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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 September 30, 2021
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 October 29, 2021, there were 120,888,142 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)
 
 September 30,
2021
December 31,
2020
(Unaudited)
Assets  
Current assets:  
Cash and cash equivalents$532,517 $405,430 
Marketable securities421,328 565,593 
Accounts receivable, net of allowance for credit losses of $4,702 and $5,787 as of September 30, 2021 and December 31, 2020, respectively
187,460 199,243 
Deferred costs66,282 51,878 
Prepaid expenses and other current assets61,769 53,829 
Total current assets1,269,356 1,275,973 
Marketable securities, noncurrent591,153 428,678 
Property and equipment, net93,523 94,208 
Deferred costs, noncurrent67,448 52,731 
Lease right-of-use assets73,094 84,013 
Goodwill and intangible assets, net198,946 196,218 
Other assets27,720 25,458 
Total assets$2,321,240 $2,157,279 
Liabilities and stockholders’ equity  
Current liabilities:  
Accounts payable$33,535 $15,428 
Accrued liabilities45,401 38,921 
Accrued compensation and related benefits128,280 103,437 
Deferred revenue444,373 378,935 
Lease liabilities20,201 23,533 
Current portion of convertible senior notes, net137,861 132,388 
Total current liabilities809,651 692,642 
Convertible senior notes, net968,188 935,576 
Deferred revenue, noncurrent3,696 4,423 
Lease liabilities, noncurrent66,733 85,275 
Other liabilities4,696 7,532 
Total liabilities1,852,964 1,725,448 
Commitments and contingencies (Note 9)
Stockholders’ equity:  
Preferred stock  
Common stock1,204 1,174 
Additional paid-in capital1,553,846 1,344,337 
Accumulated other comprehensive (loss) income(8,385)3,203 
Accumulated deficit(1,078,389)(916,883)
Total stockholders’ equity468,276 431,831 
Total liabilities and stockholders’ equity$2,321,240 $2,157,279 
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
September 30,
Nine Months Ended
September 30,
2021202020212020
Revenue$346,974 $261,926 $963,238 $746,066 
Cost of revenue (1)
70,226 62,819 197,863 184,036 
Gross profit276,748 199,107 765,375 562,030 
Operating expenses (1):     
Research and development92,112 64,842 248,721 184,266 
Sales and marketing172,828 123,737 495,596 369,442 
General and administrative50,716 38,854 139,667 109,427 
Total operating expenses315,656 227,433 883,984 663,135 
Operating loss(38,908)(28,326)(118,609)(101,105)
Other income (expense), net:
Interest expense(14,762)(14,087)(43,768)(29,060)
Loss on early extinguishment of debt   (25,950)
Interest and other income (expense), net2,386 3,683 8,430 12,750 
Total other income (expense), net(12,376)(10,404)(35,338)(42,260)
Loss before provision for income taxes(51,284)(38,730)(153,947)(143,365)
Provision for income taxes3,133 1,973 7,842 4,777 
Net loss$(54,417)$(40,703)$(161,789)$(148,142)
Net loss per share, basic and diluted$(0.45)$(0.35)$(1.36)$(1.29)
Weighted-average shares used to compute net loss per share, basic and diluted120,164 115,809 119,050 114,653 
(1) Includes share-based compensation expense as follows:
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Cost of revenue$5,343 $4,831 $15,047 $15,077 
Research and development17,189 13,921 49,886 39,076 
Sales and marketing24,915 19,335 72,648 53,467 
General and administrative12,086 8,176 31,020 24,437 
 

See Notes to Condensed Consolidated Financial Statements.

6

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 Three Months Ended
September 30,
Nine Months Ended
September 30,
2021202020212020
Net loss$(54,417)$(40,703)$(161,789)$(148,142)
Other comprehensive (loss) income, before tax:    
Net unrealized (loss) gain on available-for-sale investments(863)(1,361)(3,664)2,817 
Net unrealized (loss) gain on derivative instruments(2,354)388 (7,972)(848)
Other comprehensive (loss) income, before tax(3,217)(973)(11,636)1,969 
Tax effect 699   
Other comprehensive (loss) income, net of tax(3,217)(274)(11,636)1,969 
Comprehensive loss$(57,634)$(40,977)$(173,425)$(146,173)

See Notes to Condensed Consolidated Financial Statements.

