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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 June 30, 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 July 28, 2022, there were 123,434,222 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)
 
  June 30,
2022
December 31,
2021
(Unaudited)
Assets    
Current assets:    
Cash and cash equivalents $ 567,980  $ 476,103 
Marketable securities 590,263  539,780 
Accounts receivable, net of allowance for credit losses of $5,742 and $6,190 as of June 30, 2022 and December 31, 2021, respectively
258,127  273,898 
Deferred costs 82,497  72,042 
Prepaid expenses and other current assets 71,514  56,809 
Total current assets 1,570,381  1,418,632 
Marketable securities, noncurrent 473,949  559,652 
Property and equipment, net 90,955  97,815 
Deferred costs, noncurrent 78,266  72,553 
Lease right-of-use assets 48,259  69,936 
Goodwill and intangible assets, net 193,610  197,098 
Other assets 36,689  35,593 
Total assets $ 2,492,109  $ 2,451,279 
Liabilities and stockholders’ equity    
Current liabilities:    
Accounts payable $ 70,682  $ 49,213 
Accrued liabilities 56,562  50,075 
Accrued compensation and related benefits 105,297  138,127 
Deferred revenue 563,873  512,933 
Lease liabilities 21,977  21,253 
Current portion of convertible senior notes, net 148,687  139,738 
Total current liabilities 967,078  911,339 
Convertible senior notes, net 1,137,424  979,350 
Deferred revenue, noncurrent 6,326  4,277 
Lease liabilities, noncurrent 51,727  63,212 
Other liabilities 2,733  3,883 
Total liabilities 2,165,288  1,962,061 
Commitments and contingencies (Note 9)
Stockholders’ equity:    
Preferred stock —  — 
Common stock 1,232  1,215 
Additional paid-in capital 1,568,922  1,637,157 
Accumulated other comprehensive loss (22,176) (8,911)
Accumulated deficit (1,221,157) (1,140,243)
Total stockholders’ equity 326,821  489,218 
Total liabilities and stockholders’ equity $ 2,492,109  $ 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
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
Revenue $ 407,208  $ 318,216  $ 795,535  $ 616,264 
Cost of revenue (1)
82,790  66,743  158,468  127,637 
Gross profit 324,418  251,473  637,067  488,627 
Operating expenses (1):        
Research and development 110,539  82,826  218,616  156,609 
Sales and marketing 209,160  165,250  410,820  322,768 
General and administrative 97,210  45,818  160,748  88,951 
Total operating expenses 416,909  293,894  790,184  568,328 
Operating loss (92,491) (42,421) (153,117) (79,701)
Other income (expense), net:
Interest expense (3,121) (14,591) (6,242) (29,006)
Interest and other income (expense), net 2,094  960  2,932  6,044 
Total other income (expense), net (1,027) (13,631) (3,310) (22,962)
Loss before provision for income taxes (93,518) (56,052) (156,427) (102,663)
Provision for income taxes 1,564  2,355  5,601  4,709 
Net loss $ (95,082) $ (58,407) $ (162,028) $ (107,372)
Net loss per share, basic and diluted $ (0.77) $ (0.49) $ (1.32) $ (0.91)
Weighted-average shares used to compute net loss per share, basic and diluted 122,841  119,050  122,404  118,484 
(1) Includes share-based compensation expense as follows:
 
  Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
Cost of revenue $ 6,982  $ 5,218  $ 13,159  $ 9,704 
Research and development 20,482  17,024  39,769  32,697 
Sales and marketing 31,120  24,501  57,920  47,733 
General and administrative 14,775  9,951  26,449  18,934 
 

See Notes to Condensed Consolidated Financial Statements.

6

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
  Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
Net loss $ (95,082) $ (58,407) $ (162,028) $ (107,372)
Other comprehensive loss:        
Net unrealized loss on available-for-sale investments (5,140) (826) (17,045) (2,801)
Net unrealized (loss) gain on derivative instruments (3,499) (61) 3,828  (5,618)
Other comprehensive loss (8,639) (887) (13,217) (8,419)
Comprehensive loss $ (103,721) $ (59,294) $ (175,245) $ (115,791)

See Notes to Condensed Consolidated Financial Statements.

