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

Yes ☐ No ☒
As of April 28, 2022, there were 122,543,331 shares of the registrant’s common stock outstanding.


ZENDESK, INC.
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
 
Item 1
5
 
5
 
6
 
7
8
 
9
 
Item 2
Item 3
Item 4
PART II — OTHER INFORMATION 
Item 1
Item 1A
Item 6
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions.
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
4
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
ZENDESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
  March 31,
2022		 December 31,
2021
(Unaudited)
Assets    
Current assets:    
Cash and cash equivalents $ 496,039  $ 476,103 
Marketable securities 602,591  539,780 
Accounts receivable, net of allowance for credit losses of $6,923 and $6,190 as of March 31, 2022 and December 31, 2021, respectively
 224,146  273,898 
Deferred costs 76,818  72,042 
Prepaid expenses and other current assets 73,455  56,809 
Total current assets 1,473,049  1,418,632 
Marketable securities, noncurrent 491,682  559,652 
Property and equipment, net 99,556  97,815 
Deferred costs, noncurrent 74,895  72,553 
Lease right-of-use assets 67,671  69,936 
Goodwill and intangible assets, net 195,279  197,098 
Other assets 35,595  35,593 
Total assets $ 2,437,727  $ 2,451,279 
Liabilities and stockholders’ equity    
Current liabilities:    
Accounts payable $ 31,185  $ 49,213 
Accrued liabilities 51,521  50,075 
Accrued compensation and related benefits 133,368  138,127 
Deferred revenue 522,532  512,933 
Lease liabilities 20,503  21,253 
Current portion of convertible senior notes, net 148,508  139,738 
Total current liabilities 907,617  911,339 
Convertible senior notes, net 1,136,378  979,350 
Deferred revenue, noncurrent 3,988  4,277 
Lease liabilities, noncurrent 59,180  63,212 
Other liabilities 3,464  3,883 
Total liabilities 2,110,627  1,962,061 
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock —  — 
Common stock 1,223  1,215 
Additional paid-in capital 1,465,489  1,637,157 
Accumulated other comprehensive loss (13,537) (8,911)
Accumulated deficit (1,126,075) (1,140,243)
Total stockholders’ equity 327,100  489,218 
Total liabilities and stockholders’ equity $ 2,437,727  $ 2,451,279 
See Notes to Condensed Consolidated Financial Statements.
5
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
  Three Months Ended
March 31,
2022 2021
Revenue $ 388,327  $ 298,048 
Cost of revenue (1)
 75,678  60,894 
Gross profit 312,649  237,154 
Operating expenses (1):    
Research and development 108,077  73,783 
Sales and marketing 201,660  157,518 
General and administrative 63,538  43,133 
Total operating expenses 373,275  274,434 
Operating loss (60,626) (37,280)
Other income (expense), net:
Interest expense (3,121) (14,415)
Interest and other income (expense), net 838  5,084 
Total other income (expense), net (2,283) (9,331)
Loss before provision for income taxes (62,909) (46,611)
Provision for income taxes 4,037  2,354 
Net loss $ (66,946) $ (48,965)
Net loss per share, basic and diluted $ (0.55) $ (0.42)
Weighted-average shares used to compute net loss per share, basic and diluted 121,962  117,912 
(1) Includes share-based compensation expense as follows:
 
  Three Months Ended
March 31,
2022 2021
Cost of revenue $ 6,177  $ 4,486 
Research and development 19,287  15,673 
Sales and marketing 26,800  23,232 
General and administrative 11,674  8,983 
 

See Notes to Condensed Consolidated Financial Statements.

6
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
  Three Months Ended
March 31,
2022 2021
Net loss $ (66,946) $ (48,965)
Other comprehensive loss:    
Net unrealized loss on available-for-sale investments (11,905) (1,975)
Net unrealized gain (loss) on derivative instruments 7,327  (5,557)
Other comprehensive loss (4,578) (7,532)
Comprehensive loss $ (71,524) $ (56,497)

See Notes to Condensed Consolidated Financial Statements.

7
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
  Three Months Ended March 31, 2022 Three Months Ended March 31, 2021
Common Stock Additional
Paid-In
Capital		 Accumulated
Other
Comprehensive Loss		 Accumulated
Deficit		 Total
Stockholders’
Equity		 Common Stock Additional
Paid-In
Capital		 Accumulated
Other
Comprehensive Income (Loss)		 Accumulated Deficit Total
Stockholders’
Equity
Shares Amount Shares Amount
Balances at beginning of period 121,598  $ 1,215  $ 1,637,157  $ (8,911) $ (1,140,243) $ 489,218  117,489  $ 1,174  $ 1,344,337  $ 3,203  $ (916,883) $ 431,831 
Cumulative effect adjustment resulting from the adoption of ASU 2020-06 (Note 1) —  —  (245,690) —  81,114  (164,576) —  —  —  —  —  — 
Issuance of common stock upon exercise of stock options 335  3  10,813  —  —  10,816  208  2  3,929  —  —  3,931 
Issuance of common stock for settlement of RSUs and PRSUs 436  4  (1,699) —  —  (1,695) 661  7  (2,806) —  —  (2,799)
Share-based compensation —  —  64,908  —  —  64,908  —  —  53,554  —  —  53,554 
Other comprehensive loss —  —  —  (4,578) —  (4,578) —  —  —  (7,532) —  (7,532)
Net loss —  —  —  —  (66,946) (66,946) —  —  —  —  (48,965) (48,965)
Other —  —  —  (48) —  (48) —  —  —  —  223  223 
Balances at end of period 122,369  $ 1,223  $ 1,465,489  $ (13,537) $ (1,126,075) $ 327,100  118,358  $ 1,183  $ 1,399,014  $ (4,329) $ (965,625) $ 430,243 


See Notes to Condensed Consolidated Financial Statements.
8
ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
  Three Months Ended March 31,
2022 2021
Cash flows from operating activities    
Net loss $ (66,946) $ (48,965)
Adjustments to reconcile net loss to net cash provided by operating activities    
Depreciation and amortization 10,317  9,515 
Share-based compensation 63,938  52,374 
Amortization of deferred costs 20,325  14,757 
Amortization of debt discount and issuance costs 1,221  12,525 
Allowance for credit losses on accounts receivable 2,309  3,168 
Other, net 2,815  (965)
Changes in operating assets and liabilities:
Accounts receivable 47,992  16,370 
Prepaid expenses and other current assets (12,574) (467)
Deferred costs (26,876) (20,984)
Lease right-of-use assets 4,632  4,464 
Other assets and liabilities (488) 316 
Accounts payable (17,805) 5,797 
Accrued liabilities 3,679  (2,078)
Accrued compensation and related benefits (22,585) (20,113)
Deferred revenue 7,832  13,419 
Lease liabilities (6,574) (5,538)
Net cash provided by operating activities 11,212  33,595 
Cash flows from investing activities    
Purchases of property and equipment (7,438) (3,061)
Internal-use software development costs (3,016) (4,468)
Purchases of marketable securities (166,206) (305,310)
Proceeds from maturities of marketable securities 118,329  198,564 
Proceeds from sales of marketable securities 39,763  36,599 
Net cash used in investing activities (18,568) (77,676)
Cash flows from financing activities    
Proceeds from exercises of employee stock options 10,817  3,931 
Proceeds from employee stock purchase plan 17,826  15,184 
Taxes paid related to net share settlement of share-based awards (1,694) (2,800)
Net cash provided by financing activities 26,949  16,315 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (14) (8)
Net increase (decrease) in cash, cash equivalents and restricted cash 19,579  (27,774)
Cash, cash equivalents and restricted cash at beginning of period 477,350  407,859 
Cash, cash equivalents and restricted cash at end of period $ 496,929  $ 380,085 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets
Cash and cash equivalents $ 496,039  $ 378,363 
Restricted cash included in prepaid expenses and other current assets 890  1,717 
Restricted cash included in other assets —  5 
Total cash, cash equivalents and restricted cash $ 496,929  $ 380,085 
Supplemental cash flow data    
Cash paid for interest $ 186  $ 186 
Cash paid for taxes $ 2,719  $ 2,416 
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses $ 3,994  $ 1,078 
Share-based compensation capitalized in internal-use software development costs $ 402  $ 562 
Share-based compensation capitalized in deferred costs $ 567  $ 616 
Property and equipment acquired through tenant improvement allowances $ 1,208  $ — 
See Notes to Condensed Consolidated Financial Statements.
9

ZENDESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1. Overview and Basis of Presentation
Company and Background
Zendesk was founded in Denmark in 2007 and reincorporated in Delaware in April 2009.
We are a software development company that provides software as a service, or SaaS, solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to product and platform solutions that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it’s needed most.
References to Zendesk, the “Company,” “our,” or “we” in these notes refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
Basis of Presentation
These unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles, or GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K, for the year ended December 31, 2021, filed with the SEC on February 15, 2022. There have been no changes to our significant accounting policies described in the Annual Report on Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes, except for the methodology to value market-based stock awards described in footnote 10 and the accounting for convertible debt instruments described below.
The consolidated balance sheet as of December 31, 2021 included herein was derived from the audited financial statements as of that date. The unaudited condensed consolidated financial statements reflect all normal recurring adjustments necessary to present fairly our financial position, results of operations, comprehensive loss, stockholders’ equity, and cash flows for the interim periods, but are not necessarily indicative of the results of operations to be anticipated for the full year ending December 31, 2022.
Use of Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reported periods.
Significant items subject to such estimates and assumptions include:
•the estimate of variable consideration related to revenue recognition;
•the estimate of credit losses for accounts receivable and marketable securities;
•the fair value and useful lives of acquired intangible assets;
•the capitalization and useful life of capitalized costs to obtain customer contracts;
•the valuation of strategic investments;
•the fair value and useful lives of property and equipment;
•the capitalization and useful lives of internal-use software;
10
•the lease term and incremental borrowing rate for lease liabilities;
•the fair value of our convertible senior notes;
•the fair value of asset retirement obligations;
•the fair value and expense recognition for certain share-based awards;
•the preparation of financial forecasts used in currency hedging;
•the recognition and measurement of legal contingencies; and
•the recognition of tax benefits and forecasts used to determine our effective tax rate.