7

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 Three Months Ended September 30, 2021Three Months Ended September 30, 2020
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Loss
Accumulated
Deficit
Total
Stockholders’
Equity
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balances at beginning of period119,789 $1,197 $1,492,117 $(5,216)$(1,023,971)$464,127 115,186 $1,150 $1,212,471 $2,834 $(806,145)$410,310 
Issuance of common stock upon exercise of stock options212 2 3,752 — — 3,754 577 6 15,483 — — 15,489 
Issuance of common stock for settlement of RSUs and PRSUs521 5 (2,642)— — (2,637)700 8 (1,998)— — (1,990)
Share-based compensation— — 60,619 — — 60,619 — — 47,271 — — 47,271 
Other comprehensive loss, net of tax— — — (3,217)— (3,217)— — — (274)— (274)
Net loss— — — — (54,417)(54,417)— — — — (40,703)(40,703)
Other— — — 48 (1)47 — — 15 — — 15 
Balances at end of period120,522 $1,204 $1,553,846 $(8,385)$(1,078,389)$468,276 116,463 $1,164 $1,273,242 $2,560 $(846,848)$430,119 


Nine Months Ended September 30, 2021Nine Months Ended September 30, 2020
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive Income
Accumulated DeficitTotal
Stockholders’
Equity
SharesAmountSharesAmount
Balances at beginning of period117,489 $1,174 $1,344,337 $3,203 $(916,883)$431,831 113,081 $1,130 $1,155,044 $591 $(698,781)$457,984 
Issuance of common stock upon exercise of stock options820 8 18,881 — — 18,889 911 9 24,582 — — 24,591 
Issuance of common stock for settlement of RSUs and PRSUs1,833 18 (8,958)— — (8,940)2,118 21 (6,150)— — (6,129)
Issuance of common stock in connection with employee stock purchase plan380 4 27,651 — — 27,655 353 4 19,948 — — 19,952 
Share-based compensation— — 171,935 — — 171,935 — — 135,326 — — 135,326 
Equity component of 2025 convertible senior notes— — — — — — — — 216,026 — — 216,026 
Purchase of capped calls related to 2025 convertible senior notes— — — — — — — — (129,950)— — (129,950)
Equity component of partial repurchase of 2023 convertible senior notes— — — — — — — — (224,639)— — (224,639)
Proceeds from capped calls related to 2023 convertible senior notes— — — — — — — — 83,040 — — 83,040 
Other comprehensive (loss) income, net of tax— — — (11,636)— (11,636)— — — 1,969 — 1,969 
Net loss— — — — (161,789)(161,789)— — — — (148,142)(148,142)
Other— — — 48 283 331 — — 15 — 75 90 
Balances at end of period120,522 $1,204 $1,553,846 $(8,385)$(1,078,389)$468,276 116,463 $1,164 $1,273,242 $2,560 $(846,848)$430,119 
See Notes to Condensed Consolidated Financial Statements.
8