7

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
  Three Months Ended June 30, 2022 Three Months Ended June 30, 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 Loss
Accumulated Deficit Total
Stockholders’
Equity
Shares Amount Shares Amount
Balances at beginning 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 
Issuance of common stock upon exercise of stock options 43  1,415  —  —  1,416  400  11,200  —  —  11,204 
Issuance of common stock for settlement of RSUs and PRSUs 522  (2,267) —  —  (2,261) 651  (3,510) —  —  (3,504)
Issuance of common stock in connection with employee stock purchase plan 344  29,834  —  —  29,837  380  27,651  —  —  27,655 
Share-based compensation —  —  74,451  —  —  74,451  —  —  57,762  —  —  57,762 
Other comprehensive loss —  —  —  (8,639) —  (8,639) —  —  —  (887) —  (887)
Net loss —  —  —  —  (95,082) (95,082) —  —  —  —  (58,407) (58,407)
Other —  —  —  —  —  —  —  —  —  —  61  61 
Balances at end of period 123,278  $ 1,232  $ 1,568,922  $ (22,176) $ (1,221,157) $ 326,821  119,789  $ 1,197  $ 1,492,117  $ (5,216) $ (1,023,971) $ 464,127 



Six Months Ended June 30, 2022 Six Months Ended June 30, 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 378  12,228  —  —  12,232  608  15,129  —  —  15,135 
Issuance of common stock for settlement of RSUs and PRSUs 958  10  (3,966) —  —  (3,956) 1,312  13  (6,316) —  —  (6,303)
Issuance of common stock in connection with employee stock purchase plan 344  29,834  —  —  29,837  380  27,651  —  —  27,655 
Share-based compensation —  —  139,359  —  —  139,359  —  —  111,316  —  —  111,316 
Other comprehensive loss —  —  —  (13,217) —  (13,217) —  —  —  (8,419) —  (8,419)
Net loss —  —  —  —  (162,028) (162,028) —  —  —  —  (107,372) (107,372)
Other —  —  —  (48) —  (48) —  —  —  —  284  284 
Balances at end of period 123,278  $ 1,232  $ 1,568,922  $ (22,176) $ (1,221,157) $ 326,821  119,789  $ 1,197  $ 1,492,117  $ (5,216) $ (1,023,971) $ 464,127 
See Notes to Condensed Consolidated Financial Statements.
8

ZENDESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
  Six Months Ended June 30,
2022 2021
Cash flows from operating activities    
Net loss $ (162,028) $ (107,372)
Adjustments to reconcile net loss to net cash provided by operating activities    
Depreciation and amortization 19,657  18,623 
Share-based compensation 137,297  109,068 
Amortization of deferred costs 42,044  30,942 
Amortization of debt discount and issuance costs 2,446  25,219 
Real estate impairments 24,908  — 
Allowance for credit losses on accounts receivable 3,977  4,495 
Other, net 4,565  123 
Changes in operating assets and liabilities:
Accounts receivable 8,680  (11,498)
Prepaid expenses and other current assets (8,998) (1,739)
Deferred costs (56,963) (53,251)
Lease right-of-use assets 8,588  8,818 
Other assets and liabilities (979) (1,850)
Accounts payable 22,156  5,377 
Accrued liabilities 1,327  (2,561)
Accrued compensation and related benefits (28,905) (5,961)
Deferred revenue 52,183  59,139 
Lease liabilities (9,718) (17,099)
Net cash provided by operating activities 60,237  60,473 
Cash flows from investing activities    
Purchases of property and equipment (12,850) (5,957)
Internal-use software development costs (5,896) (7,538)
Purchases of marketable securities (364,788) (504,850)
Proceeds from maturities of marketable securities 265,659  380,608 
Proceeds from sales of marketable securities 114,610  57,061 
Purchases of strategic investments (1,000) — 
Net cash used in investing activities (4,265) (80,676)
Cash flows from financing activities    
Proceeds from exercises of employee stock options 12,231  15,135 
Proceeds from employee stock purchase plan 28,035  26,778 
Taxes paid related to net share settlement of share-based awards (3,957) (6,302)
Net cash provided by financing activities 36,309  35,611 
Effect of exchange rate changes on cash, cash equivalents and restricted cash 63  (19)
Net increase in cash, cash equivalents and restricted cash 92,344  15,389 
Cash, cash equivalents and restricted cash at beginning of period 477,350  407,859 
Cash, cash equivalents and restricted cash at end of period $ 569,694  $ 423,248 
Reconciliation of cash, cash equivalents and restricted cash to condensed consolidated balance sheets
Cash and cash equivalents $ 567,980  $ 422,810 
Restricted cash included in prepaid expenses and other current assets 1,714  433 
Restricted cash included in other assets — 
Total cash, cash equivalents and restricted cash $ 569,694  $ 423,248 
Supplemental cash flow data    
Cash paid for interest $ 3,780  $ 3,780 
Cash paid for taxes $ 6,125  $ 5,496 
Non-cash investing and financing activities    
Balance of property and equipment in accounts payable and accrued expenses $ 3,098  $ 1,315 
Share-based compensation capitalized in internal-use software development costs $ 815  $ 916 
Share-based compensation capitalized in deferred costs $ 1,247  $ 1,329 
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.
Founded in 2007, Zendesk is a service-first customer relationship management company, built to give organizations of all sizes, in every industry, the ability to deliver a transparent, responsive and empowering customer experience. With solutions designed to address an increasingly broad set of customer interactions, Zendesk allows organizations to deliver omnichannel customer service and customize and build apps across the customer journey. Zendesk has evolved its 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” refer to Zendesk, Inc. and its subsidiaries on a consolidated basis.
Proposed Merger
On June 24, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by an investor group led by Permira Advisers LLC (“Permira”) and Hellman & Friedman Advisors LLC (“H&F”) in an all-cash transaction valued at approximately $10.2 billion. Under the terms of the Merger Agreement, our stockholders will receive $77.50 per share. The transaction is expected to close in the fourth quarter of 2022, and is subject to customary closing conditions, including approval by our stockholders. Upon closing of the transaction, Zendesk will operate as a privately-held company.

