10-Q 1 zen-20220331.htm 10-Q zen-20220331
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UNITED STATES  
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to       
Commission File Number: 001-36456
 
ZENDESK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 26-4411091
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
  
989 Market StreetSan FranciscoCalifornia94103
(Address of principal executive offices) (Zip Code)
 
 
Registrant’s telephone number, including area code: (415418-7506
Securities registered pursuant to Section 12(b) of the Act
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareZENNew York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


YesNo
As of April 28, 2022, there were 122,543,331 shares of the registrant’s common stock outstanding.



ZENDESK, INC.
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 
Item 2
Item 3
Item 4
PART II — OTHER INFORMATION 
Item 1
Item 1A
Item 6
3

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
4

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ZENDESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 March 31,
2022
December 31,
2021
(Unaudited)
Assets  
Current assets:  
Cash and cash equivalents$496,039 $476,103 
Marketable securities602,591 539,780 
Accounts receivable, net of allowance for credit losses of $6,923 and $6,190 as of March 31, 2022 and December 31, 2021, respectively
224,146 273,898 
Deferred costs76,818 72,042 
Prepaid expenses and other current assets73,455 56,809 
Total current assets1,473,049 1,418,632 
Marketable securities, noncurrent491,682 559,652 
Property and equipment, net99,556 97,815 
Deferred costs, noncurrent74,895 72,553 
Lease right-of-use assets67,671 69,936 
Goodwill and intangible assets, net195,279 197,098 
Other assets35,595 35,593 
Total assets$2,437,727 $2,451,279 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$31,185 $49,213 
Accrued liabilities51,521 50,075 
Accrued compensation and related benefits133,368 138,127 
Deferred revenue522,532 512,933 
Lease liabilities20,503 21,253 
Current portion of convertible senior notes, net148,508 139,738 
Total current liabilities907,617 911,339 
Convertible senior notes, net1,136,378 979,350 
Deferred revenue, noncurrent3,988 4,277 
Lease liabilities, noncurrent59,180 63,212 
Other liabilities3,464 3,883 
Total liabilities2,110,627 1,962,061 
Commitments and contingencies (Note 9)
Stockholders’ equity:  
Preferred stock  
Common stock1,223 1,215 
Additional paid-in capital1,465,489 1,637,157 
Accumulated other comprehensive loss(13,537)(8,911)
Accumulated deficit(1,126,075)(1,140,243)
Total stockholders’ equity327,100 489,218 
Total liabilities and stockholders’ equity$2,437,727 $2,451,279 
See Notes to Condensed Consolidated Financial Statements.
5

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 Three Months Ended
March 31,
20222021
Revenue$388,327 $298,048 
Cost of revenue (1)
75,678 60,894 
Gross profit312,649 237,154 
Operating expenses (1):   
Research and development108,077 73,783 
Sales and marketing201,660 157,518 
General and administrative63,538 43,133 
Total operating expenses373,275 274,434 
Operating loss(60,626)(37,280)
Other income (expense), net:
Interest expense(3,121)(14,415)
Interest and other income (expense), net838 5,084 
Total other income (expense), net(2,283)(9,331)
Loss before provision for income taxes(62,909)(46,611)
Provision for income taxes4,037 2,354 
Net loss$(66,946)$(48,965)
Net loss per share, basic and diluted$(0.55)$(0.42)
Weighted-average shares used to compute net loss per share, basic and diluted121,962 117,912 
(1) Includes share-based compensation expense as follows:
 
 Three Months Ended
March 31,
20222021
Cost of revenue$6,177 $4,486 
Research and development19,287 15,673 
Sales and marketing26,800 23,232 
General and administrative11,674 8,983 
 

See Notes to Condensed Consolidated Financial Statements.

6

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 Three Months Ended
March 31,
20222021
Net loss$(66,946)$(48,965)
Other comprehensive loss:  
Net unrealized loss on available-for-sale investments(11,905)(1,975)
Net unrealized gain (loss) on derivative instruments7,327 (5,557)
Other comprehensive loss(4,578)(7,532)
Comprehensive loss$(71,524)$(56,497)

See Notes to Condensed Consolidated Financial Statements.

