Company Quick10K Filing
Zendesk
Price73.40 EPS-1
Shares111 P/E-61
MCap8,167 P/FCF143
Net Debt283 EBIT-133
TEV8,450 TEV/EBIT-64
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-04
10-K 2019-12-31 Filed 2020-02-13
10-Q 2019-09-30 Filed 2019-11-01
10-Q 2019-06-30 Filed 2019-08-02
10-Q 2019-03-31 Filed 2019-05-02
10-K 2018-12-31 Filed 2019-02-14
10-Q 2018-09-30 Filed 2018-11-05
10-Q 2018-06-30 Filed 2018-08-03
10-Q 2018-03-31 Filed 2018-05-04
10-K 2017-12-31 Filed 2018-02-22
10-Q 2017-09-30 Filed 2017-11-03
10-Q 2017-06-30 Filed 2017-08-07
10-K 2016-12-31 Filed 2017-02-27
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-02-17
10-Q 2014-09-30 Filed 2014-11-06
10-Q 2014-06-30 Filed 2014-08-07
8-K 2020-05-19 Shareholder Vote
8-K 2020-04-30 Earnings, Regulation FD, Exhibits
8-K 2020-02-06 Earnings, Regulation FD, Exhibits
8-K 2019-11-11
8-K 2019-10-24 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-07-25 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-05-29
8-K 2019-04-24
8-K 2019-04-02
8-K 2019-01-31 Earnings, Officers, Regulation FD, Exhibits
8-K 2018-10-30
8-K 2018-07-31
8-K 2018-05-22
8-K 2018-04-30
8-K 2018-04-03
8-K 2018-03-15
8-K 2018-03-14
8-K 2018-02-01

ZEN 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1. Overview and Basis of Presentation
Note 2. Business Combinations
Note 3. Financial Instruments
Note 4. Costs To Obtain Customer Contracts
Note 5. Property and Equipment
Note 6. Leases
Note 7. Goodwill and Acquired Intangible Assets
Note 8. 0.25% Convertible Senior Notes and Capped Call
Note 9. Commitments and Contingencies
Note 10. Common Stock and Stockholders' Equity
Note 11. Deferred Revenue and Performance Obligations
Note 12. Net Loss per Share
Note 13. Income Taxes
Note 14. Geographic Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors.
Item 6. Exhibits
EX-31.1 zen10-qq12020exhibit311.htm
EX-31.2 zen10-qq12020exhibit312.htm
EX-32.1 zen10-qq12020exhibit321.htm

Zendesk Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
1.51.20.90.60.30.02014201620182020
Assets, Equity
0.30.20.10.1-0.0-0.12014201620182020
Rev, G Profit, Net Income
0.60.40.30.1-0.0-0.22014201620182020
Ops, Inv, Fin

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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, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from       to       
Commission File Number: 001-36456
 
ZENDESK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
 
26-4411091
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
1019 Market Street
San Francisco
California
94103
(Address of principal executive offices)
 
 
(Zip Code)
 
 
Registrant’s telephone number, including area code: (415418-7506
 

Securities registered pursuant to Section 12(b) of the Act
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
ZEN
New 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 filer
Accelerated filer
Non-accelerated filer
Smaller 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).
Yes
No
As of April 30, 2020, there were 114,225,954 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. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

the effect of uncertainties related to the novel coronavirus and resulting COVID-19 disease pandemic on U.S. and global markets, our business, operations, revenue results, cash flow, operating expenses, demand for our solutions, sales cycles, customer retention, and our customers' businesses;
worldwide economic conditions and their impact on information technology spending;
our ability to attract and retain customers to use our product and platform solutions;
our ability to optimize the pricing for our solutions;
our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;
our ability to effectively manage our growth and future expenses;
our ability to understand how changes in worldwide economic conditions may affect businesses of organizations of varying sizes differently;
our ability to forecast retention of customers on contracts with monthly terms and customers who are small to midsized organizations;
the evolution of technology affecting our product and platform solutions, services, and markets;
our ability to securely maintain customer data;
our ability to prevent, mitigate, and respond effectively to both historical and future data breaches;
our ability to innovate and provide a superior customer experience;
our ability to successfully expand in our existing markets and into new markets;
the expenses and administrative workload associated with being a public company;
our ability to introduce and market new solutions and to integrate such solutions into our infrastructure;
the attraction and retention of qualified employees and key personnel;
our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations;
the sufficiency of our cash and cash equivalents and marketable securities to meet our liquidity needs;
our ability to service the interest on our convertible notes and repay such notes, if required;
our ability to maintain, protect, and enhance our intellectual property;
our ability to successfully integrate people, solutions, technology, and services following completion of acquisitions;
our ability to maintain and enhance our brand; and
our ability to adapt to and comply with upcoming and newly effective tax regulations.
We caution you that the foregoing list does not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our