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

Note 2. Business Combinations
Cleverly, Lda.
In the third quarter of 2021, we completed the acquisition of Cleverly, Lda., or Cleverly, resulting in increases of $7 million and $1 million to goodwill and developed technology, respectively.
From the date of the acquisition, the financial results of Cleverly have been included in and are immaterial to our condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented because the historical results are not material to our condensed consolidated financial statements in any period presented.
11
Note 3. Financial Instruments

Investments
The following tables present information about our financial assets measured at fair value on a recurring basis based on the three-tier fair value hierarchy (in thousands):
Fair Value Measurement at
March 31, 2022
Level 1 Level 2 Total
Description      
U.S. Treasury securities $ —  $ 485,959  $ 485,959 
Corporate bonds —  420,271  420,271 
Money market funds 223,448  —  223,448 
Asset-backed securities —  93,704  93,704 
Agency securities —  48,272  48,272 
Commercial paper —  47,569  47,569 
Certificates of deposit and time deposits —  9,396  9,396 
Total $ 223,448  $ 1,105,171  $ 1,328,619 
Included in cash and cash equivalents     $ 234,346 
Included in marketable securities     $ 1,094,273 
  Fair Value Measurement at
December 31, 2021
Level 1 Level 2 Total
Description      
U.S. Treasury securities $ —  $ 480,726  $ 480,726 
Corporate bonds —  430,018  430,018 
Money market funds 234,123  —  234,123 
Asset-backed securities —  93,620  93,620 
Agency securities —  50,057  50,057 
Commercial paper —  48,950  48,950 
Certificates of deposit and time deposits —  1,488  1,488 
Total $ 234,123  $ 1,104,859  $ 1,338,982 
Included in cash and cash equivalents     $ 239,550 
Included in marketable securities     $ 1,099,432 
 
As of March 31, 2022 and December 31, 2021, there were no securities within Level 3 of the fair value hierarchy. There were no transfers between fair value measurement levels during the three months ended March 31, 2022 or 2021.
As of March 31, 2022, gross unrealized gains and gross unrealized losses for marketable securities were not material and $14 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,342 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $947 million.
As of December 31, 2021, gross unrealized gains and gross unrealized losses for marketable securities were $1 million and $3 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,341 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $795 million.
Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of March 31, 2022 and December 31, 2021 were not material. We have not recorded an allowance for credit losses, as we believe any such losses would be immaterial based on the high-grade credit rating for each of our marketable securities as of the end of each period. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered.
The following table classifies our marketable securities by contractual maturity (in thousands):
12
 
  March 31,
2022		 December 31,
2021
Due in one year or less $ 602,591  $ 539,780 
Due after one year and within five years 491,682  559,652 
Total $ 1,094,273  $ 1,099,432 
 
As of March 31, 2022 and December 31, 2021, the balance of strategic investments without readily determinable fair values was $16 million. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes.
For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
Derivative Instruments and Hedging
Our foreign currency exposures typically arise from expenditures associated with foreign operations and sales in foreign currencies of our products. To mitigate the effect of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts with certain financial institutions and designate those contracts as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
We include time value related to our cash flow hedges for effectiveness testing purposes and the entire change in the unrecognized value of our hedge contracts is recorded in accumulated other comprehensive income (loss), or AOCI. As of March 31, 2022, the balance of AOCI included an unrecognized net gain of $5 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net gain of $5 million into earnings over the next 12 months associated with our cash flow hedges.
The following tables present information about our derivative instruments on our consolidated balance sheets (in thousands):
 
  March 31, 2022
Asset 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 $ 10,864  Accrued liabilities $ 7,867 
Total $ 10,864    $ 7,867 
  December 31, 2021
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 $ 6,439  Accrued liabilities $ 9,422 
Total   $ 6,439    $ 9,422 
 
Our foreign currency forward contracts had a total notional value of $505 million and $488 million as of March 31, 2022 and December 31, 2021, respectively. We have a master netting arrangement with each of our counterparties, which permit net settlement of multiple, separate derivative contracts with a single payment. We do not have collateral requirements with any of our counterparties. GAAP permits companies to present the fair value of derivative instruments on a net basis according to master netting arrangements. We have elected to present our derivative instruments on a gross basis in our consolidated financial statements. We do not enter into any derivative contracts for trading or speculative purposes. All derivatives have been designated as hedging instruments.
The following table presents information about our foreign currency forward contracts on our consolidated statements of operations for the three months ended March 31, 2022 and 2021 (in thousands):
 
13
Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended March 31,
Classification 2022 2021
Revenue $ 794  $ (708)
Cost of revenue (505) 490 
Research and development (674) 515 
Sales and marketing (1,236) 1,029 
General and administrative (393) 417 
 Total $ (2,014) $ 1,743 
The gain recognized in AOCI related to foreign currency forward contracts was $5 million for the three months ended March 31, 2022. The loss recognized in AOCI related to foreign currency forward contracts was $4 million for the three months ended March 31, 2021.

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

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

Note 5. Property and Equipment
Property and equipment, net consists of the following (in thousands): 
  March 31,
2022		 December 31,
2021
Leasehold improvements $ 83,428  $ 79,661 
Capitalized internal-use software 58,135  58,135 
Computer equipment and licensed software and patents 42,690  41,512 
Furniture and fixtures 15,265  14,627 
Construction in progress 23,793  20,927 
Total 223,311  214,862 
Less: accumulated depreciation and amortization (123,755) (117,047)
Property and equipment, net $ 99,556  $ 97,815 
 
Depreciation expense was $6 million for each of the three months ended March 31, 2022 and 2021.
14
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended March 31, 2022 and 2021. The carrying values of capitalized internal-use software as of March 31, 2022 and December 31, 2021 were $41 million and $40 million, respectively, including $18 million and $15 million in construction in progress, respectively. These balances include $8 million and $7 million, respectively, of implementation costs incurred in hosting arrangements that are service contracts, all of which is included in construction in progress.

Note 6. Leases
The following table presents information about leases on our consolidated balance sheets (in thousands):
March 31, 2022 December 31, 2021
Assets
Lease right-of-use assets $ 67,671  $ 69,936 
Liabilities
Lease liabilities 20,503  21,253 
Lease liabilities, noncurrent 59,180  63,212 

As of March 31, 2022, the weighted average remaining lease term was 5.6 years and the weighted average discount rate was 4.7%.
The following table presents information about leases on our consolidated statements of operations (in thousands):
Three Months Ended March 31,
2022 2021
Operating lease expense $ 5,581  $ 5,622 
Short-term lease expense 120  128 
Variable lease expense 1,432  1,218 
Sublease income (361) (440)

The following table presents supplemental cash flow information about our leases (in thousands):
Three Months Ended March 31,
2022 2021
Cash paid for amounts included in the measurement of lease liabilities $ 7,447  $ 6,953 
Operating lease assets obtained in exchange for new lease liabilities 2,754  1,397 

Note 7. Goodwill and Acquired Intangible Assets
Acquired intangible assets subject to amortization consist of the following (in thousands):
 
  As of March 31, 2022
Cost Accumulated
Amortization		 Net Weighted Average Remaining Useful Life
      (In years)
Developed technology $ 28,000  $ (14,911) $ 13,089  2.8
Customer relationships 14,300  (8,875) 5,425  3.1
  $ 42,300  $ (23,786) $ 18,514   
 
15
  As of December 31, 2021
Cost Accumulated
Amortization		 Net Weighted Average Remaining Useful Life
      (In years)
Developed technology $ 28,000  $ (13,734) $ 14,266  3.0
Customer relationships 14,300  (8,233) 6,067  3.2
  $ 42,300  $ (21,967) $ 20,333   
 
Amortization expense of acquired intangible assets was $2 million for each of the three months ended March 31, 2022 and 2021.
Estimated future amortization expense as of March 31, 2022 is as follows (in thousands):
Remainder of 2022 $ 5,478 
2023 6,579 
2024 4,837 
2025 972 
2026 488 
Thereafter 160 
$ 18,514 
 
