Zendesk, Inc. - Annual Report: 2018 (Form 10-K)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018



☐	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, CA		94103
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (415) 418-7506

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common Stock traded on the New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ☐

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐ NO x

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 x 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 x NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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. (Check one):

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 x

The aggregate market value of common stock held by non-affiliates of the Registrant, computed by reference to the price at which the common stock was last sold on June 30, 2018, the last business day of the Registrant's most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $3.7 billion. Shares of common stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates of the Registrant for any other purpose.

The number of shares of the Registrant’s Common Stock outstanding as of January 31, 2019 was 108,358,875.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for its 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2018. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.

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		Page
PART I

Item 1.	Business	4

Item 1A.	Risk Factors	12

Item 1B.	Unresolved Staff Comments	36

Item 2.	Properties	36

Item 3.	Legal Proceedings	36

Item 4.	Mine Safety Disclosures	36

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37

Item 6.	Selected Financial Data	39

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 8.	Financial Statements and Supplementary Data	58

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	92

Item 9A.	Controls and Procedures	92

Item 9B.	Other Information	93

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	94

Item 11.	Executive Compensation	94

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	94

Item 13.	Certain Relationships and Related Transactions, and Director Independence	94

Item 14.	Principal Accountant Fees and Services	94

PART IV

Item 15.	Exhibits, Financial Statement Schedules	95
Item 16.	Form 10-K Summary	95
Item 17.	Signatures	98

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K include, but are not limited to, statements about:


•	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;


•	the sufficiency of our cash and cash equivalents and marketable securities to meet our liquidity needs;


•	our ability to attract and retain customers to use our products, and our ability to optimize the pricing for such products;


•	the evolution of technology affecting our products, services, and markets;


•	our business strategy including our ability to innovate and provide a superior customer experience;


•	our ability to successfully expand in our existing markets and into new markets;


•	the attraction and retention of qualified employees and key personnel;


•	worldwide economic conditions and their impact on information technology spending;


•	our ability to effectively manage our growth and future expenses, including our international expansion strategy;


•	our ability to introduce and market new products and to integrate such products into our infrastructure;


•	our ability to successfully integrate people, products, technology and services following completion of acquisitions;


•	our ability to maintain and enhance our brand;


•	our ability to maintain, protect, and enhance our intellectual property;


•	our ability to comply with modified or new laws and regulations applying to our business, including privacy and data security regulations, accounting pronouncements, and tax laws;


•	our ability to securely maintain customer data;


•	our ability to develop our brand;


•	our reliance upon and our ability to forecast costs associated with third-party platform providers;


•	our ability to service the interest on our convertible notes and repay such notes, if required;


•	the impact of foreign currency exchange rate and interest rate fluctuations on our results; and


•	the increased expenses and administrative workload associated with being a public company.

We caution you that the foregoing list does not contain all of the forward-looking statements made in this Annual Report on Form 10-K.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K 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.

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PART I

Item 1. Business.

Overview

We believe we’re living in a time of radical change in customer expectations that requires organizations to change the way they do business and serve their customers. Customers are moving faster, are more informed, and are more empowered than ever before. The organizations they do business with are under pressure to adapt and transform their customer experiences to keep up with these changes. Businesses can stand out from their competitors and gain an advantage by delivering the best customer experiences across their organization.

The Zendesk product family and platform is purpose-built to help companies deliver the best customer experiences and adapt to changing customer expectations. It unifies customer communication and customer data across disparate channels and departments, and simplifies the process of providing great omnichannel customer service and engagement across self service, phone calls, live chat, messaging, and email.

Zendesk’s open and flexible customer relationship management (“CRM”) platform, Zendesk Sunshine, is built on the public cloud and open standards, enabling rapid innovation for our customers and enhancing our product family. We have evolved from our origins in customer service to increasingly help even the largest organizations understand their customers, and to introduce products and a CRM platform that impact customer experiences and engagement broadly within organizations.

We are a software development company founded in Copenhagen, Denmark in 2007. We reincorporated in Delaware in 2009. Our principal executive offices are located at 1019 Market Street, San Francisco, California 94103, and our telephone number is (415) 418-7506. Our website address is www.zendesk.com. Information contained on or that can be accessed through our website does not constitute part of this Annual Report on Form 10-K, and inclusions of our website address in this Annual Report on Form 10-K are inactive textual references only. Unless expressly indicated or the context requires otherwise, the terms “Zendesk,” “company,” “we,” “us,” and “our” in this Annual Report on Form 10-K refer to Zendesk, Inc., a Delaware corporation, and its consolidated subsidiaries.

The Zendesk Approach

We build software that helps companies deliver better customer experiences, and we believe in an approach to both product design and delivery that is unified, unique, and innovative. As software becomes more central to the customer experience, we strive to design products that are proactive, contextual, and integrated by design. We believe in developing products that serve organizations of all sizes and across all industries. Our focus on these core principles has led us to design a product family and platform that share the following characteristics:

•

A unified omnichannel experience: Through our innovative products, we seek to be channel agnostic, allowing even some of the largest organizations to transform how they engage with customers regardless of how and when those customers want to communicate. As we expand the reach of our technology, we recognize the critical importance of having our products work cohesively together. All of our products share a common interface and we are continuing to invest in supporting our product family on a shared services platform.

•

Easy to use and implement: We build our products first and foremost for the people that use them everyday. We focus relentlessly on making the user experience intuitive and product implementation fast while managing complex processes and interactions on the backend of our software. Because of our attention to ease of use, we believe business users are more effective and efficient, and are able to deliver better experiences to their customers as a result.

•

Open and flexible platform: We believe that the establishment of open and public cloud computing has fundamentally changed how companies can and will build their customer experiences. Sunshine is a flexible CRM platform that leverages public cloud technologies and open standards. This platform enables organizations to connect and integrate customer data generated through the Zendesk product family with other business applications to build highly specialized workflows and customer experiences. Sunshine enables organizations to get a more complete picture of the customer so they can build more personalized experiences and adapt to evolving customer expectations.


•	Expanding access to analytics and data science: We are committed to enabling all sizes of organizations to better understand their customers through powerful analytics that unify data across our product family and platform and

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connect easily to outside data sources. We believe our investments in building machine learning and artificial intelligence into the fabric of our products gives more organizations and users access to harness the power of data science so they can be more efficient, informed, and proactive with their customers.

We have witnessed business software undergo a sweeping shift toward consumerization over the past decade. Zendesk has embraced this shift with an approach to delivering a family of products and CRM platform that is dramatically different from earlier generations of business software. Our goal is to remove barriers that make business software difficult to buy, deploy, and use. Our approach to software delivery focuses on the following key elements:

•

Elastic and agile: Our software products can easily grow and scale with our customers, and be used in new departments and use cases without the expensive deployment projects required in the past. Zendesk products are flexible by design and easy to configure and use. In addition to our family of products, we enable our customers through Sunshine, which gives customers the freedom to build customer applications and experiences using open tools and cloud architecture, instead of proprietary tools and technology.


•	Trial experience: We believe customers should be able to try our products before they commit to a purchase. Our free trials are core to the marketing of all of our products. They offer our small and large customers alike with access to the same fully functioning product experience as paying customers and the ability to begin a complete implementation during the evaluation period.

•

Price Transparency: We provide our customers a well-defined total cost of ownership across our family of products by providing transparent and predictable pricing. Our product pricing is designed to make our software accessible to customers of all sizes by offering a variety of subscription packages that include features based on customer need. We offer subscriptions that may be purchased online and deployed without the need to engage a sales or enablement professional.

Growth Strategy

Zendesk was founded with a mission to help organizations build better relationships with their customers. We have continued to pursue that mission by building and delivering a family of customer experience software products and a CRM platform that help companies be the company their customers want them to be. We believe our future growth will be a natural extension of our mission, and we are focused on the following key growth drivers:

•

Expanding our market by maturing our family of products and CRM platform: From our founding of providing customer support software, we have evolved to helping businesses design, build, and manage their entire customer experience infrastructure and transform how they interact and engage with their customers. Our family of products has expanded to serve the customer journey from sales, to support, to customer success, and proactive engagement. We will continue to mature our products’ features and seamless usability across communication channels, while also integrating and expanding our products across CRM functions.

With Zendesk Sunshine, we provide organizations the ability to unify and use data for a more complete picture of their customer and also give their developers the ability to build and deploy customer apps and services faster in the public cloud. We will continue to expand the capabilities of our platform and its integration with our products. Additionally, we will continue our investments in building machine learning and artificial intelligence into the fabric of our products and platform, empowering organizations to harness the power of data science and be more efficient, informed, and proactive with their customers.

•

Being strategic partners with our customers who are larger organizations: With our family of customer experience software products and CRM platform, we are increasingly evolving from a software vendor to a trusted partner that is strategically engaging with our customers around their visions and digital transformations. We are helping companies build or transform their companies around their customer experience. We are scaling these capabilities by continuing to build and mature our expertise in enterprise sales, success, relationships, systems architecture, and integrations. Additionally, we are continuing to develop a partner ecosystem strategy to help us reach and serve more enterprise customers and build a community of developer evangelists for our CRM platform.

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•

Making experiences simple for organizations and their customers: At our core, we believe that customer experiences should be simple and effortless. This belief has enabled us to build a compelling brand and leadership position among both small-to-medium sized organizations and larger enterprises for which our ease of use, quick return on investment, and flexible pricing are important differentiators. Our products and platform provide simple solutions and interfaces across the customer journey and multiple communication channels, for both agents providing service and for customers interacting with businesses. Additionally, we have been built on the premise that our products should be easy to discover, deploy, and purchase so that any organization, from startup to large enterprise, can realize their value.

Our principle of democratizing software has developed into a highly efficient business model represented by expansion within customer accounts and organic growth through promotion by our customers. We will continue our focus on providing a beautifully simple family of products and CRM platform that create simple and effortless experiences for both the end customer and the agent.

With our solutions, Zendesk has always served a global market and, for the year ended December 31, 2018, we generated 48% of our revenue outside of the United States. We have customers in more than 160 countries and territories, and products available in more than 30 languages. We will continue to expand our global footprint, particularly in those markets where we have demonstrated significant customer traction with our democratized approach or which represent particularly strategic opportunities.

Zendesk Products

Zendesk’s products are built to help companies address the rise in customer expectations and to craft their customer experiences into a competitive differentiator. Zendesk products share a common interface and are being developed to support a shared services infrastructure and common customer data platform. Zendesk’s products are developed using agile software techniques, and are designed to quickly incorporate and innovate on customer feedback obtained through extensive Early Access Programs, or EAPs. This approach allows us to share our newest technology with customers, and quickly adapt our products to address customer needs.

Zendesk offers products that are used throughout the customer lifecycle by customer support, marketing, sales, customer success, mobile and application development teams, and more.

The Zendesk family of products includes the following:


•	Zendesk Support, our flagship product, is a beautifully simple system for tracking, prioritizing, and solving customer support tickets across multiple channels, bringing customer information and interactions into one place.


•	Zendesk Chat is live chat software that provides a fast and responsive way to connect with customers in the moment, on websites, in applications, on mobile devices, and through their favorite messaging apps.


•	Zendesk Talk is cloud-based call center software for more personal and productive phone and SMS support conversations and enables organizations to provide phone support from the same platform they use to manage all other support channels.

•

Zendesk Guide is a knowledge base that powers both customer self-service and support agent productivity through content that is created and organized by companies. Guide content is available via self-service website, accessible through APIs on websites, in apps and mobile devices, and surfaced to agents within Support and Chat. Additionally, Answer Bot is a feature within Guide that uses machine learning to automatically answer customers’ questions by suggesting content from the Guide knowledge base.


•	Zendesk Explore provides analytics for businesses to measure and improve the entire customer experience, with instant access to the customer analytics that matter—and the deeper understanding of customers and business that comes with it.


•	Zendesk Sell is sales force automation software to enhance productivity, processes, and pipeline visibility for sales teams. Sell is simple and designed to keep sales representatives selling. Sell eliminates the friction from deal updates so representatives and management are always able to access, analyze, and collaborate on relevant deal data.

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•	Zendesk Connect manages proactive customer communication across channels, to deliver better customer experiences at scale. Zendesk Connect leverages that information in order to design the journey that’s right for each customer.

For customer support teams, The Zendesk Suite is a pre-configured and pre-packaged bundle of our Support, Chat, Guide and Talk products, offering everything companies need to let customer conversations flow more seamlessly across channels, creating a better experience for both businesses and their customers.

Zendesk’s platform and developer tools allow organizations to extend the functionality of our family of products, integrate into internal and third-party systems, and customize the experience for their employees and customers. Key components include:

•

Zendesk Sunshine, our open and flexible CRM platform, allows organizations to address an increasingly broader set of customer experiences. Sunshine provides organizations with the ability to develop a more complete picture of their customer with a flexible database and the ability to model, store and manage customer profiles, events, objects and relationships. Organizations can connect and integrate this data across the Zendesk product family with other business applications to build highly specialized workflow and unique customer experiences.


•	Zendesk Embeddables, a combination of our application programming interfaces, or APIs, Web Widget, and Mobile software developer’s kits, or SDKs, allow developers to embed Support, Chat, and Guide experiences natively on the web and within mobile applications.


•	Zendesk APIs are extensible and built on open standards, allowing users to build custom integrations and interact with Zendesk data using over 400 different API endpoints.


•	Zendesk Apps enable organizations to customize Zendesk product interfaces and optimize workflow through powerful plug-ins. Our customers can build custom apps or select from hundreds of pre-built apps on the Zendesk Marketplace.

Technology

We employ a modern technology architecture in which our products are built upon a set of core APIs that enable rapid innovation and deep integration. The technology infrastructure used for the Zendesk family of products is designed to provide a highly available and scalable cloud-based platform with industry-standard security measures.

Zendesk’s strategy is to leverage the open and public cloud both in hosting our applications and building Sunshine as a development platform. We believe this provides Zendesk and our customers with greater reliability, performance, and flexibility than operating through proprietary platforms and self-managed data centers.

The architecture and deployment of our software are described and guided by the following key characteristics:


•	Reliability. Our customers are highly dependent on our products, which are designed to be available 24 hours a day, 365 days a year. We provide transparency to customers on availability and technical operations matters that impact them through our website and other channels.


•	Scalability. Our data infrastructure is highly scalable and regularly processes more than 100 million data driven requests that require the processing of specific data, on a daily basis.


•	Security. Each of our products are designed to host a large quantity of customer data. We maintain a comprehensive security program designed to help safeguard the security and integrity of our customers’ data. We regularly review our security program. In addition, we regularly obtain third-party security audits and examinations of our technical operations and practices covering data security.

Customers

As of December 31, 2018, we had an aggregate of approximately 136,600 paid customer accounts using our family of products. This includes approximately 73,600 customer accounts for paid subscription plans for Zendesk Support (other than our legacy Starter plan) and approximately 46,100 customer accounts for paid subscription plans of Zendesk Chat. In addition, we had approximately 16,900 paid customer accounts on our other products, collectively, as of December 31, 2018. Prior to

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purchase, we generally provide our prospective customers with the opportunity to try fully-functioning versions of our products for a free trial period. This is a central part of our business model as we believe customers should have the right to try products before being locked-into a subscription. Providing our customers with a free trial period exposes customers to our brand and establishes a relationship that can facilitate further adoption of our products as organizations grow in size and their needs become more complex. For further details as to how we calculate our number of paid customer accounts, please see the discussion in the "Key Business Metrics" section of this Annual Report on Form 10-K.

Our customers are located in over 160 countries and territories and represent organizations across a broad array of sizes, industries, and geographies.

Research and Development

Our research and development organization is responsible for the development, design, and testing of all aspects of our products. We invest heavily in these efforts to continuously improve and innovate. In addition to our hosted software solution, and platform, we have developed multi-functional APIs that we utilize to build our products as well as facilitate integrations of our products with third-party applications.

Our global research and development team is primarily based in San Francisco, California; Copenhagen, Denmark; Melbourne, Australia; Dublin, Ireland; Singapore; Montpellier, France; Metro Manila, Philippines; and Krakow, Poland. To foster rapid innovation, our research and development team is further apportioned into smaller, agile development teams.

We deploy new features, functionality, and technologies across our products through frequent software releases or updates in order to minimize disruption and provide for constant improvement.

To create a product roadmap that meets our customers’ needs, we emphasize collaboration during the development process. Customers provide input through feedback forums, dialogue with our product support and research and development teams, and feature utilization. As a result of using our products internally to support our customers, we also develop new or improved features based on our own employees’ feedback.

As of December 31, 2018, we had approximately 730 employees in our research and development organization. Our research and development expenses were $160.3 million, $115.3 million, and $91.1 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Sales and Marketing

Subscriptions to our products are designed to be easy to purchase. A substantial number of our customers subscribe to our products with limited or no direct interaction with our sales team.

We also deploy a direct sales approach, which includes a sales team based in four regional hubs: North America, LATAM (Latin America), EMEA (Europe, Middle East, and Africa), and APAC (Asia-Pacific). This team manages prospective and current customers, aiming to initiate, retain, and expand their use of our family of products over time, and is responsible for driving expansions and renewals of existing contracts. Our sales team also partners with sales and product engineers to provide pre-sales technical support to prospective customers.

We expect to continue increasing penetration into larger organizations through a land and expand strategy whereby we attempt to capitalize on the use of our products by a functional or geographic department to expand the use of our products throughout the organization. Through our sales team, we also seek to discover and work with a growing number of forward-thinking enterprises on larger initiatives to transform their approach to customer experience.

We also utilize indirect sales channels, including referral partners and resellers, as well as implementation partners. These channel partners provide additional sales coverage, particularly in geographic markets where we may have limited presence, as well as implementation services to our customers. Sales from indirect channels have not been significant to date, but we plan to continue investing in these relationships to help us in certain markets and to complement our direct sales efforts.

Our marketing efforts are focused on generating awareness of our products, creating sales leads, nurturing prospective customers through the process of product discovery and evaluation, establishing and promoting our brand, and cultivating a community of successful and vocal customers. Based on our belief that the best method to sell subscriptions to our products is to provide customers with the opportunity to actively use and explore our products’ capabilities, one focus of our marketing team is to drive and encourage free trials and the successful conversion of free trials to paid subscriptions. We utilize both

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online and offline marketing initiatives, including search engine and email marketing, display and video advertising, blogs, corporate communications, whitepapers, case studies, user events, conferences, and webinars.

As of December 31, 2018, we had approximately 920 employees in our sales and marketing organizations. Our sales and marketing expenses were $291.7 million, $211.9 million, and $161.7 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Product Support, Customer Success, and Professional Services

We strive to exemplify the great customer service that organizations of all sizes can provide with our products by offering multi-channel service from our product support team, a rich self-help knowledge base with detailed product guides, and active community forums for agents, managers, and developers.

We offer different levels of product support based upon the subscription plans purchased by our customers. Regardless of the plan purchased, our products provide a unified intuitive interface, connectivity to our self-help knowledge base and community forums, and step-by-step tutorials to help users learn, use, and deploy our products effectively.

We additionally offer a variety of customer success initiatives aimed to address customer needs with varying levels of complexity, from our small business customers to even our largest enterprise customers. These initiatives are designed to ensure that our customers are best equipped to meet their business goals and to realize the full value of the implementation of our products.

Along with our global partners, our professional services team assists our customers in implementing more complex deployments of our products. These services include mapping our products to new and existing business processes, data migration, and integration with existing systems. Service engagements are typically scoped on a time and materials or project milestone basis and billed separately from the subscription to our products.

Through our training platform, we offer courses to help our customers quickly learn how to effectively use our products as well as implement best practices. Courses are available online, in-person at events, and, as requested by certain customers, on-site. Our training sessions are typically targeted at specific levels of employee seniority and product experience, such as agent essentials or administrator expert, to more effectively tailor training to intended audiences.

Seasonality

Historically, we have experienced the highest demand for our products and services in our fourth quarter, which we believe is a result of industry buying patterns. For a more detailed discussion of the seasonality impacting our business, see the “Seasonality” discussion in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report on Form 10-K.

Competition

There are a number of established and emerging competitors in the broad market of customer engagement software. This market is fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry in some segments. We consider the principal competitive differentiators in our market to include:


•	Ease-of-deployment and use;


•	Time to value realization;


•	Enablement of customer communications across channels;


•	Availability of self-service options;


•	Data analytics and performance recommendations;


•	Mobile and multi-device capabilities;


•	Proactive outreach tools;


•	Customization and integration with third-party applications;


•	Brand recognition and thought leadership; and

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•	Total cost of ownership for the customer (including software updates, ongoing maintenance, and consulting and system integration fees).

While we believe that we successfully compete with respect to these dynamics, given the large number, disparate sizes, and varying areas of focus of other companies with which we compete in the provision of customer engagement software, we may not always compare favorably with respect to some or all of the foregoing factors.

For small to medium-sized organizations, we often compete with general use computer applications and other tools that organizations have adapted for managing relationships with their customers, including shared accounts for email communication, phone banks for voice communication, and pen and paper, text editors, and spreadsheets for tracking and management. For larger organizations, we compete with custom software systems and large enterprise software vendors, including salesforce.com, Inc., Oracle Corporation, Microsoft Corporation, and ServiceNow, Inc., each of which may have greater operational flexibility to bundle competing products and services with other software offerings, or offer them at a lower price than our current Suite offering, which will negatively affect our competitiveness for that offering. In addition, we compete with a number of other SaaS providers with focused applications competitive to one or more of our products. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our family of products to achieve or maintain more widespread market acceptance, any of which could harm our business.

In order to maintain and improve our competitive position in the market, we remain focused in our development, operations, and sales and marketing efforts on the evolving customer service needs of all organizations.

Intellectual Property

We rely on a combination of patent, trade secret, copyright, and trademark laws, a variety of contractual arrangements, such as license agreements, assignment agreements, confidentiality and non-disclosure agreements, and confidentiality procedures and technical measures to gain rights to and protect the intellectual property used in our business.

We have developed a patent program, and a strategy to identify, apply for, and secure patents for innovative aspects of our platform and technology. We have three issued U.S. patents and 14 U.S. patent applications pending. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost-effective.

We actively pursue registration of our trademarks, logos, service marks, and domain names in the United States and in other key jurisdictions. We are the registered holder of a variety of United States and international domain names that include the term Zendesk or certain variations. Our products and services utilize our “Zendesk” trademark as well as our logo and images.

We also rely on certain intellectual property rights that we license from third parties, including under certain open source licenses. Though such third-party technologies may not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available to us.

Our policy is to require employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments, and other processes generated by them on our behalf and agreeing to protect our confidential information, and all of our key employees and contractors have done so. In addition, we generally enter into confidentiality agreements with our vendors and customers. We also control and monitor access to, and distribution of, our software, documentation, and other proprietary information.

Although we rely on intellectual property rights, including patents, trade secrets, copyrights, trademarks, a variety of contractual arrangements, and confidentiality procedures, we believe that factors such as the technical and creative skills of our personnel, development of new features and functionality, and frequent enhancements to our products are more fundamental to establishing and maintaining our technology leadership position.

Culture and Employees

As a company we are highly focused on our customers and their success. To support this focus, we highly value simplicity, agility, sincerity, as well as a sense of humor and humility often absent from enterprises that sell business software. These values guide our communication, work, and company culture and are a cornerstone of the team of employees that we have assembled and seek to develop. We are a global and diverse group of individuals that strive to balance work with play and that focus on big-scale thinking.

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We believe strongly in our obligation to participate in and improve the communities in which we work and live. We do this by offering an active roster of corporate social responsibility engagements. In 2015, we launched the Zendesk Neighbor Foundation, a nonprofit organization dedicated to providing financial and strategic support to organizations that operate near our offices around the world. In addition to our extensive volunteer efforts, we have continued to offer workforce development and training, financial support for critical community programs, and promotion of local arts and culture, with the communities in which our offices are located and our employees live and work.

As of December 31, 2018, we had approximately 2,740 employees, including approximately 1,300 employees located outside the United States. Although we have statutory employee representation obligations in certain countries, our U.S. employees are not represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Regulatory Considerations

The legal environment of Internet-based businesses is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations are applied in this environment, and how they will relate to our business in particular, both in the United States and internationally, is often unclear. For example, we sometimes cannot be certain which laws will be deemed applicable to us given the global nature of our business, including with respect to such topics as data privacy and security, pricing, credit card fraud, advertising, taxation, content regulation, and intellectual property ownership and infringement.

Our customers, and those with whom they communicate using our products, upload and store customer service and other data into our products and provide access to their data sources to our products, generally without any restrictions imposed by us. This presents legal challenges to our business and operations, such as rights of privacy related to the content loaded into our products. Both in the United States and internationally, we must monitor and comply with a host of legal concerns regarding the data stored and processed in our products as well as the operation of our business.