7

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 Three Months Ended March 31, 2022Three Months Ended March 31, 2021
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated
Deficit
Total
Stockholders’
Equity
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balances at beginning of period121,598 $1,215 $1,637,157 $(8,911)$(1,140,243)$489,218 117,489 $1,174 $1,344,337 $3,203 $(916,883)$431,831 
Cumulative effect adjustment resulting from the adoption of ASU 2020-06 (Note 1)— — (245,690)— 81,114 (164,576)— — — — — — 
Issuance of common stock upon exercise of stock options335 3 10,813 — — 10,816 208 2 3,929 — — 3,931 
Issuance of common stock for settlement of RSUs and PRSUs436 4 (1,699)— — (1,695)661 7 (2,806)— — (2,799)
Share-based compensation— — 64,908 — — 64,908 — — 53,554 — — 53,554 
Other comprehensive loss— — — (4,578)— (4,578)— — — (7,532)— (7,532)
Net loss— — — — (66,946)(66,946)— — — — (48,965)(48,965)
Other— — — (48)— (48)— — — — 223 223 
Balances at end of period122,369 $1,223 $1,465,489 $(13,537)$(1,126,075)$327,100 118,358 $1,183 $1,399,014 $(4,329)$(965,625)$430,243 


See Notes to Condensed Consolidated Financial Statements.
8

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months Ended March 31,
20222021
Cash flows from operating activities  
Net loss$(66,946)$(48,965)
Adjustments to reconcile net loss to net cash provided by operating activities  
Depreciation and amortization10,317 9,515 
Share-based compensation63,938 52,374 
Amortization of deferred costs20,325 14,757 
Amortization of debt discount and issuance costs1,221 12,525 
Allowance for credit losses on accounts receivable2,309 3,168 
Other, net 2,815 (965)
Changes in operating assets and liabilities:
Accounts receivable47,992 16,370 
Prepaid expenses and other current assets(12,574)(467)
Deferred costs(26,876)(20,984)
Lease right-of-use assets4,632 4,464 
Other assets and liabilities(488)316 
Accounts payable(17,805)5,797 
Accrued liabilities3,679 (2,078)
Accrued compensation and related benefits(22,585)(20,113)
Deferred revenue7,832 13,419 
Lease liabilities(6,574)(5,538)
Net cash provided by operating activities11,212 33,595 
Cash flows from investing activities  
Purchases of property and equipment(7,438)(3,061)
Internal-use software development costs(3,016)(4,468)
Purchases of marketable securities(166,206)(305,310)
Proceeds from maturities of marketable securities118,329 198,564 
Proceeds from sales of marketable securities39,763 36,599 
Net cash used in investing activities(18,568)(77,676)
Cash flows from financing activities  
Proceeds from exercises of employee stock options10,817 3,931 
Proceeds from employee stock purchase plan17,826 15,184 
Taxes paid related to net share settlement of share-based awards(1,694)(2,800)
Net cash provided by financing activities26,949 16,315 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(14)(8)
Net increase (decrease) in cash, cash equivalents and restricted cash19,579 (27,774)
Cash, cash equivalents and restricted cash at beginning of period477,350 407,859 
Cash, cash equivalents and restricted cash at end of period$496,929 $380,085 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets
Cash and cash equivalents$496,039 $378,363 
Restricted cash included in prepaid expenses and other current assets890 1,717 
Restricted cash included in other assets 5 
Total cash, cash equivalents and restricted cash$496,929 $380,085 
Supplemental cash flow data  
Cash paid for interest$186 $186 
Cash paid for taxes$2,719 $2,416 
Non-cash investing and financing activities  
Balance of property and equipment in accounts payable and accrued expenses$3,994 $1,078 
Share-based compensation capitalized in internal-use software development costs$402 $562 
Share-based compensation capitalized in deferred costs$567 $616 
Property and equipment acquired through tenant improvement allowances$1,208 $ 
See Notes to Condensed Consolidated Financial Statements.
9


ZENDESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Overview and Basis of Presentation
Company and Background
Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.
We are a software development company that provides software as a service, or SaaS, solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to product and platform solutions that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it’s needed most.
References to Zendesk, the “Company,” “our,” or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on February 15, 2022. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes, except for the methodology to value market-based stock awards described in footnote 10 and the accounting for convertible debt instruments described below.
The consolidated balance sheet as of December 31, 2021 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 our financial position, results of operations, comprehensive loss, stockholders’ equity, 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, 2022.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods.
Significant items subject to such estimates and assumptions include:
the estimate of variable consideration related to revenue recognition;
the estimate of credit losses for accounts receivable and marketable securities;
the fair value and useful lives of acquired intangible assets;
the capitalization and useful life of capitalized costs to obtain customer contracts;
the valuation of strategic investments;
the fair value and useful lives of property and equipment;
the capitalization and useful lives of internal-use software;
10

the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
the fair value of asset retirement obligations;
the fair value and expense recognition for certain share-based awards;
the preparation of financial forecasts used in currency hedging;
the recognition and measurement of legal contingencies; and
the recognition of tax benefits and forecasts used to determine our effective tax rate.