As of March 31, 2022 and December 31, 2021, the carrying amount of goodwill was $177 million. There was no change to the carrying amount of goodwill for the three months ended March 31, 2022.
Note 8. Convertible Senior Notes

2025 Convertible Senior Notes

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

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

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

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

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

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

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

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

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

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

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

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


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

The interest expense related to the 2025 Notes is as follows (in thousands):
Three Months Ended March 31,
2022 2021
Contractual interest expense $ 1,797  $ 1,797 
Amortization of debt discount —  10,029 
Amortization of issuance costs 1,043  697 
Total interest expense $ 2,840  $ 12,523 

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

2025 Capped Calls

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

2023 Convertible Senior Notes

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

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

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

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

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

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

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

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

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

The interest expense related to the 2023 Notes is as follows (in thousands):
Three Months Ended March 31,
2022 2021
Contractual interest expense $ 93  $ 93 
Amortization of debt discount —  1,656 
Amortization of issuance costs 178  143 
Total interest expense $ 271  $ 1,892 


2023 Capped Calls

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

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

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

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

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

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

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

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

The outcomes of legal proceedings and other contingencies are inherently unpredictable and subject to significant uncertainties. As a result, the Company is not able to reasonably estimate the amount or range of possible losses in excess of any amounts accrued, including losses that could arise as a result of application of non-monetary remedies, with respect to the contingencies it faces. In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows.
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Indemnifications
In the ordinary course of business, we enter into contractual arrangements under which we agree to provide indemnification of varying scope and terms to customers, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties, and other liabilities relating to or arising from our products or our acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments. In addition, we have indemnification agreements with our directors and executive officers that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The terms of such obligations may vary. To date, we have not incurred any material costs, and we have not accrued any liabilities in our consolidated financial statements, as a result of these obligations.
Certain of our product offerings include service-level agreements warranting defined levels of uptime reliability and performance, which permit those customers to receive credits for future services in the event that we fail to meet those levels. To date, we have not accrued for any significant 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 March 31, 2022 and December 31, 2021, there were 400 million shares of common stock authorized for issuance with a par value of $0.01 per share, and 122.4 million and 121.6 million shares were issued and outstanding as of March 31, 2022 and December 31, 2021, respectively.
Preferred Stock
As of March 31, 2022 and December 31, 2021, 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 the offering period or the fair market value of our common stock at the end of the purchase period. During the three months ended March 31, 2022 and 2021, no 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 1.2 million shares on January 1, 2022. As of March 31, 2022, 6.6 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 6.1 million shares on January 1, 2022. As of March 31, 2022, we had 21.6 million shares of common stock available for future grants under the 2014 Plan.
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A summary of restricted stock unit (“RSU”) activity for the three months ended March 31, 2022 is as follows (in thousands, except per share information):
Restricted Stock Units
Number of Shares Weighted Average Grant Date Fair Value
Unvested — January 1, 2022 4,402  $ 113.97 
Granted 2,526  111.32 
Vested (437) 95.72 
Forfeited or canceled (283) 111.99 
Unvested — March 31, 2022 6,208  $ 114.27 

The total fair value of RSUs vested during the three months ended March 31, 2022 and 2021 was $47 million and $91 million, respectively. The fair value of RSUs vested represents market value on the vesting date.
A summary of stock option activity for the three months ended March 31, 2022 is as follows (in thousands, except per share information):
 
  Stock Options
Number of
Shares		 Weighted
Average
Exercise Price		 Weighted
Average
Remaining
Contractual
Term		 Aggregate
Intrinsic
Value
    (In years)  
Outstanding — January 1, 2022 3,457  $ 44.71  4.4 $ 222,460 
Granted 492  116.56 
Exercised (335) 32.28 
Forfeited or canceled (32) 118.11 
Outstanding — March 31, 2022 3,582  $ 55.08  5.3 $ 243,400 
 
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 total intrinsic value of stock options exercised during the three months ended March 31, 2022 and 2021 was $27 million and $26 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 three months ended March 31, 2022 and 2021 was $43.72 and $54.55, respectively.
As of March 31, 2022, we had a total of $720 million in future expense related to our stock options, RSUs, and ESPP to be recognized over a weighted average period of 3.1 years.
For the three months ended March 31, 2022, we recorded $1 million of share-based compensation expense related to accelerated vesting of share-based awards associated with an employee termination.
Performance Restricted Stock Units
During the three months ended March 31, 2022, the compensation committee of our board of directors granted performance-based restricted stock units, or PRSUs, representing a target of 0.1 million shares of common stock to certain senior executives. The PRSUs vest over a four-year service period. The PRSUs include a performance condition, based on company-wide revenue growth, and a market condition, based on our total Zendesk stockholder return as compared to the total stockholder return of the Russell 3000 Index, each measured over a one-year performance period. The PRSUs will vest in a percentage of the target number of shares depending on the extent the conditions are achieved and subject to the required service. The fair value of those PRSUs subject to the market condition was estimated on the date of grant using a Monte Carlo simulation, which incorporates various assumptions including the expected stock price volatility over the performance period and the stock price at the grant date.
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The compensation cost is recognized under the accelerated attribution method. During the three months ended March 31, 2022, we recorded $1 million of share-based compensation expense related to the PRSUs. The total future expense related to the PRSUs that are expected to vest as of March 31, 2022 is $15 million.

Note 11. Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Three Months Ended March 31,
2022 2021
Balance, beginning of period $ 517,210  $ 383,358 
Billings 397,637  311,212 
Subscription and services revenue (364,376) (282,839)
Other revenue* (23,951) (15,209)
Balance, end of period $ 526,520  $ 396,522 
*Other revenue primarily includes implementation and training services, usage-based revenue, and amounts from contract assets.

For the three months ended March 31, 2022 and 2021, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. When revenue is recognized in advance of invoicing we record contract assets, which are included in prepaid expenses and other current assets on our consolidated balance sheets. As of March 31, 2022 and December 31, 2021, the balance of contract assets was $5 million and $4 million, respectively.

The aggregate balance of remaining performance obligations as of March 31, 2022 was $1,359 million. We expect to recognize $915 million of the balance as revenue in the next 12 months and the substantial majority of the remainder in the next 13-36 months. The aggregate balance of remaining performance obligations represents contracted revenue that has not yet been recognized, including contracted revenue from renewals, and does not include contract amounts which are cancellable 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):
  Three Months Ended
March 31,
2022 2021
Net loss $ (66,946) $ (48,965)
Weighted-average shares used to compute basic and diluted net loss per share 121,962  117,912 
Net loss per share, basic and diluted $ (0.55) $ (0.42)
 
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
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  As of March 31,
2022 2021
Shares subject to outstanding common stock options and employee stock purchase plan 3,856  4,601 
RSUs and PRSUs 6,338  5,370 
Shares related to convertible senior notes 12,939  3,871 
  23,133  13,842 


Prior to the adoption of ASU 2020-06, we used the treasury stock method for calculating any potential dilutive effect of the conversion spread of our convertible senior notes on diluted net income per share, if applicable. The conversion spread had a dilutive impact on diluted net income per share when the average market price of our common stock for a given reporting period exceeded the initial conversion prices of $63.07 and $108.76 per share for the 2023 Notes and 2025 Notes, respectively.

After the adoption of ASU 2020-06, we use the if-converted method for calculating any potential dilutive effect of our convertible senior notes. Under this method, we calculate diluted net income per share assuming that all the convertible senior notes were converted solely into shares of common stock at the beginning of the reporting period. Based on the initial conversion price, potential dilution related to the 2023 Notes and 2025 Notes is approximately 2.4 million and 10.6 million shares, respectively. The potential impact upon the conversion of the convertible senior notes was excluded from the calculation of diluted net loss per share for the three months ended March 31, 2022 because the effect would have been anti-dilutive.

Note 13. Income Taxes
We reported income tax expense of $4 million and $2 million for the three months ended March 31, 2022 and 2021, respectively. 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.

Note 14. Geographic Information
Our chief operating decision maker reviews the financial information presented on a consolidated basis for purposes of allocating resources and evaluating our financial performance. Accordingly, we have determined that we operate in a single reporting segment.
Revenue
The following table presents our revenue by geographic area, as determined based on the billing address of our customers (in thousands):
 
  Three Months Ended
March 31,
2022 2021
United States $ 197,138  $ 152,824 
EMEA 112,123  86,417 
APAC 39,888  31,130 
Other 39,178  27,677 
Total $ 388,327  $ 298,048 
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Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
As of
March 31, 2022		 As of
December 31, 2021
United States $ 54,841  $ 59,776 
EMEA:
Republic of Ireland 33,732  34,728 
Other EMEA 10,996  8,261 
Total EMEA 44,728  42,989 
APAC:
Singapore 11,425  13,145 
Other APAC 7,447  5,948 
Total APAC 18,872  19,093 
Other 7,483  5,883 
Total $ 125,924  $ 127,741 
 
The table above includes property and equipment and lease right-of-use assets and excludes capitalized internal-use software and intangible assets.