We are subject to data privacy and security regulation by data protection authorities in countries throughout the world, by the U.S. federal government, and by the states in which we conduct our business. In recent years, there have been a number of well-publicized data breaches involving the improper use and disclosure of personal information of individuals. Many governing authorities have responded to these incidents by enacting laws requiring holders of personal information to maintain safeguards and to take certain actions in response to a data breach, such as providing prompt notification of the breach to affected individuals and public officials or amending existing laws to expand compliance obligations. In the European Union, U.S. companies must meet specified privacy and security standards, such as the European General Data Protection Regulation, or the GDPR, which govern the protection of individuals with regard to the processing of personally identifiable information, or PII, and on the free movement of such data established in the European Union to certain non-EU countries, such as the United States. Additionally, the data protection laws of each of the European Member countries require comprehensive information privacy and security protections for consumers with respect to PII collected about them. In February 2016, European Union and U.S. officials announced an agreement, which established the EU-U.S. Privacy Shield, or the Privacy Shield, as a means for legitimating the transfer of PII by U.S. companies doing business in Europe from the European Economic Area to the U.S. We have certified compliance with the Privacy Shield. In June 2017, we announced that we completed the EU approval process for our global Binding Corporate Rules ("BCRs") as a data processor and controller. This significant regulatory approval validated our implementation of the highest possible standards for protecting PII globally, covering both the PII of our customers and employees. We have and expect to continue to engage in efforts to ensure that data transfers from the European Economic Area comply with the GDPR, the Privacy Shield, our BCRs, and the data protection legislation of individual member states.

Geographic Information

For a description of our revenue and long-lived assets by geographic location, see Note 14 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Additional Information

Our website is located at http://www.zendesk.com, and our investor relations website is located at http://investor.zendesk.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available, free of charge, on our investor relations website as soon as reasonably

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practicable after we file such material electronically with or furnish it to the Securities and Exchange Commission, or the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is http://www.sec.gov.

We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website, as well as our Twitter account (@Zendesk), as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

Item 1A. Risk Factors.

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report, and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition, or operating results could differ materially from the plans, projections, and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition, or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

Risks Related to Our Business

We derive, and expect to continue to derive, substantially all of our revenue and cash flows from Support. If we fail to adapt this product to changing market dynamics and customer preferences or to achieve increased market acceptance of Support, our business, results of operations, financial condition, and growth prospects would be harmed.

We derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of subscriptions to Support. As such, the market acceptance of this product is critical to our success. Demand for our products is affected by a number of factors, many of which are beyond our control, such as continued market acceptance of our products by customers for existing and new use cases, the timing of development and release of new products, features, and functionality introduced by our competitors, technological change, and growth or contraction in our addressable market. We expect that an increasing focus on the customer experience and the growth of various communications channels will profoundly impact the market for customer support software and blur distinctions between traditionally separate systems for customer support, customer engagement and retention software, sales force automation, and customer relationship management, enabling new competitors to emerge. If we are unable to meet customer demands to improve relationships between organizations and their customers through flexible solutions designed to address all these needs or otherwise achieve more widespread market acceptance of our products, our business, results of operations, financial condition, and growth prospects will be adversely affected.

We have a history of losses and we expect our revenue growth rate to decline. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain our profitability.

We have incurred net losses in each year since our inception, including net losses of $33.3 million and $25.0 million in the three months ended December 31, 2018 and 2017, respectively, and net losses of $131.1 million and $102.1 million for the fiscal years ended December 31, 2018 and 2017, respectively. We had an accumulated deficit of $529.1 million as of December 31, 2018. For the three months ended December 31, 2018 and 2017, our revenue was $172.2 million and $121.9 million, respectively, representing a 41% growth rate. For the fiscal years ended December 31, 2018 and 2017, our revenue was $598.7 million and $430.2 million, respectively, representing a 39% growth rate. Our historical revenue growth has been inconsistent, and should not be considered indicative of our future performance. We expect that our revenue growth rate will decline over time. We may not be able to generate sufficient revenue to achieve and sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:


•	development of our family of products, including investments in our research and development team, the development or acquisition of new products, features, and functionality, and improvements to the scalability, availability, and security of our products, and the integration of acquired products into our platform;

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•	enhancements to our network operations and infrastructure;


•	sales and marketing, including an expansion of our direct sales organization;


•	continued international expansion in an effort to increase our customer base and sales; and


•	general administration, including legal, accounting, and other expenses related to being a public company.

These investments may not result in increased revenue or growth of our business. If we fail to continue to grow our revenue, our operating results and business would be harmed.

We face a number of risks in our strategy to increasingly target larger organizations for sales of our products and, if we do not manage these efforts effectively, our business and results of operations could be adversely affected.

As we target more of our sales efforts to larger organizations, we expect to incur higher costs and longer sales cycles, and we may be less effective at predicting when we will complete these sales. In this market segment, the decision to subscribe to one or more of our products may require the approval of a greater number of technical personnel and management levels within a potential customer’s organization than we have historically encountered, and if so, these types of sales would require us to invest more time educating these potential customers on the benefits of our products. In addition, larger organizations may demand more features and integration services. We have limited experience in developing and managing sales channels and distribution arrangements for larger organizations. As a result of these factors, these sales opportunities may require us to devote greater research and development, sales, product support, and professional services resources to individual customers, resulting in increased costs and reduced profitability, and would likely lengthen our typical sales cycle, which could strain our resources. Moreover, these transactions may require us to delay recognizing portions of the associated revenue we derive from these customers until any technical or implementation requirements have been met, and larger customers may demand discounts to the subscription prices they pay for our products. Furthermore, because we have limited experience selling to larger organizations, our investment in marketing our products to these potential customers may not be successful, which could harm our results of operations and our overall ability to grow our customer base. Following sales to larger organizations, we may have fewer opportunities to expand usage of our products or to sell additional functionality, and we may experience increased subscription terminations as compared to our experience with smaller organizations, any of which could harm our results of operations. Additionally, as we target larger organizations, we may need to divert a greater percentage of personnel and investments away from support of smaller organizations, resulting in an increasing churn in such segment and a negative effect on our results of operations.

Failure to effectively expand and maintain our sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our products.

Increasing our customer base and achieving broader market acceptance of our products will depend, to a significant extent, on our ability to effectively expand and maintain our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain certain of our new customers, including larger organizations. We plan to continue to expand our direct sales force both domestically and internationally to increase our sales capacity. During the twelve months ended December 31, 2018, our sales and marketing organization increased by approximately 260 employees to approximately 920 employees. There is significant competition for experienced sales and marketing professionals with the skills and technical knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training, and retaining a sufficient number of experienced sales and marketing professionals. New hires require significant training and time before they achieve full productivity, particularly in new sales segments and territories. Our recent hires and planned hires may not become as productive as we anticipate as quickly as we expect, and we may be unable to hire or retain sufficient numbers of qualified individuals in the future in the markets where we do business. We cannot predict whether, or to what extent, our sales will increase as we expand our sales and marketing functions or how long it will take for new personnel to become productive. Our business will be harmed if our sales and marketing efforts do not generate a significant increase in revenue.

The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.

The market for customer experience solutions is fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry. With respect to larger organizations seeking to deploy a customer service software system, we have many competitors that are larger than us and which have greater name recognition, much longer operating histories, more established customer relationships, larger marketing budgets, and significantly greater resources than we do. Among the small to medium-sized organizations that make up a large proportion of our customers, we often compete with general use computer applications

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and other tools, which these organizations use to provide support and which can be deployed for little or no cost. These include shared accounts for email communication, phone banks for voice communication, and pen and paper, text editors, and spreadsheets for tracking and management.

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. With the introduction of new technologies, the evolution of our products, and new market entrants, we expect competition to intensify in the future. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our products to achieve or maintain more widespread market acceptance, any of which could harm our business.

We face competition from in-house software systems, large integrated systems vendors, and smaller companies offering alternative SaaS applications. Our competitors vary in size and in the breadth and scope of the products and services they offer. For larger organizations, we compete with customer software systems and large enterprise software vendors such as salesforce.com, Inc., Oracle Corporation, Microsoft Corporation, and ServiceNow, Inc., each of which may have greater operational flexibility to bundle competing products and services with other software offerings, or offer them at a lower price than our current Suite offering, which will negatively affect our competitiveness for that offering. In addition, we compete with a number of other SaaS providers with focused applications competitive to one or more of our products that our potential customers may elect to use in lieu of our products. Further, other established SaaS providers not currently focused on the functionality that our products provide may expand their services to compete with us. Many of our current and potential competitors have established marketing relationships, access to larger customer bases, pre-existing customer relationships, and major distribution agreements with consultants, system integrators, and resellers. Additionally, some existing and potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal customer support software system. Certain of our competitors have partnered with, or have acquired, and may in the future partner with or acquire, other competitors to offer services, leveraging their collective competitive positions, which makes, or would make, it more difficult for us to compete with them. Additionally, as our offerings expand to adjacent markets, such as sales force automation and platform-based features and functionality, in which we may not have the operational history or familiarity, we may find it difficult to compete with established vendors in those markets. For all of these reasons, we may not be able to compete successfully against our current and future competitors or retain existing customers, which would harm our business.

Our business depends substantially on our customers renewing their subscriptions, expanding the use of their subscriptions, and purchasing subscriptions for additional products from us. Any decline in our customer retention or expansion, or any failure by us to sell subscriptions to additional products to existing customers, would harm our future operating results.

In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions when the initial contract term expires and add additional authorized agents to their customer accounts. Even though the majority of our revenue is derived from subscriptions to our products that have terms longer than one month, a significant portion of the subscriptions to our products have monthly terms. Our customers have no obligation to renew their subscriptions, and our customers may not renew subscriptions with a similar contract period or with the same or a greater number of agents. Some of our customers have elected not to renew their agreements with us and it is difficult to accurately predict long-term customer retention. Additionally, our future success is also substantially dependent on our ability to expand our existing customers' use of our products by expanding the number of products to which such customers subscribe. This may require increasingly sophisticated and costly sales efforts and may not result in additional sales.

Our customer retention, our ability to sell additional products to existing customers, and the rate at which our existing customers purchase subscriptions to additional products may be impacted by a number of factors, including our customers’ satisfaction with our products, our product support, our prices, the prices of competing software systems, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels. In addition, the rate at which our existing customers purchase subscriptions to additional products depends on a number of factors, including the perceived need for additional products to build better relationships between organizations and their customers. If our customers do not renew their subscriptions, renew on less favorable terms, fail to add more agents, or fail to purchase subscriptions to additional products, our revenue may decline, and we may not realize improved operating results from our customer base.

We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.

We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, products, and other assets in the future. We also may enter into relationships with other businesses to

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expand our products and services, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, or investments in other companies.

Any acquisition, investment, or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the business strategy, sales plans, technologies, products, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our products, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management, customers' experience with the acquired company prior to acquisition, or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown risks or liabilities.

Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of these transactions, we may:


•	issue additional equity securities that would dilute our existing stockholders;


•	use cash that we may need in the future to operate our business;


•	encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures;


•	incur large charges or substantial liabilities;


•	incur debt on terms unfavorable to us or that we are unable to repay; and


•	become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.

If we are not able to develop enhancements to our products or introduce new products and services that achieve market acceptance and that keep pace with technological developments, our business would be harmed.

Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our products and to introduce new products and services. In order to grow our business, we must research and develop products and services that reflect the changing nature of customer service, and expand beyond customer service to other areas of improving relationships between organizations and their customers. In each of the fiscal years ending 2018 and 2017, our research and development expenses was 27% of our revenue. If we do not spend our research and development budget efficiently or effectively on compelling innovation and technologies, our operating results may be harmed and we may not realize the expected benefits of our strategy.

The success of any enhancement to our products depends on several factors, including timely completion, adequate quality testing, and market acceptance. Any new product or service that we develop may not be introduced in a timely or cost-effective manner, may contain defects, or may not achieve the market acceptance necessary to generate sufficient revenue. If we are unable to successfully develop new products or services, enhance our existing products to meet customer requirements, or otherwise gain market acceptance, our business and operating results will be harmed.

Because our products are available over the Internet, we need to continuously modify and enhance them to keep pace with changes in Internet-related hardware, software, communications, and database technologies and standards. If we are unable to respond in a timely and cost-effective manner to these rapid technological developments and changes in standards, our products may become less marketable, less competitive, or obsolete, and our operating results will be harmed.

We employ a pricing model that subjects us to various challenges that could make it difficult for us to derive sufficient value from our customers.

We generally charge our customers for their use of our products based on the number of users they enable as “agents” to under their customer account, as well as the features and functionality enabled. The features and functionality we provide within our products enable our customers to promote customer self-service and otherwise efficiently and cost-effectively address product support requests without the need for substantial human interaction. As a result of these features, customer agent staffing requirements may be minimized and our revenue may be adversely impacted. Additionally, other than subscriptions related to our Suite offering, we generally require a separate subscription to enable the functionality of each of our products. We do not know whether our current or potential customers or the market in general will accept this pricing model going forward and, if it fails to gain acceptance, our business and results of operations could be harmed.

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Our terms of service generally prohibit the sharing of user logins and passwords. These restrictions may be improperly circumvented or otherwise bypassed by certain users and, if they are, we may not be able to capture the full value of the use of our products. We license access and use of our products exclusively for our customers’ internal use. If customers improperly resell or otherwise make our products available to their customers, it may cannibalize our sales or commoditize our products in the market. Additionally, if a customer that has received a volume discount from us offers our products to its customers in violation of our terms of service, we may experience price erosion and be unable to capture sufficient value from the use of our products by those customers.

While our terms of service provide us the ability to enforce our terms, our customers may resist or refuse to allow us to audit their usage, in which case we may have to pursue legal recourse to enforce our rights. Any such enforcement action would require us to spend money, distract management, and potentially adversely affect our relationship with our customers.

We may not be able to integrate new products into our infrastructure, which could negatively impact our future sales and results of operations.

Our business depends in part on our ability to build or acquire products that both complement our existing products and respond to our customers’ needs. Our customers also expect that new products will integrate with existing products that we currently offer. Our ability to successfully integrate newly developed or acquired products into a shared services infrastructure is unproven. Because we have a limited history in integrating newly developed or acquired products and the market for such products is rapidly evolving, it is difficult for us to predict our operating results following the integration of such products. If we are not able to fully integrate new products into our infrastructure, our business could be harmed.

If we fail to effectively manage our growth and organizational change in a manner that preserves the key aspects of our culture, our business and operating results could be harmed.

We have experienced and may continue to experience rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational, and financial resources. For example, our headcount has grown from approximately 2,060 employees as of December 31, 2017 to approximately 2,740 employees as of December 31, 2018. In addition, we have established subsidiaries in Denmark, the United Kingdom, Australia, Ireland, Japan, the Philippines, Brazil, Germany, India, and Mexico since our inception in 2007, and, as a result of acquisitions, we also have subsidiaries in Singapore, France, and Poland. We may continue to expand our international operations into other countries in the future. We have also experienced significant growth in the number of customers, end users, transactions, and data that our products support. Finally, our organizational structure is becoming more complex and we may need to scale and adapt our operational, financial, and management controls, as well as our reporting systems and procedures, to manage this complexity. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, simplicity in design, and attention to customer experience that has been critical to our growth so far. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our culture, the quality of our products and services may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.

If our network or computer systems are breached or unauthorized access to customer data is otherwise obtained, our products may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities.

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Use of our products involves the storage, transmission, and processing of our customers’ proprietary data, including personal or identifying information regarding their customers or employees. Unauthorized access to or security breaches of our products could result in the loss of data, loss of intellectual property or trade secrets, loss of business, severe reputational damage adversely affecting customer or investor confidence, regulatory investigations and orders, litigation, or indemnity obligations. Furthermore, if our network or computer systems are breached or unauthorized access to customer data is otherwise obtained, we may be held responsible for damages for contract breach, penalties for violation of applicable laws, regulations, or contractual obligations, and significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and other liabilities. Notifications related to a security breach regarding or pertaining to any of such service providers could impact our reputation, harm customer confidence, hurt our sales and expansion into new markets, or cause us to lose existing customers. We have incurred, and expect to continue to incur, significant expenses to prevent, investigate, and remediate security breaches and vulnerabilities, including deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants. Our errors and omissions insurance coverage covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all liability.

We have previously experienced significant breaches and identified significant vulnerabilities of our security measures and the security measures deployed by third-party vendors upon which we rely, and our products are at risk for future breaches as a result of third-party action, employee, vendor, or contractor error, malfeasance, or other factors.

New products and services, including newly acquired products and services, may rely on systems, networks, personnel, equipment, and vendors that may initially be different from those utilized in connection with our existing products and may not have been subject to the same security reviews and assessments as those used to provide our existing products. Any failure to complete these security reviews and assessments and to implement improvements to the security measures deployed to protect our new products in a timely manner could increase our risk of a security breach with respect to these products, which would harm our reputation and our business as a whole.

Because the techniques used and vulnerabilities exploited to obtain unauthorized access to or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or to implement adequate preventative measures. We may also experience security breaches that may remain undetected for an extended period.

Because data security is a critical competitive factor in our industry, we make numerous statements in our privacy policies, terms of service, and data processing agreements, through our certifications to privacy standards, and in our marketing materials, providing assurances about the security of our products, including detailed descriptions of security measures we employ. Should any of these statements be untrue or become untrue, even due to circumstances beyond our reasonable control, we may face claims of misrepresentation or deceptiveness by the U.S. Federal Trade Commission, state and foreign regulators, and private litigants.

We do not have the history with our subscription or pricing models that we need to accurately predict optimal pricing necessary to attract new customers and retain existing customers.

We have limited experience with respect to determining the optimal prices for our products and, as a result, we have in the past and expect in the future that we will need to change our pricing model from time to time. As the market for our products matures, or as new competitors introduce new products or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically. Pricing decisions may also impact the mix of adoption among our subscription plans and negatively impact our overall revenue. Moreover, larger organizations may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.

Additionally, we have a very limited history in respect of pricing our Suite offering and our Sell product. We may not fully understand the impact of pricing changes in the market, and if we fail to find an optimal price for our Suite offering or our Sell product our business and results of operations may be harmed.

If the market for SaaS business software applications develops more slowly than we expect or declines, our business would be adversely affected.

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The market for SaaS business software applications is less mature than the market for on-premise business software applications, and the adoption rate of SaaS business software applications may be slower among subscribers in industries with heightened data security interests or business practices requiring highly customizable application software. Our success will depend to a substantial extent on the widespread adoption of SaaS business applications in general, and of SaaS customer service applications in particular. Many organizations have invested substantial personnel and financial resources to integrate traditional on-premise business software applications into their businesses, and therefore may be reluctant or unwilling to migrate to SaaS applications. The expansion of the SaaS business applications market depends on a number of factors, including the cost, performance, and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. If SaaS business applications do not continue to achieve market acceptance, if there is a reduction in demand for SaaS business applications caused by a lack of customer acceptance, or if there are technological challenges, weakening economic conditions, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending, it would result in decreased revenue and our business would be adversely affected.

Our financial results may fluctuate due to increasing variability in our sales cycles.

We plan our expenses based on certain assumptions about the length and variability of our sales cycle. These assumptions are based upon historical trends for sales cycles and conversion rates associated with our existing customers, many of whom to date have been small to medium-sized organizations that make purchasing decisions with limited interaction with our sales or other personnel. As we continue to become more dependent on sales to larger organizations, we expect our sales cycles to lengthen and become less predictable. This may adversely affect our financial results. Factors that may influence the length and variability of our sales cycle include:


•	the need to educate prospective customers about the uses and benefits of our products;


•	the discretionary nature of purchasing and budget cycles and decisions;


•	the competitive nature of evaluation and purchasing processes;


•	announcements or planned introductions of new products, features, or functionality by us or our competitors; and


•	lengthy purchasing approval processes.

An increasing dependence on sales to larger organizations may increase the variability of our financial results. If we are unable to close one or more expected significant transactions with these customers in a particular period, or if an expected transaction is delayed until a subsequent period, our operating results for that period, and for any future periods in which revenue from such transaction would otherwise have been recognized, may be adversely affected.

Our quarterly results may fluctuate for various other reasons, and if we fail to meet the expectations of analysts or investors, our stock price and the value of an investment in our common stock could decline substantially.

Our quarterly financial results may fluctuate as a result of a variety of other factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Some of the important factors that may cause our revenue, operating results, and cash flows to fluctuate from quarter to quarter include:


•	our ability to attract new customers, retain and increase sales to existing customers, and satisfy our customers’ requirements;


•	the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;


•	the rate of expansion and productivity of our sales force;


•	changes in our or our competitors’ pricing policies;


•	security breaches, technical difficulties, or service interruptions to our products;


•	the number of new employees added to our company in a given period;


•	new products, features, or functionalities introduced by our competitors;


•	our investments in and our ability to successfully sell newly developed or acquired products, features, or functionality;


•	increasing efforts by our customers to develop native applications as a substitute for our own;


•	the timing of customer payments and payment defaults by customers;


•	general economic conditions that may adversely affect either our customers’ ability or willingness to purchase additional subscriptions, delay a prospective customer’s purchasing decision, reduce the value of new subscription contracts, or affect customer retention;


•	changes in the relative and absolute levels of professional services we provide;

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•	changes in foreign currency exchange rates;


•	expenses such as litigation or other dispute-related settlement payments;


•	the impact of new accounting pronouncements; and


•	the timing of the grant, price of our common stock, or vesting of equity awards to employees.

Many of these factors are outside of our control, and the occurrence of one or more of them might cause our revenue, operating results, cash flows, gross margin, operating margin, profitability, unearned revenue, and remaining revenue performance obligations, to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue, operating results, and cash flows may not be meaningful and should not be relied upon as an indication of future performance.

Our ongoing and planned expenditures on third-party managed hosting services and expenditures on transitioning our services and customers fully to third-party managed hosting services from self-managed colocation data centers are expensive and complex, have resulted, and will result, in a negative impact on our cash flows, and may negatively impact our financial results.

We have made and will continue to make substantial expenditures for third-party managed hosting services to support our growth and provide enhanced levels of service to our customers. We have been continuing to decrease the amount of capital expenditures on hosting equipment for use in our self-managed colocation data centers as we transition to greater dependence on third-party managed hosting services. If costs associated with third-party managed hosting services utilized to support our growth are greater than expected, if we are required to make larger continuing investments in our self-managed colocation data centers than we anticipated, or if the costs associated with the transition to our self-managed colocation data centers is greater than we anticipated, the negative impact on our operating results would likely exceed our initial expectations. Furthermore, if we determine to no longer utilize our self-managed colocation data centers earlier than we expect, we may be forced to accelerate expense recognition as a result of the shorter estimated life of such assets.

We plan to continue to invest resources in connection with transitioning our customers and services infrastructure to third-party managed hosting services and may encounter obstacles in completing the transition. Additionally, due to the difficulty in predicting usage of third-party managed hosting services related to customers recently migrated or customers to be migrated from our self-managed colocation data centers, we may not be able to accurately forecast our expenditures on such third-party managed hosting services, which may increase the variability of our results of operations.

We increasingly rely on third-party managed hosting services to support our operations and disruption or interference in such service may negatively impact our business.

Given that we will increasingly become more reliant on third-party managed hosting services, any significant disruption of or interference in our use of such services will negatively impact our operations and customer satisfaction. Third-party managed hosting services may additionally take actions beyond our control that could seriously harm our business, including:


•	discontinuing or limiting our access to the service;


•	increasing price terms, including establishing more favorable relationships or pricing terms with one or more of our competitors;


•	terminating or seeking to terminate the contractual relationship altogether, or


•	modifying or interpreting its terms of service or other policies in a manner that impacts our ability to run our businesses and operations.

Our international sales and operations subject us to additional risks that can adversely affect our business, operating results, and financial condition.

In the three months and fiscal years ended December 31, 2018 and 2017, we derived 48% and 47% of our revenue from customers located outside of the United States, respectively. We are continuing to expand our international operations as part of our growth strategy. We currently have sales personnel and sales and product support operations in certain countries across North America, Europe, Australia, Asia, and South America. To date a very limited portion of our sales has been driven by resellers or other channel partners. We believe our ability to convince new customers to subscribe to our products or to convince existing customers to renew or expand their use of our products is directly correlated to the level of engagement we obtain with the customer. To the extent we are unable to effectively engage with non-U.S. customers due to our limited sales force capacity and limited channel partners, we may be unable to effectively grow in international markets.

Our international operations subject us to a variety of additional risks and challenges, including:

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•	increased management, travel, infrastructure, and legal compliance costs associated with having multiple international operations;


•	longer payment cycles and difficulties in enforcing contracts, collecting accounts receivable, or satisfying revenue recognition criteria, especially in emerging markets;


•	increased financial accounting and reporting burdens and complexities;


•	requirements or preferences for domestic products;


•	differing technical standards, existing or future regulatory and certification requirements and required features and functionality;


•	economic conditions in each country or region and general economic uncertainty around the world;


•	compliance with foreign privacy and security laws and regulations and the risks and costs of non-compliance;

•

compliance with laws and regulations for foreign operations, including anti-bribery laws (such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, and the U.K. Bribery Act 2010), import and export controls laws, tariffs, trade barriers, economic sanctions, and other regulatory or contractual limitations on our ability to sell our products in certain foreign markets, and the risks and costs of non-compliance;


•	heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial results and result in restatements of our consolidated financial statements;


•	fluctuations in foreign currency exchange rates and the related effect on our operating results;


•	difficulties in repatriating or transferring funds from or converting currencies in certain countries;


•	communication and integration problems related to entering new markets with different languages, cultures, and political systems;


•	differing labor standards, including restrictions related to, and the increased cost of, terminating employees in some countries;


•	the need for localized software and licensing programs;


•	the need for localized language support;


•	reduced protection for intellectual property rights in some countries and practical difficulties of enforcing rights abroad; and


•	compliance with the laws of numerous foreign tax jurisdictions, including withholding obligations, and overlapping of different tax regimes.

