UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 20192021
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.) | ||||||||||
| San Francisco | California | 94103 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: (415) (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 | ||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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. (Check one):
| 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 ActAct. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock held by non-affiliates of the Registrant, computed by reference to the price at which the common stock was last sold on June 28, 2019,30, 2021, the last business day of the Registrant’s most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $7.3 billion.$12.4 billion. Shares of common stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates of the Registrant for any other purpose.
The number of shares of the Registrant’s Common Stock outstanding as of January 31, 2020February 14, 2022 was 113,351,292.121,868,122.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 20202022 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year ended December 31, 2019.2021. Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part of this Annual Report on Form 10-K.
Table of Contents
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “might,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Forward-looking statements contained in this Annual Report on Form 10-K include, but are not limited to, statements about:
You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Annual Report on Form 10-K primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors described in the section titled “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Annual Report on Form 10-K. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Annual Report on Form 10-K to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
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PART I
Overview
Zendesk believes that every customer relationship is built upon one ongoing conversation between a customer and the organization. As champions of customer service, we are a service-first customer relationship management (“CRM”) company, with support, sales, and other customer engagement solutions designed to improve customer relationships.
Founded to democratize customer service software by making it easy to try, buy, and use, our solutions are built on an open and flexible platform that is both quick to giveset up and customizable. With roots in service and a deep understanding of the customer mindset, Zendesk gives companies the solutions they need to create easy, cohesive, and frictionless experiences. Through our solutions, organizations of all sizes and across many industries can set their teams up for success and keep their businesses in every industry, the abilitysync, while making it easy for customers to deliver a transparent, responsive, and empowering customer experience. With solutions designed to address an increasingly broader set of customer interactions, Zendesk allows organizations to deliver omnichannel customer service, customize and build apps across the customer journey, and extend beyond support into sales.do business with them. The result: better, more conversational experiences for everyone.
We are a software development company and were founded in Copenhagen, Denmark in 2007. We2007, and reincorporated in Delaware in 2009. Our principal executive offices are located at 1019989 Market Street, San Francisco, California 94103, and our telephone number is (415) 418-7506. Our website address is www.zendesk.com. Information contained on or that can be accessed through our website does not constitute part of this Annual Report on Form 10-K, and inclusions of our website address in this Annual Report on Form 10-K are inactive textual references only. Unless expressly indicated or the context requires otherwise, the terms “Zendesk,” “company,” “we,” “us,” and “our” in this Annual Report on Form 10-K refer to Zendesk, Inc., a Delaware corporation, and its consolidated subsidiaries.
The Zendesk Approach
We build software that helps organizations deliverbuild better customer relationships through conversational experiences, and we believe in an approach to both productthe design and delivery of products and solutions that isare unique and innovative. As software becomes more centralinnovative, while also being fast to the customer experience, we strive to design solutions that areimplement and easy to use, yet robust and sophisticated for all types and sizes of organizations and across all industries. Our focus on these core principles has led us to design customer experience solutions that share the following characteristics:
•A more conversational experience: Through our product and platform solutions, we enable organizations to have seamless conversations with their customers, allowing organizations of all sizes and industries to transform how they engage with customers regardless of how and when those customers want to communicate. As we expand the |
reach of our technology, we recognize the critical importance of having our solutions work cohesively together and we are continuing to invest in supporting our product solutions on a shared services platform.
•Easy to use and implement: We build our solutions first and foremost for the people that use them every day. We focus on making the user experience intuitive and product implementation fast while managing complex processes and interactions on the backend of our software. Because of our attention to ease of use, we believe organizations who use our solutions are more effective and efficient, and are able to engage with and deliver better experiences to their customers as a result.
•Open and flexible platform: We believe that the establishment of open and public cloud computing has fundamentally changed how organizations can and will build their customer experiences. Our flexible platform leverages public cloud technologies and open standards. Organizations are able to connect and integrate customer data to build customer-focused experiences, by providing relevant customer data in one modern, flexible, and developer-friendly environment. Our platform enables many audiences - from customer support agents, to developers, to sales representatives - to get a more complete picture of the customer so they can deliver personalized experiences and adapt to evolving customer expectations.
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•Expanding access to analytics and data science: We are committed to enabling and empowering organizations of all sizes to better understand their customers through analytics that unify data across our product and platform solutions and connect easily to outside data sources. We believe our investments in building machine learning and artificial intelligence into our solutions gives more organizations and users access to data science so they can be more efficient, informed, and proactive with their customers.
We have witnessed business software continue to undergo a sweeping shift toward consumerization over the past decade. Zendesk has embraced this shift with an approach to delivering customer experience solutions that is different from earlier generations of business software. Our goal is to remove barriers that make business software difficult to buy, deploy, and use. Our approach to software delivery focuses on the following key elements:
•Elastic and agile: Our product and platform solutions can easily grow and scale with our customers and be used in new departments and use cases without the expensive deployment projects required in the past. Zendesk product solutions are flexible by design and easy to configure and use. In addition to our product solutions, we enable our customers through our platform solution, which gives customers the freedom to build customer applications and experiences using open tools and cloud architecture, instead of proprietary tools and technology. •Try before you buy: We believe customers should be able to try our solutions and see how they work before they commit to a purchase. Free trials are core to the marketing of our solutions and we can deliver fast prototypes and proof of concepts for our most sophisticated prospective customers. We offer a wide range of trial experiences for our solutions, ranging from introductory offerings to experiences geared towards larger organizations, each with an ability to begin an implementation during the evaluation period. •Price transparency: We provide our customers a well-defined total cost of ownership across our solutions by providing transparent and predictable pricing. Our pricing is designed to make our software accessible to customers of all sizes by offering a variety of subscription packages that include features based on customer need. We offer subscriptions that may be purchased online and deployed without the need to engage a sales or enablement professional. |
Growth Strategy
Zendesk was founded with a mission to help organizations build better relationships with their customers. We have continued to pursue that mission by building and delivering our customer experience solutions, which include product solutions and a CRM platform, that help organizations be the company their customers want them to be. We believe our future growth will be a natural extension of our mission, and we are focused on the following key growth drivers:
•Making experiences simple for organizations and their customers: At our core, we believe that customer experiences should be simple and effortless. This belief has enabled us to build a compelling brand among both small to midsized organizations and larger organizations for which our ease of use, quick return on investment, and agility and flexibility are important differentiators. Our customer experience solutions provide simple and contextual interfaces across the customer journey and multiple communication channels for organizations interacting with their customers. Additionally, our product and platform solutions have been built on the premise that our solutions should be easy to discover, deploy, and purchase so that any organization, from startup to large organizations, can realize their value. •Expanding our market by maturing and investing in our customer experience solutions: From our roots in customer service software, we have evolved to helping organizations design, build, and manage their entire customer experience infrastructure and transform how they interact and proactively engage with their customers. Our product solutions have expanded to serve the entire customer journey. Our focus is to engage in customer-facing conversations for our customers and to expand our footprint in support, sales, and beyond. We will continue to mature our product and platform features and usability across communication channels, while also integrating and expanding our solutions across functions and use cases. |
Our objective is to enhance the customer experience by extending our solution and accelerating development through our CRMunified platform. With our platform solution, we provide organizations the ability to unify and use customer data to build a more complete picture of that customer and deliver them unique experiences. Developers gain the ability to build and deploy custom appsapplications and services faster because of the flexibility, scale, and capabilities of the public cloud. With the addition of our messaging platform to our CRM platform, organizations can build more unified conversational experiences by integrating social, web, and mobile messaging channels into their own apps and services. We will continue to expand the capabilities of our platform solution and its integration with our product solutions.
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Additionally, we will continue our investments in building automation, machine learning and artificial intelligence into our product and platform solutions, empowering organizations to harness the power of data science and be more efficient, informed, and proactive with their customers.
•Being strategic partners with our customers who are larger organizations: With our customer experience solutions, we are increasingly evolving from a software vendor to a trusted partner that is strategically engaging with our customers around their visions and digital transformations. We are helping organizations build or transform their organizations around their customer experience. We are scaling these capabilities by continuing to build and mature our expertise in sales, success, relationships, systems architecture, and integrations. Additionally, we are continuing to |
develop a partner ecosystem strategy to help us reach and serve more of our customers who are larger organizations and build a community of developer evangelists for our CRM platform.
•Intentionally differentiate for our customers: With approximately 111,100 logos as of December 31, 2021, our customers range from startups to traditional small and midsized organizations to large organizations. These customers have very different dynamics and needs. To better engage with our customers, we are differentiating our offerings and services. For large organizations, we want to be the strategic provider of modern customer experiences, built on and extended with our platform solution. To accomplish this, we aim to continue to develop and focus a coordinated team to collaborate product development, go-to-market initiatives, and customer success and support for our customers that are larger organizations. For our customers who are small and midsized organizations, we want to continue to be the easiest solution to implement, use, and scale. We will continue to enhance our self-service capabilities for our customers' standard needs and requests, while engaging with our customers on higher-value strategic initiatives. For further details as to how we calculate our number of logos, please see the discussion in the “Key Business Metrics” section included in Item 7 of Part II of this Annual Report on Form 10-K. |
Our principle of democratizing software has developed into an efficient business model represented by expansion within customer accountscustomers and organic growth through promotion by our customers. We will continue our focus on providing customer experience solutions that create simple and straightforward experiences for both our customers and the organizations they support.
With our customer experience solutions, Zendesk has served a global market and, for the year ended December 31, 2019,2021, we generated 48%49% of our revenue outside of the United States. We have customers in more than 160 countries and territories, and solutions available in more than 30 languages. We will continue to invest in expanding our global footprint, particularly in those markets where we have demonstrated significant customer traction with our democratized approach or which represent particularly strategic opportunities. We are also taking a more coordinated approach to our business outside the U.S. to further invest in our international business. We plan to continue to develop our leadership in sales and operations, standardize processes and metrics, and share best practices across regions.regions, and mature our partner ecosystem.
Zendesk Product Solutions
Zendesk’s customer experienceservice and sales solutions are built to help organizations address the rise in customer expectations and to craft their customer experiences into a competitive differentiator. Zendesk product solutions are developed to support a shared services infrastructure and common customer data platform. Zendesk’s solutions are developed using agile software techniques, and are designed to quickly incorporate and innovate on customer feedback obtained through extensive early access programs.from our customers. This approach allows us to share our newest technology with customers, and quickly adapt our solutions to address customer needs.
Zendesk offers product solutions that are used throughout the customer lifecycle by key customer facing teams, including support, sales, customer success, and more.
•Zendesk Support, our flagship product solution, is an easy-to-use system for tracking, prioritizing, and solving customer support tickets across multiple channels, bringing customer information and interactions into one place.
•Zendesk Chat is live chat and messaging software that provides a fast and responsive way to connect with customers on websites, on mobile devices, and through social messaging applications. •Zendesk Talk is cloud-based call center software for more personal and productive voice and short message service support conversations and enables organizations to provide voice support from the same platform they use to manage all other support channels. 6 •Zendesk Guide |
•Zendesk Gather is community forum software that allows customer end-users to connect and collaborate.
•Zendesk Explore provides analytics for organizations to measure and improve the entire customer experience, with instant access to the customer analytics that matter and the deeper understanding of our Support, Chat, Guide,customers and Talk solutions, offering organizations methodsbusiness that comes with it.
•Zendesk Sell is a sales CRM product solution to let customer conversations continueenhance productivity, processes, and pipeline visibility across channels, creating a better experience for both organizationscustomers’ organizations. Sell is easy to use and their customers. Additionally,designed to keep sales representatives selling. Zendesk provides unique priceSell eliminates the friction from deal updates so representatives and product tiering for our solutions so that we evolve with our customers as they grow from startupsmanagement are always able to large organizations.access, analyze, and collaborate on relevant deal data.
Zendesk’s platform solutions and developer tools allow organizations to extend the functionality of our customer experience solutions, integrate into internal and third-party systems, and customize the experience for their employees and customers. KeyThese include:
•Zendesk Sunshine, our open and flexible platform solution that allows organizations to address an increasingly broader set of customer experiences. Sunshine provides organizations with the ability to develop a more complete picture of their customer with flexible databases and the ability to model, store and manage customer profiles, events, objects and relationships. Organizations can connect and integrate this data across our product solutions with other business applications to build highly specialized workflow and unique customer experiences.