Note 15. Subsequent Events
In April 2022, our board of directors approved a plan to cease use or sublease certain leased premises across our real estate portfolio. As a result, we expect to record an impairment charge in the second quarter of 2022, which we estimate could range up to $26 million. The impairment considers the estimated residual value based on the present value of the estimated cash flows that could be generated from subleasing each property for the remaining lease term, if applicable. The timing and amount of subsequent impairments, if any, is dependent on sublease opportunities and our ability to terminate the leases.
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Item 2. 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 our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 15, 2022. As discussed in the section titled “Special Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, impacts on our business and general economic conditions due to the current COVID-19 pandemic, those identified below, and those discussed in the section titled “Risk Factors” included under Part II, Item 1A below.
Overview
We are a software development company that provides software as a service solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to product and platform solutions that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it’s needed most.
We believe in developing solutions that serve organizations of all sizes and across all industries. Our flagship product solution, 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 product solutions integrate with Support and include Zendesk Chat, Zendesk Talk, and Zendesk Guide. Chat is live chat and messaging 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 voice and short message service 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.
We additionally offer Zendesk Sell, sales customer relationship management software that complements our mission in delivering solutions that provide a better customer experience, Zendesk Explore, a solution to provide analytics for organizations to measure and improve the entire customer experience, Zendesk Gather, a product solution that enables companies to provide trusted and transparent support to customers through online community forums, Zendesk Sunshine, a customer relationship management platform which enables organizations to connect and integrate customer data generated through our product solutions, and Zendesk Sunshine Conversations, a messaging platform solution that allows businesses to integrate messaging through social channels and directly interact and transact with customers. For a service solution which provides Support, Chat, Talk, Guide, Gather, Explore, and Sunshine together, we offer the Zendesk Suite.
We offer a range of subscription account plans for our solutions 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.
For the three months ended March 31, 2022 and 2021, our revenue was $388 million and $298 million, respectively, representing a 30% growth rate. For the three months ended March 31, 2022 and 2021, we derived $191 million, or 49%, and $145 million, or 49%, 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 three months ended March 31, 2022 and 2021, we generated net losses of $67 million and $49 million, respectively.
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The growth of our business and our future success depend on many factors, including our ability to continue to innovate, further develop our product and platform solutions geared towards the entire customer experience, build brand recognition and scalable solutions for larger organizations, sell to and provide a unified and reliable service to those larger organizations, maintain our leadership in the small and midsized 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 invest in our operations. 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 third-party license fees to support certain products and 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 solutions, to further integrate these solutions and services, and to introduce new solutions. We plan to continue to invest in our sales and marketing organizations, particularly in connection with our efforts to expand our customer base and expand usage of our solutions. 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.

COVID-19 Update

We are continuing to ascertain the long-term impact of the COVID-19 pandemic on our business. We continue to focus on supporting our employees, customers, and community.
Our business continuity plans have continued to focus on the health and safety of our employees while continuing to drive innovation in customer experience solutions for our customers. The ongoing global shift to a digital-first world has continued to emphasize the importance of fast time-to-value solutions such as our own and our need to reimagine the way our employees engage with each other and their customers. We continue to evaluate conditions in each region we operate and reassess local restrictions across the globe. We have reopened some of our offices on a staggered, region-to-region basis in accordance with local authority guidelines, while taking into account vaccine administration prevalence and infection rates.
Because we primarily have a subscription-based business model which generally results in recognition of revenue in subsequent periods originating from customer contracts executed in prior periods, the effects of the COVID-19 pandemic may continue to have a delayed impact on our results of operations. See the “Risk Factors” section for further discussion of the possible impact of the COVID-19 pandemic on our business.
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.
Logos. Our number of logos is a consolidation of paid customer accounts across our solutions, exclusive of our legacy Starter plan, free trials, or other free services, as of the end of the period. A paid customer account is one individual billing relationship for subscription to our services. We calculate our logo number by consolidating paid customer accounts that share common corporate information as a single organization or customer may have multiple paid customer accounts across our solutions to service separate subsidiaries, divisions, or work processes. As of March 31, 2022, we had 110,300 logos. We do not currently include in our logo metric logos associated with our legacy analytics product, our legacy Outbound product, our legacy Starter plan, our Sell product, Sunshine Conversations, our legacy Smooch product, free trials, or other free services. We
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may from time to time refer to "customers" or "brands" in our publicly-available disclosures, each of which refers to our number of logos.
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 solutions. 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 logo, 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 a logo, upgrades in subscription plans, and the purchase of additional products as offset by contraction and churn in authorized agents associated with a logo, and downgrades in subscription plans. We do not currently incorporate operating metrics associated with our legacy analytics product, our legacy Outbound product, our legacy Starter plan, our Sell product, Sunshine Conversations, our legacy Smooch product, 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 annual recurring revenue for a set of logos on our products. Annual recurring revenue is determined by multiplying monthly recurring revenue by 12. Monthly recurring revenue is a legal and contractual determination made by assessing the contractual terms, as of the date of determination, as to the revenue we expect to generate in the next monthly period, 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. We exclude the impact of revenue that we expect to generate from fixed-term contracts that are each associated with an existing account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring revenue. We additionally exclude the impact of accounts that are free-trial accounts that did not result in paid subscriptions, and temporary coupons, such as short-term discounts that were applied to certain accounts due to the COVID-19 pandemic, from our annual recurring revenue. 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.
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 annual recurring revenue across our products from logos 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 annual 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 was 121% as of March 31, 2022. We expect that, among other factors, our continued focus on adding larger logos 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 annual recurring revenue grows.
Components of Results of Operations
Revenue
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, Sell, Explore, Gather and Sunshine and includes related support services. We also derive revenue from Zendesk Suite, which provides a subset of these solutions for a single price. 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 solutions that vary in price based on functionality, type, and the amount of 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. Additionally, certain customers have arrangements that provide for unlimited users during the subscription term for a fixed fee. 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
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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 our future revenue for a given period of time.
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 (primarily 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 located in North America, Europe, Asia and Australia. Cost of revenue also includes third-party license fees, payment processing fees, amortization expense associated with acquired intangible assets, amortization expense associated with capitalized internal-use software, 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 intend to continue to invest additional resources in our infrastructure, professional service organizations, and product support 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 solutions 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 solutions or for certain subscription plans or integrations, we expect third-party license fees for technology that is incorporated in such solutions 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, 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 (primarily 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 solutions, including the development and deployment of new features and functionality and enhancements to our software architecture and integration across our solutions. 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 (primarily 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 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 and contact generation. Sales commissions are considered incremental costs of obtaining customer contracts and are capitalized and amortized on a straight-line basis over their anticipated period of benefit, which we have determined to be three years.
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We focus our sales and marketing efforts on generating awareness of our solutions, 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, improving our demand generation strategies, and building brand awareness, 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 (primarily 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, allowance for credit losses on accounts receivable, 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. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. Our general and administrative 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 general and administrative expenses.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest income from marketable securities, strategic investment gains and losses, 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 and income taxes in certain foreign jurisdictions.
Results of Operations
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands, except percentages):
 
  Three Months Ended March 31,
2022 2021
Revenue $ 388,327  $ 298,048 
Cost of revenue (1)
 75,678  60,894 
Gross profit 312,649  237,154 
Operating expenses (1):
    
Research and development 108,077  73,783 
Sales and marketing 201,660  157,518 
General and administrative 63,538  43,133 
Total operating expenses 373,275  274,434 
Operating loss (60,626) (37,280)
Other income (expense), net:
Interest expense (3,121) (14,415)
Interest and other income (expense), net 838  5,084 
Total other income (expense), net (2,283) (9,331)
Loss before provision for income taxes (62,909) (46,611)
Provision for income taxes 4,037  2,354 
Net loss $ (66,946) $ (48,965)
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(1) Includes share-based compensation expense as follows (in thousands):
 
  Three Months Ended March 31,
2022 2021
Cost of revenue $ 6,177  $ 4,486 
Research and development 19,287  15,673 
Sales and marketing 26,800  23,232 
General and administrative 11,674  8,983 
 
  Three Months Ended March 31,
2022 2021
Revenue 100.0  % 100.0  %
Cost of revenue (1)
 19.5  20.4 
Gross profit 80.5  79.6 
Operating expenses (1):
    
Research and development 27.8  24.8 
Sales and marketing 51.9  52.8 
General and administrative 16.4  14.5 
Total operating expenses 96.1  92.1 
Operating loss (15.6) (12.5)
Other income (expense), net:
Interest expense (0.8) (4.8)
Interest and other income (expense), net 0.2  1.7 
Total other income (expense), net (0.6) (3.1)
Loss before provision for income taxes (16.2) (15.6)
Provision for income taxes 1.0  0.8 
Net loss (17.2) % (16.4) %

(1) Includes share-based compensation expense as follows:
 