Any of these risks could adversely affect our international operations, reduce our international revenue, or increase our operating costs, adversely affecting our business, operating results, financial condition, and growth prospects.

Compliance with laws and regulations applicable to our international operations substantially increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with new or revised government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. Additionally, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. or other regulations applicable to us. Although we have implemented policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, partners, and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, partners, or agents could result in delays in revenue recognition, financial reporting misstatements, enforcement actions, disgorgement of profits, fines, civil and criminal penalties, damages, injunctions, other collateral consequences, or the prohibition of the importation or exportation of our products and services, and could adversely affect our business and results of operations.

Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.

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Our continued growth depends in part on the ability of our existing and potential customers to access our products at any time and within an acceptable amount of time. Our products are proprietary, and we rely on the expertise of members of our engineering, operations, and software development teams for their continued performance. We have experienced, and may in the future experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users simultaneously accessing our products, distributed denial of service attacks, or other security related incidents. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our products become more complex and our user traffic increases. If any of our products are unavailable or if our users are unable to access our products within a reasonable amount of time or at all, our business would be negatively affected. In addition, a significant portion of our infrastructure does not currently support the mirroring of data. Therefore, in the event of any of the factors described above, or certain other failures of our infrastructure, customer data may be permanently lost. Moreover, some of our customer agreements and certain subscription plans include performance guarantees and service level standards that obligate us to provide credits or termination rights in the event of a significant disruption in our services. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.

Real or perceived errors, failures, or bugs in our products could adversely affect our operating results and growth prospects.

Because our products are complex, undetected errors, failures, vulnerabilities, or bugs may occur, especially when updates are deployed. Our products are often used in connection with large-scale computing environments with different operating systems, system management software, equipment, and networking configurations, which may cause errors or failures of our products or other aspects of the computing environment into which they are deployed. In addition, deployment of our products into complicated, large-scale computing environments may expose undetected errors, failures, vulnerabilities, or bugs in our products. We have discovered, and expect to continue to discover, software errors, failures, vulnerabilities, and bugs in our products, some of which have or may only be discovered and remediated after deployment to customers. Real or perceived errors, failures, vulnerabilities, or bugs in our products could result in negative publicity, loss of or delay in market acceptance of our products, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.

We depend on our executive officers and other key employees and the loss of one or more of these employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our executive officers and other key employees. We rely on our leadership team and on individual contributors in the areas of research and development, operations, security, sales, marketing, support, and general and administrative functions. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business.

We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period of time and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers, especially our Chief Executive Officer, or other key employees could have an adverse effect on our business.

In addition, to execute on our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, is intense, especially for engineers experienced in designing and developing software and SaaS applications and experienced sales professionals. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. For example, certain domestic immigration laws restrict or limit our ability to recruit internationally. Any changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to recruit and retain highly qualified employees. Additionally, many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived or actual value of our equity awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.

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Incorrect or improper implementation or use of our products could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.

Our products are deployed in a wide variety of technology environments and into a broad range of complex workflows. Increasingly, our products have been, and will continue to be, integrated into large-scale, complex technology environments and specialized use cases, and we believe our future success will depend on our ability to increase use of our products in such deployments. We often assist our customers in implementing our products, but many customers attempt to implement deployments, including complex deployments, themselves. If we or our customers are unable to implement our products successfully, or are unable to do so in a timely manner, customer perceptions of our products and of our company may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our products.

Our customers and third-party partners may need training in the proper use of our products to maximize their potential. If our products are not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our products to manage a wide range of operations and to drive a number of their internal processes, the incorrect or improper implementation or use of our products, our failure to train customers on how to efficiently and effectively use our products or our failure to provide adequate product support to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our products.

Any failure to offer high-quality product support or customer success initiatives may adversely affect our relationships with our customers and our financial results.

In deploying and using our products, our customers depend on our product support team and customer success organization to resolve complex technical and operational issues. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for product support. We also may be unable to modify the nature, scope, and delivery of our product support to compete with changes in product support services provided by our competitors. Increased customer demand for product support, without corresponding revenue, could increase costs and adversely affect our operating results. Furthermore, adoption of Suite and increasing usage by customers of multiple products may additionally increase demand on our product support team and customer success organizations. We may allocate resources to support such increased demand and, as a consequence, our support of any individual product may suffer. Additionally, we may be unable to develop our customer success organization to continue to support the increasing level of complexity that larger enterprise customers require while maintaining the same level of engagement across all customers.

Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality product support, or a market perception that we do not maintain high-quality product support, or maintain a high complexity customer success organization, could adversely affect our reputation, our ability to sell our products to existing and prospective customers, and our business, operating results, and financial position.

We are highly dependent upon free trials of our products and other inbound lead generation strategies to drive our sales and revenue. If these strategies fail to continue to generate sales opportunities or do not convert into paying customers, our business and results of operations would be harmed.

We are highly dependent upon our marketing strategy of offering free trials of our products and other inbound lead generation strategies to generate sales opportunities. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. Many early users never convert from the trial version of a product to a paid version of such product. Further, we often depend on individuals within an organization who initiate the trial versions of our products being able to convince decision makers within their organization to convert to a paid version. Many of these organizations increasingly have complex and multi-layered purchasing requirements, especially as we continue to target larger organizations and in the case of our sales force automation software, increasingly target decision makers that are not in the customer support organizations we have traditionally targeted. To the extent that these users do not become, or are unable to convince others to become, paying customers, we will not realize the intended benefits of this marketing strategy and our ability to grow our revenue will be adversely affected.

If we are unable to develop and maintain successful relationships with channel partners, our business, operating results, and financial condition could be adversely affected.

To date, we have been primarily dependent on our direct sales force to sell subscriptions to our products. Although we have developed certain channel partners, such as referral partners, resellers, and integration partners, these channels have resulted in limited revenue to date. We believe identifying, developing, and maintaining strategic relationships with additional channel partners are important to driving revenue growth for our company, and will continue to dedicate resources to those

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efforts. Our agreements with our existing channel partners are non-exclusive, meaning our channel partners may offer customers the products of several different companies, including products that compete with ours. They may also cease marketing our products with limited or no notice and with little or no penalty. We expect that any additional channel partners we identify and develop will be similarly non-exclusive and not bound by any requirement to continue to market our products. If we fail to identify additional channel partners, in a timely and cost-effective manner, or at all, or are unable to assist our current and future channel partners in independently selling and deploying our products, our business, results of operations, and financial condition could be adversely affected. Additionally, customer retention and expansion attributable to customers acquired through our channel partners may differ significantly from customers acquired through our direct sales efforts. If our channel partners do not effectively market and sell our products, or fail to meet the needs of our customers, our reputation and ability to grow our business may also be adversely affected.

Sales by channel partners are more likely than direct sales to involve collectibility concerns. In particular sales by our channel partners into developing markets, and accordingly, variations in the mix between revenue attributable to sales by channel partners and revenue attributable to direct sales, may result in fluctuations in our operating results.

If we are not able to maintain and enhance our brand, our business, operating results, and financial condition may be adversely affected.

We believe that maintaining and enhancing our reputation as a differentiated and category-defining company in customer service is critical to our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality software, and our ability to successfully differentiate our products from competitive products and services. We are and have been highly dependent upon “consumer” tactics to build our brand and develop brand loyalty, but may need to increasingly spend significant energy to develop branding to retain and increase brand recognition with our customers who are larger enterprises. In addition, independent industry analysts often provide reviews of our products, as well as products and services offered by our competitors, and perception of our products in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected. It may also be difficult to maintain and enhance our brand, specifically following the launch of our updated corporate brand, in connection with sales through channel or strategic partners.

The promotion of our brand requires us to make substantial expenditures, and we anticipate that these expenditures will continue to increase, as our market becomes more competitive, as we expand into new markets, and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors, and we could lose customers or fail to attract potential customers, all of which would adversely affect our business, results of operations, and financial condition.

Because our products can be used to collect and store personal information, domestic and international privacy and data security concerns could result in additional costs and liabilities to us or inhibit sales of our products.

Personal privacy and data security have become significant issues in the United States, Europe, and in many other jurisdictions where we offer our products. The regulatory framework for privacy and security issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. Many federal, state, and foreign government bodies and agencies have adopted, or are considering adopting, laws and regulations regarding the collection, use, and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of federal agencies and state attorneys general and consumer protection agencies. For example, California recently enacted the California Consumer Privacy Act ("CCPA") that will, among other things, require covered companies to provide new disclosures to California consumers and afford such consumers new abilities to opt-out of certain sales of personal information, when it goes into effect on January 1, 2020. The CCPA recently was amended, and it is possible that it will be amended again before it goes into effect. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply. On May 25, 2018, the European General Data Protection Regulation, or the GDPR, became effective, which imposes additional obligations and risks upon our business. Compliance with GDPR has and will continue to require valuable management and employee time and resources, and failure to comply with GDPR could trigger severe penalties, including steep fines of up to €20.0 million or 4% of global annual revenue, whichever is higher, and could reduce demand for our products. In many jurisdictions enforcement actions and consequences for non-compliance are also rising.

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Failure to comply with data protection regulations may result in data protection authorities and other privacy regimes imposing additional obligations to obtain consent from data subjects by or on behalf of our customers. Additionally, the inability to guarantee compliance or otherwise provide acceptable privacy assurances may inhibit the sale and use of our software in the European Union and certain other markets, which could, were it to occur, harm our business and operating results.

In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Further, our customers may require us to comply with more stringent privacy and data security contractual requirements. Particularly in this regulatory environment, if we or other SaaS providers experience data security incidents, loss of customer data, disruptions in delivery, or other problems, the market for SaaS business applications, including our products, may be negatively affected.

Because the interpretation and application of many privacy and data protection laws (including the GDPR), commercial frameworks, and standards are uncertain, it is possible that these laws, frameworks, and standards may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our products. If so, in addition to the possibility of fines, lawsuits, breach of contract claims, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and security or data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business.

Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and foreign countries.

Unfavorable conditions in our industry or the global economy or reductions in information technology spending could limit our ability to grow our business and negatively affect our operating results.

Our operating results may vary based on the impact of changes in our industry or the global economy on us or our customers. The revenue growth and potential profitability of our business depend on demand for business software applications and services generally and for customer service systems in particular. In addition, our revenue is dependent on the number of users of our products, which in turn is influenced by the employment and hiring patterns of our customers. To the extent that weak economic conditions cause our customers and prospective customers to freeze or reduce their hiring for personnel providing service and support, demand for our products may be negatively affected. Historically, during economic downturns there have been reductions in spending on information technology and customer service systems as well as pressure for extended billing terms and other financial concessions. If economic conditions deteriorate, our customers and prospective customers may elect to decrease their information technology and customer service budgets, which would limit our ability to grow our business and negatively affect our operating results.

We are subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

We are subject to U.S. export controls, and we incorporate encryption technology into our products that is enabled through mobile applications and other software we may be deemed to export. These encryption products and the underlying technology may be exported outside of the U.S. only with the required export authorizations, including by license, a license exception, or other appropriate government authorizations, including the filing of an encryption registration. We previously deployed mobile applications prior to obtaining the required export authorizations. Accordingly, we have not fully complied with applicable encryption controls in U.S. export administration regulations.

Furthermore, U.S. export controls laws and economic sanctions prohibit the shipment of certain products and services to countries, governments, territories, and persons targeted by U.S. sanctions. While we are currently taking precautions to prevent our products from being enabled by persons targeted by U.S. sanctions, including IP blocking and periodic customer screening against U.S. government lists of prohibited persons, such measures may be circumvented. Given the technical limitations in developing measures that will prevent access to internet based services from particular geographies or by particular individuals, we have previously identified and expect we will continue to identify customer accounts for our products that we suspect originate from countries which are subject to U.S. embargoes.

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We are aware that trials of and subscriptions to our products have been initiated by persons and organizations in countries that are the subject of U.S. embargoes. Our provision of services in these instances was likely in violation of U.S. export controls and sanctions laws. We have terminated the accounts of such organizations as we have become aware of them, implemented certain measures designed to prevent future unauthorized access by such persons and organizations, and filed voluntary self-disclosures with the U.S. Department of Commerce’s Bureau of Industry and Security, or BIS, and the U.S. Department of Treasury’s Office of Foreign Assets Control, or OFAC, concerning prior potential violations. With respect to these matters, each of BIS and OFAC completed its investigations, and no monetary penalties or other sanctions were imposed.

If we are found to be in violation of U.S. sanctions or export controls laws, it could result in fines or penalties for us and for individuals, including civil penalties of approximately $300,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation, fines of up to $1 million and possible incarceration for responsible employees and managers for willful and knowing violations. Each instance in which we provide services through our products or in which unlicensed encryption functionality software is downloaded may constitute a separate violation of these laws.

If our channel partners fail to obtain appropriate import, export, or re-export licenses or permits, we may also be adversely affected, through reputational harm as well as other negative consequences, including government investigations and penalties. We presently incorporate sanctions compliance requirements in our channel partner agreements for our products. Complying with export controls and sanctions regulations for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Failure to comply with exports control and sanctions regulations for a particular sale may expose us to government investigations and penalties, which could have an adverse effect on our business, operating results, and financial condition.

In addition, various countries regulate the import of certain encryption technology, including import permitting and licensing requirements, and have enacted laws that could limit our ability to offer or distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or future changes in export and import regulations may create delays in the introduction of our products in international markets or prevent our customers with international operations from deploying our products globally. Any change in export or import regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business operations and financial results.

We recognize revenue over the term of our customer contracts. Consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.

We generally recognize subscription revenue from customers ratably over the terms of their contracts and a majority of our revenue is derived from subscriptions that have terms longer than one month. As a result, a portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions with terms that are longer than one month in any single quarter may have a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our products, and potential changes in our pricing policies or rate of expansion or retention, may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, because we believe a substantial percentage of subscriptions to our products are shorter than many comparable SaaS companies and because we have many variations of billing cycles, our deferred revenue may be a less meaningful indicator of our future financial results as compared to other SaaS companies. A significant majority of our costs are expensed as incurred, while revenue is recognized over the life of the agreement with the applicable customer. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality.

We have experienced, and expect to continue to experience in the future, seasonality in our business, and our operating results and financial condition may be affected by such trends in the future. We generally experience seasonal fluctuations in demand for our products and services, and believe that our quarterly sales are affected by industry buying patterns. For example, we typically have customers who add flexible agents when they need more capacity during busy periods, especially in the fourth quarter, and then subsequently scale back in the first quarter of the following year. We believe that the seasonal

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trends that we have experienced in the past may continue for the foreseeable future, particularly as we expand our sales to larger enterprises. Additionally, since a large percentage of our subscriptions are monthly, customers are able to increase and decrease the number of authorized agents for whom they require a subscription quickly and easily, thereby potentially increasing the impact of seasonality on our revenue. Seasonality within our business may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of our agreement. To the extent we experience this seasonality, it may cause fluctuations in our operating results and financial metrics, and make forecasting our future operating results and financial metrics difficult. Additionally, we do not have sufficient experience in selling certain of our products to determine if demand for these services are or will be subject to material seasonality.

Our business and growth depend in part on the success of our strategic relationships with third parties, including technology partners, channel partners, and professional services partners.

We depend on, and anticipate that we will continue to depend on, various third-party relationships in order to sustain and grow our business. We are highly dependent upon third-party technology partners for certain critical features and functionality of our platform. For example, the features available on Zendesk Talk are highly dependent on our technology integration with Twilio, Inc. Failure of this or any other technology provider to maintain, support, or secure its technology platforms in general, and our integrations in particular, or errors or defects in its technology, could materially and adversely impact our relationship with our customers, damage our reputation and brand, and harm our business and operating results. Any loss of the right to use any of this hardware or software could result in delays or difficulties in our ability to provide our products until equivalent technology is either developed by us or, if available, identified, obtained, and integrated.

For deployments of our products into complex technology environments and workflows, we are highly dependent on third-party implementation consultants to provide professional services to our customers. The failure of these third-party consultants to perform their services adequately may disrupt or damage the relationship between us and our customers, damage our brand, and harm our business.

Identifying, negotiating, and documenting relationships with strategic third parties such as technology partners and implementation providers require significant time and resources. In addition, integrating third-party technology is complex, costly, and time-consuming. Our agreements with technology partners and implementation providers are typically limited in duration, non-exclusive, and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our products.

If we are unsuccessful in establishing or maintaining our relationships with these strategic third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results would suffer. Even if we are successful, we cannot assure you that these relationships will result in improved operating results.

If we fail to integrate our products with a variety of operating systems, software applications, and hardware that are developed by others, our products may become less marketable, less competitive, or obsolete, and our operating results would be harmed.

Our products must integrate with a variety of network, hardware, and software platforms, and we need to continuously modify and enhance our products to adapt to changes in cloud-enabled hardware, software, networking, browser, and database technologies. In particular, we have developed our products to be able to easily integrate with third-party SaaS applications, including the applications of software providers that compete with us, through the interaction of application platform interfaces, or APIs. To date, we have not typically relied on a long-term written contract to govern our relationship with these providers. Instead, we are typically subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation, and fees of such software systems, and which are subject to change by such providers from time to time. To the extent that we do not have long-term written contracts to govern our relationship with these providers, we rely on the fact that the providers of such software systems continue to allow us access to their APIs to enable these customer integrations. Our business may be harmed if any provider of such software systems:


•	discontinues or limits our access to its APIs;


•	modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers;


•	changes how customer information is accessed by us or our customers;


•	establishes more favorable relationships with one or more of our competitors; or

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•	otherwise favors its own competitive offerings over ours.

We believe a significant component of our value proposition to customers is the ability to optimize and configure our products to communicate with these third-party SaaS applications through our respective APIs. If we are not permitted or able to integrate with these and other third-party SaaS applications in the future, demand for our products could be adversely impacted and business and operating results would be harmed. In addition, an increasing number of individuals within organizations are utilizing mobile devices to access the Internet and corporate resources and to conduct business. We have designed mobile applications to provide access to our products through these devices. If we cannot provide effective functionality through these mobile applications as required by organizations and individuals that widely use mobile devices, we may experience difficulty attracting and retaining customers. Failure of our products to operate effectively with future infrastructure platforms and technologies could also reduce the demand for our products, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to changes in a cost-effective manner, our products may become less marketable, less competitive, or obsolete and our operating results may be negatively impacted.

We may be sued by third parties for alleged infringement of their proprietary rights.

There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, our competitors or other third parties may claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. We may receive claims from third parties, including our competitors, that our products and underlying technology infringe or violate a third party’s intellectual property rights, and we may be found to be infringing upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering one or more of our products, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify our products, or refund subscription fees, which could further exhaust our resources. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty, or license fees, modification of our products, or refunds to customers of subscription fees. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Such disputes could also disrupt our products, adversely impacting our customer satisfaction and ability to attract customers.

Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.

Our agreements with customers and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our products or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, operating results, and financial condition. From time to time, customers require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their data stored, transmitted, or processed by our products and customer service platform. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our products, and harm our business and operating results.

Our use of “open source” software could negatively affect our ability to sell our products and subject us to possible litigation.

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We use open source software in our products and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works, or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license, or require us to devote additional research and development resources to change our products, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our products or incur additional costs. Although we have implemented policies to regulate the use and incorporation of open source software into our products, we cannot be certain that we have not incorporated open source software in our products in a manner that is inconsistent with such policies.

Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.

Our success and ability to compete depend in part upon our intellectual property. We currently have two issued patents and have a limited number of patent applications, none of which may result in an issued patent. We primarily rely on copyright, trade secret, and trademark laws, trade secret protection, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.

In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and adversely impact our business.

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

We have funded our operations since inception primarily through customer payments for subscription services, the issuance of our convertible senior notes, and public and private equity financings. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of subscriptions for our products, or unforeseen circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any additional debt financing obtained by us could involve restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, we may not be able to generate sufficient cash to service any debt financing obtained by us, which may force us to reduce or delay capital expenditures or sell assets or operations. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be significantly limited.

We face exposure to foreign currency exchange rate fluctuations.

As our international operations expand, our exposure to the effects of fluctuations in currency exchange rates grows. While we have primarily transacted with customers in U.S. dollars historically, we expect to continue to expand the number of transactions with our customers that are denominated in foreign currencies in the future. Fluctuations in the value of the U.S. dollar and foreign currencies may make our subscriptions more expensive for international customers, which could harm our business. Additionally, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency for such locations. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses. These fluctuations could cause our results of operations to differ from our expectations or the expectations of our investors. Additionally, such foreign currency exchange rate fluctuations could make it more difficult to detect underlying trends in our business and results of operations.

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Our international subsidiaries maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our operating results due to transactional and translational remeasurements that are reflected in our results of operations. To the extent that fluctuations in foreign currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.

We currently operate a hedging program to mitigate the impact of foreign currency exchange rate fluctuations on our cash flows and earnings. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments, which could adversely affect our financial condition and operating results.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, value added, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.

We do not collect sales and use, value added, or similar taxes in all jurisdictions in which we have sales, based on our understanding that such taxes are not applicable. Sales and use, value added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, and interest, or future requirements, may adversely affect our results of operations.

Our international operations subject us to potentially adverse tax consequences.

We were founded in Denmark in 2007 and were headquartered in Denmark until we reincorporated in Delaware in 2009. Today, we generally conduct our international operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships and transactions are subject to complex regulations, including transfer pricing regulations administered by taxing authorities in various jurisdictions. Our tax returns are generally subject to examination by taxing authorities and the relevant taxing authorities may disagree with our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions or transactions. If such a disagreement were to occur, and our position were not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our operations.

Additionally, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The United States recently enacted significant tax reform, and certain provisions of the new law may potentially adversely affect us in the future. In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition, or results of operations may be adversely impacted.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. As of December 31, 2018, we had a net balance of $146.3 million of goodwill and intangible assets related to prior acquisitions. An adverse change in market conditions, particularly a change resulting in a significant decrease in our share price, or if such change has the effect of changing one of our critical assumptions or estimates, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or intangible assets. Any such charges may have a material negative impact on our operating results.

Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.

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As of December 31, 2018, we had federal and state net operating loss carryforwards, or NOLs, of $695.9 million and $302.9 million, respectively, due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, including in connection with our initial public offering or our follow-on public offering. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. Our NOLs generated before fiscal year 2018 are subject to a 20-year carryover limitation and may expire if unused within that period. There is also a risk that due to legislative changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. In addition, under the Tax Cuts and Jobs Act, or the Tax Act, the amount of NOLs that we are permitted to deduct in any taxable year is limited to 80% of our taxable income in such year, where taxable income is determined without regard to the NOL deduction itself. For these reasons, we may not be able to realize a tax benefit from the use of our NOLs, whether or not we attain profitability.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

Generally accepted accounting principles, or GAAP, in the United States are subject to interpretation by the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. For example, on January 1, 2018, we adopted Accounting Standards Codification 606, “Revenue from Contracts with Customers,” which changed our accounting policies regarding revenue recognition and incremental costs to acquire contracts. We also adjusted our consolidated financial statements from amounts previously reported to reflect the adoption. Certain other standards that become effective in the future may have a material impact on our consolidated financial statements. See Note 2 of the notes to our consolidated financial information for information regarding the effect of new accounting pronouncements on our consolidated financial statements. Any difficulties in implementing these standards could cause us to fail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.

Our estimates of market opportunity and forecasts of market growth may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our estimates and forecasts relating to the size and expected growth of the customer relationship management market may prove to be inaccurate. Even if the market in which we compete meets our size estimates and forecasted growth, our business could fail to grow at similar rates, if at all.

We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or performance problems with these technologies may adversely affect our business and operating results.

We rely heavily on hosted SaaS applications from third parties in order to operate critical functions of our business, including billing and order management, enterprise resource planning, and financial accounting services. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms, our expenses could increase, our ability to manage finances could be interrupted, and our processes for managing sales of our products and supporting our customers could be impaired until equivalent services, if available, are identified, obtained, and implemented, all of which could adversely affect our business.

Changes in laws and regulations related to the Internet or changes in the Internet infrastructure itself may diminish the demand for our products, cause us to incur additional expenses, or otherwise have a negative impact on our business.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting the use of the Internet as a commercial medium. Changes in these laws or regulations could require us to modify our products in order to comply with these changes or substantially increase costs associated with the operation of our products. Additionally, the adoption of any laws, regulations, or practices limiting Internet neutrality could allow Internet service providers to block, degrade, or interfere with our products or services. These laws, regulations, or practices could decrease the demand for, or the usage of, our products and services, increase our cost of doing business, and adversely affect our operating results. In addition, government agencies or private organizations have imposed and may impose additional taxes, fees, or other charges for accessing the Internet or commerce conducted via the

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Internet. These laws or charges could limit the growth of Internet-related commerce or communications generally, or result in reductions in the demand for Internet-based platforms and services such as ours. In addition, the use of the Internet as a business tool could be adversely affected due to delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been adversely affected by “viruses,” “malware,” and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure.

Catastrophic events may disrupt our business.