As of the date of issuance of the financial statements, we are not aware of any material specific events or circumstances that would require us to update our estimates, judgments, or to revise the carrying values of our assets or liabilities. These estimates may change, as new events occur and additional information is obtained, and are recognized in the consolidated financial statements as soon as they become known. Actual results could differ from those estimates and any such differences may be material to our financial statements.
Concentrations of Risk
As of March 31, 2022 and December 31, 2021, no customers represented 10% or greater of our total accounts receivable balance. There were no customers that individually exceeded 10% of our revenue during the three months ended March 31, 2022 or 2021.
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2020-06 ("ASU 2020-06"), regarding ASC Topic 470 “Debt” and ASC Topic 815 “Derivatives and Hedging,” which reduces the number of accounting models for convertible instruments, including amending the calculation of diluted earnings per share and the balance sheet presentation of those instruments, as well as the resulting recognition of interest expense, among other changes. We adopted this standard as of January 1, 2022 using the modified retrospective method.
Adoption under the modified retrospective method impacted the 2023 Notes and 2025 Notes outstanding as of January 1, 2022, and resulted in the re-combination of the liability and equity components of each instrument into a single liability instrument measured at amortized cost. As a result, at transition the Company recorded a $246 million decrease to additional paid-in-capital, net of income tax effects, to remove the equity component separately recorded for the conversion features associated with the Notes, a $165 million increase to the total carrying value of the Notes, to reflect the full principal amount of the Notes outstanding net of issuance costs, and a $81 million cumulative effect decrease to the beginning balance of accumulated deficit, net of income tax effects. Interest expense recognized in future periods will be reduced as a result of accounting for each instrument as a single liability measured at amortized cost. In addition, the ASU also requires the use of the if-converted method in calculating diluted earnings per share for convertible instruments. Since the Company had a net loss for the three months ended March 31, 2022, the convertible senior notes were determined to be anti-dilutive and therefore had no impact to basic or diluted net loss per share for the period as a result of adopting ASU 2020-06.

Note 2. Business Combinations
Cleverly, Lda.
In the third quarter of 2021, we completed the acquisition of Cleverly, Lda., or Cleverly, resulting in increases of $7 million and $1 million to goodwill and developed technology, respectively.
From the date of the acquisition, the financial results of Cleverly have been included in and are immaterial to our condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results are not material to our condensed consolidated financial statements in any period presented.
11

Note 3. Financial Instruments

Investments
The following tables present information about our financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
Fair Value Measurement at
March 31, 2022
Level 1Level 2Total
Description   
U.S. Treasury securities$ $485,959 $485,959 
Corporate bonds 420,271 420,271 
Money market funds223,448  223,448 
Asset-backed securities 93,704 93,704 
Agency securities 48,272 48,272 
Commercial paper 47,569 47,569 
Certificates of deposit and time deposits 9,396 9,396 
Total$223,448 $1,105,171 $1,328,619 
Included in cash and cash equivalents  $234,346 
Included in marketable securities  $1,094,273 
 Fair Value Measurement at
December 31, 2021
Level 1Level 2Total
Description   
U.S. Treasury securities$ $480,726 $480,726 
Corporate bonds 430,018 430,018 
Money market funds234,123  234,123 
Asset-backed securities 93,620 93,620 
Agency securities 50,057 50,057 
Commercial paper 48,950 48,950 
Certificates of deposit and time deposits 1,488 1,488 
Total$234,123 $1,104,859 $1,338,982 
Included in cash and cash equivalents  $239,550 
Included in marketable securities  $1,099,432 
 