  Three Months Ended March 31,
2022 2021
Cost of revenue 1.6  % 1.5  %
Research and development 5.0  5.3 
Sales and marketing 6.9  7.8 
General and administrative 3.0  3.0 
Revenue
 
  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
Revenue $ 388,327  $ 298,048  30  %
Revenue increased $90 million, or 30%, in the three months ended March 31, 2022 compared to the same period in 2021. The total increase in revenue was primarily attributable to expansions from existing accounts as of March 31, 2021 and the remainder was attributable to revenue from new accounts acquired thereafter.
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Cost of Revenue and Gross Margin
 
  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
Cost of revenue $ 75,678  $ 60,894  24  %
Gross margin 80.5  % 79.6  %  
Cost of revenue increased $15 million, or 24%, in the three months ended March 31, 2022 compared to the same period in 2021. The overall increase was primarily due to higher employee compensation costs of $10 million, driven by headcount growth, and higher allocated shared costs of $1 million. Additionally, in the three months ended March 31, 2022, hosting and related costs and third-party license fees increased by $2 million, driven by increased customer usage.
Our gross margin increased by 0.9 percentage points in the three months ended March 31, 2022 compared to the same period in 2021. The overall improvement was driven primarily by efficiencies in our use of third-party licenses and hosting services, including timing of vendor credits, partially offset by increased employee compensation-related costs.
Operating Expenses
Research and Development Expenses
 
  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
Research and development $ 108,077  $ 73,783  46  %
Research and development expenses increased $34 million, or 46%, in the three months ended March 31, 2022 compared to the same period in 2021. The overall increase was primarily due to increased employee compensation-related costs of $26 million, driven by headcount growth. The increase was also driven by higher allocated shared costs of $4 million.
Sales and Marketing Expenses
 
  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
Sales and marketing $ 201,660  $ 157,518  28  %
Sales and marketing expenses increased $44 million, or 28%, in the three months ended March 31, 2022 compared to the same period in 2021. The overall increase was primarily due to increased employee compensation-related costs, including amortization of deferred commissions, of $35 million, driven by headcount growth. The increase was also driven by higher allocated shared costs of $5 million.
General and Administrative Expenses
 
  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
General and administrative $ 63,538  $ 43,133  47  %
General and administrative expenses increased $20 million, or 47%, in the three months ended March 31, 2022 compared to the same period in 2021. The overall increase was primarily due to increased employee compensation-related costs of $18 million, due to headcount growth, and higher allocated shared costs of $1 million.
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Other Income (Expense), Net

  Three Months Ended March 31,  
2022 2021 % Change
(In thousands, except percentages)
Interest expense $ (3,121) $ (14,415) (78) %
Interest and other income (expense), net 838  5,084  (84) %

Interest expense decreased by $11 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to the adoption of ASU 2020-06, which resulted in the elimination of the debt discounts that were amortized to interest expense over the contractual term of the related convertible senior notes prior to January 1, 2022. Interest and other income (expense), net decreased by $4 million in the three months ended March 31, 2022 compared to the same period in 2021, primarily due to net foreign currency losses.
Liquidity and Capital Resources
As of March 31, 2022, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $1.6 billion, which were held for working capital and general corporate purposes. Our cash equivalents and marketable securities are comprised of U.S. Treasury securities, corporate bonds, money market funds, asset-backed securities, agency securities, commercial paper, certificates of deposit, and time deposits.
The following table summarizes our cash flows for the periods indicated (in thousands):
 
  Three Months Ended March 31,
2022 2021
Net cash provided by operating activities $ 11,212  $ 33,595 
Net cash used in investing activities (18,568) (77,676)
Net cash provided by financing activities 26,949  16,315 

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. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our customers, and other risks detailed in the “Risk Factors” section. However, based on our current business plan and revenue prospects, 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.
In March 2018, we issued $575 million aggregate principal amount of 0.25% convertible senior notes due March 15, 2023 (refer to Note 8 of the Notes to our Condensed Consolidated Financial Statements for more information). As of the date of this filing, we have received one request for conversion for an immaterial amount. The 2023 Notes are convertible during the three months ending June 30, 2022.
In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due June 15, 2025 (refer to Note 8 of the Notes to our Condensed Consolidated Financial Statements for more information). In connection with the offering of the 2025 Notes, we used $618 million of the proceeds from the offering to repurchase a portion of the 2023 Notes, of which $39 million was related to repayment of the debt discount and was reflected as a cash outflow from operating activities. We also terminated a portion of our existing capped call in amounts corresponding to the principal of the 2023 Notes repurchased. The 2025 Notes are not convertible during the three months ending June 30, 2022.
We are in compliance with all covenants under both the 2023 Notes and the 2025 Notes as of March 31, 2022.
The impact of the 2023 Notes and the 2025 Notes on our liquidity will depend on whether we elect to settle any conversions in shares of our common stock or a combination of cash and shares.
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Our material cash requirements from known contractual and other obligations consist of our convertible senior notes, obligations under operating leases for office space, and contractual commitments for third-party managed hosting and other support services. For more information regarding our convertible senior notes, refer to Note 8 of the Notes to our Condensed Consolidated Financial Statements. For more information regarding our lease obligations, refer to Note 6 of the Notes to our Condensed Consolidated Financial Statements. Our other contractual obligations consist primarily of purchase commitments for third-party managed hosting services. Except as discussed below, there were no material changes to our material cash requirements from known contractual and other obligations from those disclosed in our audited consolidated financial statements for the year ended December 31, 2021.
In February 2022, we terminated and entered into a new agreement with a cloud services provider for which we have a total obligation of $400 million over a five-year period.
Our future capital requirements will depend on many factors, including employee-related expenditures from expansion of our headcount, 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 introduction of new and enhanced solutions, features, and functionality, the expansion of sales and marketing activities, 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 the three months ended March 31, 2022 was $11 million, reflecting our net loss of $67 million, adjusted by non-cash charges including share-based compensation expense of $64 million, amortization of deferred costs of $20 million, depreciation and amortization of $10 million, allowance for credit losses on accounts receivable of $2 million, and amortization of debt issuance costs of $1 million, partially offset by net changes in operating assets and liabilities of $23 million. The net outflow from changes in operating assets and liabilities was primarily attributable to an increase in deferred costs of $27 million, primarily including sales commissions, a decrease in accrued compensation and related benefits of $23 million, a decrease in accounts payable of $18 million due to timing of vendor payments, and an increase in prepaid expenses and other current assets of $13 million, partially offset by a decrease in accounts receivable of $48 million due to timing of customer billings and collections and an increase in deferred revenue of $8 million.
Net cash provided by operating activities in the three months ended March 31, 2021 was $34 million, reflecting our net loss of $49 million, adjusted by non-cash charges including share-based compensation expense of $52 million, depreciation and amortization of $10 million, amortization of deferred costs of $15 million, amortization of debt discount and issuance costs of $13 million, and allowance for credit losses on accounts receivable of $3 million, partially offset by net changes in operating assets and liabilities of $9 million. The net outflow from changes in operating assets and liabilities was primarily attributable to an increase in deferred costs of $21 million, primarily including sales commissions, and a decrease in accrued compensation and benefits of $20 million, partially offset by an increase in deferred revenue of $13 million, a decrease in accounts receivable of $16 million due to timing of customer billings and collections, and an increase in accounts payable of $6 million due to timing of payments.
Investing Activities
Net cash used in investing activities in the three months ended March 31, 2022 of $19 million was primarily attributable to purchases of marketable securities of $8 million, net of sales and maturities, purchases of property and equipment of $7 million, primarily for employee equipment and leasehold improvements for newly leased office facilities, and capitalized internal-use software costs of $3 million, primarily related to the development of additional features and functionality for our platform.
Net cash used in investing activities in the three months ended March 31, 2021 of $78 million was primarily attributable to purchases of marketable securities of $70 million, net of sales and maturities, purchases of property and equipment of $3 million, primarily for employee equipment, and capitalized internal-use software costs of $4 million related to the development of additional features and functionality for our platform.
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Financing Activities
Net cash provided by financing activities in the three months ended March 31, 2022 of $27 million was primarily attributable to proceeds from our employee stock purchase plan of $18 million and proceeds from exercises of employee stock options of $11 million, partially offset by payments for withholding taxes related to net share settlement of RSUs of $2 million.
Net cash provided by financing activities in the three months ended March 31, 2021 of $16 million was primarily attributable to proceeds from our employee stock purchase plan of $15 million and proceeds from exercises of employee stock options of $4 million, partially offset by payments for withholding taxes related to net share settlement of RSUs of $3 million.
Critical Accounting Policies and Estimates
We prepare our condensed consolidated financial statements in accordance with GAAP. In the preparation of these condensed 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.
There were no changes to our critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 15, 2022, that had a material impact on our condensed consolidated financial statements and related notes.
Recently Issued and Adopted Accounting Pronouncements
Refer to Note 1 of the Notes to our Condensed Consolidated Financial Statements for a summary of recently issued and adopted accounting pronouncements.
Item 3. 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, Korean Won, Polish Zloty, Canadian Dollar, 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. As of March 31, 2022, the effect of a hypothetical 10% change in foreign currency exchange rates applicable to our business would not have had a material impact on our cash and marketable securities.
We operate a hedging program to mitigate the impact of foreign currency fluctuations on our cash flows and earnings. For additional information, see Note 3 of the Notes to our Condensed Consolidated Financial Statements.
Interest Rate and Market Risk
We had cash, cash equivalents, and marketable securities totaling $1.6 billion as of March 31, 2022, of which $1.3 billion was invested in U.S. Treasury securities, corporate bonds, money market funds, asset-backed securities, agency securities, commercial paper, 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 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. Our debt securities are classified as “available for sale.” When the fair value of the security declines below its amortized cost basis, any portion of that decline attributable to credit losses, to the extent expected to
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be nonrecoverable before the sale of the security, is recognized in our consolidated statement of operations. When the fair value of the security declines below its amortized cost basis due to changes in interest rates, such amounts are recorded in other comprehensive income (loss), and are recognized in our consolidated statement of operations only if we sell or intend to sell the security before recovery of its cost basis.
As of March 31, 2022, 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 $10 million. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur.
We had non-controlling equity investments in privately held companies totaling $16 million as of March 31, 2022. The fair value of these strategic investments may fluctuate depending on the financial condition and near-term prospects of these companies, and we may be required to record an impairment loss if the carrying values of these investments exceed their fair values.
In March 2018, we issued $575 million aggregate principal amount of 0.25% convertible senior notes due 2023. In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due 2025. In connection with the offering of the 2025 Notes, we used part of the proceeds from the offering to repurchase a portion of the 2023 Notes. The fair values of our convertible senior notes are subject to interest rate risk, market risk and other factors due to the conversion feature. The fair values 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 values 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 obligations. 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.