See Note 15 of the Notes to our Condensed Consolidated Financial Statements for further details.
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 Note 10 of the Notes to our Condensed Consolidated Financial Statements 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:
10

the estimate of variable consideration related to revenue recognition;
the estimate of credit losses for accounts receivable and marketable securities;
the fair value and useful lives of acquired intangible assets;
the capitalization and useful life of capitalized costs to obtain customer contracts;
the valuation of strategic investments;
the fair value and useful lives of property and equipment;
the capitalization and useful lives of internal-use software;
the lease term and incremental borrowing rate for lease liabilities;
the fair value of our convertible senior notes;
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 June 30, 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 and six months ended June 30, 2022 and 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 Accounting Standards Codification, or 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 (as each is defined below) 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 (as defined below), 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, ASU 2020-06 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 and six months ended June 30, 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 periods as a result of adopting ASU 2020-06.

Note 2. Business Combinations
Cleverly, Lda.
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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.
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
June 30, 2022
Level 1 Level 2 Total
Description      
U.S. Treasury securities $ —  $ 473,780  $ 473,780 
Corporate bonds —  407,259  407,259 
Money market funds 296,670  —  296,670 
Asset-backed securities —  92,019  92,019 
Agency securities —  52,012  52,012 
Commercial paper —  49,286  49,286 
Certificates of deposit and time deposits —  10,841  10,841 
Total $ 296,670  $ 1,085,197  $ 1,381,867 
Included in cash and cash equivalents     $ 317,655 
Included in marketable securities     $ 1,064,212 
  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 June 30, 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 and six months ended June 30, 2022 or 2021.
As of June 30, 2022, gross unrealized gains and gross unrealized losses for marketable securities were not material and $19 million, respectively. The aggregate amortized cost basis for cash equivalents and marketable securities was $1,401 million and excludes accrued interest of $3 million. The aggregate fair value of securities with unrealized losses was $989 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.
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Unrealized losses for securities that have been in an unrealized loss position for more than 12 months as of June 30, 2022 and December 31, 2021 were $1 million and not material, respectively. 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):
 
  June 30,
2022
December 31,
2021
Due in one year or less $ 590,263  $ 539,780 
Due after one year and within five years 473,949  559,652 
Total $ 1,064,212  $ 1,099,432 
 
As of June 30, 2022 and December 31, 2021, the balance of strategic investments without readily determinable fair values was $17 million and $16 million, respectively. There have been no adjustments to the carrying values of strategic investments resulting from impairments or observable price changes.
For our other financial instruments, including accounts receivable, accounts payable, and other current liabilities, the carrying amounts approximate their fair values due to the relatively short maturity of these balances.
Derivative Instruments and Hedging
Our foreign currency exposures typically arise from expenditures associated with foreign operations and sales in foreign currencies of our products. To mitigate the effect of foreign currency fluctuations on our future cash flows and earnings, we enter into foreign currency forward contracts with certain financial institutions and designate those contracts as cash flow hedges. Our foreign currency forward contracts generally have maturities of 15 months or less.
We include time value related to our cash flow hedges for effectiveness testing purposes and the entire change in the unrecognized value of our hedge contracts is recorded in accumulated other comprehensive income (loss), or AOCI. As of June 30, 2022, the balance of AOCI included an unrecognized net gain of $1 million related to the changes in the fair value of foreign currency forward contracts designated as cash flow hedges. We expect to reclassify a net loss of $1 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):
 
  June 30, 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 $ 13,110  Accrued liabilities $ 15,944 
Total $ 13,110    $ 15,944 
  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 $537 million and $488 million as of June 30, 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
13

financial statements. We do not enter into any derivative contracts for trading or speculative purposes. All derivatives have been designated as hedging instruments.
The following table presents information about our foreign currency forward contracts on our consolidated statements of operations for the three and six months ended June 30, 2022 and 2021 (in thousands):
 