4


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.

5


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ZENDESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and shares)
 
 
March 31,
2020
 
December 31,
2019
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
199,092

 
$
196,591

Marketable securities
269,003

 
286,958

Accounts receivable, net of allowance for doubtful accounts of $5,796 and $2,846 as of March 31, 2020 and December 31, 2019, respectively
101,027

 
127,808

Deferred costs
38,215

 
35,619

Prepaid expenses and other current assets
45,785

 
45,847

Total current assets
653,122

 
692,823

Marketable securities, noncurrent
369,091

 
361,948

Property and equipment, net
103,017

 
102,090

Deferred costs, noncurrent
36,520

 
35,230

Lease right-of-use assets
96,307

 
89,983

Goodwill and intangible assets, net
204,093

 
206,883

Other assets
26,640

 
25,632

Total assets
$
1,488,790

 
$
1,514,589

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
26,227

 
$
38,376

Accrued liabilities
42,629

 
36,347

Accrued compensation and related benefits
61,996

 
61,512

Deferred revenue
301,402

 
320,642

Lease liabilities
21,253

 
21,804

Total current liabilities
453,507

 
478,681

Convertible senior notes, net
490,014

 
483,464

Deferred revenue, noncurrent
1,941

 
3,320

Lease liabilities, noncurrent
86,535

 
83,478

Other liabilities
6,850

 
7,662

Total liabilities
1,038,847

 
1,056,605

Commitments and contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
1,139

 
1,130

Additional paid-in capital
1,200,521

 
1,155,044

Accumulated other comprehensive income (loss)
(10,152
)
 
591

Accumulated deficit
(741,565
)
 
(698,781
)
Total stockholders’ equity
449,943

 
457,984

Total liabilities and stockholders’ equity
$
1,488,790

 
$
1,514,589



See Notes to Condensed Consolidated Financial Statements.

6


ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
March 31,
2020
 
2019
Revenue
$
237,475

 
$
181,484

Cost of revenue (1)
59,702

 
55,654

Gross profit
177,773

 
125,830

Operating expenses (1):
 
 
 
Research and development
60,421

 
46,791

Sales and marketing
124,310

 
91,700

General and administrative
34,326

 
31,253

Total operating expenses
219,057

 
169,744

Operating loss
(41,284
)
 
(43,914
)
Other income (expense), net:
 
 
 
Interest income
4,570

 
5,472

Interest expense
(6,887
)
 
(6,544
)
Other income, net
2,334

 
700

Total other income (expense), net
17

 
(372
)
Loss before provision for income taxes
(41,267
)
 
(44,286
)
Provision for income taxes
1,516

 
434

Net loss
$
(42,783
)
 
$
(44,720
)
Net loss per share, basic and diluted
$
(0.38
)
 
$
(0.41
)
Weighted-average shares used to compute net loss per share, basic and diluted
113,538

 
108,630

(1) Includes share-based compensation expense as follows:
 
 
Three Months Ended
March 31,
2020
 
2019
Cost of revenue
$
5,059

 
$
4,937

Research and development
12,626

 
11,636

Sales and marketing
16,559

 
12,399

General and administrative
7,838

 
7,685

 

See Notes to Condensed Consolidated Financial Statements.