As of March 31, 2022 and December 31, 2021, there were no securities within Level 3 of the fair value hierarchy. There were no transfers between fair value measurement levels during the three months ended March 31, 2022 or 2021.
As of March 31, 2022, gross unrealized gains and gross unrealized losses for marketable securities were not material and $14 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,342 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $947 million.
As of December 31, 2021, gross unrealized gains and gross unrealized losses for marketable securities were $1 million and $3 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,341 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $795 million.
Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of March 31, 2022 and December 31, 2021 were not material. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our marketable securities as of the end of each period. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered.
The following table classifies our marketable securities by contractual maturity (in thousands):
12

 
 March 31,
2022
December 31,
2021
Due in one year or less$602,591 $539,780 
Due after one year and within five years491,682 559,652 
Total$1,094,273 $1,099,432 
 
As of March 31, 2022 and December 31, 2021, the balance of strategic investments without readily determinable fair values was $16 million. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes.
For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
Derivative Instruments and Hedging
Our foreign currency exposures typically arise from expenditures associated with foreign operations and sales in foreign currencies of our products. To mitigate the effect of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts with certain financial institutions and designate those contracts as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
We include time value related to our cash flow hedges for effectiveness testing purposes and the entire change in the unrecognized value of our hedge contracts is recorded in accumulated other comprehensive income (loss), or AOCI. As of March 31, 2022, the balance of AOCI included an unrecognized net gain of $5 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net gain of $5 million into earnings over the next 12 months associated with our cash flow hedges.
The following tables present information about our derivative instruments on our consolidated balance sheets (in thousands):
 
 March 31, 2022
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$10,864 Accrued liabilities$7,867 
Total$10,864  $7,867 
 December 31, 2021
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$6,439 Accrued liabilities$9,422 
Total $6,439  $9,422 
 
Our foreign currency forward contracts had a total notional value of $505 million and $488 million as of March 31, 2022 and December 31, 2021, respectively. We have a master netting arrangement with each of our counterparties, which permit net settlement of multiple, separate derivative contracts with a single payment. We do not have collateral requirements with any of our counterparties. GAAP permits companies to present the fair value of derivative instruments on a net basis according to master netting arrangements. We have elected to present our derivative instruments on a gross basis in our consolidated financial statements. We do not enter into any derivative contracts for trading or speculative purposes. All derivatives have been designated as hedging instruments.
The following table presents information about our foreign currency forward contracts on our consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands):
 
13

Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended March 31,
Classification20222021
Revenue$794 $(708)
Cost of revenue(505)490 
Research and development(674)515 
Sales and marketing(1,236)1,029 
General and administrative(393)417 
 Total$(2,014)$1,743 
The gain recognized in AOCI related to foreign currency forward contracts was $5 million for the three months ended March 31, 2022. The loss recognized in AOCI related to foreign currency forward contracts was $4 million for the three months ended March 31, 2021.

The cash flow effects related to foreign currency forward contracts are included within operating activities on our consolidated statements of cash flows.
Convertible Senior Notes
As of March 31, 2022, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $287 million and $1,397 million, respectively. We estimate the fair value of our convertible senior notes based on their last traded prices or market observable inputs, resulting in a Level 2 classification in the fair value hierarchy. Based on the closing price of our common stock of $120.29 on the last trading day of the quarter, the if-converted values of the 2023 and 2025 convertible senior notes exceeded their remaining principal amounts by $135 million and $122 million, respectively, as of March 31, 2022.

Note 4. Costs to Obtain Customer Contracts
The balance of deferred costs to obtain customer contracts was $152 million and $145 million as of March 31, 2022 and December 31, 2021, respectively. Amortization expense for deferred costs was $20 million and $15 million for the three months ended March 31, 2022 and 2021, respectively. There were no impairment losses related to deferred costs for the periods presented.

Note 5. Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 March 31,
2022
December 31,
2021
Leasehold improvements$83,428 $79,661 
Capitalized internal-use software58,135 58,135 
Computer equipment and licensed software and patents42,690 41,512 
Furniture and fixtures15,265 14,627 
Construction in progress23,793 20,927 
Total223,311 214,862 
Less: accumulated depreciation and amortization(123,755)(117,047)
Property and equipment, net$99,556 $97,815 
 
Depreciation expense was $6 million for each of the three months ended March 31, 2022 and 2021.
14

Amortization expense of capitalized internal-use software was $2 million for each of the three months ended March 31, 2022 and 2021. The carrying values of capitalized internal-use software as of March 31, 2022 and December 31, 2021 were $41 million and $40 million, respectively, including $18 million and $15 million in construction in progress, respectively. These balances include $8 million and $7 million, respectively, of implementation costs incurred in hosting arrangements that are service contracts, all of which is included in construction in progress.

