards that were classified as accrued liabilities for an aggregated amount of $2.4 million and $1.4 million, respectively.   There were no repurchases during the three and nine months ended September 30, 2014.

 

Net Loss per Share
Net Loss per Share

Note 9. Net Loss Per Share

We compute net loss per share of common stock in conformity with the two-class method required for participating securities. We considered all series of the redeemable convertible preferred stock to be participating securities as the holders of the preferred stock were entitled to receive a non-cumulative dividend on a pari passu basis in the event that a dividend is paid on common stock. We also consider shares of common stock issued upon the early exercise of stock options subject to repurchase to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is paid on common stock. The holders of all series of the redeemable convertible preferred stock and the holders of shares of common stock acquired upon early exercise of stock options do not have a contractual obligation to share in our losses. As such, our net losses for the three and nine months ended September 30, 2014 and 2013 were not allocated to these participating securities. Upon the closing of the IPO in May 2014, all shares of our then-outstanding redeemable convertible preferred stock automatically converted into our common stock.  

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period, less the weighted-average unvested common stock subject to repurchase. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including common stock issuable upon conversion of the redeemable convertible preferred stock, outstanding share-based awards, and outstanding warrants, to the extent dilutive. Basic and diluted net loss per share was the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

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

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net loss

$

(17,919

)

 

$

(4,755

)

 

$

(49,922

)

 

$

(16,465

)

Less: Accretion of redeemable convertible preferred stock

 

 

 

 

(12

)

 

 

(18

)

 

 

(36

)

Net loss attributable to common stockholders

$

(17,919

)

 

$

(4,767

)

 

$

(49,940

)

 

$

(16,501

)

Basic shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

71,732

 

 

 

22,024

 

 

 

46,110

 

 

 

21,486

 

Diluted shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

71,732

 

 

 

22,024

 

 

 

46,110

 

 

 

21,486

 

Net loss per share attributable to common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

$

(0.25

)

 

$

(0.22

)

 

$

(1.08

)

 

$

(0.77

)

 

The anti-dilutive securities excluded from the shares used to calculate the diluted net loss per share are as follows (in thousands):

 

 

As of September 30,

 

 

2014

 

 

2013

 

Redeemable convertible preferred stock

 

 

 

 

34,323

 

Shares subject to outstanding common stock options

 

14,214

 

 

 

10,351

 

Shares subject to common stock warrants

 

 

 

 

125

 

Restricted stock units

 

2,944

 

 

 

554

 

 

 

17,158

 

 

 

45,353

 

 

Income Taxes
Income Taxes

Note 10. Income Taxes

The effective tax rates for the three and nine months ended September 30, 2014 and 2013 were one percent. The effective tax rate differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.  The tax benefit recorded for the three and nine months ended September 30, 2014 is primarily due to recognizing deferred tax assets in foreign jurisdictions for losses and research credits. There were no material changes to the unrecognized tax benefits in the three and nine months ended September 30, 2014 and 2013.

Geographic Information
Geographic Information

Note 11. Geographic Information

Our chief operating decision maker reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reporting segment.

Revenue

The following table presents our revenue by geographic areas, as determined based on the billing address of our customers (in thousands):

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

United States

$

19,031

 

 

$

11,432

 

 

$

50,774

 

 

$

29,000

 

EMEA

 

9,704

 

 

 

4,993

 

 

 

24,565

 

 

 

13,236

 

Other

 

5,175

 

 

 

2,812

 

 

 

13,169

 

 

 

7,308

 

Total

$

33,910

 

 

$

19,237

 

 

$

88,508

 

 

$

49,544

 

 

Long-Lived Assets

The following table presents our long-lived assets by geographic areas (in thousands):

 

 

As of

 

 

As of

 

 

September 30, 2014

 

 

December 31, 2013

 

United States

$

23,396

 

 

$

6,466

 

EMEA

 

4,683

 

 

 

2,054

 

Other

 

532

 

 

 

135

 

Total

$

28,611

 

 

$

8,655

 

 

The carrying value of capitalized internal-use software and intangible assets is excluded from the balance of long-lived assets presented in the table above.

Overview and Basis of Presentation (Policies)

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include the fair value of share-based awards, fair value of acquired intangible assets, goodwill, unrecognized tax benefits, useful lives of 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.

Concentrations of Risk

At September 30, 2014, there was one customer represented 17% of our total accounts receivable balance.  At December 31, 2013, there were no customers that represented more than 10% of our accounts receivable balance.  There were no customers that individually exceeded 10% of our revenue during the three and nine months ended September 30, 2014.