7


ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
March 31,
2020
 
2019
Net loss
$
(42,783
)
 
$
(44,720
)
Other comprehensive income (loss), before tax:
 
 
 
Net unrealized gain (loss) on available-for-sale investments
(3,395
)
 
3,342

Net unrealized gain (loss) on derivative instruments
(7,348
)
 
1,124

Other comprehensive income (loss), before tax
(10,743
)
 
4,466

Tax effect

 
(1,072
)
Other comprehensive income (loss), net of tax
(10,743
)
 
3,394

Comprehensive loss
$
(53,526
)
 
$
(41,326
)


See Notes to Condensed Consolidated Financial Statements.


8


ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at beginning of period
113,081

 
$
1,130

 
$
1,155,044

 
$
591

 
$
(698,781
)
 
$
457,984

 
108,037

 
$
1,080

 
$
950,693

 
$
(5,724
)
 
$
(529,128
)
 
$
416,921

Issuance of common stock upon exercise of stock options
175

 
2

 
3,999

 

 

 
4,001

 
376

 
4

 
8,434

 

 

 
8,438

Issuance of common stock for settlement of RSUs and PRSUs
720

 
7

 
(1,904
)
 

 

 
(1,897
)
 
847

 
8

 
(2,425
)
 

 

 
(2,417
)
Share-based compensation

 

 
43,382

 

 

 
43,382

 

 

 
37,329

 

 

 
37,329

Other comprehensive income (loss), net of tax

 

 

 
(10,743
)
 

 
(10,743
)
 

 

 

 
3,394

 

 
3,394

Net loss

 

 

 

 
(42,783
)
 
(42,783
)
 

 

 

 

 
(44,720
)
 
(44,720
)
Balances at end of period
113,976

 
$
1,139

 
$
1,200,521

 
$
(10,152
)
 
$
(741,565
)
 
$
449,943

 
109,260

 
$
1,092

 
$
994,031

 
$
(2,330
)
 
$
(573,848
)
 
$
418,945



See Notes to Consolidated Financial Statements.


9


ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
2020
 
2019
Cash flows from operating activities
 

 
 
Net loss
$
(42,783
)
 
$
(44,720
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 
Depreciation and amortization
11,240

 
8,732

Share-based compensation
42,082

 
36,657

Amortization of deferred costs
9,965

 
6,918

Amortization of debt discount and issuance costs
6,549

 
6,188

Other
2,061

 
394

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
26,023

 
(6,966
)
Prepaid expenses and other current assets
1,743

 
(3,774
)
Deferred costs
(13,448
)
 
(10,190
)
Lease right-of-use assets
4,975

 
4,373

Other assets and liabilities
(232
)
 
(498
)
Accounts payable
(10,323
)
 
15,655

Accrued liabilities
(662
)
 
2,512

Accrued compensation and related benefits
(9,541
)
 
(4,629
)
Deferred revenue
(21,464
)
 
12,149

Lease liabilities
(8,794
)
 
(3,832
)
Net cash provided by (used in) operating activities
(2,609
)
 
18,969

Cash flows from investing activities
 
 
 
Purchases of property and equipment
(9,938
)
 
(9,258
)
Internal-use software development costs
(3,058
)
 
(1,213
)
Purchases of marketable securities
(121,430
)
 
(145,142
)
Proceeds from maturities of marketable securities
74,231

 
47,265

Proceeds from sales of marketable securities
54,784

 
91,562

Purchases of strategic investments
(1,500
)
 
(500
)
Net cash used in investing activities
(6,911
)
 
(17,286
)
Cash flows from financing activities
 
 
 
Proceeds from exercises of employee stock options
4,001

 
8,437

Proceeds from employee stock purchase plan
10,115

 
8,415

Taxes paid related to net share settlement of share-based awards
(1,897
)
 
(2,416
)
Net cash provided by financing activities
12,219

 
14,436

Effect of exchange rate changes on cash, cash equivalents and restricted cash
16

 
33

Net increase in cash, cash equivalents and restricted cash
2,715

 
16,152

Cash, cash equivalents and restricted cash at beginning of period
199,897

 
128,876

Cash, cash equivalents and restricted cash at end of period
$
202,612

 
$
145,028

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets
 
 
 