Gain (Loss) Reclassified from AOCI into Earnings
Three Months Ended June 30, Six Months Ended June 30,
Classification 2022 2021 2022 2021
Revenue $ 2,392  $ (1,373) $ 3,186  $ (2,081)
Cost of revenue (901) 400  (1,406) 890 
Research and development (1,272) 488  (1,946) 1,003 
Sales and marketing (2,384) 1,044  (3,620) 2,073 
General and administrative (742) 290  (1,135) 707 
 Total $ (2,907) $ 849  $ (4,921) $ 2,592 
The loss recognized in AOCI related to foreign currency forward contracts was $6 million for the three months ended June 30, 2022. The gain recognized in AOCI related to foreign currency forward contracts was $1 million for the three months ended June 30, 2021. The loss recognized in AOCI related to foreign currency forward contracts was $1 million and $3 million for the six months ended June 30, 2022 and 2021, respectively.

The cash flow effects related to foreign currency forward contracts are included within operating activities on our consolidated statements of cash flows.
Convertible Senior Notes
As of June 30, 2022, the fair values of our 0.25% convertible senior notes due 2023 and our 0.625% convertible senior notes due 2025 were $177 million and $973 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 $74.07 on the last trading day of the quarter, the if-converted value of the 2025 convertible senior notes did not exceed the principal amount of $1,150 million, and the if-converted value of the 2023 convertible senior notes exceeded the remaining principal amount by $26 million as of June 30, 2022.

Note 4. Costs to Obtain Customer Contracts
The balance of deferred costs to obtain customer contracts was $161 million and $145 million as of June 30, 2022 and December 31, 2021, respectively. Amortization expense for deferred costs was $22 million and $16 million for the three months ended June 30, 2022 and 2021, respectively, and $42 million and $31 million for the six months ended June 30, 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): 
  June 30,
2022
December 31,
2021
Leasehold improvements $ 61,219  $ 79,661 
Capitalized internal-use software 61,013  58,135 
Computer equipment and licensed software and patents 42,447  41,512 
Furniture and fixtures 11,595  14,627 
Construction in progress 19,458  20,927 
Total 195,732  214,862 
Less: accumulated depreciation and amortization (104,777) (117,047)
Property and equipment, net $ 90,955  $ 97,815 
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Depreciation expense was $5 million and $6 million for the three months ended June 30, 2022 and 2021, respectively, and $11 million and $12 million for the six months ended June 30, 2022 and 2021, respectively.
Amortization expense of capitalized internal-use software was $2 million for each of the three months ended June 30, 2022 and 2021 and $4 million for each of the six months ended June 30, 2022 and 2021. The carrying values of capitalized internal-use software as of June 30, 2022 and December 31, 2021 were $42 million and $40 million, respectively, including $19 million and $15 million in construction in progress, respectively. These balances included $9 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):
June 30, 2022 December 31, 2021
Assets
Lease right-of-use assets $ 48,259  $ 69,936 
Liabilities
Lease liabilities 21,977  21,253 
Lease liabilities, noncurrent 51,727  63,212 

As of June 30, 2022, the weighted average remaining lease term was 5.5 years and the weighted average discount rate was 4.9%.
The following table presents information about leases on our consolidated statements of operations (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Operating lease expense $ 4,842  $ 5,506  $ 10,423  $ 11,128 
Short-term lease expense 83  128  203  256 
Variable lease expense 1,079  1,244  2,511  2,462 
Sublease income (634) (434) (995) (874)

The following table presents supplemental cash flow information about our leases (in thousands):
Six Months Ended June 30,
2022 2021
Cash paid for amounts included in the measurement of lease liabilities $ 11,240  $ 13,903 
Operating lease assets obtained in exchange for new lease liabilities 2,754  1,397 
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 recorded an aggregate impairment charge of $25 million, which is the amount that the carrying value of the asset groups exceeded their estimated fair values. The asset groups primarily include lease right-of-use assets and leasehold improvements. The estimated fair values were 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 impairment charge was recorded in general and administrative expenses on our consolidated statement of operations. Further, in July 2022, our board of directors approved a plan to cease use of additional leased premises for which we expect to record an impairment charge in the third quarter of 2022 of approximately $3 million.