Zendesk Sunshine includes the following key features: Unified Profiles facilitate building customer profiles with attributes from third-party applications to obtain a more complete picture of customers; Custom Events capture customer interactions, such as shopping cart, web, or mobile activity, which in turn provides a dynamic view of the customer journey; and Custom Objects store and connect new data sources, such as products and order history, for greater context about customers.
•Sunshine Conversations is the platform solution our messaging capabilities are built on that allows businesses to extend Zendesk’s messaging capabilities for more sophisticated use cases and empowers organizations to proactively engage customers, introduce third-party bots for automation, and design bespoke messaging experiences that help customers transact directly within the conversation, such as browsing products, making reservations, and making payments.
•Zendesk Developer Tools, a combination of our application programming interfaces, or APIs, web widget, and mobile software development kits allow developers to embed Zendesk experiences natively on the web and within mobile applications.
•Zendesk APIs are extensible and built on open standards, allowing users to build custom integrations and interact with Zendesk data using over 1,000 different API endpoints.
•Zendesk Apps enable organizations to customize Zendesk product and platform solution interfaces and optimize workflow through powerful plug-ins. Our customers can build custom apps or select from over a thousand pre-built apps and integrations on the Zendesk Marketplace.
Zendesk Suite
In the first quarter of 2021, we released a new version of our omnichannel offering, which combines many of our existing solutions (which among other features include Support, Chat, Talk, Guide, Explore, and Sunshine) into a complete customer experience offering - Zendesk Suite. Zendesk Suite combines our customer experience solutions into easy to purchase plans, which grow as our customers’ needs grow.
With Zendesk Suite, our customers get the components include:they need to deliver exceptional customer experiences. First, we help our customers provide support where and how it is convenient for their customers, and we allow our customers to
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customize the experience to fit their businesses. Second, we help agents, administrators, and internal teams do their best work by giving them powerful tools to manage conversations, collaborate effectively, and create content for customers all within a unified workspace. Finally, we keep our customers’ businesses in sync during the customer experience process through a unified view of their customer, enhanced integration and extension capabilities, world-class customer experience analytics, and workflows that make it easy to automate and optimize the experience.
Zendesk Suite also features our unified messaging capabilities. Zendesk messaging delivers rich conversational experiences for businesses that are connected and engaging with customers across websites, mobile devices or social messaging applications. Zendesk messaging is easy to automate and can be customized within our open and flexible platform. |
Technology
We employ a modern technology architecture in which our solutions are built upon a set of core APIs that enable rapid innovation and deep integration. The technology infrastructure used for the Zendesk customer experience solutions are designed to provide a highly available and scalable cloud-based platform with industry-standard security measures.
Zendesk’s strategy is to leverage the open and public cloud both in hosting our applications and building Sunshine as a developmentproviding platform tools and services for developers, for both extensions of Zendesk as well as to power their own applications and experiences. We believe this provides Zendesk and our customers with greater reliability, performance, and flexibility than operating through proprietary platforms and self-managed data centers.
The architecture and deployment of our software are described and guided by the following key characteristics:
•Reliability. Our customers are highly dependent on our solutions, which are designed to be available 24 hours a day, 365 days a year. We provide transparency to customers on availability and technical operations matters that impact them through our website and other channels.
•Scalability. Our data infrastructure is highly scalable and regularly processes a high volume of data driven requests that require the processing of specific data. •Security. Each of our solutions is designed to host a large quantity of customer data. We maintain a comprehensive security program designed to help safeguard the security and integrity of our customers’ data. We regularly review our security program. In addition, we regularly obtain third-party security audits and examinations of our technical operations and practices covering data security. |
Customers
As of December 31, 2019,2021, we had an aggregate of approximately 157,000 paid customer accounts111,100 logos using our solutions. This includes approximately 81,200 customer accounts for paid subscription plans for Zendesk Support (other than our legacy Starter plan) and approximately 42,600 customer accounts for paid subscription plans of Zendesk Chat. In addition, we had approximately 33,200 paid customer accounts on our other solutions, collectively, as of December 31, 2019. Prior to purchase, we generally provide our prospective customers with the opportunity to try fully-functioning versions of our solutions for a free trial period. This is a central part of our business model as we believe prospective customers should have the right to try solutions before being locked into a subscription. Providing our customers with a free trial period exposes customers to our brand and establishes a relationship that can facilitate further adoption of our solutions as organizations grow in size and their needs become more complex. For further details as to how we calculate our number of paid customer accounts,logos, please see the discussion in the "Key“Key Business Metrics"Metrics” section included in Item 7 of Part II of this Annual Report on Form 10-K.
Our customers are located in over 160 countries and territories and represent organizations across a broad array of sizes, industries, and geographies.
Research and Development
Our research and development organization is responsible for the development, design, and testing of all aspects of our product and platform solutions. We invest heavily in these efforts to continuously improve and innovate. In addition to our product and platform solutions, we have developed multi-functional APIs that we utilize to build our solutions as well as facilitate integrations of our solutions with third-party applications.
Our global research and development team is primarily based in San Francisco, California; Melbourne, Australia; Dublin, Ireland; Krakow, Poland; Copenhagen, Denmark; Singapore; and Madison, Wisconsin; Montreal, Canada; and Montpellier, France.Wisconsin. To foster rapid innovation, our research and development team is further apportioned into smaller, agile development teams.
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We deploy new features, functionality, and technologies across our solutions through software releases or updates in order to minimize disruption and provide for constant improvement.
To create a product roadmap that meets our customers’ needs, we emphasize collaboration during the development process. Customers provide input through feedback forums, dialogue with our product support and research and development teams, and feature utilization. As a result of using our solutions internally to support our customers, we also develop new or improved features based on our own employees’ feedback.
As of December 31, 2019,2021, we had approximately 1,0101,650 employees in our research and development organization. Our research and development expenses were $208$352 million, $160$255 million, and $115$208 million for the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, respectively.
Sales and Marketing
Subscriptions to our product and platform solutions are designed to be easy to purchase. A substantial number of our customers subscribe to our solutions with limited or no direct interaction with our sales team.
We also deploy a direct sales approach, which includes a sales team based in four regional hubs: North America, LATAM (Latin America), EMEA (Europe, Middle East, and Africa), and APAC (Asia-Pacific). This team manages prospective
and current customers, aiming to initiate, retain, and expand their use of our solutions over time, and is responsible for driving expansions and renewals of existing contracts. Our sales team also partners with sales and product engineers to provide pre-sales technical support to prospective customers.
We expect to continue increasing penetration into larger organizations through a land and expand strategy whereby we attempt to capitalize on the use of our solutions by a functional or geographic department to expand the use of our solutions into other use cases throughout the organization. Through our sales team, we also seek to discover and work with a growing number of forward-thinking organizations on larger initiatives to transform their approach to customer experience.
We also utilize indirect sales channels, including referral partners, and resellers, as well asbusiness process outsourcers and implementation partners. These channel partners provide additional sales coverage, particularly in geographic markets where we may have limited presence, as well as implementation services to our customers. We plan to continue investing in these relationships to help us in certain markets and to complement our direct sales efforts.
Our marketing efforts are focused on generating awareness of our solutions, creating sales leads, nurturing prospective customers through the process of product discovery and evaluation, establishing and promoting our brand, and cultivating a community of successful and vocal customers. Based on our belief that the best method to sell subscriptions to our solutions is to provide customers with the opportunity to actively use and explore our solutions’ capabilities, one focus of our marketing team is to drive and encourage free trials and the successful conversion of free trials to paid subscriptions. We utilize both 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.
As of December 31, 2019,2021, we had approximately 1,2802,340 employees in our sales and marketing organizations. Our sales and marketing expenses were $397$680 million, $292$512 million, and $212$397 million for the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, respectively.
Product Support, Customer Success, and Professional Services
We strive to exemplify the great customer experiences that organizations of all sizes can provide with our product and platform solutions by offering multi-channel service from our product support team, a rich self-help knowledge base with detailed product guides, and active community forums for agents, managers, and developers.
We offer different levels of product support based upon the subscription plans purchased by our customers. Regardless of the plan purchased, our solutions provide a unified intuitive interface, connectivity to our self-help knowledge base and community forums, and step-by-step tutorials to help users learn, use, and deploy our solutions effectively.
We additionally offer a variety of customer success initiatives aimed to address customer needs with varying levels of complexity, from our small business customers to even our largest customers. These initiatives are designed to ensure that our customers are best equipped to meet their business goals and to realize the full value of the implementation of our solutions.
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Along with our global partners, our professional services team assists our customers in implementing more complex deployments of our solutions. These services include mappingimplementing our solutions toproducts for new and existing business processes, data migration,advising our customers on customer experience best practices and integration with existing systems.optimizing their infrastructure as a trusted partner. Service engagements are typically scoped on a time and materials or project milestonefixed fee basis and billed separately from the subscription to our solutions.
Through our training platform, we offer free on-demand training, paid courses and certifications to help our customers quickly learn how to effectively use our solutions as well as implement best practices. Courses are available online, in-person at events, and, as requested by certain customers, on-site.online. Our training sessions are typically targeted atfor specific levels of employee seniority and product experience,roles, such as agent essentials or administrator expert, to more effectively tailor training to intended audiences.
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Competition
There are a number of established and emerging competitors in the broad market of customer engagement software. This market is fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry in some segments. We consider the principal competitive differentiators in our market to include:
•Enablement of customer communications across channels;
•Solutions that are open and flexible;
•Time to value realization through ease-of-deployment and use;
•Availability of self-service options;
•Data-rich analytics and performance recommendations;
•Mobile and multi-device capabilities;
•Proactive outreach tools;
•Customization and integration with third-party applications;
•Brand recognition and thought leadership; and
•Total cost of ownership for the customer (including software updates, ongoing maintenance, and consulting and system integration fees).
While we believe that we successfully compete with respect to these dynamics, given the large number, disparate sizes, and varying areas of focus of other organizations with which we compete in the provision of customer experience solutions, we may not always compare favorably with respect to some or all of the foregoing factors.
For small to medium-sizedmidsized organizations, we often compete with general use computer applications and other tools that organizations have adapted for managing relationships with their customers, including shared accounts for email communication, phone banks for voice communication and text messaging, shared accounts for social messaging, and pen and paper, text editors, and spreadsheets for tracking and management. In addition, we compete with a number of other software as a service, or SaaS, providers with focused applications or broader suites of product offerings designed to appeal to small to midsized organizations, which may be competitive to one or more of our product and platform solutions, that our potential customers may elect to use in lieu of our solutions,such as Freshworks Inc. and such providers may be able to offer their products at a lower price due to the focused nature of their applications.HubSpot, Inc. For larger organizations, we compete with custom software systems and software vendors geared towards larger organizations, including salesforce.com, Inc., Oracle Corporation, Microsoft Corporation, and ServiceNow, Inc., each of which may have greater operational flexibility to bundle competing products and services with other software offerings, or offer them at a lower price than our current Zendesk Suite offering, which will negatively affect our competitiveness for that offering. Other established SaaS
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providers not currently focused on the functionality that our solutions provide may expand their services to compete with us as well. Further, large enterprise software vendors have a greater ability to aggressively price their product at a level below their typical selling price in order to gain market share, decreasing our ability to compete successfully with such vendors in certain regions. Additionally, some existing and potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal customer support software system. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business.
In order to maintain and improve our competitive position in the market, we remain focused in our development, operations, and sales and marketing efforts on the evolving customer service needs of all organizations.
Intellectual Property
We rely on a combination of patent, trade secret, copyright, and trademark laws, a variety of contractual arrangements, such as license agreements, assignment agreements, confidentiality and non-disclosure agreements, and confidentiality procedures and technical measures to gain rights to and protect the intellectual property used in our business.
We have developed a patent program, and a strategy to identify, apply for, and secure patents for innovative aspects of our platform and technology. We have fivefourteen issued U.S. patents and 15fourteen U.S. patent applications pending. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost-effective.
We actively pursue registration of our trademarks, logos, service marks, and domain names in the United States and in other key jurisdictions. We are the registered holder of a variety of United States and international domain names that include the term Zendesk or certain variations. Our solutions and services utilize our “Zendesk” trademark as well as our logo and images.