Note 6. Leases
The following table presents information about leases on our consolidated balance sheets (in thousands):
March 31, 2022December 31, 2021
Assets
Lease right-of-use assets$67,671 $69,936 
Liabilities
Lease liabilities20,503 21,253 
Lease liabilities, noncurrent59,180 63,212 

As of March 31, 2022, the weighted average remaining lease term was 5.6 years and the weighted average discount rate was 4.7%.
The following table presents information about leases on our consolidated statements of operations (in thousands):
Three Months Ended March 31,
20222021
Operating lease expense$5,581 $5,622 
Short-term lease expense120 128 
Variable lease expense1,432 1,218 
Sublease income(361)(440)

The following table presents supplemental cash flow information about our leases (in thousands):
Three Months Ended March 31,
20222021
Cash paid for amounts included in the measurement of lease liabilities$7,447 $6,953 
Operating lease assets obtained in exchange for new lease liabilities2,754 1,397 

Note 7. Goodwill and Acquired Intangible Assets
Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 As of March 31, 2022
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$28,000 $(14,911)$13,089 2.8
Customer relationships14,300 (8,875)5,425 3.1
 $42,300 $(23,786)$18,514  
 
15

 As of December 31, 2021
CostAccumulated
Amortization
NetWeighted Average Remaining Useful Life
   (In years)
Developed technology$28,000 $(13,734)$14,266 3.0
Customer relationships14,300 (8,233)6,067 3.2
 $42,300 $(21,967)$20,333  
 
Amortization expense of acquired intangible assets was $2 million for each of the three months ended March 31, 2022 and 2021.
Estimated future amortization expense as of March 31, 2022 is as follows (in thousands):
Remainder of 2022$5,478 
20236,579 
20244,837 
2025972 
2026488 
Thereafter160 
$18,514 
 
As of March 31, 2022 and December 31, 2021, the carrying amount of goodwill was $177 million. There was no change to the carrying amount of goodwill for the three months ended March 31, 2022.
Note 8. Convertible Senior Notes

2025 Convertible Senior Notes

In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due June 15, 2025 in a private offering, the “2025 Notes.” The 2025 Notes are senior unsecured obligations and bear interest at a fixed rate of 0.625% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. The total net proceeds from the offering, after deducting initial purchase discounts and estimated debt issuance costs, were approximately $1,129 million.

Each $1,000 principal amount of the 2025 Notes will initially be convertible into 9.1944 shares of our common stock, which is equivalent to an initial conversion price of approximately $108.76 per share, subject to adjustment upon the occurrence of specified events.

The 2025 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding March 15, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of 2025 Notes for such trading day was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the 2025 Notes for redemption, at any time prior to the close of business on the second business day immediately prior to the redemption date as discussed further below, but only with respect to the 2025 Notes called (or deemed called) for redemption; or (4) upon the occurrence of specified corporate events (as set forth in the indenture).

On or after March 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2025 Notes, in minimum denominations of $1,000 or an integral multiple in excess thereof, at the option of the holders regardless of the foregoing circumstances. Upon conversion, we will pay
16

or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

If certain specified fundamental changes occur (as set forth in the indenture) prior to the maturity date, holders of the 2025 Notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date or if we deliver a notice of redemption, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event or converts its notes called (or deemed called) for redemption in connection with such notice of redemption in certain circumstances.

During the three months ended March 31, 2022, the conditions allowing holders of the 2025 Notes to convert were not met. As the criteria for conversion were not met, the 2025 Notes are classified as a long-term liability as of March 31, 2022.

We may not redeem the 2025 Notes prior to June 20, 2023. We may redeem for cash all or any portion of the 2025 Notes, at our option, on or after June 20, 2023 and on or prior to the 41st scheduled trading day immediately preceding the maturity date, if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption, at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2025 Notes.

As described in Note 1, we adopted ASU 2020-06 effective January 1, 2022 on a modified retrospective basis, under which prior-period information was not retrospectively adjusted.