Cash and cash equivalents
$
199,092

 
$
142,418

Restricted cash included in prepaid expenses and other current assets
2,797

 
1,891

Restricted cash included in other assets
723

 
719

Total cash, cash equivalents and restricted cash
$
202,612

 
$
145,028

 
 
 
 
Supplemental cash flow data
 
 
 
Cash paid for interest
$
719

 
$
719

Cash paid for taxes
$
657

 
$
700

Non-cash investing and financing activities
 
 
 
Balance of property and equipment in accounts payable and accrued expenses
$
4,801

 
$
2,411

Property and equipment acquired through tenant improvement allowances
$

 
$
349

Share-based compensation capitalized in internal-use software development costs
$
850

 
$
375

Share-based compensation capitalized in deferred costs
$
404

 
$
297


See Notes to Condensed Consolidated Financial Statements.

10



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, 2019, filed with the SEC on February 13, 2020. 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, 2019 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, 2020.
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 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;

11


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.

In December 2019, the novel coronavirus and resulting disease (“COVID-19”) was reported and in March 2020 the World Health Organization declared it a pandemic. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, and impact on our employees, as discussed in more detail the Overview section. During the quarter, this uncertainty resulted in a higher level of judgment related to our estimates and assumptions concerning variable consideration related to revenue recognition, the estimate of credit losses for accounts receivable, and impairment of strategic investments. As of the date of issuance of the financial statements, we are not aware of any specific event or circumstance that would require us to update our estimates, judgments, or revise the carrying value 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.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. The allowance also reflects current market conditions and reasonable and supportable forecasts of future economic conditions. As of March 31, 2020, our allowance reflects increased collectibility concerns stemming from the COVID-19 pandemic and may increase in future periods as we ascertain further impacts to our customers and business. The allowance for doubtful accounts was $6 million and $3 million as of March 31, 2020 and December 31, 2019, respectively.
Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.

Concentrations of Risk
As of March 31, 2020 and December 31, 2019, 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, 2020 or 2019.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, regarding ASC Topic 740 “Income Taxes,” which simplifies certain aspects of accounting for income taxes. The guidance is effective for annual reporting periods beginning after December 15, 2020, 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.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, including subsequent amendments, regarding ASC Topic 326 “Measurement of Credit Losses on Financial Instruments,” which modifies the accounting methodology for most financial instruments. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Additionally, any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. We adopted this standard in the first quarter of 2020. The adoption did not have a material effect on our consolidated financial statements.
In connection with the adoption, for purposes of identifying and measuring impairment, the policy election was made to exclude accrued interest from both the fair value and amortized cost basis of our available-for-sale debt securities. Such accrued interest is recorded in prepaid expenses and other current assets.


12


In January 2017, the FASB issued ASU 2017-04, regarding ASC Topic 350 “Simplifying the Test for Goodwill Impairment,” which simplifies the required methodology to calculate an impairment charge for goodwill. We adopted this standard in the first quarter of 2020. The adoption did not have an effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, regarding ASC Topic 820 “Fair Value Measurement,” which modifies the disclosure requirements for fair value measurements for certain types of investments. We adopted this standard in the first quarter of 2020. The adoption did not have an effect on our consolidated financial statements.

Note 2. Business Combinations
Smooch Technologies Holdings ULC
On May 14, 2019, we completed the acquisition of Smooch Technologies Holdings ULC, or Smooch, a developer of messaging technology. We acquired Smooch for purchase consideration of $72 million in cash. In connection with the acquisition in the second quarter of 2019, we incurred transaction costs of $3 million within general and administrative expenses and share-based compensation expense of $5 million, primarily within general and administrative expenses, resulting from the accelerated vesting of certain unvested Smooch stock options because post-combination service requirements were eliminated.
The fair value of assets acquired and liabilities assumed was based on a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period. The primary area that remains preliminary relates to the evaluation of certain tax-related items. The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands). During the three months ended March 31, 2020, we made certain immaterial adjustments to the preliminary purchase price allocation, which are reflected in the table below.
The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to assembled workforce and expected growth from the expansion of the scope of and market opportunity for our products. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present. As a result of the structure of the transaction, the balance of goodwill is deductible in the U.S. over 15 years for income tax purposes.
Net tangible assets
$
1,974

Net deferred tax liability
(1,194
)
Identifiable intangible assets:
 
Developed technology
8,000

Customer relationships
3,900

Backlog
1,000

Goodwill
58,317

Total purchase consideration
$
71,997



The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 5.5, 8.0, and 2.0 years, respectively.