Our corporate headquarters are located in San Francisco, California and we operate in or utilize hosting resources that are located in North America, Europe, Asia, and Australia. Key features and functionality of our products are enabled by third parties that are headquartered in California and operate in or utilize data centers in the United States and Europe. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services, and sales activities. In the event of a major earthquake, hurricane, or catastrophic event such as fire, flood, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our products, breaches of data security, and loss of critical data, all of which could have an adverse effect on our future operating results.

Exposure to United Kingdom political developments, including the United Kingdom's vote to leave the European Union, could have a material adverse effect on us.

On June 23, 2016, a referendum was held on the United Kingdom's membership in the European Union, the outcome of which was a vote in favor of leaving the European Union. On March 29, 2017, the United Kingdom provided its official notice to the European Council that it intends to leave the European Union triggering the two-year transition period, which is expiring on March 29, 2019. The United Kingdom's vote to leave the European Union creates an uncertain political and economic environment in the United Kingdom and potentially across other European Union member states, which may last for a number of months or years.

The result of the referendum means that the long-term nature of the United Kingdom's relationship with the European Union is unclear and that there is considerable uncertainty as to when any such relationship will be agreed and implemented. In the interim, there is a risk of instability for both the United Kingdom and the European Union, which could adversely affect our results, financial condition, and prospects.

The political and economic instability created by the United Kingdom's vote to leave the European Union has caused and may continue to cause significant volatility in global financial markets and the value of the British Pound Sterling currency or other currencies, including the Euro. Depending on the terms reached regarding any exit from the European Union, it is possible that there may be adverse practical or operational implications on our business.

The outcome of the referendum has also created uncertainty with regard to the regulation of data protection in the United Kingdom. In particular, it is unclear how the United Kingdom's vote to leave the European Union will affect the United Kingdom's enactment of the European General Data Protection Regulation, and how data transfers to and from the United Kingdom will be regulated.

Risks Related to Ownership of Our Common Stock

Our stock price has been, and may continue to be, volatile or may decline regardless of our operating performance, resulting in substantial losses for our stockholders.

The trading price of our common stock has been, and may continue to be, volatile and could fluctuate widely regardless of our operating performance. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:


•	actual or anticipated fluctuations in our operating results;


•	the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;


•	failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates, and publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

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•	ratings changes by any securities analysts who follow our company;


•	announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;


•	changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;


•	price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;


•	changes in accounting standards, policies, guidelines, interpretations, or principles;


•	actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;


•	developments or disputes concerning our intellectual property or our products, or third-party proprietary rights;


•	announced or completed acquisitions of businesses or technologies by us or our competitors;


•	new laws or regulations or new interpretations of existing laws or regulations applicable to our business;


•	any major change in our board of directors or management;


•	sales of shares of our common stock by us or our stockholders;


•	lawsuits threatened or filed against us; and


•	other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from operating our business, and adversely affect our business, results of operations, financial condition, and cash flows.

Our directors, officers, and principal stockholders beneficially own a significant percentage of our stock and will be able to exert significant influence over matters subject to stockholder approval.

As of December 31, 2018, our directors, officers, five percent or greater stockholders, and their respective affiliates beneficially owned in the aggregate approximately 25% of our outstanding common stock. As a result, these stockholders have the ability to influence us through this ownership position. These stockholders may be able to exert significant influence in matters requiring stockholder approval. For example, these stockholders may be able to exert significant influence in elections of directors, amendments of our organizational documents, and approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

Substantial future sales of shares of our common stock could cause the market price of our common stock to decline.

The market price of our common stock could decline as a result of substantial sales of our common stock, particularly sales by our directors, executive officers, and significant stockholders, or the perception in the market that holders of a large number of shares intend to sell their shares.

Additionally, the shares of common stock subject to outstanding options and restricted stock unit awards under our equity incentive plans and the shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations.

Certain holders of our common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or our stockholders.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:


•	authorize our board of directors to issue, without further action by our stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;

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•	require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;


•	specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;


•	establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;


•	establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with each class serving three-year staggered terms;


•	prohibit cumulative voting in the election of directors;


•	provide that our directors may be removed only for cause;


•	provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and


•	require the approval of our board of directors or the holders of at least 75% of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the exchanges and other markets upon which our common stock is listed, and other applicable securities rules and regulations. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. We are required to disclose changes made in our internal control and procedures on a quarterly basis and to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. As a result of the complexity involved in complying with the rules and regulations applicable to public companies, our management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. Although we have already hired additional employees to assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our operating expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

Being a public company and these new rules and regulations have made it more expensive for us to obtain director and officer liability insurance, and in the future we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

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As a result of disclosure of information in our filings with the SEC, our business and financial condition have become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and operating results.

We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.

We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of our future debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.

If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.

Our charter documents designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our certificate of incorporation and bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on our behalf, (B) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders, (C) any action asserting a claim arising pursuant to any provision of the General Corporation Law of the State of Delaware, our certificate of incorporation, or our bylaws, or (D) any action asserting a claim against us governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition, or results of operations.

Risks Related to our Outstanding Convertible Notes

Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle cash conversions of the Notes or to repurchase the Notes for cash upon a fundamental change, which could adversely affect our business and results of operations.

In March 2018, we issued $575 million in aggregate principal amount of 0.25% convertible senior notes due 2023, or Notes, in a private offering. The interest rate is fixed at 0.25% per annum and is payable semi-annually in arrears on March 15 and September 15 of each year. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flows from operations in the future that are sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.

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Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases in connection with such conversion and our ability to pay may additionally be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions as required by such indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Notes or make cash payments upon conversions thereof. Additionally, under the indenture and subject to certain exceptions, if we fail to timely file any document or report required under the Securities and Exchange Act of 1934, in certain circumstances we may be required to pay, additional interest of up to 0.50% per annum on our Notes in order to avoid an event of default under the indenture, which may affect our ability to repay the Notes. Furthermore, if we do not remedy such failure within 360 days after receiving notice thereof from the noteholders, there would be an event of default under the indenture.

The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.

Transactions relating to our Notes may affect the value of our common stock.

The conversion of some or all of the Notes would dilute the ownership interests of existing stockholders to the extent we satisfy our conversion obligation by delivering shares of our common stock upon any conversion of such Notes. Our Notes may become in the future convertible at the option of their holders under certain circumstances. If holders of our Notes elect to convert their Notes, we may settle our conversion obligation by delivering to them a significant number of shares of our common stock, which would cause dilution to our existing stockholders.

In addition, in connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions, or the Option Counterparties. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion or settlement of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.

The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.

Under Financial Accounting Standards Board Accounting Standards Codification 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. ASC 470-20 requires the value of the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying value. The carrying value of the Notes, net of the discount recorded, will be accreted up to the principal amount of the Notes from the issuance date until maturity, which will result in non-cash charges to interest expense in our consolidated statement of operations. Accordingly, we will report lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.

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In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then our diluted earnings per share would be adversely affected in periods when we report net income.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters are located in San Francisco, California. We operate in San Francisco under five leases for approximately 72,900, 51,800, 34,900, 18,000, and 16,400 square feet of space, respectively. These leases expire in August 2022, October 2023, April 2023, January 2021, and June 2023 respectively.

We also lease office space in various locations in North America, South America, Europe, Australia, and Asia. We intend to procure additional space as we add employees and expand geographically. We believe our facilities are adequate and sufficient for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate any such expansion of our operations.

Item 3. Legal Proceedings.

From time to time, we may be subject to legal proceedings, claims, investigations, and government inquires 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, privacy, and contractual rights. Legal risk is enhanced in certain jurisdictions outside the United States where our protection from liability for content added to our products by third parties may be unclear and where we may be less protected under local laws than we are in the United States. Future litigation may be necessary to defend ourselves, our partners, and our customers by determining the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors.

Item 4. Mine Safety Disclosures.

Not Applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information for Common Stock

Our common stock has been listed on the New York Stock Exchange under the symbol “ZEN” since May 15, 2014, the date of our initial public offering. Prior to that date, there was no public trading market for our common stock.

The following table sets forth for the indicated periods the high and low intra-day sales prices of our common stock as reported by the New York Stock Exchange.



	High		Low
Year ended December 31, 2017
First quarter	$	29.53	$	21.43
Second quarter	$	30.24	$	24.49
Third quarter	$	31.36	$	25.09
Fourth quarter	$	35.89	$	28.81
Year ended December 31, 2018
First quarter	$	50.15	$	33.44
Second quarter	$	60.26	$	44.42
Third quarter	$	72.23	$	53.25
Fourth quarter	$	72.76	$	45.60

Holders

As of December 31, 2018, there were approximately 34 holders of record of our common stock. However, because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to accurately estimate the total number of stockholders represented by these record holders.

Dividends

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, operating results, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.

Issuer Purchases of Equity Securities

No shares of our common stock were repurchased during the three months ended December 31, 2018.

Securities Authorized for Issuance Under Equity Compensation Plans

See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance.

Stock Performance Graph

The following stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

The following stock performance graph compares total stockholder returns for Zendesk, Inc. from May 15, 2014, the date of our initial public offering, through December 31, 2018, against the S&P 500 Index and the S&P 500 Composite/Software, assuming a $100 investment made on May 15, 2014. Each of the two comparative measures of cumulative total return assumes

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reinvestment of dividends. The stock performance shown in the graph below is not necessarily indicative of future price performance.

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Item 6. Selected Financial Data.

The consolidated statements of operations data and the consolidated balance sheets data are derived from our audited consolidated financial statements and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements, and the related notes included elsewhere in this Annual Report on Form 10-K. Our historical data results are not necessarily indicative of our results in any future period.



	Year Ended December 31,
	2018			2017			2016			2015			2014
	2018			*As adjusted			*As adjusted			2015			2014
Revenue	$	598,746		$	430,165		$	312,844		$	208,768		$	127,049
Cost of revenue (1)	181,255			127,422			93,900			67,184			46,047
Gross profit	417,491			302,743			218,944			141,584			81,002
Operating expenses (1):
Research and development	160,260			115,291			91,067			62,615			36,403
Sales and marketing	291,668			211,918			161,653			114,052			77,875
General and administrative	103,491			81,680			64,371			47,902			32,869
Total operating expenses	555,419			408,889			317,091			224,569			147,147
Operating loss	(137,928		)	(106,146		)	(98,147		)	(82,985		)	(66,145		)
Other income (expense), net
Interest income	15,086			3,542			1,821			575			126
Interest expense	(19,882		)	—			(148		)	(503		)	(988		)
Other expense, net	(467		)	(1,055		)	(153		)	(801		)	(671		)
Total other income (expense), net	(5,263		)	2,487			1,520			(729		)	(1,533		)
Loss before provision for (benefit from) income taxes	(143,191		)	(103,659		)	(96,627		)	(83,714		)	(67,678		)
Provision for (benefit from) income taxes	(12,107		)	(1,518		)	993			338			(263		)
Net loss	(131,084		)	(102,141		)	(97,620		)	(84,052		)	(67,415		)
Accretion of redeemable convertible preferred stock	—			—			—			—			(18		)
Net loss attributable to common stockholders	$	(131,084	)	$	(102,141	)	$	(97,620	)	$	(84,052	)	$	(67,433	)
Net loss per share, basic and diluted	$	(1.24	)	$	(1.02	)	$	(1.05	)	$	(0.99	)	$	(1.26	)
Weighted-average shares used to compute net loss per share, basic and diluted	105,567			99,918			93,161			84,926			53,571
__________
(1) Includes share-based compensation expense as follows:
	Year Ended December 31,
	2018			2017			2016			2015			2014
	2018			*As adjusted			*As adjusted			2015			2014
Cost of revenue	$	14,835		$	9,040		$	7,045		$	4,541		$	2,464
Research and development	41,365			29,970			27,083			19,414			10,918
Sales and marketing	37,882			24,279			22,693			14,759			10,680
General and administrative	25,401			21,263			16,608			13,842			8,077

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	As of December 31,
Consolidated Balance Sheet Data:	2018		2017		2016		2015		2014
	2018		*As adjusted		*As adjusted		2015		2014
Cash and cash equivalents	$	126,518	$	109,370	$	93,677	$	216,226	$	80,265
Marketable securities, current and noncurrent	693,884		235,023		206,358		51,750		51,409
Working capital	229,833		114,631		125,589		165,832		60,856
Total assets	1,237,879		591,370		497,627		422,686		205,788
Deferred revenue, current and noncurrent	247,962		174,360		122,829		85,615		51,731
Long-term obligations	458,176		—		—		—		6,952
Total liabilities	820,958		237,186		174,153		129,396		92,082
Stockholders' equity	416,921		354,184		323,474		293,290		113,706

*The summary consolidated financial data for the years ended December 31, 2018, 2017, and 2016 and as of December 31, 2018, 2017, and 2016 reflects the adoption of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (“ASC 606”). See Note 2 of the notes to our consolidated financial statements. The summary consolidated financial data for the years ended December 31, 2015 and 2014 and as of December 31, 2015 and 2014 does not reflect the adoption of ASC 606.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K.

Overview

We are a software development company that provides SaaS products that are intended to help organizations and their customers build better experiences. Our product family is 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 a family of products and platform 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.

We believe in developing products that serve organizations of all sizes and across all industries. The flagship product in our family, Zendesk Support, provides organizations with the ability to track, prioritize, and solve customer support tickets across multiple channels, bringing customer information and interactions into one place. Our other widely available products integrate with Support and include Zendesk Chat, Zendesk Talk, Zendesk Guide, and Zendesk Connect. Chat is live chat software that provides a fast and responsive way for organizations to connect with their customers. Talk is cloud-based call center software that facilitates personal and productive phone support conversations between organizations and their customers. Guide is a self-service destination that organizations can use to provide articles, interactive forums, and a community that help an organization's customers help themselves. Connect enables customer service teams to send automated and timely messages based on a customer’s past actions and preferences. Additionally, we offer Zendesk Suite, an omnichannel offering which provides Support, Chat, Talk, and Guide together for a single price, Zendesk Sell, sales force automation software that complements our mission in delivering products that provide a better customer experience, and Zendesk Sunshine, a customer relationship management platform which enables organizations to connect and integrate customer data generated through the Zendesk product family.

We offer a range of subscription account plans for our products that vary in price based on functionality, type, and the amount of product support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions.

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For the years ended December 31, 2018, 2017, and 2016, our revenue was $598.7 million, $430.2 million, and $312.8 million, respectively, representing a 39% growth rate from 2017 to 2018 and a 38% growth rate from 2016 to 2017. For the years ended December 31, 2018, 2017, and 2016 we derived $288.9 million, or 48%, $200.5 million, or 47%, and $142.4 million, or 46%, respectively, of our revenue from customers located outside of the United States. We expect that the rate of growth in our revenue will decline as our business scales, even if our revenue continues to grow in absolute terms. For the years ended December 31, 2018, 2017, and 2016, we generated net losses of $131.1 million, $102.1 million, and $97.6 million, respectively.

The growth of our business and our future success depend on many factors, including our ability to continue to innovate, further develop our unified omnichannel offering geared towards the entire customer experience, build brand recognition and a scalable product for larger enterprises, maintain our leadership in the small and medium-sized business, market, add new customers, generate additional revenue from our existing customer base, and increase our global customer footprint. While these areas represent significant opportunities for us, we also face significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our operating results. We anticipate that we will continue to expand our operations and headcount in the near term. The expected expenditures that we anticipate will be necessary to manage our anticipated growth, including personnel costs, expenditures relating to hosting capabilities, leasehold improvements, and related fixed assets, will make it more difficult for us to achieve profitability in the near term. Many of these investments will occur in advance of us experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.

We have focused on rapidly growing our business and plan to continue to invest for long-term growth. We expect to continue to develop our hosting capabilities primarily through expenditures for third-party managed hosting services. The amount and timing of these expenditures will vary based on our estimates of projected growth and planned use of hosting resources. Over time, we anticipate that we will continue to gain economies of scale by efficiently utilizing our hosting and personnel resources to support the growth in our number of customers. In addition, we expect to incur amortization expense associated with acquired intangible assets and capitalized internal-use software. As a result, we expect our gross margin to improve in the long-term, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of such costs.

We expect our operating expenses to continue to increase in absolute dollars in future periods. We have invested, and expect to continue to invest, in our software development efforts to broaden the functionality of our existing products, to further integrate these products and services, and to introduce new products. We plan to continue to expand our sales and marketing organizations, particularly in connection with our efforts to expand our customer base. We also expect to continue to incur additional general and administrative costs in order to support the growth of our business and the infrastructure required to comply with our obligations as a public company.

Key Business Metrics

We review a number of operating metrics, including the following key metrics, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans, and make strategic decisions.

Number of Paid Customer Accounts. We believe that our ability to increase our number of paid accounts using our products is an indicator of our market penetration, the growth of our business, and our potential future business opportunities. We define the number of paid customer accounts as the sum of the number of accounts on Zendesk Support, exclusive of our legacy Starter plan, free trials, or other free services, the number of accounts on Chat, exclusive of free trials or other free services, and the number of accounts on all of our other products, exclusive of free trials and other free services, each as of the end of the period and as identified by a unique account identifier. The number of paid customer accounts does not currently include the number of customer accounts on Sell. In the quarter ended June 30, 2018, we began to offer an omnichannel subscription, which provides access to multiple products through a single paid customer account, Zendesk Suite. The number of Suite paid customer accounts are included in the number of accounts on products other than Support and Chat, and are not included in the number of paid customer accounts using Support or Chat. Existing customers may also expand their utilization of our products by adding new accounts and a single consolidated organization or customer may have multiple accounts across each of our products to service separate subsidiaries, divisions, or work processes. Each of these accounts is also treated as a separate paid customer account. Other than paid accounts for Zendesk Connect, an increase in the number of paid customer accounts generally correlates to an increase in the number of authorized agents licensed to use our products, which directly affects our revenue and results of operations. We view growth in this metric as a measure of our success in converting new sales opportunities. We had approximately 136,600 paid customer accounts as of December 31, 2018, including approximately 73,600 paid customer accounts on Support, approximately 46,100 paid customer accounts on Chat, and approximately 16,900

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paid customer accounts on our other products. As the total number of paid customer accounts increases, we expect the rate of growth in the number of paid customer accounts to decline.

Dollar-Based Net Expansion Rate. Our ability to generate revenue is dependent upon our ability to maintain our relationships with our customers and to increase their utilization of our products. We believe we can achieve this by focusing on delivering value and functionality that retains our existing customers, expands the number of authorized agents associated with an existing paid customer account, and results in upgrades to higher-priced subscription plans and the purchase of additional products. Maintaining customer relationships allows us to sustain and increase revenue to the extent customers maintain or increase the number of authorized agents licensed to use our products. We assess our performance in this area by measuring our dollar-based net expansion rate. Our dollar-based net expansion rate provides a measurement of our ability to increase revenue across our existing customer base through expansion of authorized agents associated with paid customer accounts, upgrades in subscription plans, and the purchase of additional products as offset by churn, contraction in authorized agents associated with paid customer accounts, and downgrades in subscription plans. We do not currently incorporate operating metrics associated with our legacy analytics product, our legacy Outbound product, our Sell product, our legacy Starter plan, free trials, or other free services into our measurement of dollar-based net expansion rate.

Our dollar-based net expansion rate is based upon our monthly recurring revenue for a set of paid customer accounts on our products. Monthly recurring revenue for a paid customer account is a legal and contractual determination made by assessing the contractual terms of each paid customer account, as of the date of determination, as to the revenue we expect to generate in the next monthly period for that paid customer account, assuming no changes to the subscription and without taking into account any usage above the subscription base, if any, that may be applicable to such subscription. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other United States generally accepted accounting principles, or GAAP, financial measure over any period. It is forward-looking and contractually derived as of the date of determination.

We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and churn by our base revenue. We define our base revenue as the aggregate monthly recurring revenue across our products from paid customer accounts as of the date one year prior to the date of calculation. We define our retained revenue net of contraction and churn as the aggregate monthly recurring revenue across our products from the same customer base included in our measure of base revenue at the end of the annual period being measured. Our dollar-based net expansion rate is also adjusted to eliminate the effect of certain activities that we identify involving consolidation of customer accounts, or the split of a single paid customer account into multiple paid customer accounts. In addition, our dollar-based net expansion rate is adjusted to include paid customer accounts in the customer base used to determine retained revenue net of contraction and churn that share common corporate information with customers in the customer base that is used to determine our base revenue. Giving effect to this consolidation results in our dollar-based net expansion rate being calculated across approximately 100,400 customers, as compared to the approximately 136,600 total paid customer accounts as of December 31, 2018. To the extent that we can determine that the underlying customers do not share common corporate information, we do not aggregate paid customer accounts associated with reseller and other similar channel arrangements for the purposes of determining our dollar-based net expansion rate. While not material, we believe the failure to account for these activities would otherwise skew our dollar-based net expansion metrics associated with customers that maintain multiple paid customer accounts across their products, and paid customer accounts associated with reseller and other similar channel arrangements.

Our dollar-based net expansion rate was 119% as of December 31, 2018. We expect that, among other factors, our continued focus on adding larger paid customer accounts at the time of addition and the growth in our revenue will result in an overall decline in our dollar-based net expansion rate over time as our aggregate monthly recurring revenue grows.

Components of Results of Operations

Revenue

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We derive substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on Support and, to a lesser extent, Chat, Talk, Guide, Explore, Sell, and Connect. Each subscription may have multiple authorized users, and we refer to each user as an “agent.” The number of agents ranges from one to thousands for various customer accounts. Our pricing is generally established on a per agent basis. We offer a range of subscription account plans for our products that vary in price based on functionality, type, and, for Support and Chat, the amount of product support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions. Certain arrangements provide for incremental fees above a fixed maximum number of monthly agents during the subscription term. We sell subscription services under contractual agreements that vary in length, ranging between one month and multiple years, with the majority of subscriptions having a term of either one month or one year.

Subscription fees are generally non-refundable regardless of the actual use of the service. Subscription revenue is typically affected by the number of customer accounts, number of agents, and the type of plan purchased by our customers, and is recognized ratably over the term of the arrangement beginning on the date that our services are made available to our customers. Subscription services purchased online are typically paid for via a credit card on the date of purchase while subscription services purchased through our internal sales organization are generally billed with monthly, quarterly, or annual payment frequencies. Due to our mixed contract lengths and billing frequencies, the annualized value of the arrangements we enter into with our customers may not be fully reflected in deferred revenue at any single point in time. Accordingly, we do not believe that the change in deferred revenue for any period provides sufficient context to accurately predict of future revenue for a given period of time. Additionally, because of the mix of contract lengths, customer purchasing patterns, and renewal patterns for our products, we similarly do not believe that the amount of unsatisfied performance obligations, or any backlog calculated therefrom, measured as of any particular determination date, or period-over-period changes in such amounts, provides sufficient context to accurately predict our future revenue for any future period, and we caution you not to rely on such amounts for that purpose.

We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.

Cost of Revenue, Gross Margin, and Operating Expenses

Cost of Revenue. Cost of revenue consists primarily of personnel costs (including salaries, share-based compensation, and benefits) for employees associated with our infrastructure, product support, and professional service organizations, and expenses for hosting capabilities, primarily for third-party managed hosting services and costs associated with our self-managed colocation data centers. Cost of revenue also includes third party license fees, payment processing fees, amortization expense associated with capitalized internal-use software, amortization expense associated with acquired intangible assets, and allocated shared costs. We allocate shared costs such as facilities, information technology and security costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category.

We utilize third-party managed hosting facilities located in North America, Europe, Asia and Australia to host our services, support our infrastructure, and support certain research and development functions. In addition, we currently operate out of four self-managed colocation data centers, in which we manage our own network equipment and systems, located in California, Virginia, and Ireland. We currently intend to continue to operate our self-managed colocation data centers and incur expenditures for third-party managed hosting services over time while we transition our primary data center usage to third-party managed hosting services.

We intend to continue to invest additional resources in our infrastructure, product support, and professional service organizations, organically and through acquisitions. We expect that recent and future business acquisitions will result in increased amortization expense of intangible assets such as acquired technology. As we continue to invest in technology innovation, we expect to continue to incur capitalized internal-use software costs and related amortization. We expect these investments in technology to not only expand the capabilities of our products but also to increase the efficiency of how we deliver these services, enabling us to improve our gross margin over time, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of these investments. To the extent that we continue to rely on third-party technology to provide certain functionality within our products or for certain subscription plans or integrations, we expect third-party license fees for technology that is incorporated in such products and subscription plans to remain significant over time.

Gross Margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates and as a result of the timing and amount of usage of third-party managed hosting resources, investments to expand our product support and professional services teams, investments in additional personnel,

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increased share-based compensation expense, as well as the amortization of certain acquired intangible assets, costs associated with capitalized internal-use software, and third-party license fees.

Research and Development. Research and development expenses consist primarily of personnel costs (including salaries, share-based compensation, and benefits) for employees associated with our research and development organization and allocated shared costs.

We focus our research and development efforts on the continued development of our products, including the development and deployment of new features and functionality and enhancements to our software architecture and integration across our products. We expect that, in the future, research and development expenses will increase in absolute dollars. However, we expect our research and development expenses to decrease modestly as a percentage of our revenue in the long-term, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and the extent of our research and development expenses.