Prior to the adoption of ASU 2020-06, in accounting for the transaction, the 2025 Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The fair value of the liability component was estimated by calculating the present value of expected cash flows using an interest rate that reflects our incremental borrowing rate, with an estimated adjustment for our credit standing on nonconvertible debt with similar maturity. The carrying amount of the equity component representing the conversion option was $220 million and was determined by deducting the fair value of the liability component from the par value of the 2025 Notes. The equity component was recorded in additional paid-in capital upon issuance. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 5.00%.

Additionally, in accounting for the debt issuance costs of $21 million related to the 2025 Notes, we allocated the total amount incurred to the liability and equity components of the 2025 Notes based on their relative values. Issuance costs attributable to the liability component were $17 million and were amortized to interest expense using the effective interest method over the contractual term of the 2025 Notes. Issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

Upon adoption of ASU 2020-06 on January 1, 2022, we recombined the liability and equity components of the 2025 Notes, assuming that the instrument was accounted for as a single liability from inception to the date of adoption. We similarly recombined the liability and equity components of the issuance costs. The issuance costs are amortized to interest expense using the effective interest method over the contractual term of the 2025 Notes at an effective interest rate of 1.00%.

The net carrying amount of the liability component of the 2025 Notes is as follows (in thousands):
March 31,
2022
December 31,
2021
Principal$1,150,000 $1,150,000 
Unamortized debt discount (157,983)
Unamortized issuance costs(13,622)(12,667)
Net carrying amount$1,136,378 $979,350 


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The net carrying amount of the equity component of the 2025 Notes is as follows (in thousands):
March 31,
2022
December 31,
2021
Debt discount for conversion option$ $220,061 
Issuance costs (4,035)
Net carrying amount$ $216,026 

The interest expense related to the 2025 Notes is as follows (in thousands):
Three Months Ended March 31,
20222021
Contractual interest expense$1,797 $1,797 
Amortization of debt discount 10,029 
Amortization of issuance costs1,043 697 
Total interest expense$2,840 $12,523 

Prior to the adoption of ASU 2020-06, the difference between the book and tax treatment of the debt discount and debt issuance costs of the 2025 Notes resulted in a difference between the carrying amount and tax basis of the 2025 Notes. This taxable temporary difference resulted in the recognition of a $51 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital. The creation of the deferred tax liability represented a source of future taxable income which supported the realization of deferred tax assets. As we continued to maintain a full valuation allowance against these deferred tax assets, this additional source of income resulted in the release of a portion of the valuation allowance. Consistent with the adoption of ASU 2019-12 in the second quarter of 2020, the release of the valuation allowance of $51 million was recorded as an adjustment to additional paid-in capital. As of January 1, 2022, the unamortized balance of this net deferred tax liability was $36 million, which was derecognized upon adoption of ASU 2020-06. Both the reduction to the net deferred tax liability and the offsetting increase to our valuation allowance were recorded to additional paid-in capital.

2025 Capped Calls

In connection with the pricing of the 2025 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “2025 Capped Calls.” The 2025 Capped Calls each have an initial strike price of approximately $108.76 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2025 Notes. The 2025 Capped Calls have initial cap prices of $164.17 per share, subject to certain adjustments. The 2025 Capped Calls cover, subject to anti-dilution adjustments, approximately 10.6 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the 2025 Capped Calls are similar to the conditions that result in corresponding adjustments for the 2025 Notes. The 2025 Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the 2025 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the 2025 Capped Calls are separate transactions, and not part of the terms of the 2025 Notes. As these transactions meet certain accounting criteria, the 2025 Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $130 million incurred in connection with the 2025 Capped Calls was recorded as a reduction to additional paid-in capital.

2023 Convertible Senior Notes

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

In connection with the offering of the 2025 Notes, we used $618 million of the net proceeds from the offering of the 2025 Notes to repurchase $426 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions, the “2023 Notes Partial Repurchase.” Pursuant to ASC Subtopic 470-20 under existing accounting rules prior to adoption of ASU 2020-06, total consideration for the repurchase was separated into liability and equity components. Of the $618 million consideration, $393 million and $225 million were allocated to the debt and equity components on our consolidated balance sheets, respectively, utilizing an effective interest rate to determine the fair value of the liability component. The fair value of the liability component was estimated by calculating the present value of expected cash flows
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using an interest rate that reflects our incremental borrowing rate, with an estimated adjustment for our credit standing on nonconvertible debt with similar maturity. As of the repurchase date, the carrying value of the 2023 Notes subject to the 2023 Notes Partial Repurchase, net of unamortized debt discount and issuance costs, was $367 million. The 2023 Notes Partial Repurchase resulted in a $26 million loss on early debt extinguishment. Additionally, $39 million of the total consideration was related to repayment of the debt discount and reflected as a cash outflow from operating activities. As of March 31, 2022, $149 million of principal remains outstanding on the 2023 Notes.