We also rely on certain intellectual property rights that we license from third parties, including under certain open source licenses. Though such third-party technologies may not continue to be available to us on commercially reasonable terms, we believe that alternative technologies would be available to us.
Our policy is to require employees and independent contractors to sign agreements assigning to us any inventions, trade secrets, works of authorship, developments, and other processes generated by them on our behalf and agreeing to protect our confidential information, and all of our key employees and contractors have done so. In addition, we generally enter into confidentiality agreements with our vendors and customers. We also control and monitor access to, and distribution of, our software, documentation, and other proprietary information.
Although we rely on intellectual property rights, including patents, trade secrets, copyrights, trademarks, a variety of contractual arrangements, and confidentiality procedures, we believe that factors such as the technical and creative skills of our personnel, development of new features and functionality, and frequent enhancements to our solutions are more fundamental to establishing and maintaining our technology leadership position.
Human Capital Management
As a service-first customer relationship management company, we design customer experience solutions that drive improvements in the relationships between organizations and their customers. We believe that to achieve that purpose, it is essential to invest in building an engaged, diverse, supported, and incentivized workforce who can empathize and empower our customers to build those relationships.
Our values are as follows:
•Inclusivity. We believe diversity makes us stronger and strive for a workplace where everyone feels welcome.
•Humblidence. We achieve success with our winning combination of humility and confidence.
•Trust. We put our customers at the center of our business and are always working to earn their trust.
•Simplicity. We design technology to reduce complexity and create better experiences for everyone.
•Purpose. We do everything with intention and focus on work that moves us forward.
•Community. We want to be a champion of empathy and a force for good in the places we live and work, and the world at large. Our values are deeply woven into the fabric of our company and will be represented in how we show up for our employees and our customers.
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The Company employed approximately 5,860 people as of December 31, 2021, including the following employees in each region as provided below:
| Region | Employee Count | |||||||
| Americas | 2,800 | |||||||
| EMEA | 1,390 | |||||||
| APAC | 1,390 | |||||||
| LATAM | 280 | |||||||
Although we have statutory employee representation obligations in certain countries, our U.S. employees are not represented by a labor union. We have not experienced any work stoppages.
Our primary initiatives in attracting, retaining, and developing our employees include:
Diversity, Equity, and Inclusion
Inclusivity is the first among our values and we are working to build a diverse and creative company where all employees feel empowered and comfortable being their authentic selves. Our diversity, equity and inclusion strategy is focused on taking sustained action to build a belonging-rich environment where the mosaic of our employees can find success and where differences can be leveraged towards innovation.
In the year ended December 31, 2021, our workforce grew by over 1,700 employees. As of December 31, 2021, approximately 39% of our global workforce identify as female and 59% identify as male, with approximately 2% of employees who did not disclose an identification. Within the United States, our employees self-identified their race and ethnicity as provided below (as of December 31, 2021):
| Race/Ethnicity | Employees (% of total) | |||||||
| White | 61 | % | ||||||
| Asian | 20 | % | ||||||
| Hispanic or Latino | 7 | % | ||||||
| Black | 6 | % | ||||||
| Multiracial | 4 | % | ||||||
| Native Hawaiian or Other Pacific Islander | < 1% | |||||||
| American Indian or Alaska Native | < 1% | |||||||
| Undisclosed | 1 | % | ||||||
We will continue to drive progress through targeted recruiting partnerships, debiasing our job descriptions using artificial intelligence software, and implementing initiatives that focus on ensuring greater representation from underrepresented communities in our sourcing processes.
We are also focused on the retention of diverse talent through a focus on building belonging-rich environments. Our employee communities continued to play a critical role in building our inclusive culture in 2021 by embedding inclusive practices within leadership and providing our employees with support tailored to their needs. Employee communities are supported by executive sponsors, representing many of our regions and offering development opportunities through coaching, mentorship programs, and discussion forums. We currently offer eight communities that represent persons of color, LGBTQ+ employees, women, veterans, parents and caregivers, multigenerational employees, and persons who are neurodivergent or have physical disabilities.
To ensure that our value of inclusivity permeates throughout our organization, in 2021, we continued our investments in inclusive talent management. We have a global equity policy which encourages our employees to seek opportunities to promote equity through our work, model respectful and inclusive behavior, and prevent and report policy violations. We established a diversity council made up of senior executives to ensure governance and accountability on our commitments by promoting policies and practices that are conducive to the development of a diverse, high-performing organization. We also successfully launched and graduated the first cohort of our talent development program, Ignite, aimed at developing the next generation of
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rising underrepresented leaders at Zendesk through one-on-one mentoring, networking events, and group coaching. The positive impact of these combined efforts was evidenced in our 2021 employee engagement scores (with a response rate over 80%) with results evidencing confidence that our leaders are promoting an inclusive work environment.
Culture and EmployeesEngagement
As a company, we are investing in the future of our employee experience with a similar philosophy aligned to our view on the future of customer experience. We value simplicity, agility, sincerity, as well as a sense of humor and humility often absent from large organizations. Just as we build our solutions first and foremost for the people that use them every day, we also build an organization and culture that trusts, values, and empowers our employees. We arelisten to our employees and use their feedback to shape our employee experience priorities. Based on results from our internal employee survey, our employee engagement in 2021 remained above our industry benchmark and we hit a global, inclusive team who actively embraces diverse setsrecord percentage of perspectives. We are firm believers that each employee can make an impact and that together we can solve big challenges through innovation and teamwork.participation.
We also believe stronglycontinue to primarily operate in a remote capacity during the pandemic. Post-pandemic, we intend for a significant proportion of our obligationworkforce to participate incontinue to be designated as remote employees. By hiring and improve the communities wheremaintaining more remote teams, we work and live. Taking a hyperlocal approachare able to giving back, we support an array of corporate social responsibility engagements. We alsomore easily enter new geographical regions to support our neighborhoods worldwidecustomers, and expand our talent footprint while keeping diversity top-of-mind. Throughout 2021, we have supported our employee population in working remotely by providing them with grants from the Zendesk Neighbor Foundation,guiding principles on how to embrace a nonprofit organization dedicated to providing financial and strategic support to organizations working to strengthen neighborhoods in and around where Zendesk does business. With a focus on addressing homelessness and poverty, promoting technical literacy, and advancing diversity and gender equality in our communities, we empowerdynamic work style - principles that give our employees through educationflexibility in how they best work, leveraging technology to bring people together in an easy and training, volunteer opportunities,more inclusive way while being more thoughtful when we ask people to come together in person.
We believe that building a high performing and authentic community engagement.
Total Rewards
Our total rewards programs are designed to attract, reward and motivate our employees in a transparent and equitable way in line with our company core values. We strive to innovate and evolve our reward programs to be market competitive and comprehensive to cover employees at every stage of their personal and professional path. We are focused on keeping wellness as the foundation for all employees globally. We review our programs annually to ensure we maintain competitiveness and rely on employee feedback to shape and evolve our offerings.
•Comprehensive Benefits: We strive to offer options that are competitive, locally relevant and provide the resources needed to live fully, healthily, and balanced in work and life. Our benefits include comprehensive healthcare, income protection insurance, time off and leave programs, retirement programs and additional resources to support employees' overall well-being.
•Mental Health & Well-being: We provide access to programs that strengthen and support the emotional wellness and resiliency of our workforce. These resources include online therapy programs from licensed clinicians, relationship counseling and critical incident support, and an online application that promotes mindfulness and guided meditation. In 2021, we continued to see strong employee engagement in our well-being solutions where utilization remained consistent in all programs throughout the year.
•Family Resources: We have established programming, policies, and workplace practices to promote work and life harmony and strengthen social connectedness. Employees have access to an online platform that finds general care services to support employees in balancing work and life. We also offer family-forming benefits with access to employer-sponsored funds to pay for fertility treatments and family-forming services, including adoption and surrogacy. We have a global parental leave program with an equal length of time for all parents.
•Pay Equity: We are committed to pay equity and perform a global pay equity analysis on an annual basis.
Social Impact
Our Social Impact initiatives are informed by our core value of community. With the goal of facilitating life-changing moments of connection – by mobilizing our people, product and resources – we support nonprofit organizations that strengthen communities, advance equity and promote resilience. Our goals for social impact fall into four core areas:
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•Giving Money: In 2021, Zendesk’s corporate foundation funded approximately $4 million in grants to global and community nonprofits supporting our areas of focus. Additional funds were allocated to employees through our giving platform, with funds going to a wide range of recipients and causes including Afghan refugees, schoolgirls in India, coral reef restoration, and COVID-19 relief.
•Giving Time: Zendesk has transitioned to virtual volunteering as a way to stay connected to one another and our communities, even during the COVID-19 pandemic. In 2021, our employees volunteered over 5,000 hours, mentoring students and job seekers, creating greeting cards and participating in educational and advocacy programs.
•Giving Technology and Expertise: Zendesk’s Tech for Good program provides free software and expertise to nonprofits that address urgent social problems. By leveraging the power of customer experience tools, our partners are able to improve efficiency and magnify their impact.
•Improve our Environmental Stewardship: Zendesk’s sustainability program has three components: measuring our impact on the environment; trying to reduce that impact; and, mitigating our impact through carbon offsets and removals. We support ecosystem restoration under the broader umbrella of promoting resilience in local communities.
Regulatory Considerations
The legal environment of Internet-basedinternet-based businesses is evolving rapidly in the United States and elsewhere. The manner in which existing laws and regulations are applied in this environment, and how they will relate to our business in particular, both in the United States and internationally, is often unclear. For example, we sometimes cannot be certain which laws will be deemed applicable to us given the global nature of our business, including with respect to such topics as antitrust, data privacy and security, pricing, credit card fraud, advertising, taxation, content regulation, artificial intelligence, and intellectual property ownership and infringement.
Our customers, and those with whom they communicate using our product and platform solutions, upload and store customer service and other data into our solutions and provide access to such data, generally without any restrictions imposed by us. This presents legal challenges to our business and operations, such as rights of privacy related to the content loaded into our solutions. Both in the United States and internationally, we must monitor and comply with a host of legal concerns regarding the data stored and processed in our solutions by customers. We must also monitor and comply with these issues directly in the operation of our business in these jurisdictions.
Geographic Information
For a description of our revenue and long-lived assets by geographic location, see Note 15 of the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Additional Information
Our website is located at http://www.zendesk.com, and our investor relations website is located at http://investor.zendesk.com. Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, are available, free of charge, on our investor relations website as soon as reasonably practicable after we file such material electronically with or furnish it to the Securities and Exchange Commission, or the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is http://www.sec.gov.
We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website. Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases, and blogs as part of our investor relations website. We have used, and intend to continue to use, our investor relations website, our Twitter account (@Zendesk), and our Chief Executive Officer's Twitter account (@mikkelsvane), as means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Further corporate governance information, including our certificate of incorporation, bylaws, governance guidelines, board committee charters, and code of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of our websites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
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Item 1A. Risk Factors.
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this report, and in our other public filings. If any
of such risks and uncertainties actually occurs, our business, financial condition, or operating results could differ materially from the plans, projections, and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report and in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition, or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.