In connection with the acquisition, we granted cash-based retention awards to certain employees of Smooch, which vest over a required service period. The awards will be recorded as expense and were not included in the total purchase consideration.
From the date of the acquisition, the results of operations of Smooch have been included in and are immaterial to our consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results of Smooch are not material to our consolidated financial statements in any period presented.

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):

13


 
 
Fair Value Measurement at
March 31, 2020
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
401,130

 
$
401,130

Money market funds
125,936

 

 
125,936

Asset-backed securities

 
118,816

 
118,816

U.S. Treasury securities

 
78,854

 
78,854

Agency securities

 
26,670

 
26,670

Commercial paper

 
12,624

 
12,624

Total
$
125,936

 
$
638,094

 
$
764,030

Included in cash and cash equivalents
 
 
 
 
$
125,936

Included in marketable securities
 
 
 
 
$
638,094

 
Fair Value Measurement at
December 31, 2019
Level 1
 
Level 2
 
Total
Description
 
 
 
 
 
Corporate bonds
$

 
$
418,005

 
$
418,005

Asset-backed securities

 
124,046

 
124,046

U.S. Treasury securities

 
94,731

 
94,731

Money market funds
70,455

 

 
70,455

Commercial paper

 
13,548

 
13,548

Certificates of deposit and time deposits

 
1,144

 
1,144

Agency securities

 
920

 
920

Total
$
70,455

 
$
652,394

 
$
722,849

Included in cash and cash equivalents
 
 
 
 
$
73,943

Included in marketable securities
 
 
 
 
$
648,906


 
As of March 31, 2020 and December 31, 2019, 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, 2020.
As of March 31, 2020, gross unrealized gains and losses for marketable securities were $3 million and $2 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $763 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $246 million.
As of December 31, 2019, gross unrealized gains and losses for marketable securities were $4 million and not material, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities as of December 31, 2019 was $719 million and excludes accrued interest of $4 million. The aggregate fair value of securities with unrealized losses was $45 million.
Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of March 31, 2020 and December 31, 2019 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):
 

14


 
March 31,
2020
 
December 31,
2019
Due in one year or less
$
269,003

 
$
286,958

Due after one year and within five years
369,091

 
361,948

Total
$
638,094

 
$
648,906


 
As of March 31, 2020 and December 31, 2019, the balances of strategic investments without readily determinable fair values were $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.
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, 2020, 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):
 
 
March 31, 2020
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
3,852

 
Accrued liabilities
 
$
10,751

Total
 
 
$
3,852

 
 
 
$
10,751

 
December 31, 2019
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
(Level 2)
 
Balance Sheet Location
 
Fair Value
(Level 2)
Foreign currency forward contracts
Other current assets
 
$
2,385

 
Accrued liabilities
 
$
1,975

Total
 
 
$
2,385

 
 
 
$
1,975


 
Our foreign currency forward contracts had a total notional value of $318 million and $260 million as of March 31, 2020 and December 31, 2019, 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. 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. As of March 31, 2020 and December 31, 2019, there was no cash collateral posted with counterparties. All derivatives have been designated as hedging instruments.
The following table presents information about our foreign currency forward contracts on our condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019 (in thousands):
 

15


 
Gain (Loss) Reclassified from AOCI into Earnings
 
Three Months Ended March 31,
Classification
2020
 
2019
Revenue
$
397

 
$
443

Cost of revenue
(321
)
 
(474
)
Research and development
(281
)
 
(434
)
Sales and marketing
(562
)
 
(790
)
General and administrative
(174
)
 
(276
)
 Total
$
(941
)
 
$
(1,531
)