Note 7. Goodwill and Acquired Intangible Assets
Acquired intangible assets subject to amortization consist of the following (in thousands):
 
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  As of June 30, 2022
Cost Accumulated
Amortization
Net Weighted Average Remaining Useful Life
      (In years)
Developed technology $ 28,000  $ (16,089) $ 11,911  2.5
Customer relationships 14,300  (9,517) 4,783  3.0
  $ 42,300  $ (25,606) $ 16,694   
 
  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 June 30, 2022 and 2021, and $4 million for each of the six months ended June 30, 2022 and 2021.
Estimated future amortization expense as of June 30, 2022 is as follows (in thousands):
Remainder of 2022 $ 3,658 
2023 6,579 
2024 4,837 
2025 972 
2026 488 
Thereafter 160 
$ 16,694 
 
As of June 30, 2022 and December 31, 2021, the carrying amount of goodwill was $177 million. There was no material change to the carrying amount of goodwill for the six months ended June 30, 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
16

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 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 June 30, 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 June 30, 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%.

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The net carrying amount of the liability component of the 2025 Notes is as follows (in thousands):
June 30,
2022
December 31,
2021
Principal $ 1,150,000  $ 1,150,000 
Unamortized debt discount —  (157,983)
Unamortized issuance costs (12,576) (12,667)
Net carrying amount $ 1,137,424  $ 979,350 


The net carrying amount of the equity component of the 2025 Notes is as follows (in thousands):
June 30,
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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Contractual interest expense $ 1,797  $ 1,797  $ 3,594  $ 3,594 
Amortization of debt discount —  10,155  —  20,184 
Amortization of issuance costs 1,046  715  2,089  1,412 
Total interest expense $ 2,843  $ 12,667  $ 5,683  $ 25,190 

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
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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, or the “2023 Notes Partial Repurchase.” Pursuant to ASC 470-20, Debt with Conversion and Other Options ("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 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 June 30, 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 June 30, 2022, the conditions allowing holders of the 2023 Notes to convert were not met. 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%. The 2023 Notes are within one year of maturity and are therefore classified as a current liability as of June 30, 2022.

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.

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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%.

The net carrying amount of the liability component of the 2023 Notes is as follows (in thousands):
June 30,
2022
December 31,
2021
Principal $ 149,194  $ 149,194 
Unamortized debt discount —  (8,641)
Unamortized issuance costs (507) (815)
Net carrying amount $ 148,687  $ 139,738 

The net carrying amount of the equity component of the 2023 Notes is as follows (in thousands):
June 30,
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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Contractual interest expense $ 93  $ 93  $ 186  $ 186 
Amortization of debt discount —  1,677  —  3,333 
Amortization of issuance costs 179  147  357  290 
Total interest expense $ 272  $ 1,917  $ 543  $ 3,809 


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 June 30, 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
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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.

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 (the “Exchange Act”), 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 United States 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. In May 2022, the deadline to file a writ of certiorari to the United States Supreme Court lapsed.

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 Exchange Act 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, which was granted by the court on May 20, 2022.

On May 27, 2022, Zendesk was named as a defendant in an employment-related putative class action captioned Roe, et al. v. Zendesk, No. 22-599855 (S.F. Super. Ct.). The complaint, filed by one current employee and three former employees, alleges violations of the California Equal Pay Act and Unfair Competition Law. Plaintiffs seek to represent a class consisting of all women who worked for Zendesk in California at any time during the four years preceding the filing of the complaint. Zendesk has a deadline of August 1, 2022, to respond. No damages were specified, and no settlement demands or offers have been made.

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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.
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 June 30, 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 123.3 million and 121.6 million shares were issued and outstanding as of June 30, 2022 and December 31, 2021, respectively.
Preferred Stock
As of June 30, 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 (the “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 and six months ended June 30, 2022, 0.3 million shares of common stock were purchased under the ESPP. During the three and six months ended June 30, 2021, 0.4 million shares of common stock were purchased under the ESPP. Pursuant to the terms of the ESPP, the number of shares reserved under the ESPP increased by 1.2 million shares on January 1, 2022. As of June 30, 2022, 6.2 million shares of common stock were available for issuance under the ESPP.
Stock Option and Grant Plans
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Our board of directors adopted the 2009 Stock Option and Grant Plan (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 (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 June 30, 2022, we had 20.9 million shares of common stock available for future grants under the 2014 Plan.
A summary of restricted stock unit, or “RSU”, activity for the six months ended June 30, 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 3,634  106.86 
Vested (958) 103.15 
Forfeited or canceled (619) 112.60 
Unvested — June 30, 2022 6,459  $ 111.71 

The total fair value of RSUs vested during the six months ended June 30, 2022 and 2021 was $97 million and $183 million, respectively. The fair value of RSUs vested represents market value on the vesting date.
A summary of stock option activity for the six months ended June 30, 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 (378) 32.37 
Forfeited or canceled (71) 119.08 
Outstanding — June 30, 2022 3,500  $ 54.63  5.0 $ 119,138 
 
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 six months ended June 30, 2022 and 2021 was $30 million and $72 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 six months ended June 30, 2022 and 2021 was $43.72 and $52.60, respectively.
As of June 30, 2022, we had a total of $728 million in future expense related to our stock options, RSUs, and ESPP to be recognized over a weighted average period of 2.9 years.
Performance Restricted Stock Units
In the first quarter of 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
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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.
The compensation cost is recognized under the accelerated attribution method. During the three and six months ended June 30, 2022, we recorded $2 million and $3 million of share-based compensation expense related to the PRSUs, respectively. The total future expense related to the PRSUs that are expected to vest as of June 30, 2022 is $11 million.