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months Ended September 30,
20212020
Cash flows from operating activities  
Net loss$(161,789)$(148,142)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities  
Depreciation and amortization27,953 32,602 
Share-based compensation168,601 132,057 
Amortization of deferred costs48,739 32,390 
Amortization of debt discount and issuance costs38,085 26,230 
Loss on early extinguishment of debt 25,950 
Repayment of convertible senior notes attributable to debt discount (38,637)
Allowance for credit losses on accounts receivable6,199 8,450 
Other, net 1,241 (2,315)
Changes in operating assets and liabilities:
Accounts receivable3,733 (33,035)
Prepaid expenses and other current assets(9,385)(3,116)
Deferred costs(75,846)(47,292)
Lease right-of-use assets12,876 15,472 
Other assets and liabilities(3,888)(1,022)
Accounts payable18,304 (26,208)
Accrued liabilities1,349 1,569 
Accrued compensation and related benefits16,059 18,252 
Deferred revenue64,710 4,369 
Lease liabilities(22,658)(17,503)
Net cash provided by (used in) operating activities134,283 (19,929)
Cash flows from investing activities  
Purchases of property and equipment(11,030)(19,489)
Internal-use software development costs(10,837)(10,901)
Purchases of marketable securities(718,636)(701,367)
Proceeds from maturities of marketable securities590,588 281,476 
Proceeds from sales of marketable securities101,995 105,506 
Business combinations, net of cash acquired(7,811) 
Purchases of strategic investments(1,000)(1,500)
Proceeds from sales of strategic investments1,008 1,577 
Net cash used in investing activities(55,723)(344,698)
Cash flows from financing activities  
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $21,010
 1,128,990 
Purchase of capped calls related to 2025 convertible senior notes (129,950)
Payments for 2023 convertible senior notes partial repurchase (578,973)
Proceeds from capped calls related to 2023 convertible senior notes 83,040 
Proceeds from exercises of employee stock options18,889 24,591 
Proceeds from employee stock purchase plan37,136 28,913 
Taxes paid related to net share settlement of share-based awards(8,940)(6,127)
Net cash provided by financing activities47,085 550,484 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(33)237 
Net increase in cash, cash equivalents and restricted cash125,612 186,094 
Cash, cash equivalents and restricted cash at beginning of period407,859 199,905 
Cash, cash equivalents and restricted cash at end of period$533,471 $385,999 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets
Cash and cash equivalents$532,517 $383,318 
Restricted cash included in prepaid expenses and other current assets949 1,957 
Restricted cash included in other assets5 724 
Total cash, cash equivalents and restricted cash$533,471 $385,999 
Supplemental cash flow data  
Cash paid for interest$3,967 $1,174 
Cash paid for taxes$7,940 $3,093 
Non-cash investing and financing activities  
Balance of property and equipment in accounts payable and accrued expenses$1,069 $1,642 
Share-based compensation capitalized in internal-use software development costs$1,317 $2,536 
Share-based compensation capitalized in deferred costs$2,013 $1,229 
Property and equipment acquired through tenant improvement allowances$429 $110 

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, 2020, filed with the SEC on February 12, 2021. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.
The consolidated balance sheet as of December 31, 2020 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, 2021.
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;
the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
10

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 September 30, 2021 and December 31, 2020, 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 and nine months ended September 30, 2021 or 2020.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board, or FASB, issued 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. The guidance is effective for annual reporting periods beginning after December 15, 2021, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
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.
Pending Acquisition
On October 28, 2021, we entered into a definitive agreement to acquire Momentive Global Inc., or Momentive, an experience management company that offers SaaS feedback solutions. Under the terms of the agreement, each issued and outstanding share of Momentive common stock will be converted into the right to receive 0.225 shares of Zendesk common stock. The agreement also provides for Zendesk’s assumption of outstanding options and other unvested equity awards held by continuing Momentive employees.
The transaction, which is anticipated to close in the first half of calendar year 2022, is subject to approval by Zendesk and Momentive stockholders, the receipt of required regulatory approvals, and other customary closing conditions. A fee of up to $150 million may be payable by Zendesk or by Momentive upon termination of the transaction, as more fully described in the agreement.
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):
11

Fair Value Measurement at
September 30, 2021
Level 1Level 2Total
Description   
Corporate bonds$ $413,386 $413,386 
U.S. Treasury securities 401,614 401,614 
Money market funds279,370  279,370 
Asset-backed securities 104,765 104,765 
Agency securities 51,684 51,684 
Commercial paper 33,687 33,687 
Certificates of deposit and time deposits 7,345 7,345 
Total$279,370 $1,012,481 $1,291,851 
Included in cash and cash equivalents  $279,370 
Included in marketable securities  $1,012,481 
 Fair Value Measurement at
December 31, 2020
Level 1Level 2Total
Description   
U.S. Treasury securities$ $431,087 $431,087 
Corporate bonds 366,638 366,638 
Money market funds162,156  162,156 
Asset-backed securities 101,239 101,239 
Agency securities 80,394 80,394 
Commercial paper 36,954 36,954 
Certificates of deposit and time deposits 10,657 10,657 
Total$162,156 $1,026,969 $1,189,125 
Included in cash and cash equivalents  $194,854 
Included in marketable securities  $994,271 
 