Risk Factors Summary
Our business is subject to a number of risks that may adversely affect our business, financial condition, results of operations, and cash flows. These risks are discussed more fully below and include, but are not limited to:
Risks Related to our Product and Platform Solutions
•our substantial reliance on the continued market acceptance of our Support solution;
•developing our current solutions as well as new solutions that keep pace with the customer experience market;
•our ability to integrate new enhancements and solutions into our infrastructure;
•our reliance on application platform interfaces to integrate with third-party applications;
Risks Related to our Industry
•the intensely competitive nature of the customer experience industry among organizations of all sizes;
•our dependency on the growth of the SaaS market overall;
•the delayed reflection of new sales in our results due to recognizing revenue over the term of our customer contracts;
•the unpredictability of our results due to seasonality in industry buying patterns;
Risks Related to Customer Retention and Acquisition
•our substantial reliance on our customers renewing their subscriptions and purchasing additional subscriptions;
•selling to and developing our solutions for both large organizations and small to midsized organizations;
•our ability to develop and maintain successful relationships with channel partners;
•our ability to optimize the pricing model for our solutions to maximize attraction of new customers;
•our reliance on conversion of free trials, other inbound lead generation strategies, and third-party technology partners;
•the difficulty of continuing to offer high-quality product support and customer success initiatives;
•our ability to maintain our brand;
Risks Related to Operating and Growing a Global Business
•quarterly fluctuations in our financial results due to various factors and increasing variability in our sales cycles;
•scaling our sales capabilities and managing our organization to achieve acceptance of our solutions internationally;
•retaining our key employees and attracting qualified personnel, particularly in the primary regions we operate;
•our history of losses and our expectation that our revenue growth rate will decline over time;
•the ability to effectively acquire or invest in companies and to successfully integrate acquired businesses;
•maintaining compliance with export and import controls given our global business;
•our ability to secure additional financing on favorable terms to meet our future capital needs;
Risks Related to Cybersecurity, Reliability, and Data Privacy
•service interruptions, errors, failures, or bugs in our solutions, and improper implementation of our solutions;
•our ability to securely maintain customer data and to prevent and respond to historical and future data breaches;
•increased costs from complying with privacy and security regulation, including the General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act (“CCPA”);
Risks Related to Intellectual Property Matters
•our exposure to contractual indemnification for intellectual property infringement and third-party claims;
•our use of open source software;
•a failure to protect our intellectual property rights;
Risks Related to Tax and Accounting Matters
•taxing authorities which may assert we owe income, sales, value added or similar taxes, either in the future or for past amounts;
•international operations which subject us to potential tax consequences and foreign exchange rate fluctuations;
•the potential for our goodwill or intangible assets to be impaired;
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•limitations on our ability to use our net operating losses to offset future taxable income;
•our reliance on third-party SaaS technologies to operate our business;
Risks Related to Macroeconomic Conditions
•the effect of COVID-19 on global markets, the demand for our solutions, and the demand for our customers' solutions;
•unfavorable conditions in the business software applications industry;
•the occurrence of future catastrophic events;
Risks Related to Ownership of our Common Stock and our Outstanding Convertible Notes
•volatility in our stock price separate from our operating performance and the absence of a dividend on our stock;
•high concentration of ownership among relatively few principal stockholders;
•changing laws and regulations and potential legal proceedings related to governance and public disclosure;
•anti-takeover provisions in our charter and limitation of forum to the Delaware Court of Chancery for certain state law claims and the district courts of the United States for claims arising under the Securities Act;
•dependency on favorable securities and industry analyst reports;
•pressures on cash flows resulting from servicing our outstanding debt;
•conversion features on our debt which may affect our operating results and value of our common stock;
•counterparty risk with respect to capped call transactions entered into in connection with our debt offerings;
•accounting considerations related to interest, settlement, and expense recognition related to our outstanding debt;
Risks Related to the Proposed Acquisition of Momentive
•our inability to complete the proposed acquisition within the time frame anticipated or at all;
•failure to realize the anticipated benefits of the proposed acquisition or those benefits taking longer than anticipated to be realized;
•negative effects associated with uncertainty about the completion of the acquisition;
•the potential dilution of Zendesk stockholders’ ownership percentage of the combined company as compared to their ownership percentage of Zendesk prior to the Merger;
•stockholder litigation could negatively affect our business and operations; and
•actions of activist shareholders or unsolicited bidders could impair our ability to consummate the Merger or otherwise negatively affect our business.
Risks Related to Our BusinessProduct and Platform Solutions
We derive, and expect to continue to derive, substantially all of our revenue and cash flows from Support. If we fail to adapt this product to changing market dynamics and customer preferences or to maintain or achieve increased market acceptance of Support, our business, results of operations, financial condition, and growth prospects would be harmed.
We derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of subscriptions to Support or from sales of subscriptions to our productofferings and solutions primarily resulting from an interest in Support. As such, the market acceptance of this product solutionssolution is critical to our success. Demand for our solutions is affected by a number of factors, many of which are beyond our control, such as continued market acceptance of our solutions by customers for existing and new use cases, the timing of development and release of new product and platform solutions, features, and functionality introduced by our competitors, technological change, and growth or contraction in our addressable market. We expect that an increasing focus on the customer experience and the growth of various communications channels will profoundlycontinue to impact the market for our software and blur distinctions between traditionally separate systems for customer support, customer engagement and retention software, messaging, sales force automation, marketing automation, messaging, and other customer relationship management product and platform solutions, enabling new competitors to emerge. If we are unable to meet customer demands to improve relationships between organizations and their customers through flexible solutions designed to address all these needs or otherwise achieve more widespread market acceptance of our solutions, our business, results of operations, financial condition, and growth prospects will be adversely affected. Conversely, if the market for customer experience does not continue to increase relative to prior quarters, demand for our solutions will be negatively impacted.
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If we are not able to develop enhancements to our product and platform solutions, provide a unified and reliable experience between our solutions, or introduce new solutions and services that achieve market acceptance and that keep pace with technological developments, our business would be harmed.
Our ability to attract new customers and increase revenue from existing customers depends in large part on our ability to enhance and improve our existing solutions and to introduce new solutions. In order to grow our business, we must research and develop solutions and services that reflect the changing nature of the customer experience, and expand beyond customer service to other areas of improving relationships between organizations and their customers or potential customers. In addition, as we develop and introduce new products and services, including those incorporating or utilizing artificial intelligence and machine learning, they may raise new, or heighten existing, technological, legal and other challenges. In order to retain our business, we must ensure that our existing solutions and services maintain the high level of reliability, security, and sophistication our customers will continue to expect, while ensuring that we provide a unified and seamless experience across our solutions. Those expectations will continue to evolve and the resources required to continue to maintain reliable and secure solutions and services, particularly as we increasingly rely on and sell offerings which incorporate multiple solutions such as the Zendesk Suite, will increase over time.
We have limited history in offering multiple product and platform solutions as part of a historycomprehensive customer experience solution to our customers. As we increase focus on the customer experience and increasingly seek to offer our solutions as part of lossesa broader offering, we may discover challenges in creating a seamless, unified offering across our solutions that achieves market acceptance and we expectgrows our business. In the fiscal years ending 2021 and 2020, our research and development expenses were 26% and 25% of our revenue, growth rate to decline. Asrespectively. If we do not spend our costs increase,research and development budget efficiently or effectively on compelling innovation and technologies, our operating results may be harmed and we may not realize the expected benefits of our strategy.
The success of any enhancement to our solutions depends on several factors, including timely completion, adequate quality testing, service reliability, and market acceptance. Any new solution or service that we develop may not be ableintroduced in a timely or cost-effective manner, may contain defects, introduce new service reliability issues, or may not achieve the market acceptance necessary to generate sufficient revenuerevenue. If we are unable to achievesuccessfully develop new solutions or services, integrate those solutions with our existing solutions, enhance our existing solutions to meet new customer requirements, or otherwise gain market acceptance, our business and sustainoperating results will be harmed. In particular, as we continue to manage operational costs, our profitability.
We may not be able to generate sufficient revenue to achieve and sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:
If we fail to continue to grow our revenue, our operating results and business would be harmed.
Our solutions must integrate with a variety of e-mail, messaging, software platforms, network, and hardware, and we need to continuously modify and enhance our product and platform solutions to adapt to changes in cloud-enabled hardware, software, networking, messaging, browser, and database technologies. For example, we have developed our solutions to be able to easily integrate with third-party SaaS applications and messaging platforms, including the applications of software providers that compete with us, through the interaction of application platform interfaces, or APIs. To date, we have not typically relied on a significantlong-term written contract to govern our relationship with these providers. Instead, we are typically subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation, and fees of such software systems, and which are subject to change by such providers from time to time. To the extent that we do not have long-term written contracts to govern our relationship with these providers, we rely on our ability to effectively expand and maintain our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain certainthe fact that the providers of our new customers, including larger organizations. We plan tosuch software systems continue to expand our direct sales force both domestically and internationallyallow us access to increase our sales
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•discontinues or limits our sales and marketing efforts do not generate a significant increase in revenue. access to its APIs;
•changes how customer information is accessed by us or our strategy to increasingly target larger organizations for sales of our solutions and, if we do not manage these efforts effectively, our business and results of operations could be adversely affected.customers;
•is acquired by our competitors, potentially resulting in more limited access to their systems; or
•otherwise favors its own competitive offerings over ours.
We believe a significant component of our value proposition to customers is the ability to optimize and platformconfigure our solutions may requireto communicate with these third-party applications through our respective APIs. If we are not permitted or able to integrate with these and other third-party applications in the approval of a greater number of technical personnelfuture, demand for our solutions could be adversely impacted and management levels within a potential customer's organization thanbusiness and operating results would be harmed. In addition, we have historically encountered,designed mobile applications to provide access to our solutions through these devices. If we cannot provide effective functionality through these mobile applications as required by organizations and if so, these types of sales would require us to invest more time educating these potential customers on the benefits of our solutions. In addition, larger organizations may demand more features and integration services as we release solutionsindividuals that are increasingly designed for larger organizations. We have limited experience in developing and managing sales channels and distribution arrangements for larger organizations. As we target larger organizations,widely use mobile devices, we may experience difficulty hiring employees with qualifications appropriate for selling to larger organizations, which could adversely affect our ability to meet expected sales targets. As a resultattracting and retaining customers. Failure of these factors, these sales opportunities may require us to devote greater research and development, sales, marketing events, product support, and professional services resources to individual customers, resulting in increased costs and reduced profitability, and would likely lengthen our typical sales cycle, which could strain our resources. Moreover, these transactions may require us to delay recognizing portions of the associated revenue we derive from these customers until any technical or implementation requirements have been met, and larger customers may demand discounts to the subscription prices they pay for our solutions. Furthermore, because we have limited experience selling to larger organizations, our investment in marketing our solutions to these potential customers may not be successful, whichoperate effectively with future infrastructure platforms and technologies could harm our results of operations and our overall ability to grow our customer base. Following sales to larger organizations, we may have fewer opportunities to expand usage of our solutions or to sell additional functionality, and we may experience increased subscription terminations as compared to our experience with smaller organizations, any of which could harm our results of operations. Additionally, larger organizations generally have a greater amount of resources than smaller organizations to dedicate to building internal products that mimic or replacealso reduce the functionality of our product and platform solutions, which may result in a decreased needdemand for our solutions, and a decreased need to renew a subscription to those solutions, each of which would have a negative effect on our results of operations.
Risks Related to fulfill both types of requirements. We may additionally become increasingly reliant on our professional services to customize our offerings as we offer more features and functionality that are geared towards larger organizations, which may disproportionately require greater focus of internal resources on a smaller number of customers. Larger organizations also may have larger international operations and accordingly require us to divert resources to international regions in which we may not have sufficient personnel, affecting our results of operations.Our Industry
The market in which we participate is intensely competitive, and if we do not compete effectively, our operating results could be harmed.
Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business. The market for customer experience solutions is fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry. Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements, and we expect competition to continue to intensify in the future. Among the small to medium-sizedmidsized organizations that make up a large proportion of our customers, we often compete with general use computer applications and other tools, which these organizations use to provide support and which can be deployed for little or no cost. These include shared accounts for email communication, phone banks for voice communication pen and paper,text messaging, shared accounts for social messaging, text editors, and spreadsheets for tracking and management. In addition, we compete with a number of other SaaS providers with focused applications or broader suites of product offerings, which may be competitive to one or more of our product and platform solutions
that our potential customers may elect to use in lieu of our solutions, and such providers may be able to offer their products at a lower price due to the focused nature of their applications, such as Freshworks IncInc. and Kustomer,HubSpot, Inc.
We face competition from in-house software systems, large integrated systems vendors, and smaller companies offering alternative SaaS applications. Our competitors vary in size and in the breadth and scope of the products and services they offer. Many of our current and potential competitors have established marketing relationships, access to larger customer bases, pre-existing customer relationships, and major distribution agreements with consultants, system integrators, and resellers. Additionally, someSome existing and potential customers, particularly large organizations, have elected, and may in the future elect, to develop their own internal customer support software system. Pricing pressures and increased competition generally could result in reduced sales, reduced margins, losses, or the failure of our solutions to achieve or maintain more widespread market acceptance, any of which could harm our business.systems. Certain of our competitors have partnered with, or have acquired, and may in the future partner with or acquire, other competitors to offer services, leveraging their collective competitive positions, which makes or would make, it more difficult for us to compete with them. Additionally,In particular, as multiproduct and platform offerings increase in prevalence, our competitors who focus on such offerings may, through organic growth or acquisition, be able to increasingly provide customizable platform solutions which would impact our ability to compete with them. As our offerings expandhave additionally expanded to adjacent markets, such as integration of messaging into the customer experience platform, sales force automation and platform-based features and functionality, in which we may not have the operational history or familiarity, we may find it difficult to compete with established vendors in those markets. For all of these reasons, we may not be able to compete successfully against our current and future competitors or retain existing customers, which would harm our business.