Sales and Marketing. Sales and marketing expenses consist of personnel costs (including salaries, share-based compensation, sales commissions, and benefits) for employees associated with our sales and marketing organizations, costs of marketing activities, and allocated shared costs. Marketing activities include both online, and offline marketing initiatives, including digital advertising, such as search engine, paid social, e-mail and product marketing, content marketing, user events, conferences, corporate communications, web marketing and optimization, and outbound list generation. Sales commissions are considered incremental costs of obtaining customer contracts and are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have determined to be three years.

We focus our sales and marketing efforts on generating awareness of our products, establishing and promoting our brand, and cultivating a community of successful and vocal customers. We plan to continue investing in sales and marketing by increasing the number of sales employees, developing our marketing teams, building brand awareness, and sponsoring additional marketing events, which we believe will enable us to add new customers and increase penetration within our existing customer base. Because we do not have a long history of undertaking or growing many of these activities, we cannot predict whether, or to what extent, our revenue will increase as we invest in these strategies. We expect our sales and marketing expenses to continue to increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future. Our sales and marketing expenses as a percentage of our revenue over time may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our sales and marketing expenses.

General and Administrative. General and administrative expenses consist primarily of personnel costs (including salaries, share-based compensation, and benefits) for our executive, finance, legal, human resources, and other administrative employees. In addition, general and administrative expenses include fees for third-party professional services, including legal, accounting, and tax related services, other corporate expenses, and allocated shared costs.

We expect to incur incremental costs associated with supporting the growth of our business, both in terms of size and geographic expansion, and the infrastructure required to be a public company. Such costs include increases in our finance, legal, and human resources personnel, additional legal, accounting, tax, and compliance-related services fees, insurance costs, and costs of executing significant transactions, including business acquisitions, and other costs associated with being a public company. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect our general and administrative expenses to decrease modestly as a percentage of our revenue in the long-term, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our general and administrative expenses.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest income from marketable securities, foreign currency gains and losses, and interest expense from our convertible senior notes. Interest expense includes amortization of the debt discount, amortization of issuance costs, and contractual interest expense.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists of federal and state income taxes in the United States, income taxes in certain foreign jurisdictions, and a non-cash benefit in 2018 related to the issuance of our convertible senior notes.

Results of Operations for Fiscal Years 2018, 2017, and 2016

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The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands):



	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Revenue	$	598,746		$	430,165		$	312,844
Cost of revenue (1)	181,255			127,422			93,900
Gross profit	417,491			302,743			218,944
Operating expenses (1):
Research and development	160,260			115,291			91,067
Sales and marketing	291,668			211,918			161,653
General and administrative	103,491			81,680			64,371
Total operating expenses	555,419			408,889			317,091
Operating loss	(137,928		)	(106,146		)	(98,147		)
Other income (expense), net
Interest income	15,086			3,542			1,821
Interest expense	(19,882		)	—			(148		)
Other expense, net	(467		)	(1,055		)	(153		)
Total other income (expense), net	(5,263		)	2,487			1,520
Loss before provision for (benefit from) income taxes	(143,191		)	(103,659		)	(96,627		)
Provision for (benefit from) income taxes	(12,107		)	(1,518		)	993
Net loss	$	(131,084	)	$	(102,141	)	$	(97,620	)

(1) Includes share-based compensation expense as follows (in thousands):



	Year Ended December 31,
	2018		2017		2016
	2018		*As adjusted		*As adjusted
Cost of revenue	$	14,835	$	9,040	$	7,045
Research and development	41,365		29,970		27,083
Sales and marketing	37,882		24,279		22,693
General and administrative	25,401		21,263		16,608

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	Year Ended December 31,
	2018		2017		2016
	2018		*As adjusted		*As adjusted
	(As a percentage of revenue)
Revenue	100.0	%	100.0	%	100.0	%
Cost of revenue (1)	30.3		29.6		30.0
Gross profit	69.7		70.4		70.0
Operating expenses (1):
Research and development	26.8		26.8		29.1
Sales and marketing	48.7		49.3		51.7
General and administrative	17.3		19.0		20.6
Total operating expenses	92.8		95.1		101.4
Operating loss	(23.1	)	(24.7	)	(31.4	)
Other income (expense), net
Interest income	2.5		0.8		0.6
Interest expense	(3.3	)	—		—
Other expense, net	(0.1	)	(0.2	)	—
Total other income (expense), net	(0.9	)	0.6		0.5
Loss before provision for (benefit from) income taxes	(24.0	)	(24.1	)	(30.9	)
Provision for (benefit from) income taxes	(2.0	)	(0.4	)	0.3
Net loss	(22.0	)%	(23.7	)%	(31.2	)%


(1)	Includes share-based compensation expense as follows:



	Year Ended December 31,
	2018		2017		2016
	2018		*As adjusted		*As adjusted
	(As a percentage of revenue)
Cost of revenue	2.5	%	2.1	%	2.3	%
Research and development	6.9		7.0		8.7
Sales and marketing	6.3		5.6		7.3
General and administrative	4.2		4.9		5.3

*Adjusted to reflect the adoption of ASC 606. See Note 2 of the notes to our consolidated financial statements.

Revenue



	Year Ended December 31,						2017 to 2018 % change		2016 to 2017 % change
	2018		2017		2016
	2018		*As adjusted		*As adjusted
	(In thousands, except percentages)
Revenue	$	598,746	$	430,165	$	312,844	39	%	38	%

*Adjusted to reflect the adoption of ASC 606. See Note 2 of the notes to our consolidated financial statements.

Revenue increased $168.6 million, or 39%, in 2018 compared to 2017. Of the total increase in revenue, $32.0 million, or 19%, was attributable to revenue from new customer accounts acquired from January 1, 2018 through December 31, 2018, net of churn and contraction, and $136.6 million, or 81%, was attributable to revenue from accounts existing on or before December 31, 2017, net of churn and contraction. Revenue for the year ended December 31, 2018 includes revenue from Zendesk Sell.

Revenue increased $117.3 million, or 38%, in 2017 compared to 2016. Of the total increase in revenue, $25.8 million, or 22%, was attributable to revenue from new customer accounts acquired from January 1, 2017 through December 31, 2017, net

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of churn and contraction, and $91.5 million, or 78%, was attributable to revenue from accounts existing on or before December 31, 2016, net of churn and contraction.

Cost of Revenue and Gross Margin



	Year Ended December 31,									2017 to 2018 % change		2016 to 2017 % change
	2018			2017			2016			2017 to 2018 % change		2016 to 2017 % change
	(In thousands, except percentages)
Cost of Revenue	$	181,255		$	127,422		$	93,900		42	%	36	%
Gross Margin	69.7		%	70.4		%	70.0		%

Cost of revenue increased $53.8 million, or 42%, in 2018 compared to 2017. The overall increase was primarily due to increased hosting costs of $20.7 million, increased employee compensation-related costs of $19.8 million, and increased third-party license fees of $7.4 million. The increase in hosting costs was driven by expenditures for third-party managed hosting services related to the addition of new customer accounts and the continued expansion of existing customer accounts. The increase in employee compensation-related costs was driven by headcount growth. The increase in third-party license fees was driven by increased customer usage of certain product features. Further contributing to the overall increase was an increase in allocated shared costs of $5.2 million, primarily related to facilities and information technology.

Our gross margin decreased by 0.7 percentage points in 2018 compared to 2017, driven primarily by increased hosting costs in connection with our transition to third-party managed hosting services while we continue to record depreciation for our existing self-managed colocation data centers. The overall decrease was partially offset by lower amortization of capitalized internal-use software due to timing of projects.

Cost of revenue increased $33.5 million, or 36%, in 2017 compared to 2016. The overall increase was primarily due to increased hosting costs of $11.7 million, increased employee compensation-related costs of $9.7 million, and increased third-party license fees of $4.9 million. The increase in hosting costs was driven by expenditures for third-party managed hosting services and increased costs, including depreciation expense, related to our self-managed colocation data centers from the addition of new customer accounts and the continued expansion of existing customer accounts. The increase in employee compensation-related costs was driven by headcount growth. The increase in third-party license fees was driven by increased customer usage of certain product features. Further contributing to the overall increase was an increase in allocated shared costs of $4.3 million, primarily related to facilities and information technology.

Our gross margin increased by 0.4 percentage points in 2017 compared to 2016. The overall improvement was primarily driven by our ability to increase revenue with a more moderate increase in headcount. The overall improvement was partially offset by increased hosting costs.

Operating Expenses

Research and Development Expenses



	Year Ended December 31,						2017 to 2018 % change		2016 to 2017 % change
	2018		2017		2016		2017 to 2018 % change		2016 to 2017 % change
	(In thousands, except percentages)
Research and Development	$	160,260	$	115,291	$	91,067	39	%	27	%

Research and development expenses increased $45.0 million, or 39%, in 2018 compared to 2017. The overall increase was primarily due to increased employee compensation-related costs of $36.0 million, driven by headcount growth, and increased allocated shared costs of $5.5 million.

Research and development expenses increased $24.2 million, or 27%, in 2017 compared to 2016. The overall increase was primarily due to increased employee compensation-related costs of $13.8 million, driven by headcount growth, and increased outside services costs of $2.0 million. The increase in outside services costs was primarily attributable to the adaptation of our hosting infrastructure. Further contributing to the overall increase was an increase in allocated shared costs of $4.8 million.

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Sales and Marketing Expenses



	Year Ended December 31,						2017 to 2018 % change		2016 to 2017 % change
	2018		2017		2016
	2018		*As adjusted		*As adjusted
	(In thousands, except percentages)
Sales and Marketing	$	291,668	$	211,918	$	161,653	38	%	31	%

*Adjusted to reflect the adoption of ASC 606. See Note 2 of the notes to our consolidated financial statements.

Sales and marketing expenses increased $79.8 million, or 38%, in 2018 compared to 2017. The overall increase was primarily due to increased employee compensation-related costs, including amortization of capitalized commissions, of $55.1 million, driven by headcount growth, and an increase in marketing program costs of $10.0 million. The increase in marketing program costs was driven by increased volume of advertising activities. Further contributing to the overall increase was an increase in allocated shared costs of $10.8 million.

Sales and marketing expenses increased $50.3 million, or 31%, in 2017 compared to 2016. The overall increase was primarily due to increased employee compensation-related costs, including amortization of capitalized commissions, of $21.7 million, driven by headcount growth, and an increase in marketing program costs of $10.8 million. The increase in marketing program costs was driven by increased volume of advertising activities. Further contributing to the overall increase was an increase in allocated shared costs of $8.5 million.

General and Administrative Expenses



	Year Ended December 31,						2017 to 2018 % change		2016 to 2017 % change
	2018		2017		2016		2017 to 2018 % change		2016 to 2017 % change
	(In thousands, except percentages)
General and Administrative	$	103,491	$	81,680	$	64,371	27	%	27	%

General and administrative expenses increased $21.8 million, or 27%, in 2018 compared to 2017. The overall increase was primarily due to increased employee compensation-related costs of $15.2 million, driven by headcount growth, and increased allocated shared costs of $3.0 million.

General and administrative expenses increased $17.3 million, or 27%, in 2017 compared to 2016. The overall increase was primarily due to increased employee compensation-related costs of $12.6 million, driven by headcount growth, and increased allocated shared costs of $1.7 million.

Other Income (Expense), Net



	Year Ended December 31,									2017 to 2018 % change		2016 to 2017 % change
	2018			2017			2016			2017 to 2018 % change		2016 to 2017 % change
	(In thousands, except percentages)
Interest income	$	15,086		$	3,542		$	1,821		*		95	%
Interest expense	(19,882		)	—			(148		)	*		*
Other income (expense), net	(467		)	(1,055		)	(153		)	(56	)%	*

*Not meaningful

Interest income increased $11.5 million in 2018 compared to 2017. The overall increase was primarily due to the increase in the amount of marketable securities from the proceeds received from our convertible senior notes. Interest expense increased $19.9 million, in 2018 compared to 2017 due to the issuance of our convertible senior notes.

Interest income increased $1.7 million in 2017 compared to 2016. The overall increase was primarily due to higher yields earned from marketable securities.

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Provision for (Benefit from) Income Taxes



	Year Ended December 31,								2017 to 2018 % change	2016 to 2017 % change
	2018			2017			2016		2017 to 2018 % change	2016 to 2017 % change
	(In thousands, except percentages)
Provision for (benefit from) income taxes	$	(12,107	)	$	(1,518	)	$	993	*	*

*Not meaningful

Benefit from income taxes increased $10.6 million in 2018 compared to 2017 primarily due to the recognition of a net income tax benefit of $13.8 million in 2018 related to the issuance of our convertible senior notes.

The effective tax rate for each period differs from the statutory rate primarily as a result of not recognizing a deferred tax asset for U.S. losses due to having a full valuation allowance against U.S. deferred tax assets.

Quarterly Results of Operations

The following unaudited quarterly results of operations data for each of the eight quarters in the two-year period ended December 31, 2018 have been prepared on a basis consistent with our audited consolidated annual financial statements and include, in management’s opinion, all normal recurring adjustments necessary for the fair presentation of the results of operations data for these periods, in accordance with GAAP. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results of operations for any future period.

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	Three Months Ended
	Dec 31,			Sept 30,			June 30,			Mar 31,			Dec 31,			Sept 30,			June 30,			Mar 31,
	2018			2018			2018			2018			2017			2017			2017			2017
	2018			2018			2018			2018			*As adjusted
Consolidated Statement of Operations Data:
Revenue	$	172,245		$	154,828		$	141,882		$	129,791		$	121,916		$	112,265		$	102,096		$	93,888
Cost of revenue (1)	51,048			46,992			44,160			39,056			34,958			33,693			30,663			28,107
Gross profit	121,197			107,836			97,722			90,735			86,958			78,572			71,433			65,781
Operating expenses (1):
Research and development	45,142			40,410			37,624			37,085			30,779			29,358			28,698			26,456
Sales and marketing	82,890			74,270			69,450			65,058			60,854			54,383			50,412			46,269
General and administrative	29,682			27,357			24,245			22,207			22,177			21,398			19,788			18,317
Total operating expenses	157,714			142,037			131,319			124,350			113,810			105,139			98,898			91,042
Operating loss	(36,517		)	(34,201		)	(33,597		)	(33,615		)	(26,852		)	(26,567		)	(27,465		)	(25,261		)
Other income (expense), net
Interest income	5,181			4,561			3,826			1,519			1,079			923			827			713
Interest expense	(6,455		)	(6,375		)	(6,289		)	(44		)	—			—			—			—
Other income (expense), net	(275		)	(463		)	27			(475		)	63			(304		)	(319		)	(495		)
Total other income (expense), net	(1,549		)	(2,277		)	(2,436		)	1,000			1,142			619			508			218
Loss before provision for (benefit from) income taxes	(38,066		)	(36,478		)	(36,033		)	(32,615		)	(25,710		)	(25,948		)	(26,957		)	(25,043		)
Provision for (benefit from) income taxes	(4,816		)	(2,334		)	(1,667		)	(3,290		)	(732		)	(133		)	(690		)	38
Net loss	$	(33,250	)	$	(34,144	)	$	(34,366	)	$	(29,325	)	$	(24,978	)	$	(25,815	)	$	(26,267	)	$	(25,081	)
Net loss per share, basic and diluted	$	(0.31	)	$	(0.32	)	$	(0.33	)	$	(0.28	)	$	(0.24	)	$	(0.26	)	$	(0.26	)	$	(0.26	)


(1)	Share-based compensation expense was allocated as follows:



	Three Months Ended
	Dec 31,		Sept 30,		June 30,		Mar 31,		Dec 31,		Sept 30,		June 30,		Mar 31,
	2018		2018		2018		2018		2017		2017		2017		2017
	2018		2018		2018		2018		*As adjusted
Cost of revenue	$	4,335	$	3,929	$	3,474	$	3,098	$	2,372	$	2,408	$	2,156	$	2,104
Research and development	10,929		10,677		9,529		10,231		7,697		7,776		7,584		6,914
Sales and marketing	10,436		10,261		9,178		8,007		6,298		6,573		5,884		5,524
General and administrative	7,203		6,579		5,967		5,652		5,761		5,619		5,321		4,562

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	Three Months Ended
	Dec 31,		Sept 30,		June 30,		Mar 31,		Dec 31,		Sept 30,		June 30,		Mar 31,
	2018		2018		2018		2018		2017		2017		2017		2017
	2018		2018		2018		2018		*As adjusted
Consolidated Statement of Operations Data:
Revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue (1)	29.6		30.4		31.1		30.1		28.7		30.0		30.0		29.9
Gross profit	70.4		69.6		68.9		69.9		71.3		70.0		70.0		70.1
Operating expenses (1):
Research and development	26.2		26.1		26.5		28.6		25.2		26.2		28.1		28.2
Sales and marketing	48.1		48.0		48.9		50.1		49.9		48.4		49.4		49.3
General and administrative	17.2		17.7		17.1		17.1		18.2		19.1		19.4		19.5
Total operating expenses	91.5		91.8		92.5		95.8		93.3		93.7		96.9		97.1
Operating loss	(21.1	)	(22.2	)	(23.6	)	(25.9	)	(22.0	)	(23.7	)	(26.9	)	(27.0	)
Other income (expense), net
Interest income	3.0		2.9		2.7		1.2		0.9		0.8		0.8		0.8
Interest expense	(3.7	)	(4.1	)	(4.4	)	—		—		—		—		—
Other income (expense), net	(0.2	)	(0.3	)	—		(0.4	)	0.1		(0.3	)	(0.3	)	(0.5	)
Total other income (expense), net	(0.9	)	(1.5	)	(1.7	)	0.8		1.0		0.5		0.5		0.3
Loss before provision for (benefit from) income taxes	(22.0	)	(23.7	)	(25.3	)	(25.1	)	(21.0	)	(23.2	)	(26.4	)	(26.7	)
Provision for (benefit from) income taxes	(2.8	)	(1.5	)	(1.2	)	(2.5	)	(0.6	)	(0.1	)	(0.7	)	—
Net loss	(19.2	)%	(22.2	)%	(24.1	)%	(22.6	)%	(20.4	)%	(23.1	)%	(25.7	)%	(26.7	)%


(1)	Includes share-based compensation expense as follows:



	Three Months Ended
	Dec 31,		Sept 30,		June 30,		Mar 31,		Dec 31,		Sept 30,		June 30,		Mar 31,
	2018		2018		2018		2018		2017		2017		2017		2017
	2018		2018		2018		2018		*As adjusted
Cost of revenue	2.5	%	2.5	%	2.4	%	2.4	%	1.9	%	2.1	%	2.1	%	2.2	%
Research and development	6.3		6.9		6.7		7.9		6.3		6.9		7.4		7.4
Sales and marketing	6.1		6.6		6.5		6.2		5.2		5.9		5.8		5.9
General and administrative	4.2		4.2		4.2		4.4		4.7		5.0		5.2		4.9

*Adjusted to reflect the adoption of ASC 606. See Note 2 of the notes to our consolidated financial statements.

Quarterly Trends in Revenue

Our quarterly revenue increased sequentially for each period presented, primarily due to the addition of new customer accounts and the continued expansion of existing customer accounts. We cannot assure you that this pattern of sequential growth in revenue will continue.

Our revenue in the first quarter of any fiscal year is negatively impacted relative to the preceding fourth quarter due to the fewer number of days in the first quarter over which we record subscription revenue as compared to the preceding fourth quarter.

Quarterly Trends in Costs and Expenses

Our quarterly costs and expenses increased sequentially for each period presented, primarily due to increased compensation-related costs related to an increase in headcount in connection with the expansion of our business.

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Seasonality

Liquidity and Capital Resources

As of December 31, 2018, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $820.4 million, which were held for working capital and general corporate purposes. Our cash equivalents and marketable securities are comprised of corporate bonds, asset-backed securities, U.S. Treasury securities, money market funds, commercial paper, agency securities, certificates of deposit, and time deposits.

The following table summarizes our cash flows for the periods indicated (in thousands):



	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Net cash provided by operating activities	$	78,620		$	42,228		$	24,560
Net cash used in investing activities	(589,676		)	(69,871		)	(182,364		)
Net cash provided by financing activities	529,063			43,141			35,627

To date, we have financed our operations primarily through customer payments for subscription services, the issuance of our convertible senior notes, and public and private equity financings. We believe that our existing cash, cash equivalents, and marketable securities balances, together with cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

Our future capital requirements will depend on many factors, including hosting costs to support the growth in our customer accounts and continued customer expansion, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products, features, and functionality, and costs related to building out our leased office facilities. We may in the future enter into arrangements to acquire or invest in complementary businesses, services, and technologies, and intellectual property rights. We may be required to seek additional equity or debt financing in order to meet these future capital requirements. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.

Operating Activities

Our largest source of operating cash inflows is cash collections from our customers. Our primary uses of cash from operating activities are for employee-related expenditures, hosting costs, office facilities, and marketing programs.

Net cash provided by operating activities in 2018 was $78.6 million, reflecting our net loss of $131.1 million, adjusted by non-cash charges including share-based compensation expense of $119.5 million, depreciation and amortization expense of $36.5 million, amortization of deferred costs of $21.3 million, amortization of debt discount and issuance costs of $18.8 million, partially offset by income tax benefit related to convertible senior notes of $13.8 million, and net changes in operating assets and liabilities of $24.6 million. The net changes in operating assets and liabilities were primarily attributable to an increase in deferred revenue of $73.1 million due to sales growth and the timing of customer billings, and an increase in accrued compensation of $15.0 million due to overall growth in our business and timing of payments. These sources of cash were offset by an increase in deferred costs of $40.9 million, primarily related to sales commissions, an increase in accounts receivable of $30.0 million due to the timing of customer billings and collections, and an increase in prepaid expenses and other current assets of $10.6 million.

Net cash provided by operating activities in 2017 was $42.2 million, reflecting our net loss of $102.1 million, adjusted by non-cash charges including share-based compensation expense of $84.6 million, depreciation and amortization expense of $31.9 million, amortization of deferred costs of $14.4 million, and net changes in operating assets and liabilities of $12.8

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million. The net changes in operating assets and liabilities were primarily attributable to an increase in deferred revenue of $51.5 million due to sales growth and the timing of customer billings, and an increase in accrued liabilities, including accrued compensation, of $14.3 million due to overall growth in our business and timing of payments. These sources of cash were offset by an increase in deferred costs of $22.8 million, primarily related to sales commissions, and an increase accounts receivable of $21.2 million due to the timing of customer billings and collections.

Net cash provided by operating activities in 2016 was $24.6 million, reflecting our net loss of $97.6 million, adjusted by non-cash charges including share-based compensation expense of $73.4 million, depreciation and amortization expense of $27.5 million, amortization of deferred costs of $10.3 million, and net changes in operating assets and liabilities of $8.2 million. The changes in operating assets and liabilities were primarily attributable to an increase in deferred revenue of $37.6 million due to sales growth and the timing of customer billings, and an increase in accrued liabilities, including accrued compensation, of $11.3 million due to overall growth in our business and timing of payments. These sources of cash were offset by an increase in deferred costs of $15.3 million, primarily related to sales commissions, and an increase in accounts receivable of $11.8 million due to the timing of customer billings and collections.

Investing Activities

Net cash used in investing activities in 2018 of $589.7 million was primarily attributable to purchases of marketable securities of $458.0 million, net of sales and maturities, cash paid for the acquisition of FutureSimple Inc., net of cash acquired, of $79.4 million, purchases of property and equipment of $35.3 million primarily associated with leasehold improvements for newly leased office facilities, and capitalized internal-use software costs of $7.0 million related to the development of additional features and functionality for our platform.

Net cash used in investing activities in 2017 of $69.9 million was primarily attributable to purchases of marketable securities of $29.5 million, net of sales and maturities, cash paid for the acquisition of Outbound Solutions, Inc., net of cash acquired, of $16.5 million, purchases of property and equipment of $16.4 million primarily associated with leasehold improvements for newly leased office facilities and hosting equipment to maintain our self-managed colocation data centers, and capitalized internal-use software costs of $7.5 million related to the development of additional features and functionality for our platform.

Net cash used in investing activities in 2016 of $182.4 million was primarily attributable to purchases of marketable securities of $155.4 million, net of sales and maturities, purchases of property and equipment of $20.6 million primarily associated with leasehold improvements for newly leased office facilities and hosting equipment to maintain our self-managed colocation data centers, and capitalized internal-use software costs of $6.3 million related to the development of additional features and functionality for our platform.

Financing Activities

Net cash provided by financing activities in 2018 of $529.1 million was primarily attributable to net proceeds from the issuance of our convertible senior notes of $561.4 million, proceeds from our employee stock purchase plan of $21.4 million, and proceeds from exercises of employee stock options of $16.2 million, partially offset by the purchase of the capped call in connection with the issuance of our convertible senior notes of $63.9 million.

Net cash provided by financing activities in 2017 of $43.1 million was primarily attributable to proceeds from exercises of employee stock options of $31.9 million and proceeds from our employee stock purchase plan of $14.2 million.

Net cash provided by financing activities in 2016 of $35.6 million was primarily attributable to proceeds from exercises of employee stock options of $25.4 million and proceeds from our employee stock purchase plan of $11.0 million.