Note 11. Deferred Revenue and Performance Obligations
The changes in the balances of deferred revenue are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Balance, beginning of period $ 526,520  $ 396,522  $ 517,210  $ 383,358 
Billings 450,887  364,157  848,524  675,369 
Subscription and services revenue (382,250) (302,014) (746,626) (584,853)
Other revenue* (24,958) (16,202) (48,909) (31,411)
Balance, end of period $ 570,199  $ 442,463  $ 570,199  $ 442,463 
*Other revenue primarily includes implementation and training services, usage-based revenue, and amounts from contract assets.

For the three months ended June 30, 2022 and June 30, 2021, the majority of revenue recognized was from the deferred revenue balances at the beginning of each period. For the six months ended June 30, 2022 and 2021, approximately half 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 June 30, 2022 and December 31, 2021, the balance of contract assets was $3 million and $4 million, respectively.

The aggregate balance of remaining performance obligations as of June 30, 2022 was $1,406 million. We expect to recognize $951 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):
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  Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
Net loss $ (95,082) $ (58,407) $ (162,028) $ (107,372)
Weighted-average shares used to compute basic and diluted net loss per share 122,841  119,050  122,404  118,484 
Net loss per share, basic and diluted $ (0.77) $ (0.49) $ (1.32) $ (0.91)
 
The anti-dilutive securities excluded from the shares used to calculate diluted net loss per share are as follows (in thousands):
  As of June 30,
2022 2021
Shares subject to outstanding common stock options and employee stock purchase plan 3,623  4,013 
RSUs and PRSUs 6,589  4,801 
Shares related to convertible senior notes 12,939  3,739 
  23,151  12,553 

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 and six months ended June 30, 2022 because the effect would have been anti-dilutive.

Note 13. Income Taxes
We reported income tax expense of $2 million for each of the three months ended June 30, 2022 and 2021. We reported income tax expense of $6 million and $5 million for the six months ended June 30, 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 United States (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):
 
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  Three Months Ended
June 30,
Six Months Ended
June 30,
2022 2021 2022 2021
United States $ 210,310  $ 162,388  $ 407,448  $ 315,212 
EMEA 116,212  93,017  228,335  179,434 
APAC 40,662  31,840  80,550  62,970 
Other 40,024  30,971  79,202  58,648 
Total $ 407,208  $ 318,216  $ 795,535  $ 616,264 
Long-Lived Assets
The following table presents our long-lived assets by geographic area (in thousands):
 
As of
June 30, 2022
As of
December 31, 2021
United States $ 33,792  $ 59,776 
EMEA:
Republic of Ireland 28,647  34,728 
Other EMEA 12,265  8,261 
Total EMEA 40,912  42,989 
APAC:
Singapore 9,673  13,145 
Other APAC 4,858  5,948 
Total APAC 14,531  19,093 
Other 7,500  5,883 
Total $ 96,735  $ 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. Agreement and Plan of Merger
On June 24, 2022, we entered into the Merger Agreement with Zoro BidCo, Inc. (“Parent”) and Zoro Merger Sub, Inc. (“Merger Sub”), affiliates of funds advised by private equity firms H&F and Permira.

The Merger Agreement provides that, among other things and on the terms and subject to the conditions of the Merger Agreement, (a) Merger Sub will merge with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent, and (b) at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of common stock of the Company, par value $0.01 per share (other than certain shares as specified in the Merger Agreement) and outstanding equity awards will be converted into the right to receive $77.50 in cash, without interest, subject to any required tax withholding as provided in the Merger Agreement (and, for stock options, less the per share exercise price and, for unvested equity awards, subject to vesting terms and conditions).

The transaction, which has been unanimously approved by Zendesk’s Board of Directors, is expected to close in the fourth quarter of this year. If the Merger is consummated, the Company common stock will be delisted from the New York Stock Exchange and deregistered under the Securities Exchange Act of 1934 at or after the Effective Time.

The completion of the Merger is subject to the satisfaction or waiver of certain customary mutual closing conditions, including the affirmative vote of holders of a majority of the outstanding shares of Company's common stock having approved adoption of the Merger Agreement (the “Company Stockholder Approval”), the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the receipt of certain other regulatory approvals, and the absence of any law or order by a court or other governmental entity of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the Merger.