The loss recognized in AOCI related to foreign currency forward contracts was $8 million and not material for the three months ended March 31, 2020 and 2019, 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 March 31, 2020, the fair value of our convertible senior notes was $686 million. The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last traded day of the quarter and has been classified as Level 2 in the fair value hierarchy. Based on the closing price of our common stock of $64.01 on the last trading day of the quarter, the if-converted value of our convertible senior notes exceeded the principal amount of $575 million as of March 31, 2020.
Note 4. Costs to Obtain Customer Contracts
The balances of deferred costs to obtain customer contracts were $75 million and $71 million as of March 31, 2020 and December 31, 2019, respectively. Amortization expense for these deferred costs was $10 million and $7 million for the three months ended March 31, 2020 and 2019, respectively. There were no impairment losses related to these deferred costs for the periods presented.

Note 5. Property and Equipment
Property and equipment, net consists of the following (in thousands): 
 
March 31,
2020
 
December 31,
2019
Leasehold improvements
$
86,593

 
$
83,968

Capitalized internal-use software
40,647

 
38,437

Computer equipment and licensed software and patents
28,539

 
27,309

Furniture and fixtures
17,072

 
16,332

Construction in progress
10,337

 
8,647

Total
183,188

 
174,693

Less: accumulated depreciation and amortization
(80,171
)
 
(72,603
)
Property and equipment, net
$
103,017

 
$
102,090


 
Depreciation expense was $7 million and $5 million for the three months ended March 31, 2020 and 2019, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended March 31, 2020 and 2019. The carrying values of capitalized internal-use software as of March 31, 2020 and December 31, 2019 were $25 million and $23 million, respectively, including $9 million and $8 million in construction in progress, respectively.

Note 6. Leases

16


We lease office space under noncancelable operating leases with various expiration dates. Additionally, we are the sublessor for certain office space. All of our office leases are classified as operating leases with lease expense recognized on a straight-line basis over the lease term.

Lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease right-of-use assets also include any lease payments made and exclude lease incentives such as tenant improvement allowances. Options to extend the lease term are included in the lease term when it is reasonably certain that we will exercise the extension option.
Our operating leases typically include non-lease components such as common-area maintenance costs. We have elected to include non-lease components with lease payments for the purpose of calculating lease right-of-use assets and liabilities, to the extent that they are fixed. Non-lease components that are not fixed are expensed as incurred as variable lease payments.
Leases with a term of one year or less are not recognized on our consolidated balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The following tables present information about leases on our consolidated balance sheet (in thousands):
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Lease right-of-use assets
$
96,307

 
$
89,983

Liabilities
 
 
 
Lease liabilities
21,253

 
21,804

Lease liabilities, noncurrent
86,535

 
83,478



As of March 31, 2020, the weighted average remaining lease term was 6.2 years and the weighted average discount rate was 4.9%.
The following table presents information about leases on our consolidated statement of operations (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Operating lease expense
$
6,343

 
$
5,045

Short-term lease expense
185

 
874

Variable lease expense
1,543

 
885

Sublease income
(464
)
 
(401
)


The following table presents supplemental cash flow information about our leases (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities
$
9,552

 
$
4,176

Operating lease assets obtained in exchange for new lease liabilities
11,316

 
19,550



As of March 31, 2020, remaining maturities of lease liabilities are as follows:

17


Remainder of 2020
$
18,460

2021
26,074

2022
23,744

2023
16,079

2024
7,357

Thereafter
32,748

Total lease payments
124,462

Less imputed interest
16,674

Total
$
107,788



The table above excludes future payments of $10 million related to signed leases that have not yet commenced.

Note 7. Goodwill and Acquired Intangible Assets
The changes in the carrying amount of goodwill for the three months ended March 31, 2020 are as follows (in thousands):
Balance as of December 31, 2019
$
169,647

Goodwill adjustments
15

Balance as of March 31, 2020
$
169,662


Acquired intangible assets subject to amortization consist of the following (in thousands):
 
 
As of March 31, 2020
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(16,197
)
 
$
22,803

 
4.7
Customer relationships
15,210

 
(4,582
)
 
10,628

 
4.6
Backlog
3,200

 
(2,200
)
 
1,000

 
0.8
 
$
57,410

 
$
(22,979
)
 