The table below provides a sensitivity analysis of hypothetical 10% changes of our stock price as of March 31, 2022 and the estimated impact on the fair value of the convertible senior notes (in thousands, except percentages). The selected scenarios are not predictions of future events, but rather are intended to illustrate the effect such events may have on the fair value of the convertible senior notes.

Hypothetical change in Zendesk stock price 2023 Notes fair value Estimated change in fair value Hypothetical percentage increase (decrease) in fair value
10% increase $ 314,612  $ 27,678  9.6  %
No change $ 286,934  $ —  —  %
10% decrease $ 259,764  $ (27,170) (9.5) %

Hypothetical change in Zendesk stock price 2025 Notes fair value Estimated change in fair value Hypothetical percentage increase (decrease) in fair value
10% increase $ 1,498,002  $ 100,947  7.2  %
No change $ 1,397,055  $ —  —  %
10% decrease $ 1,302,916  $ (94,139) (6.7) %
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Item 4. 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, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating our disclosure controls and procedures, 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. Based on management’s evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the 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 to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings

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

For more information regarding legal proceedings, such as the Reidinger securities class action, see Note 9 “Commitments and Contingencies” of the Notes to our Condensed Consolidated Financial Statements in Item 1 of Part I.

In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of management’s expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
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.
 
 
 
Risk Factors Summary
Our business is subject to a number of risks that may adversely affect our business, financial condition, results of operations, and cash flows. These risks are discussed more fully below and include, but are not limited to:
Risks Related to our Product and Platform Solutions
•our substantial reliance on the continued market acceptance of our Support solution;
•developing our current solutions as well as new solutions that keep pace with the customer experience market;
•our ability to integrate new enhancements and solutions into our infrastructure;
•our reliance on application platform interfaces to integrate with third-party applications;
Risks Related to our Industry
•the intensely competitive nature of the customer experience industry among organizations of all sizes;
•the delayed reflection of new sales in our results due to recognizing revenue over the term of our customer contracts;
•the unpredictability of our results due to seasonality in industry buying patterns;
•our dependency on the growth of the SaaS market overall;
Risks Related to Customer Retention and Acquisition
•our substantial reliance on our customers renewing their subscriptions and purchasing additional subscriptions;
•selling to and developing our solutions for both large organizations and small to midsized organizations;
•our ability to develop and maintain successful relationships with channel partners;
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•our ability to optimize the pricing model for our solutions to maximize attraction of new customers;
•our reliance on conversion of free trials, other inbound lead generation strategies, and third-party technology partners;
•the difficulty of continuing to offer high-quality product support and customer success initiatives;
•our ability to maintain our brand;
Risks Related to Operating and Growing a Global Business
•quarterly fluctuations in our financial results due to various factors and increasing variability in our sales cycles;
•scaling our sales capabilities and managing our organization to achieve acceptance of our solutions internationally;
•retaining our key employees and attracting qualified personnel, particularly in the primary regions we operate;
•our history of losses and our expectation that our revenue growth rate will decline over time;
•the ability to effectively acquire or invest in companies and to successfully integrate acquired businesses;
•maintaining compliance with export and import controls given our global business;
•our ability to secure additional financing on favorable terms to meet our future capital needs;
Risks Related to Cybersecurity, Reliability, and Data Privacy
•service interruptions, errors, failures, or bugs in our solutions, and improper implementation of our solutions;
•our ability to securely maintain customer data and to prevent and respond to historical and future data breaches;
•increased costs from complying with privacy and security regulation, including the General Data Protection Regulation ("GDPR") and the California Consumer Privacy Act ("CCPA");
Risks Related to Intellectual Property Matters
•our exposure to contractual indemnification for intellectual property infringement and third-party claims;
•our use of open source software;
•a failure to protect our intellectual property rights;
Risks Related to Tax and Accounting Matters
•taxing authorities which may assert we owe income, sales, value added or similar taxes, either in the future or for past amounts;
•international operations which subject us to potential tax consequences and foreign exchange rate fluctuations;
•the potential for our goodwill or intangible assets to be impaired;
•limitations on our ability to use our net operating losses to offset future taxable income;
•our reliance on third-party SaaS technologies to operate our business;
Risks Related to Macroeconomic Conditions
•the effect of COVID-19 on global markets, the demand for our solutions, and the demand for our customers' solutions;
•unfavorable conditions in the business software applications industry;
•the occurrence of future catastrophic events;
Risks Related to Ownership of our Common Stock and our Outstanding Convertible Notes
•volatility in our stock price separate from our operating performance and the absence of a dividend on our stock;
•high concentration of ownership among relatively few principal stockholders;
•changing laws and regulations and potential legal proceedings related to governance and public disclosure;
•anti-takeover provisions in our charter and limitation of forum to the Delaware Court of Chancery for certain state law claims and the district courts of the United States for claims arising under the Securities Act;
•dependency on favorable securities and industry analyst reports;
•pressures on cash flows resulting from servicing our outstanding debt;
•conversion features on our debt which may affect our operating results and value of our common stock;
•counterparty risk with respect to capped call transactions entered into in connection with our debt offerings;
•accounting considerations related to interest, settlement, and expense recognition related to our outstanding debt; and
•actions of activist shareholders or unsolicited bidders could negatively affect our business.