Recently Issued and Adopted Accounting Pronouncements

On May 28, 2014, the FASB issued ASU 2014-09 regarding ASC Topic 606 “Revenue from Contracts with Customers.” This ASU provides principles for recognizing revenue to which an entity expects to be entitled for the transfer of promised goods or services to customers. 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.

Fair Value Measurements (Tables)

The following tables present information about our financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013 based on the three-tier fair value hierarchy (in thousands):

 

 

Fair Value Measurement at

 

 

September 30, 2014

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

 

41,140

 

 

$

41,140

 

Money market funds

 

24,820

 

 

 

 

 

 

24,820

 

U.S. treasury securities

 

 

 

 

2,998

 

 

 

2,998

 

Asset-backed securities

 

 

 

 

2,026

 

 

 

2,026

 

U.S. agency obligations

 

 

 

 

1,002

 

 

 

1,002

 

Commercial paper

 

 

 

 

699

 

 

 

699

 

Total

$

24,820

 

 

$

47,865

 

 

$

72,685

 

Included in cash and cash equivalents

 

 

 

 

 

 

 

 

$

24,820

 

Included in marketable securities

 

 

 

 

 

 

 

 

$

47,865

 

 

 

 

 

Fair Value Measurement at

 

 

December 31, 2013

 

 

Level 1

 

 

Level 2

 

 

Total

 

Description

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

 

 

$

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 available-for-sale marketable securities by contractual maturities as of September 30, 2014 and December 31, 2013 (in thousands):

 

 

September 30,

2014

 

 

December 31,

2013

 

Due in one year

$

29,858

 

 

$

9,889

 

Due in one to five years

 

18,007

 

 

 

2,225

 

Total

$

47,865

 

 

$

12,114

 

 

Property and Equipment (Tables)
Components of Property and Equipment

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

 

 

September 30,

2014

 

 

December 31,

2013

 

Capitalized internal-use software

$

14,453

 

 

$

11,104

 

Furniture and fixtures

 

4,440

 

 

 

1,383

 

Hosting equipment

 

12,423

 

 

 

7,931

 

Computer equipment and software

 

3,898

 

 

 

1,680

 

Leasehold improvements

 

14,871

 

 

 

1,717

 

Construction in progress

 

6,198

 

 

 

341

 

Total

 

56,283

 

 

 

24,156

 

Less accumulated depreciation and amortization

 

(15,419

)

 

 

(8,725

)

Property and equipment, net

$

40,864

 

 

$

15,431

 

 

Goodwill and Purchased Intangible Assets (Tables)

The changes in the carrying amount of goodwill for the nine months ended September 30, 2014 are as follows (in thousands):

 

Balance as of December 31, 2013

$

 

Goodwill acquired

 

9,373

 

Goodwill adjustments

 

216

 

Balance as of September 30, 2014

$

9,589

 

 

Purchased intangible assets subject to amortization as of September 30, 2014 consist of the following (in thousands). No purchased intangible assets were recorded as of December 31, 2013.

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Remaining Useful Life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In years)

 

Developed technology

$

5,200

 

 

$

(787

)

 

$

4,413

 

 

 

3.0

 

Customer relationships

 

1,300

 

 

 

(172

)

 

 

1,128

 

 

 

3.5

 

Trade name

 

60

 

 

 

(32

)

 

 

28

 

 

 

0.5

 

 

$

6,560

 

 

$

(991

)

 

$

5,569

 

 

 

 

 

 

Estimated future amortization expense as of September 30, 2014 is as follows (in thousands):

 

Remainder of 2014

$

471

 

2015

 

1,823

 

2016

 

1,810

 

2017

 

1,393

 

2018

 

72

 

2019 and thereafter

 

 

 

$

5,569

 

 

 

Credit Facility (Tables)
Schedule of Contractual Future Principal Repayments in Relation to Credit Facility

Contractual future principal repayments in relation to the credit facility are as follows for the year ending December 31 (in thousands):

 

2014 (remaining 3 months)

$

749

 

2015

 

3,041

 

2016

 

3,118

 

2017

 

792

 

2018 and thereafter

 

 

 

$

7,700

 

 

Common Stock and Stockholders' Equity (Deficit) (Tables)
Summary of Stock Option and RSU Award Activity

The following table summarizes our stock option and RSU award activities for the nine months ended September 30, 2014 (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

 

 

 

 

 

 

 

 

 

 

 

811

 

 

$

6.76

 

Increase in authorized shares

 

13,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options granted

 

(6,008

)

 

 

6,008

 

 

 

10.85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs granted

 

(2,643

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,643

 

 

 

13.24

 

Stock options exercised

 

 

 

 

(1,264

)

 

 

2.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs vested

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(234

)

 

 

8.64

 

Stock options forfeited or canceled

 

664

 

 

 

(664

)

 

 

3.60