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Contractual Obligations and Other Commitments

Our principal commitments consist of our convertible senior notes, obligations under our operating leases for office space, and contractual commitments for third-party managed hosting and other support services. The following table summarizes our contractual obligations as of December 31, 2018 (in thousands):



	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Contractual obligations:
Convertible senior notes⁽¹⁾	$	581,051	$	1,438	$	2,876	$	576,737	$	—
Purchase obligations⁽²⁾	286,577		63,200		113,375		110,002		—
Operating lease obligations⁽³⁾	138,300		24,848		46,408		36,258		30,786
Total contractual obligations	$	1,005,928	$	89,486	$	162,659	$	722,997	$	30,786

⁽¹⁾ Consists of principal and interest payments. The $575.0 million in principal is due March 2023.

⁽²⁾Primarily relates to third-party managed hosting services.

⁽³⁾Represents obligations to make payments under non-cancellable lease agreements for our corporate headquarters and worldwide offices.

Off-Balance Sheet Arrangements

Through December 31, 2018, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Polices and Estimates

We prepare our consolidated financial statements in accordance with GAAP. In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.

Revenue Recognition

We generate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on Zendesk Support and, to a lesser extent, Chat, Talk, Guide, Explore, Sell, and Connect. In addition, we generate revenue by providing additional features to certain of our subscription plans for a fee that is incremental to the base subscription rate for such plans. Subscription service arrangements are generally non-cancelable and do not provide for refunds to customers in the event of cancellations or any other right of return. We record revenue net of sales or excise taxes.

We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.

Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

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•Identification of the contract, or contracts, with a customer;

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

•Allocation of the transaction price to the performance obligations in the contract; and

•Recognition of revenue when, or as, the performance obligations are satisfied.

Subscription revenue is recognized on a ratable basis over the contractual subscription term of the arrangement beginning on the date that our service is made available to the customer. Payments received in advance of services being rendered are recorded as deferred revenue.

In limited circumstances, certain customers have arrangements that provide for a maximum number of users over the subscription term, with usage measured monthly. Incremental fees are incurred when the maximum number of users is exceeded. In determining the transaction price for these arrangements, we evaluate the expected usage and estimate any incremental fees that we are entitled to throughout the subscription term and recognize revenue ratably over the subscription term. In making these assessments, we constrain our estimates based on factors that could lead to a probable significant reversal of cumulative revenue recognized.

Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance and permitting those customers to receive credits for future services in the event that we fail to meet those levels. To date, we have not accrued for any material liabilities in our consolidated financial statements as a result of these service-level agreements.

Costs to Obtain Customer Contracts

Sales commissions are paid for initial contracts and expansions of existing customer contracts. Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have estimated to be three years. We determined the period of benefit by taking into consideration the length of our customer contracts, our technology lifecycle, and other factors. Amortization expense is recorded in sales and marketing expense within our consolidated statement of operations. Sales commissions paid for contract renewals are not material.

Capitalized Internal-Use Software Costs

We capitalize certain development costs incurred in connection with software development for our platform and software used in operations. Costs incurred in the preliminary stages of development are expensed as incurred. Once software has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Capitalization ceases upon completion of all substantial testing. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality. Capitalized costs are recorded as part of property and equipment. Maintenance and training costs are expensed as incurred.

Capitalized internal-use software is amortized on a straight-line basis over its estimated useful life and recorded in cost of revenue within the accompanying consolidated statements of operations. The weighted-average remaining useful life of our capitalized internal-use software was 3.7 years as of December 31, 2018. We evaluate the useful lives of these assets and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no material impairments to internal-use software during the years ended December 31, 2018, 2017, or 2016.

Business Combinations and Valuation of Goodwill and Acquired Intangible Assets

When we acquire a business, we allocate the purchase price to the net tangible and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable.

Goodwill is evaluated for impairment annually in the third quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are

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not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. Goodwill is evaluated for impairment at the consolidated level, as we operate as a single reporting unit.

Acquired intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisitions. Acquired intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives. The carrying amounts of our acquired intangible assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful life is shorter than originally estimated.

Share-Based Compensation

Share-based compensation expense to employees is measured based on the fair value of the awards on the grant date and recognized in our consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award, which is typically four years). The contractual term of our stock options is typically ten years. We estimate the fair value of stock options granted using the Black-Scholes option valuation model. We measure the fair value of Restricted Stock Units, or RSUs, based on the fair value of the underlying shares on the date of grant. Compensation expense for awards with only service conditions is recognized over the vesting period of the applicable award using the straight-line method. We record share-based compensation expense for performance-based equity awards using the accelerated attribution method.

We estimate the fair value of stock options granted using the Black-Scholes option valuation model, which requires inputs, including the fair value of our underlying common stock, expected term, expected volatility, risk-free interest rate, and dividend yield of our common stock. These inputs involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future. Refer to Note 10 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a summary of the assumptions and judgments used to estimate the fair value of stock options.

In the first quarter of 2017, we changed our accounting policy for share-based compensation to recognize forfeitures as they occur, as permitted by ASU 2016-09. Refer to Note 2 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the adoption of this standard.

Recently Issued and Adopted Accounting Pronouncements

Refer to Note 2 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for a summary of recently issued and adopted accounting pronouncements.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Exchange Rate Risk

While we primarily transact with customers in the U.S. dollar, we also transact in foreign currencies, including the Euro, British Pound Sterling, Australian Dollar, Singapore Dollar, Danish Krone, Brazilian Real, Philippine Peso, Japanese Yen, Indian Rupee, Polish Zloty, and Mexican Peso, due to foreign operations and customer sales. We expect to continue to grow our foreign operations and customer sales. Our international subsidiaries maintain certain asset and liability balances that are denominated in currencies other than the functional currencies of these subsidiaries, which is the U.S. dollar for all international subsidiaries. Changes in the value of foreign currencies relative to the U.S. dollar can result in fluctuations in our total assets, liabilities, revenue, operating expenses, and cash flows. The effect of a hypothetical 5% change in foreign currency exchange rates applicable to our business would not have had a material impact on our cash and marketable securities for the year ended December 31, 2018.

We operate a hedging program to mitigate the impact of foreign currency fluctuations on our cash flows and earnings. For additional information, see Note 4 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

Interest Rate Sensitivity

We had cash, cash equivalents and marketable securities totaling $820.4 million at December 31, 2018, of which $756.4 million was invested in corporate bonds, asset-backed securities, U.S. Treasury securities, money market funds, commercial paper, agency securities, certificates of deposit, and time deposits. The cash and cash equivalents are held for working capital and general corporate purposes. Our investments in marketable securities are made for capital preservation purposes. We do not enter into investments for trading or speculative purposes.

Our cash equivalents and our portfolio of marketable securities are subject to market risk due to changes in interest rates. Fixed rate securities may have their market value adversely affected due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fluctuate due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available for sale,” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other-than-temporary.

As of December 31, 2018, an immediate increase of 100-basis points in interest rates would have resulted in a decline in the fair value of our cash equivalents and portfolio of marketable securities of approximately $6.4 million. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Fluctuations in the value of our cash equivalents and portfolio of marketable securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities prior to maturity or declines in fair value are determined to be other than temporary.

In March 2018, we issued $575.0 million aggregate principal amount of 0.25% convertible senior notes due 2023. The fair value of our convertible senior notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of our convertible senior notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the convertible senior notes at face value less unamortized discount on our balance sheet, and we present the fair value for required disclosure purposes only.

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Item 8. Financial Statements and Supplementary Data.

ZENDESK, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



	Page
Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm	59
Consolidated Balance Sheets	62
Consolidated Statements of Operations	63
Consolidated Statements of Comprehensive Loss	64
Consolidated Statements of Stockholders' Equity	65
Consolidated Statements of Cash Flows	66
Notes to Consolidated Financial Statements	67

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Zendesk, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Zendesk, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 14, 2019 expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for revenue from contracts with customers, and incremental costs to acquire contracts with customers in each period presented, due to the Company’s adoption of ASU No. 2014-09, Revenue from contracts with customers.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2013.

San Francisco, CA

February 14, 2019

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Zendesk, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Zendesk, Inc.’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Zendesk, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

As indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of FutureSimple Inc., which is included in the 2018 consolidated financial statements of the Company and constituted less than 1% of total assets as of December 31, 2018 and immaterial revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of FutureSimple Inc.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Zendesk, Inc. as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2018 and the related notes and our report dated February 14, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

San Francisco, CA

February 14, 2019

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ZENDESK, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and shares)



	December 31, 2018			December 31, 2017
	December 31, 2018			*As adjusted
Assets
Current assets:
Cash and cash equivalents	$	126,518		$	109,370
Marketable securities	300,213			137,576
Accounts receivable, net of allowance for doubtful accounts of $2,571 and $1,252 as of December 31, 2018 and 2017, respectively	85,280			57,096
Deferred costs	24,712			15,771
Prepaid expenses and other current assets	35,873			24,165
Total current assets	572,596			343,978
Marketable securities, noncurrent	393,671			97,447
Property and equipment, net	75,654			59,157
Deferred costs, noncurrent	26,914			15,395
Goodwill and intangible assets, net	146,327			67,034
Other assets	22,717			8,359
Total assets	$	1,237,879		$	591,370
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	16,820		$	5,307
Accrued liabilities	34,097			21,876
Accrued compensation and related benefits	46,603			29,017
Deferred revenue	245,243			173,147
Total current liabilities	342,763			229,347
Convertible senior notes, net	458,176			—
Deferred revenue, noncurrent	2,719			1,213
Other liabilities	17,300			6,626
Total liabilities	820,958			237,186
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, par value $0.01 per share: no shares issued or outstanding; 10.0 million shares authorized as of December 31, 2018 and 2017	—			—
Common stock, par value $0.01 per share: 400.0 million shares authorized; 108.0 million and 103.1 million shares issued and outstanding as of December 31, 2018 and 2017, respectively	1,080			1,031
Additional paid-in capital	950,693			753,568
Accumulated other comprehensive loss	(5,724		)	(2,372		)
Accumulated deficit	(529,128		)	(398,043		)
Total stockholders’ equity	416,921			354,184
Total liabilities and stockholders’ equity	$	1,237,879		$	591,370

*See Note 2 for a summary of adjustments

See Notes to Consolidated Financial Statements.

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ZENDESK, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)



	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Revenue	$	598,746		$	430,165		$	312,844
Cost of revenue (1)	181,255			127,422			93,900
Gross profit	417,491			302,743			218,944
Operating expenses (1):
Research and development	160,260			115,291			91,067
Sales and marketing	291,668			211,918			161,653
General and administrative	103,491			81,680			64,371
Total operating expenses	555,419			408,889			317,091
Operating loss	(137,928		)	(106,146		)	(98,147		)
Other income (expense), net
Interest income	15,086			3,542			1,821
Interest expense	(19,882		)	—			(148		)
Other expense, net	(467		)	(1,055		)	(153		)
Total other income (expense), net	(5,263		)	2,487			1,520
Loss before provision for (benefit from) income taxes	(143,191		)	(103,659		)	(96,627		)
Provision for (benefit from) income taxes	(12,107		)	(1,518		)	993
Net loss	$	(131,084	)	$	(102,141	)	$	(97,620	)
Net loss per share, basic and diluted	$	(1.24	)	$	(1.02	)	$	(1.05	)
Weighted-average shares used to compute net loss per share, basic and diluted	105,567			99,918			93,161

(1) Includes share-based compensation expense as follows:
	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Cost of revenue	$	14,835		$	9,040		$	7,045
Research and development	41,365			29,970			27,083
Sales and marketing	37,882			24,279			22,693
General and administrative	25,401			21,263			16,608

*See Note 2 for a summary of adjustments

See Notes to Consolidated Financial Statements.

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ZENDESK, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)



	Year Ended December 31,
	2018			2017			2016
				*As adjusted			*As adjusted
Net loss	$	(131,084	)	$	(102,141	)	$	(97,620	)
Other comprehensive gain (loss), before tax:
Net unrealized loss on available-for-sale investments	(620		)	(247		)	(213		)
Foreign currency translation gain (loss)	—			824			(488		)
Net unrealized gain (loss) on derivative instruments	(2,732		)	3,888			(2,271		)
Other comprehensive gain (loss), before tax	(3,352		)	4,465			(2,972		)
Tax effect	—			(1,640		)	—
Other comprehensive gain (loss), net of tax	(3,352		)	2,825			(2,972		)
Comprehensive loss	$	(134,436	)	$	(99,316	)	$	(100,592	)

*See Note 2 for a summary of adjustments

See Notes to Consolidated Financial Statements.

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ZENDESK, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)



	Stockholders’ Equity
						Additional Paid-In Capital									Accumulated Other Comprehensive Loss						Total Stockholders’ Equity
	Common Stock								Treasury Stock									Accumulated Deficit
	Shares		Amount						Shares			Amount						Accumulated Deficit
	Shares		Amount						Shares			Amount						* As adjusted			*As adjusted
Balances as of December 31, 2015	90,861		$	905		$	511,183		(535		)	$	(652	)	$	(2,225	)	$	(198,055	)	$	311,157
Issuance of common stock upon exercise of stock options	2,924		29			25,406			—			—			—			—			25,435
Issuance of common stock for settlement of RSUs	2,894		29			(832		)	—			—			—			—			(803		)
Vesting of early exercised stock options	—		1			628			—			—			—			—			629
Issuance of common stock in connection with employee stock purchase plan	554		7			10,885			—			—			—			—			10,892
Repurchase of common stock	(38	)	—			—			—			—			—			—			—
Share-based compensation	—		—			76,419			—			—			—			—			76,419
Tax benefit from share-based award activity	—		—			337			—			—			—			—			337
Other comprehensive loss, net of income taxes	—		—			—			—			—			(2,972		)	—			(2,972		)
Net loss	—		—			—			—			—			—			(97,620		)	(97,620		)
Balances as of December 31, 2016	97,195		$	971		$	624,026		(535		)	$	(652	)	$	(5,197	)	$	(295,675	)	$	323,474
Issuance of common stock upon exercise of stock options	2,664		27			31,855			—			—			—			—			31,882
Issuance of common stock for settlement of RSUs	3,145		31			(3,020		)	—			—			—			—			(2,989		)
Vesting of early exercised stock options	—		1			411			—			—			—			—			412
Issuance of common stock in connection with employee stock purchase plan	652		6			12,904			—			—			—			—			12,910
Share-based compensation	—		—			87,546			—			—			—			—			87,546
Other comprehensive gain, net of income taxes	—		—			—			—			—			2,825			—			2,825
Retirement of treasury stock	(535	)	(5		)	(647		)	535			652			—			—			—
Cumulative-effect adjustment resulting from the adoption of ASU 2016-09 (Note 2)	—		—			493			—			—			—			(493		)	—
Cumulative-effect adjustment resulting from the adoption of ASU 2016-16 (Note 2)	—		—			—			—			—			—			265			265
Net loss	—		—			—			—			—			—			(102,141		)	(102,141		)
Balances as of December 31, 2017	103,121		$	1,031		$	753,568		—			$	—		$	(2,372	)	$	(398,044	)	$	354,184
Issuance of common stock upon exercise of stock options	1,024		10			16,140			—			—			—			—			16,150
Issuance of common stock for settlement of RSUs	3,165		32			(5,245		)	—			—			—			—			(5,213		)
Issuance of common stock in connection with employee stock purchase plan	728		7			19,766			—			—			—			—			19,773
Share-based compensation	—		—			122,160			—			—			—			—			122,160
Equity component of convertible senior notes	—		—			44,304			—			—			—			—			44,304
Other comprehensive loss, net of income taxes	—		—			—			—			—			(3,352		)	—			(3,352		)
Net loss	—		—			—			—			—			—			(131,084		)	(131,084		)
Balances as of December 31, 2018	108,038		$	1,080		$	950,693		$	—		$	—		$	(5,724	)	$	(529,128	)	$	416,921

*See Note 2 for a summary of adjustments. The cumulative-effect reduction to accumulated deficit related to the adoption of ASU 2014-09 as of December 31, 2015 was $17.9 million.

See Notes to Consolidated Financial Statements.

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ZENDESK, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Cash flows from operating activities
Net loss	$	(131,084	)	$	(102,141	)	$	(97,620	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization	36,520			31,931			27,506
Share-based compensation	119,483			84,553			73,429
Amortization of deferred costs	21,304			14,434			10,293
Amortization of debt discount and issuance costs	18,766			—			—
Income tax benefit related to convertible senior notes	(13,784		)	—			—
Excess tax benefit from share-based award activity	—			—			(337		)
Other	2,848			603			3,106
Changes in operating assets and liabilities:
Accounts receivable	(30,007		)	(21,201		)	(11,808		)
Prepaid expenses and other current assets	(10,620		)	(5,112		)	(6,248		)
Deferred costs	(40,898		)	(22,762		)	(15,277		)
Other assets and liabilities	6,635			(5,765		)	(3,887		)
Accounts payable	7,534			1,839			(3,486		)
Accrued liabilities	3,844			6,919			5,261
Accrued compensation and related benefits	15,026			7,399			6,055
Deferred revenue	73,053			51,531			37,573
Net cash provided by operating activities	78,620			42,228			24,560
Cash flows from investing activities
Purchases of property and equipment	(35,323		)	(16,396		)	(20,647		)
Internal-use software development costs	(7,005		)	(7,521		)	(6,310		)
Purchases of marketable securities	(700,226		)	(177,309		)	(249,048		)
Proceeds from maturities of marketable securities	170,882			116,735			39,690
Proceeds from sales of marketable securities	71,359			31,090			53,951
Cash paid for acquisitions, net of cash acquired	(79,363		)	(16,470		)	—
Purchase of strategic investment	(10,000		)	—			—
Net cash used in investing activities	(589,676		)	(69,871		)	(182,364		)
Cash flows from financing activities
Proceeds from issuance of convertible senior notes, net of issuance costs paid of $13,561	561,439			—			—
Purchase of capped call related to convertible senior notes	(63,940		)	—			—
Proceeds from exercises of employee stock options	16,150			31,882			25,412
Proceeds from employee stock purchase plan	21,440			14,248			11,004
Taxes paid related to net share settlement of share-based awards	(5,213		)	(2,989		)	(803		)
Excess tax benefit from share-based award activity	—			—			337
Other	(813		)	—			(323		)
Net cash provided by financing activities	529,063			43,141			35,627
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(19		)	328			(334		)
Net increase (decrease) in cash, cash equivalents and restricted cash	17,988			15,826			(122,511		)
Cash, cash equivalents and restricted cash at beginning of period	110,888			95,062			217,573
Cash, cash equivalents and restricted cash at end of period	$	128,876		$	110,888		$	95,062

Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets
Cash and cash equivalents	$	126,518		$	109,370		$	93,677
Restricted cash included in prepaid expenses and other current assets	1,643			872			967
Restricted cash included in other assets	715			646			418
Total cash, cash equivalents and restricted cash	$	128,876		$	110,888		$	95,062

Supplemental cash flow data
Cash paid for interest	$	699		$	—		$	148
Cash paid for taxes	$	2,524		$	1,766		$	1,530
Non-cash investing and financing activities
Share-based compensation capitalized in internal-use software development costs	$	2,414		$	2,704		$	2,365
Balance of property and equipment in accounts payable and accrued expenses	$	5,582		$	1,837		$	3,610
Property and equipment acquired through tenant improvement allowances	$	5,640		$	647		$	237
Share-based compensation capitalized in deferred costs	$	866		$	497		$	350
Vesting of early exercised stock options	$	—		$	411		$	628

*See Note 2 for a summary of adjustments.

See Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization

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, products that are intended to help organizations and their customers build better experiences. Our product family is 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 a family of products and platform 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.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles, or GAAP. The consolidated financial statements include the accounts of Zendesk, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had an immaterial effect on our reported results of operations.

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 fair value of share-based awards, acquired intangible assets, goodwill, and our convertible senior notes, as well as unrecognized tax benefits, the useful lives of acquired intangible assets and property and equipment, the capitalization and estimated useful life of costs to obtain customer contracts and internal-use software, variable consideration related to revenue recognition, financial forecasts used in currency hedging, and impairment of strategic investments.

These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Segment Information

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

Revenue Recognition

We also derive revenue from implementation and training services, for which we recognize revenue based on proportional performance, and Talk usage, for which we recognize revenue based on usage.

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Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We determine revenue recognition through the following steps:

•Identification of the contract, or contracts, with a customer;

•Identification of the performance obligations in the contract;

•Determination of the transaction price;

•Allocation of the transaction price to the performance obligations in the contract; and

•Recognition of revenue when, or as, the performance obligations are satisfied.

Deferred Revenue

We invoice customers for subscriptions to our products in monthly, quarterly, or annual installments. Deferred revenue consists primarily of customer billings made in advance of performance obligations being satisfied and revenue being recognized, and includes an immaterial amount of billings for subscriptions with customer cancellation rights. The term between invoicing and when payment is due is not significant and we do not provide financing arrangements to customers. Deferred revenue associated with performance obligations that are anticipated to be satisfied, and thus revenue recognized, during the succeeding 12-month period is recorded as current deferred revenue and the remaining portion is recorded as noncurrent deferred revenue. Deferred revenue associated with implementation, Talk usage, and training services was immaterial as of December 31, 2018 and 2017.

We invoice customers based on billing schedules established in our contracts. Accounts receivable are recorded when the right to consideration becomes unconditional.

Cost of Revenue

Cost of revenue consists primarily of personnel costs (including salaries, share-based compensation, and benefits) for employees associated with our infrastructure, product support, and professional service organizations, and expenses for hosting capabilities, primarily for third-party managed hosting services and costs associated with our self-managed colocation data centers. Cost of revenue also includes third-party license fees, payment processing fees, amortization expense associated with capitalized internal-use software, amortization expense associated with acquired intangible assets, and allocated shared costs, primarily including facilities, information technology, and security costs.

Cash, Cash Equivalents, and Restricted Cash

We consider all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at fair value and consist primarily of bank deposits and money market funds.

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As of December 31, 2018, our restricted cash balance was $2.4 million, consisting of $1.6 million pledged for charitable donation and $0.7 million related to deposits for leased office spaces. As of December 31, 2017, our restricted cash balance was $1.5 million, consisting of $0.9 million pledged for charitable donation and $0.6 million related to a deposit for leased office space. Restricted cash is included within prepaid expenses and other current assets and other assets on our consolidated balance sheets.

Marketable Securities

Marketable securities consist of corporate bonds, asset-backed securities, U.S. Treasury securities, money market funds, commercial paper, agency securities, certificates of deposit, and time deposits. We classify marketable securities as available-for-sale at the time of purchase and reevaluate such classification as of each balance sheet date. All marketable securities are recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive gain (loss). We evaluate our investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered other than temporary if they are related to deterioration in credit risk or if it is likely we will sell the securities before the recovery of their cost basis. Realized gains and losses and declines in value determined to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the consolidated statements of operations.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of allowance for doubtful accounts. The allowance is based upon historical loss patterns, the age of each past due invoice, and an evaluation of the potential risk of loss associated with delinquent accounts. Accounts receivable deemed uncollectable are charged against the allowance for doubtful accounts when identified. The balance of accounts receivable also includes contract assets, which are recorded when revenue is recognized in advance of invoicing.

Our allowance for doubtful accounts consists of the following activity (in thousands):



	Year Ended December 31,
	2018			2017
Allowance for doubtful accounts, beginning balance	$	1,252		$	1,269
Additions	2,667			3,400
Write-offs	(1,348		)	(3,417		)
Allowance for doubtful accounts, ending balance	$	2,571		$	1,252

Costs to Obtain Customer Contracts

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have estimated to be three years. We determined the period of benefit by taking into consideration the length of our customer contracts, our technology lifecycle, and other factors. Amortization expense is recorded in sales and marketing expense within our consolidated statement of operations. Sales commissions paid for contract renewals are not material.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Maintenance and repair costs are charged to expense as incurred. The estimated useful lives of our property and equipment are as follows:



Furniture and fixtures	5 years
Hosting equipment	3 years
Computer equipment and licensed software and patents	3 to 5 years
Leasehold improvements	Shorter of the lease term or estimated useful life

Derivative Instruments and Hedging

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We enter into foreign currency forward contracts with certain financial institutions to mitigate the impact of foreign currency fluctuations on our future cash flows and earnings. All of our foreign currency forward contracts are designated as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.

We recognize all forward contracts on our balance sheet at fair value as either assets or liabilities. The effective portion of the gain or loss on each forward contract is reported as a component of accumulated other comprehensive loss and reclassified into earnings, into revenue, cost of revenue or operating expense in the same period, or periods, during which the hedged transaction affects earnings. The ineffective portion of the gains or losses, if any, is recorded immediately in other income (expense), net. The change in time value related to our cash flow hedges is excluded from the assessment of hedge effectiveness and is recorded immediately in other income (expense), net. We evaluate the effectiveness of our cash flow hedges on a quarterly basis.

We have a master netting agreement with each of our counterparties, which permits net settlement of multiple, separate derivative contracts with a single payment. We may also be required to exchange cash collateral with certain of our counterparties on a regular basis. As of December 31, 2018, we have no restricted cash associated with cash collateral exchanged. 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.

Fair Value Measurements

We measure certain financial instruments at fair value using a fair value hierarchy. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs may be used to measure fair value:

Level 1—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2—Other inputs that are directly or indirectly observable in the marketplace.

Level 3—Unobservable inputs that are supported by little or no market activity.