Risks Related to Our Product and Platform Solutions
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 maintain or achieve increased market acceptance of Support, our business, results of operations, financial condition, and growth prospects would be harmed.
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We derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of subscriptions to Support or from sales of subscriptions to offerings and solutions primarily resulting from an interest in Support. As such, the market acceptance of this product solution is critical to our success. Demand for our solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance of our solutions by customers for existing and new use cases, the timing of development and release of new product and platform solutions, features, and functionality introduced by our competitors, 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 continue to impact the market for our software and blur distinctions between traditionally separate systems for customer support, customer engagement and retention software, messaging, sales force automation, and other customer relationship management product and platform solutions, 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 solutions, our business, results of operations, financial condition, and growth prospects will be adversely affected. Conversely, if the market for customer experience does not continue to increase relative to prior quarters, demand for our solutions will be negatively impacted.
If we are not able to develop enhancements to our product and platform solutions, provide a unified and reliable experience between our solutions, or introduce new solutions 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 existing solutions and to introduce new solutions. In order to grow our business, we must research and develop solutions and services that reflect the changing nature of the customer experience, and expand beyond customer service to other areas of improving relationships between organizations and their customers or potential customers. In addition, as we develop and introduce new products and services, including those incorporating or utilizing artificial intelligence and machine learning, they may raise new, or heighten existing, technological, legal and other challenges. In order to retain our business, we must ensure that our existing solutions and services maintain the high level of reliability, security, and sophistication our customers will continue to expect, while ensuring that we provide a unified and seamless experience across our solutions. Those expectations will continue to evolve and the resources required to continue to maintain reliable and secure solutions and services, particularly as we increasingly rely on and sell offerings which incorporate multiple solutions such as the Zendesk Suite, will increase over time.
We have limited history in offering multiple product and platform solutions as part of a comprehensive customer experience solution to our customers. As we increase focus on the customer experience and increasingly seek to offer our solutions as part of a broader offering, we may discover challenges in creating a seamless, unified offering across our solutions that achieves market acceptance and grows our business. In the three months ended March 31, 2022 and 2021, our research and development expenses were 28% and 25% of our revenue, respectively. 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 solutions depends on several factors, including timely completion, adequate quality testing, service reliability, and market acceptance. Any new solution or service that we develop may not be introduced in a timely or cost-effective manner, may contain defects, introduce new service reliability issues, or may not achieve the market acceptance necessary to generate sufficient revenue. If we are unable to successfully develop new solutions or services, integrate those solutions with our existing solutions, enhance our existing solutions to meet new customer requirements, or otherwise gain market acceptance, our business and operating results will be harmed. In particular, as we continue to manage operational costs, our long-term plans for the development of our products and services may be negatively impacted.
We may not be able to integrate new product and platform solutions 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 product and platform solutions that both complement our existing solutions and respond to our customers’ needs. Our customers also expect that new solutions will integrate with existing solutions that we currently offer. This expectation has increased especially with the launch of the Zendesk Suite, which packages multiple solutions into one offering. Our ability to successfully integrate newly developed or acquired solutions into a shared services infrastructure is unproven. Because we have a limited history in integrating newly developed or acquired solutions and the market for such solutions is rapidly evolving, it is difficult for us to predict our operating results following the integration of such solutions. If we are not able to fully integrate new solutions into our infrastructure and across multiple solutions, customer usage of our product may be disrupted, new demand for our solutions may be negatively affected if those disruptions are more broadly known, and retention of our current customers may be impacted.
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If we fail to integrate our product and platform solutions with a variety of operating systems, software applications, and hardware that are developed by others, our solutions may become less marketable, less competitive, or obsolete, and our operating results would be harmed.
Our solutions must integrate with a variety of e-mail, messaging, software platforms, network, and hardware, and we need to continuously modify and enhance our product and platform solutions to adapt to changes in cloud-enabled hardware, software, networking, messaging, browser, and database technologies. For example, we have developed our solutions to be able to easily integrate with third-party SaaS applications and messaging platforms, 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 or acquires one or more of our competitors;
•is acquired by our competitors, potentially resulting in more limited access to their systems; or
•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 solutions to communicate with these third-party applications through our respective APIs. If we are not permitted or able to integrate with these and other third-party applications in the future, demand for our solutions could be adversely impacted and business and operating results would be harmed. In addition, we have designed mobile applications to provide access to our solutions 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 solutions to operate effectively with future infrastructure platforms and technologies could also reduce the demand for our solutions, resulting in customer dissatisfaction and harm to our business. If we are unable to respond to changes in a cost-effective manner, our solutions may become less marketable, less competitive, or obsolete, and our operating results may be negatively impacted.
Risks Related to Our Industry
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business. The market for customer experience solutions is fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements, and we expect competition to continue to intensify in the future. Among the small to midsized organizations that make up a large proportion of our customers, we often compete with general use computer applications 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 text messaging, shared accounts for social messaging, text editors, and spreadsheets for tracking and management. In addition, we compete with a number of other SaaS providers with focused applications or broader suites of product offerings, which may be competitive to one or more of our product and platform solutions that our potential customers may elect to use in lieu of our solutions, and such providers may be able to offer their products at a lower price due to the focused nature of their applications, such as Freshworks Inc. and HubSpot, Inc. As a result, small to midsized organizations are able to switch to one of our competitors relatively easily. Additionally, as the barriers to entry are low into this market, new entrants or current competitors may be able to change branding, marketing, or sales strategy more quickly and effectively than us, and/or develop products that mimic our new product releases and sell those products at a low price, resulting in a decreased ability for us to increase our marketing pipeline or sales.
We face competition from in-house software systems, large integrated systems vendors, and smaller companies offering alternative SaaS applications. 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
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integrators, and resellers. Some existing and potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal customer support software systems. 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 it more difficult for us to compete with them. In particular, as multiproduct and platform offerings increase in prevalence, our competitors who focus on such offerings may, through organic growth or acquisition, be able to increasingly provide customizable platform solutions which would impact our ability to compete with them. As our offerings have additionally expanded to adjacent markets, such as integration of messaging into the customer experience platform, 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.
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. For larger organizations, we compete with customer software systems and large enterprise software vendors such as salesforce.com, Inc. 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 solutions, which will negatively affect our competitiveness for our solutions. Further, other established SaaS providers not currently focused on the functionality that our solutions provide may expand their services to compete with us as well. Large enterprise software vendors additionally have a greater ability to aggressively price their product at a level below their typical selling price in order to retain their existing customers and gain market share, both within the United States and in regions across the world, decreasing our ability to compete successfully with such vendors.
If the market for SaaS business software applications develops more slowly than we expect or declines, our business would be adversely affected.
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, business practices requiring highly customizable application software, or large employee bases requiring a high level of sophistication from their business 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. 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 residency, 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.
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 solutions, 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 solutions 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 and usage-based factors.
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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 solutions and services, and believe that our quarterly sales are affected by industry buying patterns. For example, we have customers who add flexible agents when they need more capacity during busy periods and then subsequently scale back the following year. We believe that the seasonal trends that we have experienced in the past may continue for the foreseeable future, particularly as we expand our sales to larger organizations. 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. Further, while not significant, a portion of our revenue results is not subscription-based, such as revenue related to our Talk product or revenue related to professional services, and is primarily dependent on usage-based demand, which can be difficult to predict. 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 solutions to determine if demand for these services are or will be subject to material seasonality.
Risks Related to Customer Retention and Acquisition
Our business depends substantially on our customers renewing their subscriptions, expanding the use of their subscriptions, and purchasing subscriptions for additional product and platform solutions from us. Any decline in our customer retention or expansion, or any failure by us to sell subscriptions to additional solutions 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 or additional product and platform solutions to their customer accounts. Even though the majority of our revenue is derived from subscriptions to our solutions that have terms longer than one month, a significant portion of the subscriptions to our solutions 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 elect not to renew their agreements with us and it is difficult to accurately predict long-term customer retention. Because the revenue derived from our customers on contracts with monthly terms are often small and midsized organizations, and because small and midsized organizations can have liquidity and expense limitations more restrictive than large organizations, such revenue is particularly susceptible to changes in global demand arising from economic downturns. Additionally, as we continue to expand our offerings to appeal to larger enterprises and such customers agree to longer contractual terms with subscriptions to additional solutions, if and when such larger enterprise customers decide not to renew their contractual arrangements, the negative impact on our results and operations will accordingly be increasingly larger. Further, a substantial proportion of our revenue derives from, and our future success is substantially dependent on, our ability to expand our existing customers' use of our solutions by expanding the number of solutions to which such customers subscribe. This has required and will continue to require increasingly sophisticated and costly sales efforts, may not result in additional sales, and it may be difficult to predict the success of such efforts.
Further, we have seen the impact of COVID-19 vary significantly across different industries. Certain industries have seen increased demand for their products and services as the needs of the economy shift, while other industries have struggled to maintain demand for their products and services consistent with historical levels. Our ability to retain current customers or sell additional solutions to those customers has and will depend on our ability to understand the short-term and long-term impacts of COVID-19 on each industry. Because we have a limited history in understanding these impacts, our ability to adapt our sales and marketing initiatives to such changes may be uncertain and our ability to forecast rates of customer retention and expansion may be negatively impacted.
Our customer retention, our ability to sell additional product and platform solutions to existing customers, and the rate at which our existing customers purchase subscriptions to additional solutions may be impacted by a number of factors, including our customers’ satisfaction with our solutions, our product support, our prices, the prices of competing software systems, 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 solutions depends on a number of factors, including the perceived need for additional solutions 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, fail to increase use of our usage-based solutions, or fail to purchase subscriptions to additional solutions, our revenue may decline, and we may not realize improved operating results from our customer base.
We face a number of risks in targeting larger organizations for sales of our solutions and, if we do not manage these efforts effectively, our business and results of operations could be adversely affected.
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As we target a portion of our sales efforts to larger organizations, we expect to incur high costs and long 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 product and platform solutions 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 solutions.
The success of the broader market acceptance of our product and platform solutions depends on offering solutions designed to give organizations of all sizes the ability to deliver powerful customer experiences with a focus on solutions that have the broadest market appeal across those organizations. Larger organizations may demand more features and integration services than small to midsized organizations. We may not be able to devote sufficient resources to developing those features and functionality in our solutions that are exclusively in demand by large organizations, which may negatively affect our potential sales to those organizations. Further, as we continue to focus on self-serve capabilities and simplicity in buying our solutions, many of those efforts may not be effective in selling and marketing to larger organizations as those organizations may require greater customer-specific investment, which may additionally impact our potential sales to those organizations. To the extent we do invest in customer-specific investment, such investment is and will continue to be a disproportionately large focus of internal resources on a small number of customers, negatively impacting our efficient use of those resources.
We have limited experience in developing and managing sales channels and distribution arrangements for larger organizations. We may experience difficulty hiring employees with qualifications appropriate for selling to larger organizations, which could adversely affect our ability to meet expected sales targets. Further, given their generally broader international presence, selling to larger organizations also may require us to divert resources to international regions in which we may not have sufficient personnel, affecting our results of operations. Sales opportunities to larger organizations may require us to devote greater research and development, sales, marketing events, 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 solutions. Furthermore, because we have limited experience selling to larger organizations, our investment in marketing our solutions 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 not fully understand the opportunities to expand usage of our solutions or to sell additional functionality within such organizations, and we may not be able to effectively predict subscription terminations, any of which could harm our results of operations.
Our business and growth depend substantially 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 products offered by Twilio Inc., the features available on Zendesk Support are highly dependent on our technology integration with products offered by Alphabet Inc., and the features available across our platform are generally dependent on our third-party hosting services and integrations with messaging services. 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 solutions until equivalent technology is either developed by us or, if available, identified, obtained, and integrated.
For deployments of our solutions into complex technology environments and workflows, we are 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 requires 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 solutions or services or to prevent or reduce subscriptions to our solutions.
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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.
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 particularly because we do not have the history with our subscription or pricing models that we need to accurately predict optimal pricing necessary to attract and retain customers.
We generally charge our customers for their use of our product and platform solutions based on the number of users they enable as ‘agents’ under their customer account, as well as the features and functionality enabled. The features and functionality we provide within our solutions 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. Conversely, customers may overestimate their agent needs when they initially use our solutions, negatively affecting our ability to accurately forecast the number of agents our customers need in a period. Other than subscriptions related to the Zendesk Suite, we generally require a separate subscription to enable the functionality of each of our solutions. We are continuing to analyze and improve our pricing and packaging models as we adapt to a changing market, but we do not know whether our current or potential customers or the market in general will accept changes to those models and, if it fails to gain acceptance, our business and results of operations could be harmed. In particular, in February 2021, we released a new version of our omnichannel offering, the Zendesk Suite, which offers access to Support, Chat, Talk, Guide, Explore, and Sunshine at new, unified purchase plans with various levels of pricing for different types of organizations. While we believe that simple purchase plans will enable greater adoption of the Zendesk Suite, certain organizations, such as small or midsized businesses, may not want to purchase all the included solutions in the Zendesk Suite, and other organizations may want more features offered in one solution without paying for the next purchase plan level, affecting our new business, retention, and sales for additional solutions. Those purchasing decisions will be difficult to predict due to our limited experience offering the new Zendesk Suite, and we may not fully understand the impact of our pricing changes in the market. If we fail to find an optimal pricing strategy for our latest offering, our business and results of operations may be harmed. If customers do not accept our new purchase plans, we may increasingly have difficulty in our ability to attract new customers as well as our ability to retain existing customers to the extent we apply new pricing models to existing customer agreements. Our current pricing model may be either too complex, too simple, or too expensive depending on the size of the organization to which we are selling our offering. 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.
Finally, as the market for our solutions matures, or as new competitors introduce new solutions 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.
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 solutions. We provide access and use of our solutions exclusively for our customers’ internal use. If customers improperly resell or otherwise make our solutions available to their customers, it may cannibalize our sales or commoditize our solutions in the market. Additionally, if a customer that has received a volume discount from us offers our solutions 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 solutions 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 are highly dependent upon free trials of our solutions 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 solutions and other inbound lead generation strategies to generate sales opportunities. As we increasingly focus on our core strengths of simplicity, agility, and offering solutions that are easy to adopt, it will be additionally increasingly critical to maintain a simple trial experience that markets and leads to an easy adoption of our solutions. 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 solution to a paid version of such solution. We often depend on individuals within an organization who initiate the trial versions
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of our solutions 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 the larger organizations that we continue to target. Furthermore, in the case of our sales force automation software and features and functionality related to our platform offering, we are increasingly pursuing decision makers that are not in the customer support organizations that we have traditionally targeted. Additionally, as we offer new, broader pricing and packaging offerings for our solutions, we may not be able to understand how our prospective customers trial and use each individual solution, negatively affecting our ability to sell additional solutions effectively to those organizations. 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.
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 product and platform solutions, our customers depend on our product support team, customer success organization, and our professional services 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. Adoption of the Zendesk Suite and increasing usage by customers of multiple solutions 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 solution may suffer. Additionally, we may be unable to develop our customer success organization to continue to support the increasing level of complexity that our customers that are large organizations require while maintaining the same level of engagement across all customers. For example, adoption of features and functionality related to our platform offering may increase demand on our professional services organization as customers may increasingly demand platform-related features that may not currently exist.
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, maintain a high complexity customer success organization, or maintain an adaptive and responsive professional services organization, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, and our business, operating results, and financial position.
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 product and platform solutions. 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 we will continue to dedicate resources to those efforts. Our agreements with our existing channel partners are non-exclusive, meaning our channel partners may offer customers the solutions of several different companies, including solutions that compete with ours. They may also cease marketing our solutions 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 solutions. 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 solutions, 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 solutions, 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 collectability 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.
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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 experience solutions 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 product and platform solutions from competitive solutions and services. Our ability to maintain our brand will depend on ensuring we communicate our core strengths in simplicity, agility of our solutions, and easy adoption of sophisticated solutions to our prospective customers, particularly as compared to our competitors offering products to small and midsized organizations and other competitors offering products to larger organizations. 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 organizations. In addition, independent industry analysts often provide reviews of our solutions, as well as products and services offered by our competitors, and perception of our solutions 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.