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with customer software systems and large enterprise software vendors such as salesforce.com, Inc. and ServiceNow, Inc., each of which may have greater operational flexibility to bundle competing products and services with other software offerings, or offer them at a lower price than our current solutions, which will negatively affect our competitiveness for our solutions. Further, other established SaaS providers not currently focused on the functionality that our solutions provide may expand their services to compete with us as well. Large enterprise software vendors additionally have a greater ability to aggressively price their product at a level below their typical selling price in order to retain their existing customers and gain market share, both within the United States and in regions across the world, decreasing our ability to compete successfully with such vendors.
If the market for SaaS business software applications develops more slowly than we expect or declines, our business would be adversely affected.
The market for SaaS business software applications is less mature than the market for on-premise business software applications, and the adoption rate of SaaS business software applications may be slower among subscribers in industries with heightened data security interests, business practices requiring highly customizable application software, or large employee bases requiring a high level of sophistication from their business software. Our success will depend to a substantial extent on the widespread adoption of SaaS business applications in general, and of SaaS customer service applications in particular. The expansion of the SaaS business applications market depends on a number of factors, including the cost, performance, and perceived value associated with SaaS, as well as the ability of SaaS providers to address data security and privacy concerns. If SaaS business applications do not continue to achieve market acceptance, if there is a reduction in demand for SaaS business applications caused by a lack of customer acceptance, or if there are technological challenges, weakening economic conditions, data residency, data security or privacy concerns, governmental regulation, competing technologies and products, or decreases in information technology spending, it would result in decreased revenue and our business would be adversely affected.
We recognize revenue over the term of our customer contracts. Consequently, downturns or upturns in new sales may not be immediately reflected in our operating results and may be difficult to discern.
We generally recognize subscription revenue from customers ratably over the terms of their contracts and a majority of our revenue is derived from subscriptions that have terms longer than one month. As a result, a portion of the revenue we report in each quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous quarters. Consequently, a decline in new or renewed subscriptions with terms that are longer than one month in any single quarter may have a small impact on our revenue results for that quarter. However, such a decline will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our pricing policies or rate of expansion or retention, may not be fully reflected in our results of operations until future periods. We may also be unable to reduce our cost structure in line with a significant deterioration in sales. In addition, because we believe a substantial percentage of subscriptions to our solutions are shorter than many comparable SaaS companies and because we have many variations of billing cycles, our deferred revenue may be a less meaningful indicator of our future financial results as compared to other SaaS companies. A significant majority of our costs are expensed as incurred, while revenue is recognized over the life of the agreement with the applicable customer. As a result, increased growth in the number of our customers could continue to result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.
Certain of our operating results and financial metrics may be difficult to predict as a result of seasonality and usage-based factors.
We have experienced, and expect to continue to experience in the future, seasonality in our business, and our operating results and financial condition may be affected by such trends in the future. We generally experience seasonal fluctuations in demand for our solutions and services, and believe that our quarterly sales are affected by industry buying patterns. For example, we have customers who add flexible agents when they need more capacity during busy periods and then subsequently scale back the following year. We believe that the seasonal trends that we have experienced in the past may continue for the foreseeable future, particularly as we expand our sales to larger organizations. Since a large percentage of our subscriptions are monthly, customers are able to increase and decrease the number of authorized agents for whom they require a subscription quickly and easily, thereby potentially increasing the impact of seasonality on our revenue. Further, while not significant, a portion of our revenue results is not subscription-based, such as revenue related to our Talk product or revenue related to professional services, and is primarily dependent on usage-based demand, which can be difficult to predict. Seasonality within our business may be reflected to a much lesser extent, and sometimes may not be immediately apparent, in our revenue, due to the fact that we recognize subscription revenue over the term of our agreement. To the extent we experience this seasonality, it may cause fluctuations in our operating results and financial metrics, and make forecasting our future operating results and
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financial metrics difficult. Additionally, we do not have sufficient experience in selling certain of our solutions to determine if demand for these services are or will be subject to material seasonality.
Risks Related to Customer Retention and Acquisition
Our business depends substantially on our customers renewing their subscriptions, expanding the use of their subscriptions, and purchasing subscriptions for additional product and platform solutions from us. Any decline in our customer retention or expansion, or any failure by us to sell subscriptions to additional solutions to existing customers, would harm our future operating results.
In order for us to maintain or improve our operating results, it is important that our customers renew their subscriptions when the initial contract term expires and add additional authorized agents or additional product and platform solutions to their customer accounts. Even though the majority of our revenue is derived from subscriptions to our solutions that have terms longer than one month, a significant portion of the subscriptions to our solutions have monthly terms. Our customers have no obligation to renew their subscriptions, and our customers may not renew subscriptions with a similar contract period or with the same or a greater number of agents. Some of our customers have electedelect not to renew their agreements with us and it is difficult to accurately predict long-term customer retention. OurBecause the revenue derived from our customers on contracts with monthly terms are often small and midsized organizations, and because small and midsized organizations can have liquidity and expense limitations more restrictive than large organizations, such revenue is particularly susceptible to changes in global demand arising from economic downturns. Additionally, as we continue to expand our offerings to appeal to larger enterprises and such customers agree to longer contractual terms with subscriptions to additional solutions, if and when such larger enterprise customers decide not to renew their contractual arrangements, the negative impact on our results and operations will accordingly be increasingly larger. Further, a substantial proportion of our revenue derives from, and our future success is also substantially dependent on, our ability to expand our existing customers'customers’ use of our solutions by expanding the number of solutions to which such customers subscribe. This mayhas required and will continue to require increasingly sophisticated and costly sales efforts, and may not result in additional sales. Additionally,sales, and it may be difficult to predict the success of such efforts.
Further, we have seen the impact of COVID-19 vary significantly across different industries. Certain industries have seen increased demand for their products and services as the needs of the economy shift, while other industries have struggled to maintain demand for their products and services consistent with historical levels. Our ability to retain current customers or sell additional solutions to those customers has and will depend on our ability to understand the short-term and long-term impacts of COVID-19 on each industry. Because we have a limited operating history with respectin understanding these impacts, our ability to more recent subscription offeringsadapt our sales and marketing initiatives to such as Suite and Duet. The combination of multiple offerings with similar solutionschanges may be unclear and difficult to market to our potential customers, resulting in a lower marketing pipeline. Suite and Duet each provide a combination of solutions at an overall discounted price,uncertain and our limited historyability to forecast rates of those discountscustomer retention and how they interact with one anotherexpansion may result in a decreased predictability in future subscription revenue.
be negatively impacted.
Our customer retention, our ability to sell additional product and platform solutions to existing customers, and the rate at which our existing customers purchase subscriptions to additional solutions may be impacted by a number of factors, including our customers’ satisfaction with our solutions, our product support, our prices, the prices of competing software systems, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels. In addition, the rate at which our existing customers purchase subscriptions to additional solutions depends on a number of factors, including the perceived need for additional solutions to build better relationships between organizations and their customers. If our customers do not renew their subscriptions, renew on less favorable terms, fail to add more agents, fail to increase use of our usage-based solutions, or fail to purchase subscriptions to additional solutions, our revenue may decline, and we may not realize improved operating results from our customer base. A substantial proportion
We face a number of risks in targeting larger organizations for sales of our revenue derives from subscriptions to additional solutions by existing customers to expand their usageand, if we do not manage these efforts effectively, our business and results of operations could be adversely affected.
As we target a portion of our sales efforts to larger organizations, we expect to incur high costs and long sales cycles, and we may be less effective at predicting when we will complete these sales. In this market segment, the decision to subscribe to one or more of our product and platform solutions may require the approval of a greater number of technical personnel and management levels within a potential customer’s organization than we have historically encountered, and if so, these types of sales would require us to invest more time educating these potential customers on the benefits of our solutions.
The success of the broader market acceptance of our product and platform solutions depends on offering solutions designed to give organizations of all sizes the ability to deliver powerful customer experiences with a focus on solutions that have the broadest market appeal across those organizations. Larger organizations may demand more features and integration services than small to midsized organizations. We may not be able to devote sufficient resources to developing those features and functionality in our solutions that are exclusively in demand by large organizations, which may negatively affect our potential sales to those organizations. Further, as we continue to focus on self-serve capabilities and simplicity in buying our
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solutions, many of those efforts may not be effective in selling and marketing to larger organizations as those organizations may require greater customer-specific investment, which may additionally impact our potential sales to those organizations. To the extent we do invest in customer-specific investment, such investment is and will continue to be a disproportionately large focus of internal resources on a small number of customers, negatively impacting our efficient use of those resources.
We have limited experience in developing and managing sales channels and distribution arrangements for larger organizations. We may experience difficulty hiring employees with qualifications appropriate for selling to larger organizations, which could adversely affect our ability to meet expected sales targets. Further, given their generally broader international presence, selling to larger organizations also may require us to divert resources to international regions in which we may not have sufficient personnel, affecting our results of operations. Sales opportunities to larger organizations may require us to devote greater research and development, sales, marketing events, product support, and professional services resources to individual customers, resulting in increased costs and reduced profitability, and would likely lengthen our typical sales cycle, which could strain our resources. Moreover, these transactions may require us to delay recognizing portions of the associated revenue we derive from these customers until any technical or implementation requirements have been met, and larger customers may demand discounts to the subscription prices they pay for our solutions. We believe that a customer's decisionFurthermore, because we have limited experience selling to larger organizations, our investment in marketing our solutions to these potential customers may not be successful, which could harm our results of operations and our overall ability to grow our customer base. Following sales to larger organizations, we may not fully understand the opportunities to expand usage of our solutions can be impacted by a greater number of factors comparedor to the number of factors which can affect the initial adoption of Support. As the composition of our customer base becomes increasingly composed of largersell additional functionality within such organizations, and we accordingly become increasinglymay not be able to effectively predict subscription terminations, any of which could harm our results of operations.
Our business and growth depend substantially on the success of our strategic relationships with third parties, including technology partners, channel partners, and professional services partners.
We depend on, and anticipate that we will continue to depend on, various third-party relationships in order to sustain and grow our business. We are highly dependent upon third-party technology partners for certain critical features and functionality of our platform. For example, the features available on Zendesk Talk are highly dependent on such larger organizations choosingour technology integration with products offered by Twilio Inc., the features available on Zendesk Support are highly dependent on our technology integration with products offered by Alphabet Inc., and the features available across our platform are generally dependent on our third-party hosting services and integrations with messaging services. Failure of this or any other technology provider to expand their usagemaintain, support, or secure its technology platforms in general, and our integrations in particular, or errors or defects in its technology, could materially and adversely impact our relationship with our customers, damage our reputation and brand, and harm our business and operating results. Any loss of the right to use any of this hardware or software could result in delays or difficulties in our ability to provide our solutions until equivalent technology is either developed by us or, if available, identified, obtained, and integrated.
For deployments of our solutions into complex technology environments and workflows, we are dependent on third-party implementation consultants to provide professional services to our resultscustomers. The failure of operationsthese third-party consultants to perform their services adequately may become harderdisrupt or damage the relationship between us and our customers, damage our brand, and harm our business.
Identifying, negotiating, and documenting relationships with strategic third parties such as technology partners and implementation providers requires significant time and resources. In addition, integrating third-party technology is complex, costly, and time-consuming. Our agreements with technology partners and implementation providers are typically limited in duration, non-exclusive, and do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to predict.
If we are not able to develop enhancements tounsuccessful in establishing or maintaining our product and platform solutions or introduce new solutions and services that achieve market acceptance and that keep pacerelationships with technological developments, our business would be harmed.
We employ a pricing model that subjects us to various challenges that could make it difficult for us to derive sufficient value from our customers particularly because we do not have the history with our subscription or pricing models that we need to accurately predict optimal pricing necessary to attract and retain customers.