Each $1,000 principal amount of the 2023 Notes will initially be convertible into 15.8554 shares of our common stock, the “Conversion Option,” which is equivalent to an initial conversion price of approximately $63.07 per share, subject to adjustment upon the occurrence of specified events.

The 2023 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 15, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, the “Measurement Period,” in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events (as set forth in the indenture). On or after December 15, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. If certain specified fundamental changes occur (as set forth in the indenture governing the 2023 Notes) prior to the maturity date, holders of the 2023 Notes may require us to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, we will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. 

During the three months ended March 31, 2022, the conditions allowing holders of the 2023 Notes to convert were met. The 2023 Notes are therefore convertible during the three months ending June 30, 2022, and are classified as a current liability as of March 31, 2022. To date, we have received one request for conversion for an immaterial amount of 2023 Notes. Prior to the adoption of ASU 2020-06 on January 1, 2022, in accounting for the issuance of the 2023 Notes, the 2023 Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the Conversion Option was $125 million and was determined by deducting the fair value of the liability component from the par value of the 2023 Notes. The equity component was recorded in additional paid-in capital. The excess of the principal amount of the liability component over its carrying amount was amortized to interest expense over the contractual term of the 2023 Notes at an effective interest rate of 5.26%.

Additionally, in accounting for the debt issuance costs of $14 million related to the 2023 Notes, we allocated the total amount incurred to the liability and equity components of the 2023 Notes based on their relative values. Issuance costs attributable to the equity component were $3 million and were netted with the equity component in additional paid-in capital. Issuance costs attributable to the liability component were amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes.

Upon adoption of ASU 2020-06, we recombined the liability and equity components of the outstanding 2023 Notes, assuming the instrument was accounted for as a single liability from inception to the date of adoption. We similarly recombined the liability and equity components of the issuance costs. The issuance costs are amortized to interest expense using the effective interest method over the contractual term of the 2023 Notes at an effective interest rate of 0.73%.

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The net carrying amount of the liability component of the 2023 Notes is as follows (in thousands):
March 31,
2022
December 31,
2021
Principal$149,194 $149,194 
Unamortized debt discount (8,641)
Unamortized issuance costs(686)(815)
Net carrying amount$148,508 $139,738 

The net carrying amount of the equity component of the 2023 Notes is as follows (in thousands):
March 31,
2022
December 31,
2021
Debt discount for conversion option$ $32,427 
Issuance costs (765)
Net carrying amount$ $31,662 

The interest expense related to the 2023 Notes is as follows (in thousands):
Three Months Ended March 31,
20222021
Contractual interest expense$93 $93 
Amortization of debt discount 1,656 
Amortization of issuance costs178 143 
Total interest expense$271 $1,892 


2023 Capped Calls

In connection with the pricing of the 2023 Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “2023 Capped Calls.” The 2023 Capped Calls each have an initial strike price of approximately $63.07 per share, subject to certain adjustments, which correspond to the initial conversion price of the 2023 Notes. The 2023 Capped Calls have initial cap prices of $95.20 per share, subject to certain adjustments. The 2023 Capped Calls covered, subject to anti-dilution adjustments, approximately 9.1 million shares of our common stock. Conditions that cause adjustments to the initial strike price of the 2023 Capped Calls mirror conditions that result in corresponding adjustments for the 2023 Notes. The 2023 Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the 2023 Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the 2023 Capped Calls are separate transactions, and not part of the terms of the 2023 Notes. As these transactions meet certain accounting criteria, the 2023 Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $64 million incurred in connection with the 2023 Capped Calls was recorded as a reduction to additional paid-in capital.

In June 2020, and in connection with the 2023 Notes Partial Repurchase, we terminated the 2023 Capped Calls corresponding to approximately 6.7 million shares for cash proceeds of $83 million. The proceeds were recorded as an increase to additional paid-in capital in the consolidated balance sheets. As of March 31, 2022, there remains outstanding 2023 Capped Calls giving the Company the option to purchase approximately 2.4 million shares (subject to adjustment).