$
34,431

 
 
 
 
As of December 31, 2019
Cost
 
Accumulated
Amortization
 
Net
 
Weighted Average Remaining Useful Life
 
 
 
 
 
 
(In years)
Developed technology
$
39,000

 
$
(14,492
)
 
$
24,508

 
4.9
Customer relationships
15,210

 
(3,882
)
 
11,328

 
4.8
Backlog
3,200

 
(1,800
)
 
1,400

 
1.0
 
$
57,410

 
$
(20,174
)
 
$
37,236

 
 

 
Amortization expense of acquired intangible assets was $3 million and $2 million for the three months ended March 31, 2020 and 2019, respectively.     
Estimated future amortization expense as of March 31, 2020 is as follows (in thousands):

18


Remainder of 2020
$
6,505

2021
7,600

2022
7,435

2023
6,656

2024
4,615

Thereafter
1,620

 
$
34,431

 
Note 8. 0.25% Convertible Senior Notes and Capped Call

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 “Notes”). The 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.

Each $1,000 principal amount of the 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 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 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 Notes) prior to the maturity date, holders of the 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 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. It is our current intent and policy to settle conversions through combination settlement with a specified dollar amount of $1,000 per $1,000 principal amount of Notes.

During the three months ended March 31, 2020, the conditions allowing holders of the Notes to convert were not met. The Notes are therefore not convertible during the three months ending June 30, 2020, and are classified as a noncurrent liability as of March 31, 2020. To-date, we have received one request for conversion for an immaterial amount of Notes.

In accounting for the transaction, the 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 Notes. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, the “Debt Discount,” is amortized to interest expense over the contractual term of the Notes at an effective interest rate of 5.26%.

In accounting for the debt issuance costs of $14 million related to the Notes, we allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were $11 million and are amortized to interest expense using the effective interest method over the contractual term of the Notes. Issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.


19


The net carrying amount of the liability component of the Notes is as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Principal
$
575,000

 
$
575,000

Unamortized Debt Discount
(77,979
)
 
(84,037
)
Unamortized issuance costs
(7,007
)
 
(7,499
)
Net carrying amount
$
490,014

 
$
483,464


The net carrying amount of the equity component of the Notes is as follows (in thousands):
 
March 31,
2020
 
December 31,
2019
Debt Discount for Conversion Option
$
124,976

 
$
124,976

Issuance costs
(2,948
)
 
(2,948
)
Net carrying amount
$
122,028

 
$
122,028



Interest expense related to the Notes is as follows (in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Contractual interest expense
$
359

 
$
356

Amortization of Debt Discount
6,057

 
5,751

Amortization of issuance costs
492

 
437

Total interest expense
$
6,908

 
$
6,544



In connection with the pricing of the Notes, we entered into privately negotiated capped call transactions with certain counterparties, the “Capped Calls.” The 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 Notes. The Capped Calls have initial cap prices of $95.20 per share, subject to certain adjustments. The Capped Calls cover, 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 Capped Calls mirror conditions that result in corresponding adjustments for the Notes. The Capped Calls are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $64 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
  
The net impact to our stockholders' equity, included in additional paid-in capital, of the above components of the Notes is as follows (in thousands):

Conversion Option
 
$
124,976

Purchase of Capped Calls
 
(63,940
)
Issuance costs
 
(2,948
)
Net deferred tax liability
 
(13,784
)
Total
 
$
44,304


Note 9. Commitments and Contingencies
Commitments
As of March 31, 2020, 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, 2019.
Litigation and Loss Contingencies

20


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 has appointed a lead plaintiff and consolidated the various lawsuits into a single action (Case No. 3:19-cv-06968-CRB), and lead plaintiff filed its amended complaint on April 14, 2020 asserting the same alleged violations of securities laws as the initial complaints. The class action is still in the preliminary stages, and it is not possible for the Company to quantify the extent of potential liability to the individual defendants, if any. Management believes that the lawsuit lacks merit and intends to vigorously defend the actions. We cannot predict the outcome of or estimate the possible loss or range of loss from the above described matter.

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, labor and employment rights, defamation, 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.
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