We generally charge our customers for their use of our product and platform solutions based on the number of users they enable as “agents”'agents' under their customer account, as well as the features and functionality enabled. The features and functionality we provide within our solutions enable our customers to promote customer self-service and otherwise efficiently and cost-effectively address product support requests without the need for substantial human interaction. As a result of these features, customer agent staffing requirements may be minimized and our revenue may be adversely impacted. Conversely, customers
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may overestimate their agent needs when they initially use our solutions, negatively affecting our ability to accurately forecast the number of agents our customers need in a period. Additionally, otherOther than subscriptions related to ourthe Zendesk Suite, and Duet offerings, we generally require a separate subscription to enable the functionality of each of our solutions. We are continuing to analyze and improve our pricing and packaging models as we adapt to a changing market, but we do not know whether our current or potential customers or the market in general will accept this pricing model going forwardchanges to those models and, if it fails to gain acceptance, our business and results of operations could be harmed. In particular, in February 2021, we released a new version of our omnichannel offering, the Zendesk Suite, which offers access to Support, Chat, Talk, Guide, Explore, and Sunshine at new, unified purchase plans with various levels of pricing for different types of organizations. While we believe that simple purchase plans will enable greater adoption of the Zendesk Suite, certain organizations, such as small or midsized businesses, may not want to purchase all the included solutions in the Zendesk Suite, and other organizations may want more features offered in one solution without paying for the next purchase plan level, affecting our new business, retention, and sales for additional solutions. Those purchasing decisions will be difficult to predict due to our limited experience offering the new Zendesk Suite, and we may not fully understand the impact of our pricing changes in the market. If we fail to find an optimal pricing strategy for our latest offering, our business and results of operations may be harmed. If customers do not accept our new purchase plans, we may increasingly have difficulty in our ability to attract new customers as well as our ability to retain existing customers to the extent we apply new pricing models to existing customer agreements. Our current pricing model may be either too complex, too simple, or too expensive depending on the size of the organization to which we are selling our offering. Pricing decisions may also impact the mix of adoption among our subscription plans and negatively impact our overall revenue. Moreover, larger organizations may demand substantial price concessions. As a result, in the future we may be required to reduce our prices or develop new pricing models, which could adversely affect our revenue, gross margin, profitability, financial position, and cash flow.
Finally, as the market for our solutions matures, or as new competitors introduce new solutions or services that compete with ours, we may be unable to attract new customers at the same price or based on the same pricing models as we have used historically.
Our terms of service generally prohibit the sharing of user logins and passwords. These restrictions may be improperly circumvented or otherwise bypassed by certain users and, if they are, we may not be able to capture the full value of the use of our solutions. We licenseprovide access and use of our solutions exclusively for our customers’ internal use. If customers improperly resell or otherwise make our solutions available to their customers, it may cannibalize our sales or commoditize our solutions in the market. Additionally, if a customer that has received a volume discount from us offers our solutions to its customers in violation of our terms of service, we may experience price erosion and be unable to capture sufficient value from the use of our solutions by those customers.
While our terms of service provide us the ability to enforce our terms, our customers may resist or refuse to allow us to audit their usage, in which case we may have to pursue legal recourse to enforce our rights. Any such enforcement action would require us to spend money, distract management, and potentially adversely affect our relationship with our customers.
We are highly dependent upon free trials of our solutions and other inbound lead generation strategies to drive our sales and revenue. If these strategies fail to continue to generate sales opportunities or do not convert into paying customers, our business and results of operations would be harmed.
We are highly dependent upon our marketing strategy of offering free trials of our solutions and other inbound lead generation strategies to generate sales opportunities. As we increasingly focus on our core strengths of simplicity, agility, and offering solutions that are easy to adopt, it will be additionally increasingly critical to maintain a simple trial experience that markets and leads to an easy adoption of our solutions. These strategies may not be successful in continuing to generate sufficient sales opportunities necessary to increase our revenue. Many early users never convert from the trial version of a solution to a paid version of such solution. We often depend on individuals within an organization who initiate the trial versions of our solutions being able to convince decision makers within their organization to convert to a paid version. Many of these organizations increasingly have complex and multi-layered purchasing requirements, especially the larger organizations that we continue to target. Furthermore, in the case of our sales force automation software and features and functionality related to our platform offering, we are increasingly pursuing decision makers that are not in the customer support organizations that we have traditionally targeted. Additionally, as we offer new, broader pricing and packaging offerings for our solutions, we may not be able to understand how our prospective customers trial and use each individual solution, negatively affecting our ability to sell additional solutions effectively to those organizations. To the extent that these users do not become, or are unable to convince others to become, paying customers, we will not realize the intended benefits of this marketing strategy and our ability to grow our revenue will be adversely affected.
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Any failure to offer high-quality product support or customer success initiatives may adversely affect our relationships with our customers and our financial results.
In deploying and using our product and platform solutions, our customers depend on our product support team, customer success organization, and our professional services organization to resolve complex technical and operational issues. We may be unable to respond quickly enough to accommodate short-term increases in customer demand for product support. We also may be unable to modify the nature, scope, and delivery of our product support to compete with changes in product support services provided by our competitors. Increased customer demand for product support, without corresponding revenue, could increase costs and adversely affect our operating results. Adoption of the Zendesk Suite and increasing usage by customers of multiple solutions may additionally increase demand on our product support team and customer success organizations. We may allocate resources to support such increased demand and, as a consequence, our support of any individual solution may suffer. Additionally, we may be unable to develop our customer success organization to continue to support the increasing level of complexity that our customers that are large organizations require while maintaining the same level of engagement across all customers. For example, adoption of features and functionality related to our platform offering may increase demand on our professional services organization as customers may increasingly demand platform-related features that may not currently exist.
Our sales are highly dependent on our business reputation and on positive recommendations from our existing customers. Any failure to maintain high-quality product support, or a market perception that we do not maintain high-quality product support, maintain a high complexity customer success organization, or maintain an adaptive and responsive professional services organization, could adversely affect our reputation, our ability to sell our solutions to existing and prospective customers, and our business, operating results, and financial position.
If we are unable to develop and maintain successful relationships with channel partners, our business, operating results, and financial condition could be adversely affected.
To date, we have been primarily dependent on our direct sales force to sell subscriptions to our product and platform solutions. Although we have developed certain channel partners, such as referral partners, resellers, and integration partners, these channels have resulted in limited revenue to date. We believe identifying, developing, and maintaining strategic relationships with additional channel partners are important to driving revenue growth for our company, and we will continue to dedicate resources to those efforts. Our agreements with our existing channel partners are non-exclusive, meaning our channel partners may offer customers the solutions of several different companies, including solutions that compete with ours. They may also cease marketing our solutions with limited or no notice and with little or no penalty. We expect that any additional channel partners we identify and develop will be similarly non-exclusive and not bound by any requirement to continue to market our solutions. If we fail to identify additional channel partners, in a timely and cost-effective manner, or at all, or are unable to assist our current and future channel partners in independently selling and deploying our solutions, our business, results of operations, and financial condition could be adversely affected. Additionally, customer retention and expansion attributable to customers acquired through our channel partners may differ significantly from customers acquired through our direct sales efforts. If our channel partners do not effectively market and sell our solutions, or fail to meet the needs of our customers, our reputation and ability to grow our business may also be adversely affected.
Sales by channel partners are more likely than direct sales to involve collectability concerns. In particular, sales by our channel partners into developing markets, and accordingly, variations in the mix between revenue attributable to sales by channel partners and revenue attributable to direct sales, may result in fluctuations in our operating results.
If we are not able to maintain and enhance our brand, our business, operating results, and financial condition may be adversely affected.
We believe that maintaining and enhancing our reputation as a differentiated and category-defining company in customer experience solutions is critical to our relationships with our existing customers and to our ability to attract new customers. The successful promotion of our brand attributes will depend on a number of factors, including our marketing efforts, our ability to continue to develop high-quality software, and our ability to successfully differentiate our product and platform solutions from competitive solutions and services. Our ability to maintain our brand will depend on ensuring we communicate our core strengths in simplicity, agility of our solutions, and easy adoption of sophisticated solutions to our prospective customers, particularly as compared to our competitors offering products to small and midsized organizations and other competitors offering products to larger organizations. We are and have been highly dependent upon “consumer” tactics to build our brand and develop brand loyalty, but may need to increasingly spend significant energy to develop branding to retain and increase brand recognition with our customers who are larger organizations. In addition, independent industry analysts often provide reviews of our solutions, as well as products and services offered by our competitors, and perception of our solutions in the marketplace may be significantly influenced by these reviews. If these reviews are negative, or less positive as compared to those of our competitors’ products and services, our brand may be adversely affected. It may also be difficult to maintain and
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enhance our brand, specifically following the launch of our updated corporate brand, in connection with sales through channel or strategic partners.
The promotion of our brand requires us to make substantial expenditures, and we anticipate that these expenditures will continue to increase, as our market becomes more competitive, as we expand into new markets, and as more sales are generated through our channel partners. To the extent that these activities yield increased revenue, this revenue may not offset the increased expenses we incur. If we do not successfully maintain and enhance our brand, our business may not grow, we may have reduced pricing power relative to competitors, and we could lose customers or fail to attract potential customers, all of which would adversely affect our business, results of operations, and financial condition.
Risks Related to Operating and Growing a Global Business
Our quarterly results may fluctuate significantly from period to period, and if we fail to meet the expectations of analysts or investors, our stock price and the value ofaninvestmentin our common stockcould decline substantially.
Our quarterly financial results may fluctuate dueas a result of a variety of factors, many of which are outside of our control. If our quarterly financial results fall below the expectations of investors or any securities analysts who follow our stock, the price of our common stock could decline substantially. Some of the important factors that may cause our revenue, operating results, and cash flows to increasing variabilityfluctuate from quarter to quarter include:
•the short-term and long-term impacts of COVID-19 or any other worldwide pandemic on our business, including but not limited to a decreased demand for our solutions and services, particularly in certain industries, negative impacts on our revenue results, and an increased unpredictability in expenses and cash flow;
•our ability to attract new customers, retain and increase sales cycles.to existing customers, and satisfy our customers’ requirements;
•the lengthrate of expansion and variabilityproductivity of our sales cycle. These assumptions are based upon historical trends for sales cycles and conversion rates associated with our existing customers, many of whom to date have been small to medium-sized organizationsforce;
•general economic conditions that make purchasing decisions with limited interaction with our sales or other personnel. As we continue to become more dependent on sales to larger organizations, we expect our sales cycles to lengthen and become less predictable. This may adversely affect either our financial results. Factors that may influencecustomers’ ability or willingness to purchase additional subscriptions, delay a prospective customer’s purchasing decision, reduce the lengthvalue of new subscription contracts, or affect customer retention;
•changes in our or our competitors’ pricing policies;
•the impact of security breaches, service interruptions, or other technical difficulties or reliability considerations on our solutions;
•our ability to meet the increasing expectations on product functionality of larger organizations while continuing to maintain an easily accessible solution for organizations of all sizes;
•changes in our billing and variabilityinvoicing policies and customer reception of those changes;
•our investments in and our ability to successfully sell newly developed or acquired products, features, or functionality;
•increasing efforts by our customers to develop native applications as a substitute for our own;
•the timing of customer payments and payment defaults by customers;
•the timing of the grant, price of our common stock, or vesting of equity awards to employees;
•expenses such as litigation or other dispute-related settlement payments;
•changes in foreign currency exchange rates and our customers' willingness to accept the risk of those changes; and
•the impact of new accounting pronouncements.
Many of these factors are outside of our control, and the occurrence of one or more of them might cause our revenue, operating results, cash flows, gross margin, operating margin, profitability, unearned revenue, and remaining revenue performance obligations, to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue, operating results, and cash flows may not be meaningful and should not be relied upon as an indication of future performance.