As of September 30, 2021 and December 31, 2020, there were no securities within Level 3 of the fair value hierarchy. There were no transfers between fair value measurement levels during the three and nine months ended September 30, 2021 or 2020.
As of September 30, 2021, gross unrealized gains and losses for marketable securities were $3 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,289 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $292 million.
As of December 31, 2020, gross unrealized gains and losses for marketable securities were $6 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,183 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $107 million.
Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of September 30, 2021 and December 31, 2020 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

 September 30,
2021
December 31,
2020
Due in one year or less$421,328 $565,593 
Due after one year and within five years591,153 428,678 
Total$1,012,481 $994,271 
 
As of September 30, 2021 and December 31, 2020, the balance of strategic investments without readily determinable fair values was $12 million and $11 million, respectively. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes. During the three months ended September 30, 2021, we sold a strategic investment and realized a gain of approximately $1 million, which was recorded in interest and other income (expense), net in our consolidated statements of operations.
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 September 30, 2021, the balance of AOCI included an unrecognized net loss of $6 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 loss of $7 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):
 
 September 30, 2021
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$5,268 Accrued liabilities$9,874 
Total$5,268  $9,874 
 December 31, 2020
Asset DerivativesLiability Derivatives
Derivative InstrumentBalance Sheet LocationFair Value
(Level 2)
Balance Sheet LocationFair Value
(Level 2)
Foreign currency forward contractsOther current assets$7,922 Accrued liabilities$5,768 
Total $7,922  $5,768 
 
Our foreign currency forward contracts had a total notional value of $452 million and $345 million as of September 30, 2021 and December 31, 2020, 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 and nine months ended September 30, 2021 and 2020 (in thousands):
 
13

Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended September 30,Nine Months Ended September 30,
Classification2021202020212020
Revenue$(1,126)$100 $(3,207)$1,222 
Cost of revenue(76)163 814 (701)
Research and development(92)174 911 (671)
Sales and marketing(180)366 1,893 (1,350)
General and administrative(53)108 654 (374)
 Total$(1,527)$911 $1,065 $(1,874)
The loss recognized in AOCI related to foreign currency forward contracts was $4 million for the three months ended September 30, 2021. The gain recognized in AOCI related to foreign currency forward contracts was $1 million for the three months ended September 30, 2020. The loss recognized in AOCI related to foreign currency forward contracts was $7 million and $3 million for the nine months ended September 30, 2021 and 2020, respectively.

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 September 30, 2021, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $283 million and $1,440 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 $116.39 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 $126 million and $81 million, respectively, as of September 30, 2021.

Note 4. Costs to Obtain Customer Contracts
The balance of deferred costs to obtain customer contracts was $134 million and $105 million as of September 30, 2021 and December 31, 2020, respectively. Amortization expense for deferred costs was $18 million and $12 million for the three months ended September 30, 2021 and 2020, respectively, and $49 million and $32 million for the nine months ended September 30, 2021 and 2020, 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): 
 September 30,
2021
December 31,
2020
Leasehold improvements$79,702 $91,205 
Capitalized internal-use software57,849 48,730 
Computer equipment and licensed software and patents37,871 30,725 
Furniture and fixtures14,644 13,759 
Construction in progress17,481 13,222 
Total207,547 197,641 
Less: accumulated depreciation and amortization(114,024)(103,433)
Property and equipment, net$93,523 $94,208 
 
Depreciation expense was $6 million and $7 million for the three months ended September 30, 2021 and 2020, respectively, and $17 million and $20 million for the nine months ended September 30, 2021 and 2020, respectively.
14

Amortization expense of capitalized internal-use software was $2 million for each of the three months ended September 30, 2021 and 2020, and $5 million for each of the nine months ended September 30, 2021 and 2020. The carrying values of capitalized internal-use software as of September 30, 2021 and December 31, 2020 were $39 million and $32 million, respectively, including $16 million and $13 million in construction in progress, respectively.

Note 6. Leases
The following table presents information about leases on our consolidated balance sheets (in thousands):
September 30, 2021December 31, 2020
Assets
Lease right-of-use assets$73,094 $84,013 
Liabilities
Lease liabilities20,201 23,533 
Lease liabilities, noncurrent66,733 85,275 

As of September 30, 2021, the weighted average remaining lease term was 5.8 years and the weighted average discount rate was 4.6%.
The following table presents information about leases on our consolidated statements of operations (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Operating lease expense$5,455 $6,573 $16,583 $