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The Merger Agreement contains termination rights for each of the Company and Parent. The Company is required to pay Parent a termination fee of $254 million in cash upon termination of the Merger Agreement under specified
circumstances, including, among others, the termination by Parent in the event of an adverse recommendation change by the Board of Directors of the Company or the termination by the Company to enter into an agreement in connection with a Superior Proposal (as defined in the Merger Agreement).

The Merger Agreement also provides that a reverse termination fee of $610 million will be payable by Parent to the Company under specified circumstances, including, among others, if (a) Parent fails to consummate the Merger following satisfaction or waiver of certain closing conditions and the Company’s irrevocable confirmation that it is ready to consummate the closing or (b) Parent otherwise breaches its obligations under the Merger Agreement such that there is a failure of certain conditions to the Merger that cannot be cured by March 24, 2023. The Merger Agreement also provides that, in certain circumstances, either party may seek to compel the other party to specifically perform its obligations under the Merger Agreement.

The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by the full text of the Merger Agreement.
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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 service-first customer relationship management company, built to give organizations of all sizes, in every industry, the ability to deliver a transparent, responsive and empowering customer experience. With solutions designed to address an increasingly broad set of customer interactions, Zendesk allows organizations to deliver omnichannel customer service and customize and build apps across the customer journey. Zendesk has evolved its offerings over time to product and platform solutions that work together to help organizations improve the broader customer journey, manage 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 is the Zendesk Suite. It provides companies of all sizes everything they need to deliver exceptional, personalized customer experiences at scale. The Suite includes our core support tools ranging from omni-channel messaging to ticket management. 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.
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 June 30, 2022 and 2021, our revenue was $407 million and $318 million, respectively, representing a 28% growth rate. For the six months ended June 30, 2022 and 2021, our revenue was $796 million and $616 million, respectively, representing a 29% growth rate. For the three months ended June 30, 2022 and 2021, we derived $197 million, or 48%, and $156 million, or 49%, respectively, of our revenue from customers located outside of the United States. For the six months ended June 30, 2022 and 2021, we derived $388 million, or 49%, and $301 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 June 30, 2022 and 2021, we generated net losses of $95 million and $58 million, respectively. For the six months ended June 30, 2022 and 2021, we generated net losses of $162 million and $107 million, respectively.
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We expect our financial results in future periods to be negatively impacted by ongoing macroeconomic factors including a substantial risk of global recession, persistent high inflation, changing consumer behavior and labor market dynamics that have and may continue to result in substantial employee attrition. In the quarter ended June 30, 2022, we experienced a decline in gross bookings of 16% and a decline in net bookings of 42% from the quarter ended June 30, 2021. Due to these results and ongoing changing business conditions, we expect that revenue for the year ending December 31, 2022 will grow at a rate less than previously anticipated and that growth rates in subsequent periods may also be impacted.
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 and expenditures relating to hosting capabilities, 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.

Proposed Merger
On June 24, 2022, we entered into the Merger Agreement to be acquired by an investor group in an all-cash transaction valued at approximately $10.2 billion. Under the terms of this agreement, our stockholders will receive $77.50 per share. The proposed transaction is expected to close in the fourth quarter of 2022 and is subject to customary closing conditions, including approval by our stockholders.

For a summary of the transaction, see Note 15 of the Notes to our Condensed Consolidated Financial Statements. The foregoing summary of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by the full text of the Merger Agreement, which is filed as Exhibit 2.1 of the Company's Current Report on Form 8-K filed on June 24, 2022, Film No. 221040943.

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.
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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 June 30, 2022, we had 109,600 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 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 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 115% as of June 30, 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
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We derive substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on the Zendesk Suite, Support, and, to a lesser extent, Chat, Talk, Guide, Sell, Explore, Gather and Sunshine and includes related support services. 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 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 partners, 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 partners, 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 and related personnel, investments in our product support and professional services teams, 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 as a percentage of our revenue in the long-term,
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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.
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 in the long-term. 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):
 
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  Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 407,208  $ 318,216  $ 795,535  $ 616,264 
Cost of revenue (1)
82,790  66,743  158,468  127,637 
Gross profit 324,418  251,473  637,067  488,627 
Operating expenses (1):
   
Research and development 110,539  82,826  218,616  156,609 
Sales and marketing 209,160  165,250  410,820  322,768 
General and administrative 97,210  45,818  160,748  88,951 
Total operating expenses 416,909  293,894  790,184  568,328 
Operating loss (92,491) (42,421) (153,117) (79,701)
Other income (expense), net:
Interest expense (3,121) (14,591) (6,242) (29,006)
Interest and other income (expense), net 2,094  960  2,932  6,044 
Total other income (expense), net (1,027) (13,631) (3,310) (22,962)
Loss before provision for income taxes (93,518) (56,052) (156,427) (102,663)
Provision for income taxes 1,564  2,355  5,601  4,709 
Net loss $ (95,082) $ (58,407) $ (162,028) $ (107,372)