Failure to effectively maintain and scale our sales cycle include:
Increasing our customer base and achieving broader market acceptance of our product and platform solutions will depend, to a significant extent, on our ability to effectively maintain and scale our sales and marketing operations and activities. We are substantially dependent on our direct sales force to obtain certain of our new customers, including larger organizations. We plan to continue to invest in our direct sales force both domestically and internationally to increase the effectiveness of our sales motions and increase our sales capacity. During the year ended December 31, 2021, our sales and marketing organization increased by approximately 700 employees to approximately 2,340 employees. There is significant competition for experienced
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sales and marketing professionals with the discretionary natureskills and technical knowledge that we require, both domestically and internationally. Our ability to achieve significant revenue growth in the future will depend, in part, on our success in recruiting, training, and retaining a sufficient number of purchasingexperienced sales and budget cyclesmarketing professionals. New hires require significant training and decisions;time before they achieve full productivity, particularly in new sales segments and territories. In territories outside the United States, attraction, recruiting and retention of our sales personnel has been and will be increasingly difficult and costly, affecting our ability to compete in such jurisdictions. Further, as organizations worldwide adjust to continuing precautions and safety measures related to decreasing the health risks of COVID-19, our ability to connect in person with our customers and potential customers may be and has been negatively impacted, resulting in delayed sales cycles.
We cannot predict whether, or to what extent, our sales will increase as we continue to invest in our sales and marketing functions or how long it will take for new personnel to become productive, continue to focus on our core strengths, and achieve broader market acceptance. Our business will be harmed if our sales and marketing efforts do not generate a significant increase in revenue.
We depend on our executive officers and other key employees and the competitive natureloss of evaluationone or more of these employees or an inability to attract and purchasing processes;retain highly skilled employees could adversely affect our business.
We do not have employment agreements with our executive officers or other key personnel that require them to continue to work for us for any specified period of time and, therefore, they could terminate their employment with us at any time. The loss of one or more of our executive officers, especially our Chief Executive Officer, or other key employees globally could have an adverse effect on our business.
In addition, to execute on our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel in the San Francisco Bay Area, where our headquarters is located, and in other locations where we maintain offices, especially in Dublin, Ireland and Singapore is intense, especially for engineers experienced in designing and developing software and SaaS applications and experienced sales professionals. As organizations increasingly promote digital-first employee experiences and seek to hire across multiple jurisdictions, we will additionally face competition in hiring qualified employees in areas outside our physical offices.
We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. For example, certain domestic immigration laws restrict or limit our ability to recruit internationally. Any changes to U.S. immigration policies that restrain the flow of technical and professional talent may inhibit our ability to recruit and retain highly qualified employees. Additionally, many of the companies with which we compete for experienced personnel have greater resources than we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees or we have breached their legal obligations, resulting in a diversion of our time and resources. In addition, job candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. If the perceived or actual value of our equity awards declines, it may adversely affect our ability to recruit and retain highly skilled employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be adversely affected.
If we fail to effectively manage our growth and organizational change in a manner that preserves the key aspects of our culture, our business and operating results could be harmed.
We have experienced and may continue to experience rapid growth and organizational change, which has placed, and may continue to place, significant demands on our management, operational, and financial resources. For example, our headcount has grown from approximately 4,130 employees as of December 31, 2020 to approximately 5,860 employees as of December 31, 2021. In addition, we have established subsidiaries in Denmark, the United Kingdom, Australia, Ireland, Japan, the Philippines, Brazil, Germany, India, Mexico, and South Korea since our inception in 2007, and, as a result of acquisitions, we also have subsidiaries in Singapore, France, Poland, Portugal, and Canada. We may continue to invest in our international operations and expand into other countries in the future. We have also experienced significant growth in the number of customers, end users, transactions, and data that our solutions support. Our organizational structure is becoming more complex and we may need to scale and adapt our operational, financial, and management controls, as well as our reporting systems and procedures, to manage this complexity. Further, as our employees work from geographic areas across the globe, we will require investment of resources and close monitoring of local regulations and requirements that continually change due to events that may have a global impact, such as the shift to remote work or hybrid remote and in-office models arising from the COVID-19
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pandemic, and we may experience unpredictability in our expenses, employee retention, and employee work culture. We will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining our corporate culture of rapid innovation, simplicity in design, and attention to customer experience that has been critical to our growth so far. If we fail to manage our anticipated growth and change in a manner that preserves the key aspects of our culture, the retention and productivity of our employees may be impacted, and the quality of our solutions and services may suffer, which could negatively affect our brand and reputation and harm our ability to retain and attract customers.
We have a history of losses and we expect our revenue growth rate to decline. As our costs increase, we may not be able to generate sufficient revenue to achieve and sustain our profitability.
We have incurred net losses in each year since our inception, including net losses of $62 million and $70 million for the three months ended December 31, 2021 and 2020, respectively, and net losses of $224 million and $218 million for the fiscal years ended December 31, 2021 and 2020, respectively. We had an accumulated deficit of $1,140 million as of December 31, 2021. For the three months ended December 31, 2021 and 2020, our revenue was $375 million and $283 million, respectively, representing a 32% growth rate. For the fiscal years ended December 31, 2021 and 2020, our revenue was $1,339 million and $1,030 million, respectively, representing a 30% growth rate. Our historical revenue growth has been inconsistent and should not be considered indicative of our future performance. We expect that our revenue growth rate will decline over time. We may not be able to generate sufficient revenue to achieve and sustain profitability as we also expect our costs to increase in future periods. We expect to continue to expend substantial financial and other resources on:
•development of our existing product and platform solutions or acquisition of new product and platform solutions features, or functionality by us orto appeal to as many types and sizes of organizations as possible, including investments in our competitors;research and
•continued international investment in an effort to increase our customer base and sales;
•investments in programs to ensure retention of current customers and expansion of use cases for our products with those customers;
•enhancements to our network operations and infrastructure;
•sales and marketing; and
•general administration, including legal, accounting, and other expenses related to being a public company.
These investments may not result in increased revenue or growth of our business. If we fail to continue to grow our revenue, our operating results and business would be harmed.
Our international sales and operations subject us to additional risks that can adversely affect our business, operating results, and financial results. Ifcondition.
In the fiscal years ended December 31, 2021 and 2020, we derived 49% and 48%, respectively, of our revenue from customers located outside of the United States. We are continuing to invest in our international operations as part of our growth strategy. We currently have sales personnel and sales and product support operations in certain countries across North America, Europe, Australia, Asia, and South America. To date, a limited portion of our sales has been driven by resellers or other channel partners. We believe our ability to convince new customers to subscribe to our solutions or to convince existing customers to renew or expand their use of our solutions is directly correlated to the level of engagement we obtain with the customer. To the extent we are unable to close oneeffectively engage with non-U.S. customers due to our limited sales force capacity and limited channel partners, we may be unable to effectively grow in international markets.
Our international operations subject us to a variety of additional risks and challenges, including:
•economic conditions in each country or more expected significant transactionsregion and general economic uncertainty around the world;
•the need for sales representatives to be recruited, hired, and retained locally in increasing numbers of countries abroad;
•communication and integration problems related to entering new markets with these customersdifferent languages, cultures, and political systems, particularly in regions with a particular period,high level of such differences between each country;
•compliance with foreign privacy and security laws and regulations and the risks and costs of non-compliance;
•the need for localized software and licensing programs, including the need for localized language support and data residency requirements;
•burdens of complying with a variety of foreign laws, including laws related to marketing restrictions and other data privacy regulations;
•increased management, travel, visa compliance, infrastructure, and legal compliance costs associated with having multiple international operations;
•longer payment cycles and difficulties in enforcing contracts, collecting accounts receivable, or ifsatisfying revenue recognition criteria, especially in emerging markets;
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•differing technical standards, existing or future regulatory and certification requirements and required features and functionality;
•exposure to political developments in the United Kingdom (“U.K.”), including the departure of the U.K. from the European Union (“EU”) on January 31, 2021 (“Brexit”), which has created an expected transaction is delayed until a subsequent period,uncertain political, economic and regulatory environment, instability for businesses, and volatility in global financial markets and the value of foreign currencies, all of which could disrupt trade, the sale of our services, and the mobility of our employees and contractors between the U.K., EU and other jurisdictions;
•compliance with laws and regulations for foreign operations, including anti-bribery laws (such as the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. Travel Act, and the U.K. Bribery Act 2010), import and export controls laws, tariffs, trade barriers, economic sanctions, anti-slavery laws, and other regulatory or contractual limitations on our ability to sell our solutions in certain foreign markets, and the risks and costs of non-compliance;
•heightened risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact our financial results and result in restatements of our consolidated financial statements;
•fluctuations in foreign currency exchange rates and the related effect on our operating results, particularly as our customers increasingly demand less exposure to such fluctuations;
•difficulties in repatriating or transferring funds from or converting currencies in certain countries;
•requirements or preferences for that period,domestic products;
•differing labor standards, including restrictions related to, and the increased cost of, terminating employees in some countries;
•reduced protection for any future periodsintellectual property rights in whichsome countries and practical difficulties of enforcing rights abroad;
•compliance with the laws of numerous foreign tax jurisdictions, including withholding obligations, and overlapping of different tax regimes; and
•the impact of natural disasters, diseases and pandemics, such as COVID-19, and travel restrictions and other measures undertaken by governments in response to such issues.
Any of these risks could adversely affect our international operations, reduce our international revenue, from such transaction would otherwise have been recognized,or increase our operating costs, adversely affecting our business, operating results, financial condition, and growth prospects.
Compliance with laws and regulations applicable to our international operations substantially increases our cost of doing business in foreign jurisdictions. We may be unable to keep current with new or revised government requirements as they change from time to time. Failure to comply with these regulations could have adverse effects on our business. Additionally, in many foreign countries it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. or other regulations applicable to us. Although we have implemented certain policies and procedures designed to ensure compliance with these laws and policies, there can be no assurance that all of our employees, contractors, partners, and agents will comply with these laws and policies. Violations of laws or key control policies by our employees, contractors, partners, or agents could result in delays in revenue recognition, financial reporting misstatements, enforcement actions, disgorgement of profits, fines, civil and criminal penalties, damages, injunctions, other collateral consequences, or the prohibition of the importation or exportation of our solutions and services, and could adversely affected.affect our business and results of operations.
We may acquire or invest in companies, which may divert our management’s attention and result in additional dilution to our stockholders. We may be unable to integrate acquired businesses and technologies successfully or achieve the expected benefits of such acquisitions.
We may evaluate and consider potential strategic transactions, including acquisitions of, or investments in, businesses, technologies, services, product and platform solutions, and other assets in the future. We also may enter into relationships with other businesses to expand our solutions and services, which could involve preferred or exclusive licenses, additional channels of distribution, discount pricing, or investments in other companies.
Any acquisition, investment, or business relationship may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties assimilating or integrating the business strategy, sales plans, technologies, products, personnel, or operations of the acquired companies, particularly if the key personnel of the acquired company choose not to work for us, their software is not easily adapted to work with our solutions, or we have difficulty retaining the customers of any acquired business due to changes in ownership, management, customers' experience with the acquired company prior to acquisition, or otherwise. Acquisitions may also disrupt our business, divert our resources, and require significant management attention that would otherwise be available for development of our existing business. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized or we may be exposed to unknown risks or liabilities.
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Negotiating these transactions can be time-consuming, difficult, and expensive, and our ability to complete these transactions may often be subject to approvals that are beyond our control. Consequently, these transactions, even if announced, may not be completed. For one or more of these transactions, we may:
•issue additional equity securities that would dilute our existing stockholders;
•use cash that we may need in the future to operate our business;
•encounter difficulties retaining key employees of the acquired company or integrating diverse software codes or business cultures;
•incur large charges or substantial liabilities;
•incur debt on terms unfavorable to us or that we are unable to repay;
•divert our resources to understand and comply with new jurisdictions if such acquired company is in a new country; and/or
•become subject to adverse tax consequences, substantial depreciation, or deferred compensation charges.
Our financial results may fluctuate due to increasing variability in our sales cycles.
We plan our expenses based on certain assumptions about the length and variability of our sales cycle. These assumptions are based upon historical trends for sales cycles and conversion rates associated with our existing customers, many of whom to date have been small to midsized organizations that make purchasing decisions with limited interaction with our sales or other personnel. As we continue to sell to larger organizations, we expect our sales cycles to those organizations to lengthen and become less predictable. This may not be ableadversely affect our financial results. Factors that may influence the length and variability of our sales cycle include:
•the competitive nature of evaluation and purchasing processes;
•the need to integrate neweducate prospective customers about the uses and benefits of our product and platform solutions;
•the discretionary nature of purchasing and budget cycles and decisions;
•announcements or planned introductions of new solutions, intofeatures, or functionality by us or our infrastructure,competitors; and
•lengthy purchasing approval processes.