The difference between the book and tax treatment of the debt discount, debt issuance costs, and the cost of the capped call on the 2023 Notes resulted in a difference between the carrying amount and tax basis of the 2023 Notes. This taxable temporary difference resulted in the recognition of a $14 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital. The creation of the deferred tax liability represented a source of future taxable income which supported the realization of deferred tax assets. As we continued to maintain a full valuation allowance against these deferred tax assets, this additional source of income resulted in the release of a portion of the valuation allowance and was recorded as a net income tax benefit. As of January 1, 2022, the unamortized balance of this net deferred tax liability was $2 million, which was derecognized upon adoption of ASU 2020-06. The reduction of the net deferred tax liability was recorded to additional paid-in capital and the offsetting increase to our valuation allowance was recorded to accumulated deficit under the modified retrospective approach.

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Note 9. Commitments and Contingencies
Commitments
Except as discussed below, there were no material changes in our commitments under contractual obligations as disclosed in our audited consolidated financial statements for the year ended December 31, 2021.

In February 2022, we terminated and entered into a new agreement with a cloud services provider for which we have a total obligation of $400 million over a five-year period.
Litigation and Loss Contingencies
We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. These estimates are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter.

On October 24, 2019 and November 7, 2019, purported stockholders of the Company filed two putative class action complaints in the United States District Court for the Northern District of California, entitled Charles Reidinger v. Zendesk, Inc., et al., 3:19-cv-06968-CRB and Ho v. Zendesk, Inc., et al., No. 3:19-cv-07361-WHA, respectively, against the Company and certain of the Company’s executive officers. The complaints are nearly identical and allege violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended, purportedly on behalf of all persons who purchased Zendesk, Inc. common stock between February 6, 2019 and October 1, 2019, inclusive. The claims are based upon allegations that the defendants misrepresented and/or omitted material information in certain of our prior public filings. To this point, no discovery has occurred in these cases. The court appointed a lead plaintiff and consolidated the various lawsuits into a single action (Case No. 3:19-cv-06968-CRB), and the lead plaintiff filed its amended complaint on April 14, 2020 asserting the same alleged violations of securities laws as the initial complaints. On June 29, 2020, Zendesk and the executive officer defendants moved to dismiss the amended complaint. On November 9, 2020, the court granted Zendesk's motion to dismiss and granted plaintiff leave to amend its complaint. On January 8, 2021, plaintiff filed its second amended complaint and on January 22, 2021, Zendesk and the executive officer defendants moved to dismiss the second amended complaint. On March 2, 2021, the court granted Zendesk's motion to dismiss the second amended complaint. On March 23, 2021, judgment was entered in favor of Zendesk and the executive officer defendants. On April 20, 2021, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the Ninth Circuit (the "Ninth Circuit"). On July 29, 2021, plaintiff filed its opening brief in the appeal, and on October 13, 2021, the Company and the executive officer defendants filed their answering brief. On March 2, 2022, the Ninth Circuit affirmed dismissal.

On June 2, 2020, a purported stockholder of the Company filed a derivative complaint in the United States District Court for the Northern District of California, entitled Anderson v. Svane, et al., 3:20-cv-03671, against certain of the Company’s executive officers and directors. The derivative complaint alleged breaches of fiduciary duty against all defendants, and an insider trading claim and violations of Section 10(b) of the Securities Exchange Act of 1934 against the officer defendants, purportedly on behalf of the Company itself. The claims were based on nearly identical allegations as the two putative class action complaints described above, namely that the defendants misrepresented and/or omitted material information in certain of our prior public filings. On July 27, 2020, the court ordered the derivative action related to the class action, and the derivative action was stayed pending resolution of the class action. On May 6, 2021, the court approved a joint stipulation to extend the stay pending the outcome of the appeal of the class action. On April 18, 2022, following the Ninth Circuit's affirmation of the dismissal of the class action, plaintiff filed a stipulation to dismiss the derivative action.

From time to time, we may be subject to other legal proceedings, claims, investigations, and government inquiries in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.

The outcomes of legal proceedings and other contingencies are inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows.
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Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our products or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary. To date, we have not incurred any material costs, and we have not accrued any liabilities in our consolidated financial statements, as a result of these obligations.
Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance, which permit those customers to receive credits for future services in the even