Our marketable securities are classified within either Level 1 or Level 2, and our foreign currency forward contracts and convertible senior notes are classified within Level 2. We have no financial assets or liabilities measured using Level 3 inputs. The fair value of our Level 1 marketable securities is based on quoted market prices of identical underlying securities. The fair value of our Level 2 marketable securities is based on indirect or directly observable market data, including readily available pricing sources for identical underlying securities that may not be actively traded. The fair value of our foreign currency forward contracts is based on quoted prices and market observable data of similar instruments in active markets, such as currency spot rates, forward rates, and LIBOR. The fair value of our convertible senior notes is determined based on the quoted price of the convertible senior notes in an inactive market.

For certain other financial instruments, including accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their fair value due to the relatively short maturity of these balances.

Capitalized Internal-Use Software Costs

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Business Combinations

When we acquire businesses, we allocate the purchase price to the net tangible and identifiable intangible assets. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair values of assets acquired and liabilities assumed, especially with respect to intangible assets. These estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future, the appropriate weighted-average cost of capital, and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unpredictable.

Goodwill, Acquired Intangible Assets, and Impairment Assessment of Long-Lived Assets

Goodwill. Goodwill represents the excess purchase consideration of an acquired business over the fair value of the net tangible and identifiable intangible assets. Goodwill is evaluated for impairment annually in the third quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows. No impairment charges were recorded during the years ended December 31, 2018, 2017, or 2016.

Acquired Intangible Assets. Acquired intangible assets consist of identifiable intangible assets, primarily developed technology and customer relationships, resulting from our acquisitions. Intangible assets are recorded at fair value on the date of acquisition and amortized over their estimated useful lives.

Impairment of Long-Lived Assets. The carrying amounts of our long-lived assets, including property and equipment, capitalized internal-use software, costs to obtain customer contracts, and acquired intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable or that the useful lives are shorter than originally estimated. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future undiscounted net cash flows the asset is expected to generate over its remaining life. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. If the useful life is shorter than originally estimated, we amortize the remaining carrying value over the new shorter useful life. There were no material impairments for the years ended December 31, 2018, 2017, and 2016, other than those disclosed in Note 6.

Strategic Investments

Strategic investments consist of non-controlling equity investments in privately-held companies. We have elected to apply the measurement alternative for these investments as they do not have readily determinable fair values, measuring them at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. An impairment loss is recorded when events or circumstances indicate a decline in value has occurred. We include strategic investments in other assets in our consolidated balance sheets.

Share-Based Compensation

As of December 31, 2018, we had a total of $265.4 million in future period share-based compensation expense related to all equity awards to be recognized over a weighted average period of 2.7 years.

Advertising Expense

Advertising is expensed as incurred. For the years ended December 31, 2018, 2017, and 2016, advertising expense was $48.2 million, $36.8 million, and $23.9 million, respectively.

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Government Grants

We have obtained government grants in certain jurisdictions where we operate. We receive the grant funds as we meet certain commitments, including targeted levels of employment and/or spending within the local jurisdictions. If we fail to maintain these commitments, we may be required to repay grant funds received or be ineligible to receive future funding. We recognize grant proceeds to offset costs to which the grants relate on a straight-line basis when it is reasonably assured that the applicable commitments have been met. For each of the years ended December 31, 2018 and 2017, we recognized grant proceeds of $2.0 million and in 2016 we recognized grant proceeds of $1.2 million in our consolidated statements of operations.

Income Taxes

We record income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

We recognize tax benefits from uncertain tax positions if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and results of operations.

We have elected to record interest accrued and penalties related to unrecognized tax benefits in our consolidated financial statements as a component of provision for income taxes.

Foreign Currency

The functional currency of our foreign subsidiaries is the U.S. dollar. Accordingly, monetary balance sheet accounts are remeasured using exchange rates in effect at the balance sheet dates and non-monetary items are remeasured at historical exchange rates. Expenses are generally remeasured at the average exchange rates for the period. Foreign currency remeasurement and transaction gains and losses are included in other income (expense), net and were not material for the years ended December 31, 2018, 2017, and 2016, respectively.

Concentrations of Risk

Financial instruments potentially exposing us to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, marketable securities, accounts receivable and derivative instruments. We place our cash and cash equivalents with high-credit-quality financial institutions. However, we maintain balances in excess of the FDIC insurance limits. We do not require our customers to provide collateral to support accounts receivable and maintain an allowance for doubtful accounts receivable balances. We seek to mitigate counterparty credit risk related to our derivative instruments by transacting with major financial institutions with high credit ratings.

At December 31, 2018 and 2017, there were no customers that represented 10% or greater of our accounts receivable balance. There were no customers that individually exceeded 10% of our revenue in any of the periods presented.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-02, regarding ASC Topic 842 “Leases,” including subsequent amendments. This new guidance requires lessees to recognize most leases on their balance sheets as right-of-use assets with corresponding lease liabilities and eliminates certain real estate-specific provisions. The new guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We have completed our process to identify our population of lease arrangements and completed our evaluation of each arrangement under the guidance, including application of elected practical expedients. We are also finalizing the incremental borrowing rate for each arrangement. We plan to adopt utilizing the modified retrospective method of transition. While the adoption remains in progress, we expect that adoption will result in the recognition of right-of-use assets and lease liabilities that were not previously recognized, which will increase total assets and liabilities on our consolidated balance sheet.

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In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments,” which changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. The standard is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We are currently evaluating the effect of this standard on our consolidated financial statements.

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. The standard is effective for fiscal years beginning after December 15, 2019, however early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, regarding ASC Topic 815 “Derivatives and Hedging.” This amendment simplifies various aspects of hedge accounting, including the measurement and presentation of hedge ineffectiveness and certain documentation and assessment requirements. The amendment also makes more hedging strategies eligible for hedge accounting. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income,” which provides for the reclassification of the effect of remeasuring deferred tax balances related to items within accumulated other comprehensive income to retained earnings resulting from the Tax Cuts and Jobs Act, or Tax Act. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, regarding ASC Topic 718 “Compensation - Stock Compensation,” which largely aligns the accounting for share-based compensation for non-employees with employees. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-08, regarding ASC Topic 958 “Not-for-Profit Entities,” which clarified the guidance on how entities determine whether to account for a transfer of assets as an exchange transaction or a contribution. The guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material 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. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, regarding ASC Topic 350-40 “Intangibles - Internal-Use Software,” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. We plan to early adopt this standard in the first quarter of 2019 on a prospective basis. We do not expect adoption to have a material effect on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU 2016-09, regarding ASC Topic 718 “Compensation - Stock Compensation.” This amendment changes certain aspects of accounting for share-based awards to employees, including the recognition of income tax effects of awards when the awards vest or are settled, requirements on net share settlement to cover tax withholding, and accounting for forfeitures. We adopted the standard in the first quarter of 2017.

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As required by the new standard, we now recognize excess tax effects from share-based awards as a component of provision for income taxes in our statement of operations when awards vest or are settled. Upon adoption, we recorded a deferred tax asset of $52.8 million to reflect, on a modified retrospective basis, the previously unrecognized excess tax benefits; however, the deferred tax asset was fully offset by a valuation allowance, resulting in no impact to our consolidated financial statements. In our statement of cash flows, we no longer classify excess tax benefits as a reduction from operating cash flows. This change was made prospectively beginning with the quarter ended March 31, 2017.

We also elected to account for forfeitures as they occur, therefore share-based compensation expense for the years ended December 31, 2018 and 2017 have been calculated based on actual forfeitures in our consolidated statement of operations, rather than our previous approach which was net of estimated forfeitures. The cumulative-effect adjustment of this change on a modified retrospective basis was not material. Share-based compensation expense for the year ended December 31, 2016 was recorded net of estimated forfeitures.

In May 2014, the FASB issued new revenue guidance under ASU 2014-09 that provides principles for recognizing revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for the promised goods or services provided to customers. ASC 606 and ASC 340-40 also require the deferral of incremental costs of obtaining contracts with customers and subsequent amortization of those costs over the period of anticipated benefit. Collectively, we refer to this guidance as “ASC 606.”

We adopted ASC 606 on January 1, 2018, utilizing the full retrospective method of transition. The adoption resulted in changes to our accounting policies for revenue recognition and incremental costs to acquire contracts, as described below. We applied ASC 606 using the following practical expedients:


•	consideration allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue is not disclosed for comparative periods prior to the adoption date;


•	completed contracts that included variable consideration utilize the final transaction price rather than an estimation of variable consideration for comparative periods prior to the adoption date; and


•	costs of obtaining contracts with customers are expensed when the amortization period would have been one year or less.

The effect of adopting ASC 606 on our 2017 and 2016 revenues was not material. The primary effect relates to the deferral of sales commissions and other incremental costs to acquire contracts, which we historically expensed as incurred. The impact of adoption is summarized in the tables below. Under ASC 606, all incremental costs to acquire contracts are capitalized and amortized on a straight-line basis over the anticipated period of benefit, which we have determined to be three years.

In August 2016, the FASB issued ASU 2016-15, regarding ASC Topic 230 “Statement of Cash Flows.” This update addresses eight specific cash flow issues with the objective of reducing diversity in practice. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We adopted this standard in the first quarter of 2018. The adoption did not have an effect on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows - Restricted Cash,” which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. We adopted this standard in the first quarter of 2018 on a retrospective basis, resulting in an immaterial change to our previously reported statements of cash flows for the years ended December 31, 2017 and 2016, which is summarized in the table below.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations - Clarifying the Definition of a Business,” which clarifies the definition of a business when evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We adopted this standard in the first quarter of 2018. The adoption did not have an effect on our consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05, which amends ASC Topic 740 “Income Taxes” to conform with SEC Staff Accounting Bulletin 118, issued in December 2017. The guidance was issued to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The standard is effective upon issuance. We finalized our assessment of the Tax Act in the fourth quarter of 2018 and determined that changes to our initial assessments of and its effects on our income taxes are not material.

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We adjusted our consolidated financial statements from amounts previously reported due to the adoption of ASC 606 and ASU 2016-18. Select consolidated balance sheet line items, which reflect the adoption of ASC 606 are as follows (in thousands):



	December 31, 2017
	As Previously Reported			Adjustments			As Adjusted
Assets
Deferred costs	$	—		$	15,771		$	15,771
Deferred costs, noncurrent	—			15,395			15,395
Liabilities and stockholders’ equity
Deferred revenue	$	174,524		$	(1,377	)	$	173,147
Accumulated deficit	$	(430,586	)	$	32,543		$	(398,043	)

Select audited consolidated statement of operations line items, which reflect the adoption of ASC 606 are as follows (in thousands, except per share data):



	Year Ended December 31, 2017
	As Previously Reported			Adjustments			As Adjusted
Revenue	$	430,492		$	(327	)	$	430,165
Operating expenses:
Sales and marketing	220,742			(8,824		)	211,918
Operating loss	(114,643		)	8,497			(106,146		)
Net loss	$	(110,638	)	$	8,497		$	(102,141	)
Net loss per share, basic and diluted	$	(1.11	)	$	0.09		$	(1.02	)



	Year Ended December 31, 2016
	As Previously Reported			Adjustments			As Adjusted
Revenue	$	311,999		$	845		$	312,844
Operating expenses:
Sales and marketing	166,987			(5,334		)	161,653
Operating loss	(104,326		)	6,179			(98,147		)
Net loss	$	(103,799	)	$	6,179		$	(97,620	)
Net loss per share, basic and diluted	$	(1.11	)	$	0.06		$	(1.05	)

Select audited consolidated statement of cash flows line items, which reflect the adoption of ASC 606 and ASU 2016-18 are as follows (in thousands):

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	Year Ended December 31, 2017
	As Previously Reported			Adjustments			As Adjusted
Cash flows from operating activities
Net loss	$	(110,638	)	$	8,497		$	(102,141	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation	85,049			(496		)	84,553
Amortization of deferred costs	—			14,434			14,434
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(5,055		)	(57		)	(5,112		)
Deferred costs	—			(22,762		)	(22,762		)
Other assets and liabilities	(5,955		)	190			(5,765		)
Deferred revenue	51,204			327			51,531
Net cash provided by operating activities	42,095			133			42,228
Net increase in cash, cash equivalents and restricted cash	15,693			133			15,826
Cash, cash equivalents and restricted cash at beginning of period	93,677			1,385			95,062
Cash, cash equivalents and restricted cash at end of period	$	109,370		$	1,518		$	110,888



	Year Ended December 31, 2016
	As Previously Reported			Adjustments			As Adjusted
Cash flows from operating activities
Net loss	$	(103,799	)	$	6,179		$	(97,620	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation	73,779			(350		)	73,429
Amortization of deferred costs	—			10,293			10,293
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(6,286		)	38			(6,248		)
Deferred costs	—			(15,277		)	(15,277		)
Deferred revenue	38,418			(845		)	37,573
Net cash provided by operating activities	24,522			38			24,560
Net increase in cash, cash equivalents and restricted cash	(122,549		)	38			(122,511		)
Cash, cash equivalents and restricted cash at beginning of period	216,226			1,347			217,573
Cash, cash equivalents and restricted cash at end of period	$	93,677		$	1,385		$	95,062

Note 3. Business Combinations

FutureSimple Inc.

On September 10, 2018, we completed the acquisition of FutureSimple Inc., or FutureSimple, the developer of Base, a sales force automation software product. We acquired FutureSimple for purchase consideration of $81.0 million in cash. We incurred transaction costs of $1.6 million in connection with the acquisition, which were included within general and administrative expenses.

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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 December 31, 2018, we made adjustments to the preliminary purchase price allocation, primarily related to the fair value of the customer relationships and backlog intangible assets, resulting in a decrease to goodwill of $0.6 million. 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 is not deductible for income tax purposes. 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.



Net tangible liabilities acquired	$	(3,030	)
Identifiable intangible assets:
Developed technology	19,000
Customer relationships	10,400
Backlog	2,200
Goodwill	52,453
Total purchase consideration	$	81,023

The developed technology, customer relationships, and backlog intangible assets were assigned useful lives of 6.5, 5.0, and 2.0 years, respectively.

In connection with the acquisition, we granted cash and share-based retention awards to certain employees of FutureSimple. The cash awards vest over a required service period and the share-based awards vest upon fulfillment of certain service and performance conditions. Each retention award will be recorded as expense based on the fulfillment of such service and performance conditions, as applicable, and is not included in the total purchase consideration.

From the date of the acquisition, the results of operations of FutureSimple 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 FutureSimple are not material to our consolidated financial statements in any period presented.

Outbound Solutions, Inc.

On April 27, 2017, we completed the acquisition of Outbound Solutions, Inc., or Outbound, a provider of software that enables companies to deliver intelligent, behavior-based messages across multiple channels. We acquired Outbound for purchase consideration of $16.6 million in cash.

The total purchase consideration was allocated to the assets acquired and liabilities assumed as set forth below (in thousands). The excess of the purchase price over the net assets acquired was recorded as goodwill. Goodwill generated from the acquisition is primarily attributable to expected growth from the expansion of the scope of and market opportunity for our products. Goodwill is not deductible for income tax purposes. 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.



Net tangible assets acquired	$	96
Net deferred tax liability recognized	(492		)
Identifiable intangible assets:
Developed technology	3,200
Customer relationships	410
Goodwill	13,350
Total purchase consideration	$	16,564

The developed technology and customer relationships intangible assets were assigned useful lives of 6.5 and 3.5 years, respectively.

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From the date of the acquisition, the results of operations of Outbound 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 Outbound are not material to our consolidated financial statements in any period presented.

Note 4. Financial Instruments

Investments

The following tables present information about our financial assets measured at fair value on a recurring basis as of December 31, 2018 and 2017 based on the three-tier fair value hierarchy (in thousands):



	Fair Value Measurement at December 31, 2018
	Level 1		Level 2		Total
Description
Corporate bonds	$	—	$	460,210	$	460,210
Asset-backed securities	—		127,078		127,078
U.S. Treasury securities	—		58,039		58,039
Money market funds	57,758		—		57,758
Commercial paper	—		38,900		38,900
Agency securities	—		11,256		11,256
Certificates of deposit and time deposits	—		3,200		3,200
Total	$	57,758	$	698,683	$	756,441
Included in cash and cash equivalents					$	62,557
Included in marketable securities					$	693,884



	Fair Value Measurement at December 31, 2017
	Level 1		Level 2		Total
Description
Corporate bonds	$	—	$	149,069	$	149,069
Money market funds	32,832		—		32,832
U.S. Treasury securities	—		28,382		28,382
Asset-backed securities	—		27,738		27,738
Commercial paper	—		19,622		19,622
Agency securities	—		14,911		14,911
Total	$	32,832	$	239,722	$	272,554
Included in cash and cash equivalents					$	37,531
Included in marketable securities					$	235,023

There were no transfers between fair value measurement levels during the years ended December 31, 2018 or 2017.

Gross unrealized gains and losses for cash equivalents and marketable securities as of December 31, 2018 and 2017 were not material. As of December 31, 2018 and 2017, there were no securities that were in an unrealized loss position for more than twelve months.

The following table classifies our marketable securities by contractual maturity as of December 31, 2018 and 2017 (in thousands):



	December 31, 2018		December 31, 2017
Due in one year or less	$	300,213	$	137,576
Due after one year and within five years	393,671		97,447
Total	$	693,884	$	235,023

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As of December 31, 2018 and 2017, the balance of strategic investments without readily determinable fair values was $10.0 million and none, respectively. There have been no adjustments to the carrying value 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

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. As of December 31, 2018, the balance of accumulated other comprehensive loss included an unrecognized net loss of $1.8 million related to the effective portion of changes in the fair value of foreign currency forward contracts designated as cash flow hedges. As of December 31, 2018, we have no cash collateral related to our cash flow hedges. We expect to reclassify a net loss of $2.0 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 sheet as of December 31, 2018 and 2017 (in thousands):



	December 31, 2018
	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	$	2,047	Accrued liabilities	$	4,862
Total		$	2,047		$	4,862



	December 31, 2017
	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	$	2,359	Accrued liabilities	$	1,220
Total		$	2,359		$	1,220

Our foreign currency forward contracts had a total notional value of $200.3 million and $139.7 million as of December 31, 2018 and 2017, respectively.

The following table presents information about our derivative instruments on our statements of operations for the years ended December 31, 2018 and 2017 (in thousands):



		Year Ended December 31, 2018						Year Ended December 31, 2017
Derivative Instrument	Location of Loss Reclassified into Earnings	Loss Recognized in AOCI			Loss Reclassified from AOCI into Earnings			Gain Recognized in AOCI		Loss Reclassified from AOCI into Earnings
Foreign currency forward contracts	Revenue, cost of revenue, operating expenses	$	(4,050	)	$	(1,318	)	$	3,663	$	(225	)
Total		$	(4,050	)	$	(1,318	)	$	3,663	$	(225	)

Amounts recognized in earnings related to excluded time value and hedge ineffectiveness for the years ended December 31, 2018 and 2017 were not material.

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Convertible Senior Notes

As of December 31, 2018, the fair value of our convertible senior notes was $645.3 million. The fair value was determined based on the quoted price of the convertible senior notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2 in the fair value hierarchy.

Note 5. Costs to Obtain Customer Contracts

The balances of deferred costs to obtain customer contracts were $51.6 million and $31.2 million as of December 31, 2018 and 2017, respectively. Amortization expense for these deferred costs was $21.3 million, $14.4 million, and $10.3 million for years ended December 31, 2018, 2017, and 2016, respectively. There were no impairment losses related to these deferred costs for the periods presented.

Note 6. Property and Equipment

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



	December 31, 2018			December 31, 2017
Leasehold improvements	51,832			28,113
Capitalized internal-use software	36,444			31,593
Hosting equipment	34,105			37,222
Computer equipment and licensed software and patents	21,100			16,316
Furniture and fixtures	11,550			9,581
Construction in progress	10,538			11,220
Total	165,569			134,045
Less accumulated depreciation and amortization	(89,915		)	(74,888		)
Property and equipment, net	$	75,654		$	59,157

Depreciation expense was $23.9 million, $20.3 million, and $16.2 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Amortization expense of capitalized internal-use software was $5.9 million, $7.7 million, and $7.4 million during the years ended December 31, 2018, 2017, and 2016, respectively. We recorded impairment losses of $2.2 million to construction in progress during the year ended December 31, 2018, which were included within research and development expenses on our consolidated statements of operations. The carrying value of capitalized internal-use software at December 31, 2018 and 2017 was $19.2 million and $17.7 million, respectively, including $2.7 million and $8.7 million in construction in progress, respectively.

Note 7. Goodwill and Acquired Intangible Assets

The changes in the carrying amount of goodwill for the two years ended December 31, 2018 are as follows (in thousands):



Balance as of December 31, 2016	$	45,347
Goodwill acquired	13,350
Foreign currency translation adjustments	434
Balance as of December 31, 2017	59,131
Goodwill acquired	52,453
Balance as of December 31, 2018	$	111,584

The following tables present information about our acquired intangible assets subject to amortization as of December 31, 2018 and 2017 (in thousands):

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	As of December 31, 2018
	Cost		Accumulated Amortization			Net		Weighted Average Remaining Useful Life
								(In years)
Developed technology	$	31,000	$	(8,151	)	$	22,849	5.5
Customer relationships	11,310		(1,249		)	10,061		4.6
Backlog	2,200		(367		)	1,833		1.7
	$	44,510	$	(9,767	)	$	34,743



	As of December 31, 2017
	Cost		Accumulated Amortization			Foreign Currency Translation Adjustments			Net		Weighted Average Remaining Useful Life
											(In years)
Developed technology	$	17,200	$	(9,835	)	$	(93	)	$	7,272	3.7
Customer relationships	2,210		(1,549		)	(30		)	631		2.4
	$	19,410	$	(11,384	)	$	(123	)	$	7,903

During the second quarter of 2018, we removed developed technology and customer relationships intangible assets from our consolidated balance sheet, which had become fully amortized. Amortization expense of acquired intangible assets for the years ended December 31, 2018 and 2017 was $4.8 million and $3.8 million, respectively.

Estimated future amortization expense as of December 31, 2018 is as follows (in thousands):



2019	$	8,780
2020	6,839
2021	5,494
2022	5,494
2023	4,722
Thereafter	3,414
	$	34,743

Note 8. 0.25% Convertible Senior Notes and Capped Call

In March 2018, we issued $575.0 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 $561.4 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

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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 and twelve months ended December 31, 2018, the conditions allowing holders of the Notes to convert have not been met. The Notes are therefore not convertible during the three and twelve months ended December 31, 2018 and are classified as long-term debt.

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 $125.0 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 $13.6 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 $10.6 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.

The net carrying amount of the liability component of the Notes is as follows (in thousands):



	December 31, 2018			December 31, 2017
Principal	$	575,000		$	—
Unamortized Debt Discount	(107,494		)	—
Unamortized issuance costs	(9,330		)	—
Net carrying amount	$	458,176		$	—

The net carrying amount of the equity component of the Notes is as follows (in thousands):



	December 31, 2018			December 31, 2017
Debt Discount for Conversion Option	$	124,976		$	—
Issuance costs	(2,948		)	—
Net carrying amount	$	122,028		$	—

Interest expense related to the Notes is as follows (in thousands):



	Year Ended December 31,
	2018		2017
Contractual interest expense	$	1,116	$	—
Amortization of Debt Discount	17,482		—
Amortization of issuance costs	1,284		—
Total interest expense	$	19,882	$	—

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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 $63.9 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.

The difference between the Debt Discount and the total cost of the Capped Call, and the difference between the calculation of the book and tax allocation of debt issuance costs between the liability and equity components of the Notes, resulted in a difference between the carrying amount and tax basis of the Notes. This taxable temporary difference resulted in the recognition of a $13.8 million net deferred tax liability which was recorded as an adjustment to additional paid-in capital. The creation of the deferred tax liability represents a source of future taxable income which supports realization of a portion of the income tax benefit associated with our loss from operations. Therefore, we recorded a net income tax benefit of $13.8 million in our consolidated statement of operations for the year ended December 31, 2018.

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

As of December 31, 2018, our contractual obligations are as follows for the years ending December 31 (in thousands):



	Lease Obligations ⁽¹⁾		Purchase Commitments ⁽²⁾		Convertible Senior Notes ⁽³⁾		Total
2019	$	24,848	$	63,200	$	1,438	$	89,486
2020	24,188		58,201		1,438		$	83,827
2021	22,220		55,174		1,438		$	78,832
2022	20,683		55,001		1,438		$	77,122
2023	15,575		55,001		575,299		$	645,875
Thereafter	30,786		—		—		$	30,786
Total	$	138,300	$	286,577	$	581,051	$	1,005,928

(1) Represents obligations to make payments under non-cancellable lease agreements for our corporate headquarters and worldwide offices.

(2) Primarily relates to third-party managed hosting services.

(3) Consists of principal and interest payments. The $575.0 million in principal is due March 2023.

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Leases

We lease office space under noncancelable operating leases with various expiration dates. Certain of the office space lease agreements contain rent holidays or rent escalation provisions. Rent holiday and rent escalation provisions are considered in determining the straight-line expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. For the years ended December 31, 2018, 2017, and 2016, rent expense was $19.3 million, $12.3 million, and $9.9 million, respectively. Deferred rent of $14.2 million and $6.4 million as of December 31, 2018 and 2017 respectively, is included in other liabilities.