(1) Includes share-based compensation expense as follows (in thousands):
 
  Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Cost of revenue $ 6,982  $ 5,218  $ 13,159  $ 9,704 
Research and development 20,482  17,024  39,769  32,697 
Sales and marketing 31,120  24,501  57,920  47,733 
General and administrative 14,775  9,951  26,449  18,934 
 
  Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue 100.0  % 100.0  % 100.0  % 100.0  %
Cost of revenue (1)
20.3  21.0  19.9  20.7 
Gross profit 79.7  79.0  80.1  79.3 
Operating expenses (1):
   
Research and development 27.1  26.0  27.5  25.4 
Sales and marketing 51.4  51.9  51.6  52.4 
General and administrative 23.9  14.4  20.2  14.4 
Total operating expenses 102.4  92.3  99.3  92.2 
Operating loss (22.7) (13.3) (19.2) (12.9)
Other income (expense), net:
Interest expense (0.8) (4.6) (0.8) (4.7)
Interest and other income (expense), net 0.5  0.3  0.4  1.0 
Total other income (expense), net (0.3) (4.3) (0.4) (3.7)
Loss before provision for income taxes (23.0) (17.6) (19.6) (16.6)
Provision for income taxes 0.4  0.7  0.7  0.8 
Net loss (23.4) % (18.3) % (20.3) % (17.4) %

(1) Includes share-based compensation expense as follows:
 
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  Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Cost of revenue 1.7  % 1.6  % 1.7  % 1.6  %
Research and development 5.0  5.3  5.0  5.3 
Sales and marketing 7.6  7.7  7.3  7.7 
General and administrative 3.6  3.1  3.3  3.1 
Revenue
 
  Three Months Ended June 30,   Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Revenue $ 407,208  $ 318,216  28  % $ 795,535  $ 616,264  29  %
Revenue increased $89 million, or 28%, in the three months ended June 30, 2022 compared to the same period in 2021. The total increase in revenue was primarily attributable to expansions from existing accounts as of June 30, 2021 and the remainder was attributable to revenue from new accounts acquired thereafter. Revenue increased $179 million, or 29%, in the six months ended June 30, 2022 compared to the same period in 2021. The total increase in revenue was primarily attributable to expansions from existing accounts and the remainder was attributable to revenue from new accounts. Revenue from new accounts on a year-to-date basis reflects the revenue recognized from new customers acquired in the 12 months prior for each discrete quarter within the year-to-date period.
Cost of Revenue and Gross Margin
 
  Three Months Ended June 30,   Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Cost of revenue $ 82,790  $ 66,743  24  % $ 158,468  $ 127,637  24  %
Gross margin 79.7  % 79.0  %   80.1  % 79.3  %
Cost of revenue increased $16 million, or 24%, and $31 million, or 24%, in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The overall increase was primarily due to higher employee compensation costs of $9 million and $19 million, respectively, driven by headcount growth, and increased hosting and related costs of $5 million and $6 million, respectively, driven by increased customer usage. Additionally, in the three and six months ended June 30, 2022, allocated shared costs increased by $1 million and $2 million, respectively.
Our gross margin increased by 0.7 and 0.8 percentage points in the three and six months ended June 30, 2022, respectively, compared to the same periods 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 June 30,   Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Research and development $ 110,539  $ 82,826  33  % $ 218,616  $ 156,609  40  %
Research and development expenses increased $28 million, or 33%, and $62 million, or 40%, in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021. The overall increase was primarily due to increased employee compensation-related costs of $22 million and $48 million, respectively, primarily due to headcount growth. The increase was also primarily due to higher allocated shared costs of $2 million and $6 million, respectively.
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Sales and Marketing Expenses
 
  Three Months Ended June 30,   Six Months Ended June 30,
2022 2021 % Change 2022 2021 % Change
(In thousands, except percentages)
Sales and marketing $ 209,160  $ 165,250  27  % $ 410,820  $ 322,768  27  %
Sales and marketing expenses increased $44 million, or 27%, and $88 million, or 27%, respectively, in the three and six months ended June 30, 2022 compared to the same periods in 2021. The overall increase was primarily due to increased employee compensation-related costs, including amortization of deferred commissions, of $42 million and $77 million, respectively, primarily due to headcount growth. The increase was also primarily due to higher allocated shared costs of $4 million and $9 million, respectively. The overall increase was partially offset by lower marketing program costs of $8 million in each of the three and six months ended June 30, 2022, primarily driven by decreased volume of marketing and advertising activities.