Risks Related to Operating and Growing a Global Business
Our quarterly results may fluctuate significantly from period to period, 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 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:

•the short-term and long-term impacts of COVID-19 or any other worldwide pandemic on our business, including but not limited to a decreased demand for our solutions and services, particularly in certain industries, negative impacts on our revenue results, and an increased unpredictability in expenses and cash flow;
•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;
•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 our or our competitors’ pricing policies;
•the impact of security breaches, service interruptions, or other technical difficulties or reliability considerations on our solutions;
•our ability to meet the increasing expectations on product functionality of larger organizations while continuing to maintain an easily accessible solution for organizations of all sizes;
•changes in our billing and invoicing policies and customer reception of those changes;
•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;
•the timing of the grant, price of our common stock, or vesting of equity awards to employees;  
•expenses such as litigation or other dispute-related settlement payments;
•changes in foreign currency exchange rates and our customers' willingness to accept the risk of those changes; and
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•the impact of new accounting pronouncements.
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.
Failure to effectively maintain and scale our sales capabilities could harm our ability to increase our customer base and achieve broader market acceptance of our product and platform solutions.
Increasing our customer base and achieving broader market acceptance of our product and platform solutions will depend, to a significant extent, on our ability to effectively maintain and scale 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 invest in our direct sales force both domestically and internationally to increase the effectiveness of our sales motions and increase our sales capacity. During the twelve months ended March 31, 2022, our sales and marketing organization increased by approximately 730 employees to approximately 2,570 employees. There is significant competition for experienced sales and marketing professionals with the skills and technical knowledge that we require, both domestically and internationally. 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. In territories outside the United States, attraction, recruiting and retention of our sales personnel has been and will be increasingly difficult and costly, affecting our ability to compete in such jurisdictions. Further, as organizations worldwide adjust to continuing precautions and safety measures related to decreasing the health risks of COVID-19, our ability to connect in person with our customers and potential customers may be and has been negatively impacted, resulting in delayed sales cycles.
We cannot predict whether, or to what extent, our sales will increase as we continue to invest in our sales and marketing functions or how long it will take for new personnel to become productive, continue to focus on our core strengths, and achieve broader market acceptance. Our business will be harmed if our sales and marketing efforts do not generate a significant increase in revenue. 
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, departure, or reorganization of our executive team, 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 globally 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, especially in Dublin, Ireland and Singapore is intense, especially for engineers experienced in designing and developing software and SaaS applications and experienced sales professionals. As organizations increasingly promote digital-first employee experiences and seek to hire across multiple jurisdictions, we will additionally face competition in hiring qualified employees in areas outside our physical offices.
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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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 4,520 employees as of March 31, 2021 to approximately 6,300 employees as of March 31, 2022. In addition, we have established subsidiaries in Denmark, the United Kingdom, Australia, Ireland, Japan, the Philippines, Brazil, Germany, India, Mexico, and South Korea since our inception in 2007, and, as a result of acquisitions, we also have subsidiaries in Singapore, France, Poland, Portugal, and Canada. We may continue to invest in our international operations and expand into other countries in the future. We have also experienced significant growth in the number of customers, end users, transactions, and data that our solutions support. 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. Further, as our employees work from geographic areas across the globe, we will require investment of resources and close monitoring of local regulations and requirements that continually change due to events that may have a global impact, such as the shift to remote work or hybrid remote and in-office models arising from the COVID-19 pandemic, and we may experience unpredictability in our expenses, employee retention, and employee work culture. 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 retention and productivity of our employees may be impacted, and the quality of our solutions and services may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.
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 $67 million and $49 million in the three months ended March 31, 2022 and 2021, respectively. We had an accumulated deficit of $1,126 million as of March 31, 2022. For the three months ended March 31, 2022 and 2021, our revenue was $388 million and $298 million, respectively, representing a 30% growth rate. Our historical revenue growth has been inco