As of December 31, 2018, we are the sublessor for certain of our office space for which the remaining amount of rent to be received over the noncancelable terms of the subleases is approximately $6.4 million.

In January 2019, we renewed an existing operating lease agreement for which the remaining anticipated amount of rent to be paid over the noncancelable term of the lease is approximately $10.0 million.

Letters of Credit

As of December 31, 2018 and 2017, we had a total of $1.0 million and $2.0 million, respectively in unsecured letters of credit outstanding primarily related to leased office space in San Francisco. These letters of credit renew annually and mature at various dates through October 31, 2022.

Litigation and Loss Contingencies

We accrue estimates for resolution of legal and other contingencies when losses are probable and estimable. From time to time, we may become a party to litigation and subject to claims that arise in the ordinary course of business, including intellectual property claims, labor and employment claims, threatened claims, breach of contract claims, tax, and other matters. We currently have no material pending litigation.

We are not currently aware of any litigation matters or loss contingencies that would be expected to have a material adverse effect on our business, consolidated 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 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 event that we fail to meet those levels. To date, we have not accrued for any material liabilities in our consolidated financial statements as a result of these service-level agreements.

Note 10. Common Stock and Stockholders’ Equity

Common Stock

As of December 31, 2018 and 2017, 400 million shares of common stock were authorized for issuance with a par value of $0.01 per share. There were 108.0 million and 103.1 million shares of common stock issued and outstanding as of December 31, 2018 and 2017, respectively.

Preferred Stock

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As of December 31, 2018 and 2017, there were 10 million shares of preferred stock authorized for issuance with a par value of $0.01 per share and no shares of preferred stock were issued or outstanding.

Employee Equity Plans

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, or ESPP, eligible employees are granted options to purchase shares of our common stock through payroll deductions. The ESPP provides for 18-month offering periods, which include three six-month purchase periods. At the end of each purchase period, employees are able to purchase shares at 85% of the lower of the fair market value of our common stock at the beginning of an offering period or the fair market value of our common stock at the end of the purchase period.

In each year ended December 31, 2018 and 2017, 0.7 million shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.1 million and 1.0 million shares on January 1, 2019 and 2018, respectively. As of December 31, 2018, 3.9 million shares of common stock were available for issuance under the ESPP.

Stock Option and Grant Plans

Our board of directors adopted the 2009 Stock Option and Grant Plan, or the 2009 Plan, in July 2009. The 2009 Plan was terminated in connection with our initial public offering in May 2014, and accordingly, no shares are available for issuance under this plan. The 2009 Plan continues to govern outstanding awards granted thereunder.

Our 2014 Stock Option and Incentive Plan, or the 2014 Plan, serves as the successor to our 2009 Plan. Pursuant to the terms of the 2014 Plan, the number of shares reserved for issuance under the 2014 Plan increased by 5.4 million and 5.2 million shares on January 1, 2019 and 2018, respectively. As of December 31, 2018, we had 8.2 million shares of common stock available for future grants under the 2014 Plan.

On May 6, 2016, the compensation committee of our board of directors granted equity awards representing 1.2 million shares of common stock. These awards were granted outside of the 2014 Plan pursuant to an exemption provided for “employment inducement awards” within the meaning of Section 303A.08 of the New York Stock Exchange Listed Company Manual and accordingly did not require approval from our stockholders.

A summary of our shared-based award activity for the year ended December 31, 2018 is as follows (in thousands, except per share information):

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			Options Outstanding							RSUs Outstanding
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value		Outstanding RSUs		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
							(In years)
Outstanding — January 1, 2018	8,001		6,239		$	17.31	7.11	$	103,308	5,827		$	25.00	$	197,186
Increase in authorized shares	5,156
Stock options granted	(791	)	791		42.89
RSUs granted	(4,898	)								4,898		44.35
Stock options exercised			(1,024	)	15.77
RSUs vested										(3,165	)	26.79
Stock options forfeited or canceled	68		(68	)	28.61
RSUs forfeited or canceled	918									(918	)	30.18
RSUs forfeited or canceled and unavailable for grant	—									(31	)	23.44
PRSUs granted	(222	)
Outstanding — December 31, 2018	8,232		5,938		$	20.85	6.58	$	222,959	6,611		$	37.77	$	385,891
Options vested and expected to vest as of December 31, 2018			5,710		$	20.31	6.51	$	217,370
Options vested and exercisable as of December 31, 2018			3,855		$	15.73	5.79	$	164,395
RSUs expected to vest as of December 31, 2018										5,222				$	304,815

The restricted stock units, or RSUs, forfeited or canceled and unavailable for grant relate to our employment inducement awards. The aggregate intrinsic value for options outstanding represents the difference between the closing market price of our common stock on the last trading day of the reporting period and the exercise price of outstanding, in-the-money options.

The aggregate intrinsic value for options outstanding represents the difference between the closing stock price of our common stock on the last trading day of the reporting period and the exercise price of outstanding, in-the-money options.

The total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was $36.8 million, $47.1 million and $49.2 million, respectively. The intrinsic value for options exercised represents the difference between the exercise price and the market value on the date of exercise. The weighted-average grant date fair value of stock options granted during the years ended December 31, 2018, 2017, and 2016 was $17.87, $13.07, and $11.34, respectively.

The total intrinsic value of RSUs vested during the years ended December 31, 2018, 2017 and 2016 was $176.0 million, $90.1 million and $70.6 million, respectively. The intrinsic value for RSUs vested represents market value on the vesting date. The weighted-average grant date fair value of RSUs granted during the years ended December 31, 2018, 2017, and 2016 was $44.35, $28.09, and $21.05, respectively.

Share-Based Compensation Expense

All share-based awards to employees and members of our board of directors are measured based on the grant date fair value of the awards and recognized in the consolidated statements of operations over the period during which the employee is required to perform services in exchange for the award (generally the vesting period of the award, which is typically four years). The contractual term of our stock options is typically ten years. We record share-based compensation expense for service-based equity awards using the straight-line attribution method. We record share-based compensation expense for performance-based equity awards using the accelerated attribution method.

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judgment. If factors change and different assumptions are used, our share-based compensation expense could be materially different in the future.

The inputs are as follows:

•

Expected Term. We determine the expected term based on the historical exercise activity of our employees. We applied this methodology beginning in 2018, after having obtained sufficient historical exercise information. Previously, we determined the expected term based on the average period the stock options were expected to remain outstanding, generally calculated as the midpoint of the vesting term and the contractual expiration period.

•

Expected Volatility. We determine expected volatility based on the historical volatility of our own common stock. We applied this methodology beginning in 2017, after having obtained sufficient historical information regarding the volatility of our own common stock. Previously, we determined the expected volatility using a combination of the historical volatility of our publicly traded industry peers and our own common stock.


•	Risk-Free Interest Rate. The risk-free interest rate is based on the yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term of the stock options for each stock option group.


•	Dividend Yield. We have not paid and do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero.

The assumptions used to estimate the fair value of stock options are as follows:



	Year Ended December 31,
	2018	2017	2016
Expected volatility	44% - 45%	44% - 48%	47% - 49%
Dividend yield	0%	0%	0%
Risk-free interest rate	2.3% - 3.0%	1.9% - 2.2%	1.1% - 2.0%
Expected term (in years)	4.9	6.0 - 6.1	6.0 - 6.1

The assumptions used to estimate the fair value of ESPP awards are as follows:



	Year Ended December 31,
	2018	2017	2016
Expected volatility	35% - 41%	37% - 44%	42% - 48%
Dividend yield	0%	0%	0%
Risk-free interest rate	2.1% - 2.8%	1.0% - 1.6%	0.4% - 0.9%
Expected term (in years)	0.5 -1.5	0.5 -1.5	0.5 - 1.5

In the first quarter of 2017, we changed our accounting policy for share-based compensation to recognize forfeitures as they occur, as permitted by ASU 2016-09. Refer to Note 2 for additional information regarding the adoption of this standard.

There were no material share-based award modifications in the year ended December 31, 2018. In the years ended December 31, 2017 and 2016, we recorded $1.5 million and $0.7 million of share-based compensation expense related to accelerated vesting of share-based awards for terminated employees, respectively.

Performance Restricted Stock Units

During the three months ended September 30, 2018, the compensation committee of our board of directors granted performance-based restricted stock units, or PRSUs, representing 0.2 million shares of common stock, the substantial majority of which were granted in connection with our acquisition of FutureSimple. The PRSUs vest in four semi-annual tranches, generally through March 2021. The PRSUs include a service condition and a performance condition related to the attainment of semi-annual performance targets approved and communicated in advance of each performance period. During the year ended December 31, 2018, we recorded $0.5 million of share-based compensation expense related to the PRSUs and no PRSUs were vested. The total future expense related to the PRSUs will be based on the fair value of the underlying shares on the grant date for each performance tranche.

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Note 11. Deferred Revenue and Performance Obligations

During the years ended December 31, 2018, 2017, and 2016, $172.7 million, $120.1 million, and $85.5 million of revenue was recognized that was included in the deferred revenue balances at the beginning of each period, respectively.

The aggregate balance of remaining performance obligations as of December 31, 2018 was $406.9 million. We expect to recognize $328.7 million of the balance as revenue in the next 12 months and the remainder thereafter. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized and does not include contract amounts which are cancelable by the customer and amounts associated with optional renewal periods.

Note 12. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by giving effect to all potential shares of common stock, including those related to outstanding share-based awards and our convertible senior notes, to the extent dilutive. Basic and diluted net loss per share were the same for each period presented as the inclusion of all potential common stock outstanding would have been anti-dilutive.

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



	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
Net loss	$	(131,084	)	$	(102,141	)	$	(97,620	)
Weighted-average shares used to compute basic and diluted net loss per share	105,567			99,918			93,161
Net loss per share, basic and diluted	(1.24		)	(1.02		)	(1.05		)

*Adjusted to reflect the adoption of ASC 606 (see Note 2).

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



	As of December 31,
	2018	2017	2016
Shares subject to outstanding common stock options and employee stock purchase plan	6,041	6,343	8,556
Restricted stock units	6,611	5,827	6,936
	12,652	12,170	15,492

We expect to settle the principal amount of our convertible senior notes in cash and therefore use the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share when the average market price of our common stock for a given period exceeds the initial conversion price of $63.07 per share for the convertible senior notes. Based on the initial conversion price, potential dilution related to the convertible senior notes is approximately 9.1 million shares. The convertible senior notes are not convertible as of December 31, 2018.

Note 13. Income Taxes

The components of loss before provision for income taxes are as follows (in thousands):

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	Year Ended December 31,
	2018			2017			2016
	2018			*As adjusted			*As adjusted
U.S.	$	(151,547	)	$	(107,177	)	$	(101,506	)
Foreign	8,356			3,518			4,879
Total	$	(143,191	)	$	(103,659	)	$	(96,627	)

*Adjusted to reflect the adoption of ASC 606 (see Note 2).

The income tax provision is composed of the following (in thousands):



	Year Ended December 31,
	2018			2017			2016
Current tax provision:
Federal	$	—		$	(2,636	)	$	—
State	80			104			74
Foreign	3,372			1,476			3,096
	3,452			(1,056		)	3,170
Deferred tax provision:
Federal	(13,785		)	—			(49		)
State	—			—			—
Foreign	(1,774		)	(462		)	(2,128		)
Total provision for (benefit from) income taxes	$	(12,107	)	$	(1,518	)	$	993

Significant components of deferred tax assets are as follows (in thousands):



	As of December 31,
	2018			2017
	2018			*As adjusted
Deferred tax assets:
Tax credit carryforward	$	884		$	733
Net operating loss carryforward	170,447			115,237
Share-based compensation	10,316			6,072
Accrued liabilities and reserves	7,734			3,639
Property and equipment	3,340			1,983
Other	7,066			5,086
Total deferred tax assets	199,787			132,750
Less: valuation allowance	(158,778		)	(118,549		)
Deferred tax assets, net of valuation allowance	41,009			14,201
Deferred tax liabilities:
Deferred commissions	(13,075		)	(7,443		)
Convertible debt transaction	(12,872		)	—
Intangible assets	(11,305		)	(5,036		)
Total deferred tax liabilities	(37,252		)	(12,479		)
Net deferred tax assets	$	3,757		$	1,722

*Adjusted to reflect the adoption of ASC 606 (see Note 2).

The following is a reconciliation of the statutory federal income tax rate and the effective tax rates:

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	Year Ended December 31,
	2018		2017		2016
	2018		*As adjusted		*As adjusted
Tax at federal statutory rate	21.0	%	34.0	%	34.0	%
Tax reform rate change impact	—		(64.7	)	—
Excess tax benefit from share-based compensation	—		46.5		—
Valuation allowance	(20.1	)	(19.5	)	(22.6	)
Share-based compensation	8.5		7.0		(6.5	)
Officer's compensation	(1.1	)	—		—
Other	0.1		(3.4	)	0.4
Benefit from other comprehensive gain	—		1.6		—
Intercompany dividend	—		—		(6.3	)
Effective tax rate	8.4	%	1.5	%	(1.0	)%

*Adjusted to reflect the adoption of ASC 606 (see Note 2).

We have not provided income taxes for the possible tax consequences of repatriating undistributed earnings of foreign subsidiaries as of December 31, 2018 because we intend to permanently reinvest such earnings outside of the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income taxes previously paid on these earnings. As of December 31, 2018, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $0.6 million. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable.

As of December 31, 2018, we had net operating loss carryforwards of approximately $695.9 million for federal income taxes and $302.9 million for state income taxes. If not utilized, the federal carryforwards will begin to expire in 2029 and some are indefinitely carried forward. The state carryforwards will begin to expire in 2031. As of December 31, 2018, we had research and development credit carryforwards of approximately $10.4 million and $11.2 million for federal and state income taxes, respectively. If not utilized, the federal carryforwards will begin to expire in 2029. The state tax credit can be carried forward indefinitely. Internal Revenue Code Section 382 limits the use of net operating loss and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In the event that we had a change of ownership, utilization of the net operating loss and tax credit carryforwards may be restricted. In addition, we have $14.6 million of net operating loss carryforwards in France, of which approximately $3.0 million were obtained as part of our acquisition of We Are Cloud SAS. These carryforward losses do not expire, however, utilization of these carryforwards may be subject to annual limitations. In addition, the right to the carryforward losses could be challenged if the French tax authorities determined that a significant change in the company’s actual business has occurred.

We account for income taxes under an asset and liability approach. Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carryforwards, and other tax credits measured by applying currently enacted tax laws. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. We regularly assess the need for a valuation allowance against our deferred tax assets by considering both positive and negative evidence to determine whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. We recorded a valuation allowance to fully offset our U.S. deferred tax assets, as we consider our cumulative loss in recent years to be strong negative evidence for retaining the valuation allowance. The valuation allowance increased by $40.2 million during the twelve months ended December 31, 2018. We will continue to assess the future realization of our deferred tax assets in each applicable jurisdiction and adjust the valuation allowance accordingly.

A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) for the two years ending December 31, 2018 is as follows (in thousands):

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Balance at December 31, 2016	$	11,786
Additions from tax positions related to the current year	4,141
Lapse of statutes of limitations	(283		)
Balance at December 31, 2017	15,644
Additions from tax positions related to the current year	5,887
Balance at December 31, 2018	$	21,531

As of December 31, 2018, we had no accrued interest and penalties related to the uncertain tax positions. We have elected to record interest and penalties in the financial statements as a component of provision for income taxes. Included in the balance of unrecognized tax benefits at December 31, 2018 and 2017 are no potential benefits, which if recognized, would affect the effective tax rate. Included in the balance of unrecognized tax benefits at December 31, 2016 are potential benefits of $0.4 million, which if recognized, would affect the effective tax rate.

We are currently unaware of any uncertain tax positions that could result in significant additional payments, accruals, or other material deviation in this estimate over the next 12 months.

We are subject to taxation in the United States and foreign jurisdictions. Our tax years 2009 to 2017 remain subject to examination in most jurisdictions.

On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code. The Tax Act provided for a one-time deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits, or E&P, through the year ended December 31, 2017. We have concluded that we are not subject to the deemed mandatory repatriation because we have negative net undistributed foreign E&P.

While the Tax Act provides for a territorial tax system, beginning in 2018, it includes two new U.S. tax base erosion provisions, the global intangible low-taxed income, or GILTI, provisions and the base-erosion and anti-abuse tax, or BEAT, provisions.

The GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Based on our calculations, we are not subject to incremental U.S. tax on GILTI income. We have elected to account for GILTI tax in the period in which it is incurred, and therefore have not provided any deferred tax impacts of GILTI in our consolidated financial statements for the year ended December 31, 2018.

The BEAT provisions in the Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations and impose a minimum tax if greater than regular tax. We are currently beneath the revenue threshold in which this tax applies and therefore have not included any tax impacts of BEAT in our consolidated financial statements for the year ended December 31, 2018.

Note 14. Geographic Information

Revenue

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

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	Year Ended December 31,
	2018		2017		2016
	2018		*As adjusted		*As adjusted
United States	$	309,879	$	229,667	$	170,402
EMEA	174,874		122,365		89,173
APAC	68,272		46,564		29,285
Other	45,721		31,569		23,984
Total	$	598,746	$	430,165	$	312,844

*Adjusted to reflect the adoption of ASC 606 (see Note 2).

Long-Lived Assets

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



	As of December 31,
	2018		2017
United States	$	32,351	$	23,609
EMEA:
Republic of Ireland	14,698		5,019
Other EMEA	2,450		5,007
Total EMEA	17,148		10,026
APAC	6,889		7,734
Total	$	56,388	$	41,369

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

Note 15. Retirement Plans

We have a 401(k) retirement and savings plan made available to all United States employees. The 401(k) plan allows each participant to contribute up to an amount not to exceed an annual statutory maximum. We began contributing to the 401(k) plan in 2017. For the years ended December 31, 2018 and 2017, we made matching contributions of $1.3 million and $1.1 million, respectively.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K.

Based on this evaluation, our management concluded that, as of December 31, 2018, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management's Report on Internal Control over Financial Reporting

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Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Our internal over control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K, and is incorporated herein by reference.

We acquired FutureSimple Inc., or FutureSimple, on September 10, 2018 and as permitted by SEC guidance, we excluded this entity from our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2018. Total assets of FutureSimple were less than 1% of the consolidated total as of December 31, 2018. Revenue associated with FutureSimple for the period from September 10, 2018 to December 31, 2018 was not material.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item will be set forth in our Proxy Statement for the 2019 Annual Meeting of Stockholders, or the 2019 Proxy Statement, to be filed with the SEC within 120 days of the fiscal year ended December 31, 2018 and is incorporated herein by reference.

We have a code of business ethics and conduct that applies to all of our employees, including our Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer, and our Board of Directors. A copy of this code, "Code of Business Conduct and Ethics", is available on our website at http://investor.zendesk.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct and Ethics by posting such information on our investor relations website under the heading "Corporate Governance" at http://investor.zendesk.com.

Item 11. Executive Compensation.

The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this item will be included in the 2019 Proxy Statement and is incorporated herein by reference.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.


(a)	The following documents are filed as part of this report:

(1) Financial statements.

The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements in Item 8.

(2) Financial Statement Schedules.

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes herein.

(3) Exhibits.

The documents listed in the Exhibit Index of this report are incorporated by reference or are filed with this report, in each case as indicated therein.

Item 16. Form 10-K Summary.

Not applicable.

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Exhibit Index



Exhibit Number	Exhibit Description	Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date
3.1	Amended and Restated Certificate of Incorporation of the Registrant.	10-Q	001-36456	3.1	August 7, 2014
3.2	Amended and Restated By-laws of the Registrant.	8-K/A	001-36456	3.1	February 7, 2018
4.1	Form of Common Stock Certificate of the Registrant.	S-1/A	333-195176	4.1	May 5, 2014
10.1#	2009 Stock Option and Grant Plan, as amended, and related form agreements.	S-1	333-195176	10.2	April 10, 2014
10.2#	2014 Stock Option and Incentive Plan, and related form agreements.
10.3#	2014 Employee Stock Purchase Plan, as amended.	10-Q	001-36456	10.2	November 6, 2014
10.4#	Form of Inducement Option Agreement.	8-K	001-36456	10.1	May 6, 2016
10.5#	Form of Inducement RSU Agreement.	8-K	001-36456	10.2	May 6, 2016
10.6#	Offer Letter between the Registrant and Adrian McDermott, dated as of June 16, 2010.	S-1	333-195176	10.7	April 10, 2014
10.7#	Offer Letter between the Registrant and John Geschke, dated as of May 30, 2012.	10-K	001-36456	10.9	February 26, 2016
10.8#	Offer Letter between the Registrant and Elena Gomez, dated as of April 6, 2016.	10-K	001-36456	10.9	February 27, 2017
10.9#	Offer Letter between the Registrant and Tom Keiser, dated as of March 29, 2016.	10-K	001-36456	10.10	February 27, 2017
10.11#	Offer Letter between the Registrant and Norman Gennarro, dated as of November 26, 2017.	10-K	001-36456	10.2	February 22, 2018
10.12#	Offer Letter between the Registrant and Jeffrey Titterton, dated as of April 6, 2017.	10-K	001-36456	10.2	February 22, 2018
10.13#	Offer Letter between the Registrant and InaMarie Johnson, dated as of April 26, 2018
10.14	Office Lease between the Registrant and 989 Market Street, LLC, dated as of April 29, 2011.	S-1	333-195176	10.8	April 10, 2014
10.15	First Amendment to Lease between the Registrant and 989 Market Street, LLC, dated as of June 28, 2011.	S-1	333-195176	10.9	April 10, 2014
10.16	Second Amendment to Lease between the Registrant and 989 Market Street, LLC, dated as of August 11, 2011.	S-1	333-195176	10.10	April 10, 2014



10.17	Third Amendment to Lease between the Registrant and HMC Mid-Market Ventures LLC, dated as of September 11, 2013.	S-1	333-195176	10.11	April 10, 2014
10.18	Fourth Amendment to Lease between the Registrant and ASB 989 Market, LLC, dated as of January 19, 2017.	10-Q	001-36456	10.1	May 8, 2017
10.19	Fifth Amendment to Lease between the Registrant and ASB 989 Market, LLC, dated as of August 2, 2017.	10-Q	001-36456	10.1	November 3, 2017
10.20	Sixth Amendment to Lease between the Registrant and ASB 989 Market, LLC, dated as of January 25, 2019
10.21	Lease Agreement between the Registrant and 1019 Market St. Property, LLC, dated as of September 6, 2013, as amended.	10-Q	001-36456	10.1	November 6, 2014
10.22	Lease by and between Zendesk, Inc. and 1035 Market Street, LLC., dated June 22, 2016.	8-K	001-36456	10.1	June 27, 2016

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10.23	Lease Agreement by and between Marlin Cove, Inc. and SF Prosperity I, LLC, as tenants in common and the Registrant.	10-Q	001-36456	10.2	August 3, 2018
10.22	Indenture, dated as of March 20, 2018, between Zendesk, Inc., and Wilmington Trust, National Association, as trustee.	8-K	001-36456	4.1	March 20, 2018
10.23	Form of 0.25% Convertible Senior Notes due 2023	8-K	001-36456	4.2	March 20, 2018
10.24	Form of Capped Call Confirmation	8-K	001-36456	10.1	March 20, 2018
10.20#	Amended and Restated Non-Employee Director Compensation Policy.	8-K	001-36456	10.1	May 1, 2018
10.21#	Amended and Restated Executive Incentive Bonus Plan.	8-K	001-36456	10.1	February 11, 2015
10.22#	Zendesk, Inc. Change in Control Acceleration Plan.	8-K	001-36456	10.1	May 15, 2015
10.23#	Forms of Indemnification Agreement.	S-1	333-195176	10.1	April 10, 2014
21.1	List of Significant Subsidiaries of the Registrant.
23.1	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
24.1	Power of Attorney (see page 92 of this Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.


#	Indicates management contract or compensatory plan, contract, or agreement.

†

The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Zendesk, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.



		Zendesk, Inc.

Date:	February 14, 2019	By:	/s/ Elena Gomez
			Elena Gomez
			Chief Financial Officer (Principal Financial and Accounting Officer)

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints Mikkel Svane and Elena Gomez, and each of them, as his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

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Signature	Title	Date
/s/ Mikkel Svane	Chief Executive Officer and Chair of the Board of Directors (Principal Executive Officer)	2/14/2019
Mikkel Svane
/s/ Elena Gomez	Chief Financial Officer (Principal Financial and Accounting Officer)	2/14/2019
Elena Gomez

/s/ Carl Bass	Director	2/14/2019
Carl Bass

/s/ Hilarie Koplow-McAdams	Director	2/14/2019
Hilarie Koplow-McAdams

/s/ Michael Frandsen	Director	2/14/2019
Michael Frandsen

/s/ Caryn Marooney	Director	2/14/2019
Caryn Marooney

/s/ Elizabeth Nelson	Director	2/14/2019
Elizabeth Nelson

/s/ Dana Stalder	Director	2/14/2019
Dana Stalder

/s/ Michelle Wilson	Director	2/14/2019
Michelle Wilson

/s/ Thomas Szkutak	Director	2/14/2019
Thomas Szkutak