If we are unable to close one or more expected significant transactions with these customers in a particular period, or if an expected transaction is delayed until a subsequent period, our operating results for that period, and for any future periods in which could negatively impact our future salesrevenue from such transaction would otherwise have been recognized, may be adversely affected.
Additionally, the COVID-19 pandemic has, and results of operations.
We are subject to governmental sanctions restrictions and export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.
We incorporate encryption technology into our solutions that is enabled through mobile applications and other software we may be deemed to export, and therefore we may be subject to U.S. export controls and economic sanctions regulations. These encryption solutions and the underlying technology may be exported outside of the U.S. only with the required export authorizations, including by license, a license exception, or other appropriate government authorizations. We previously deployed mobile applications prior to obtaining the required export authorizations. Accordingly, we have not fully complied with applicable encryption controls in U.S. export administration regulations.
Furthermore, U.S. export controls laws and economic sanctions prohibit the shipment or provision of certain products and services to countries, governments, territories, and persons targeted by U.S. sanctions. While we are currently taking precautions to prevent our solutions from being enabled by persons targeted by U.S. sanctions, including IP blocking and periodic customer screening against U.S. government lists of prohibited persons, such measures may be circumvented. Given the technical limitations in developing measures that will prevent access to internet-based services from particular geographies or by particular individuals, we have previously identified and expect we will continue to identify customer accounts for our solutions that we suspect originate from countries or parties which are subject to U.S. sanctions restrictions.
We are aware that trials of and subscriptions to our solutions have been initiated by persons and organizations in countries that are the subject of U.S. embargoes, or to persons and organizations supporting customers in countries that are the subject of U.S. embargoes, or to parties which are subject to targeted export and sanctions restrictions. Our provision of
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services in these instances was likely in violation of U.S. export controls and sanctions laws. We have terminated the accounts of such solutions. organizations as we have become aware of them, implemented certain measures designed to prevent future unauthorized access by such persons and organizations, and filed voluntary self-disclosures with the U.S. Department of Commerce’s Bureau of Industry and Security, or BIS, and the U.S. Department of Treasury’s Office of Foreign Assets Control, or OFAC, concerning prior potential violations. With respect to these resolved matters, each of BIS and OFAC completed its investigations, and no monetary penalties or other sanctions were imposed. With respect to future matters, there is the potential for the government to impose fines or sanctions.
If we are not ablefound to fully integrate new solutions into our infrastructure, our businessbe in violation of U.S. sanctions or export controls laws, it could be harmed.result in fines or penalties for us and for individuals, including civil penalties of approximately $300,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation, fines of up to $1 million and possible incarceration for responsible employees and managers for willful and knowing violations.
If weour channel partners fail to effectively manage our growth and organizational change in a manner that preserves the key aspects of our culture, our business and operating results could be harmed.
In eachaddition, various countries regulate the import of the fiscal years ended December 31, 2019certain encryption technology, including import permitting and 2018, we derived 48% of our revenue from customers located outside of the United States. We are continuing to expand our international operations as part of our growth strategy. We currentlylicensing requirements, and have sales personnel and sales and product support operations in certain countries across North America, Europe, Australia, Asia, and South America. To date a very limited portion of our sales has been driven by resellers or other channel partners. We believeenacted laws that could limit our ability to convince new customers to subscribe tooffer or distribute our solutions or could limit our customers’ ability to convince existingimplement our solutions in those countries. Changes in our solutions or future changes in export and import regulations may create delays in the introduction of our solutions in international markets or prevent our customers to renewwith international operations from deploying our solutions globally. Any change in export or expand theirimport regulations, economic sanctions, or related legislation, or change in the countries, governments, persons, or technologies targeted by such regulations, could result in decreased use of our solutions is directly correlatedby, or in our decreased ability to export or sell our solutions to, existing or potential customers with international operations. Any decreased use of our solutions or limitation on our ability to export or sell our solutions would likely adversely affect our business operations and financial results.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.
We have funded our operations since inception primarily through customer payments for subscription services, the issuance of our convertible senior notes, and public and private equity financings. In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions, a decline in the level of engagementsubscriptions for our solutions, or unforeseen circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any additional debt financing obtained by us could involve restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally, we obtain with the customer. To the extentmay not be able to generate sufficient cash to service any debt financing obtained by us, which may force us to reduce or delay capital expenditures or sell assets or operations. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our common stock. If we are unable to effectively engage with non-U.S. customers dueobtain adequate financing or financing on terms satisfactory to our limited sales force capacity and limited channel partners,us, when we may be unable to effectively grow in international markets.
Risks Related to Cybersecurity, Reliability, and Data Privacy
Our network and computer systems have been breached in the past, and in one case that we recently publicly disclosed, a malicious actor appears to have had unauthorized access to customer data.past. In light of this incident,prior incidents, and in the event that we are subject to any future breaches or we learn that the extent of this recently-disclosed breach isprior breaches are more significant than is currently known, our solutions may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities.
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that trust, our customer retention will decrease, our perception in the market will be harmed, and our results of operations will be negatively affected.
Use of our product and platform solutions involves the storage, transmission, and processing of our customers’ proprietary data, including personally identifiable information and other sensitive data regarding their customers or employees. Unauthorized access to, or disclosure, compromise, destruction, alteration or corruption of, such information or security breaches of our solutions, or our service providers' solutions, could result in the loss of data, loss of intellectual property or trade secrets, loss of business, severe reputational damage adversely affecting customer orand investor confidence, disruption to our business, regulatory investigations and orders, litigation, or indemnity obligations. Furthermore, ifobligations, or other legal, regulatory, and financial exposure and liability. If our network or computer systems are breached or unauthorized access to customer data is otherwise obtained, we may be held responsible for damages for contract breach, or be subjected to penalties for violation of applicable laws and regulations or contractual obligations, and we could incur significant costs for remediation that may include liability for stolen assets or information and repair of system damage that may have been caused, incentives offered to customers or other business partners in an effort to maintain business relationships after a breach, and other liabilities. Furthermore, security breaches of our solutions could make it easier for malicious third parties to discover vulnerabilities in such solutions or allow our competitors to create similar solutions with decreased development effort, harming our competitive position. Notifications related to a security breach regarding or pertaining to any of such service providers have impacted and could in the future impact our reputation, harm customer confidence, hurt our sales and expansion into new markets, or cause us to lose existing customers.
We have incurred, and expect to continue to incur, significant expenses to prevent, investigate, and remediate security breaches and vulnerabilities, including deploying additional personnel and protection technologies, implementing increasingly mature processes and programs, hiring and training employees, and engaging third-party experts and consultants. Our errors and omissions insurance coverage covering certain security and privacy damages and claim expenses may not be sufficient to compensate for all liability.liability related to or arising out of any security incidents.
We have previously experienced significant data breaches and security incidents. We have also previously identified significantmajor vulnerabilities of our security measures and the security measures deployed by third-party vendors upon which we rely, and our solutions arehave been and may continue to be at risk for future breaches as a result of third-party action against ourselves or our vendors, employee, vendor, or contractor error, malfeasance, or other factors. In the quarter ended September 30, 2019, we discovered a security matter that may have affected the Zendesk Support and Chat product solutions and customer accounts of those solutions activated prior to November of 2016. On September 24, 2019, we determined that information belonging to a small percentage of customers was accessed prior to November of 2016. The information accessed appears to have included some personally identifiable information and other service data, including customer credentials. We may learn additional information in the future regarding this incident. In light of this incident,prior incidents, and in the event that we are subject to any future breaches or we learn that the extent of this prior incidentincidents is more significant than is currently known, our solutions may be perceived as insecure, we may lose existing customers or fail to attract new customers, and we may incur significant liabilities.
In addition, new solutions and services, including newly acquired solutions and services, may rely on systems, networks, personnel, equipment, and vendors that may initially be different from those utilized in connection with our existing solutions and which may not have been subject to the same security reviews and assessments as those used to provide our existing solutions. Any failure to complete these security reviews and assessments and to implement improvements to the security measures deployed to protect our new solutions in a timely manner could increase our risk of a security breach with respect to these solutions, which would harm our reputation and our business as a whole.
Cyber incidents have been increasing in sophistication and frequency, increasing the difficulty of detecting and successfully defending against them. Such incidents can include third parties gaining access to employee or customer data using stolen or inferred credentials, computer malware, exploiting vulnerabilities in hardware, software, or other infrastructure, social engineering techniques, viruses, spamming, phishing attacks, ransomware, card skimming code, and other deliberate attacks and attempts to gain unauthorized access. Additionally, our continued use of remote work environments and virtual platforms may also increase our cybersecurity vulnerabilities and risks. Because the techniques used and vulnerabilities exploited to obtain unauthorized access to or to sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or vulnerabilities or to implement adequate preventative measures. The number and complexity of security incidents continue to increase over time, and may include phishing attacks, ransomware, dissemination of computer viruses, worms and other destructive or disruptive software, denial of service attacks, attacks by foreign state actors, and other malicious activity,
Interruptions or performance problems associated with our technology and infrastructure may adversely affect our business and operating results.
Our continued growth depends in part on the ability of our existing and potential customers to access our solutions at any time and within an acceptable amount of time. Our solutions are proprietary, and we rely on the expertise of members of our
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engineering, operations, and software development teams for their continued performance. We have experienced, and may in the future continue to experience, disruptions, outages, and other performance problems due to a variety of factors, including infrastructure changes, introductions of new functionality, human or software errors, capacity constraints due to an overwhelming number of users simultaneously accessing our solutions, distributed denial of service attacks, or other security related incidents.incidents, which may affect and have affected our perception of reliability with customers. In some instances, we may not be able to identify the cause or causes of these performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve our performance, especially during peak usage times and as our solutions become more complex and our user traffic increases. If any of our solutions are unavailable or if our users are unable to access our solutions within a reasonable amount of time or at all, impacted existing customers may decide to not renew or expand usage of our business would besolutions, and new customers who hear of such disruptions may as a result decide to not purchase our solutions, negatively affected.affecting our business. In addition, a significant portion of our infrastructure does not implement multi-region data replication. Therefore, in the event of any of the factors described above, or certain other failures of our infrastructure, customer data may be and have been permanently lost. Moreover, some of our customer agreements and certain subscription plans include performance guarantees and service level standards that obligate us to provide credits or termination rights in the event of a significant disruption in our services. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed, and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be adversely affected.
We rely substantially on third-party managed hosting services to support our operations and disruption or interference in such service may negatively impact our business.
Given that we are significantly reliant on third-party managed hosting services, any significant disruption of or interference in our use of such services will negatively impact our operations and customer satisfaction. Third-party managed hosting services may additionally take actions beyond our control that could seriously harm our business, including discontinuing or limiting our access to the service, increasing price terms, including establishing more favorable relationships or pricing terms with one or more of our competitors, maintaining control over the pricing models of those hosting services for when customers experience unique spikes in demand and usage, terminating or seeking to terminate the contractual relationship altogether, or modifying or interpreting its terms of service or other policies in a manner that impacts our ability to run our businesses and operations. Different types of challenges may arise from our various solutions' usage of third-party hosting services, and if we are not able to provide a seamless experience contemporaneously across our solutions, our reputation and perception of reliability may be negatively impacted, and our customer retention and prospective business may be harmed.
We have made and will continue to make substantial expenditures for third-party managed hosting services to support our growth and provide enhanced levels of service to our customers. If costs associated with third-party managed hosting services utilized to support our growth are greater than expected, the negative impact on our operating results would likely exceed our initial expectations.
Domestic and international privacy and data security concerns and laws could result in additional costs and liabilities to us or inhibit sales of our solutions.
The regulatory framework for privacy and security concerns and laws worldwide are rapidly evolving and are likely to remain uncertain for the foreseeable future. Many federal, state, and foreign government bodies and agencies have adopted, or are considering adopting, laws and regulations regarding the collection, use, and disclosure of personal information. In the United States, these include rules and regulations promulgated under the authority of federal agencies and state attorneys general and consumer protection agencies.Certain state laws may be more stringent or broader in scope, or offer greater individual rights, with respect to sensitive and personal information than federal or other state laws, and such laws may differ from each other, which may complicate compliance efforts. For example, in 2018, California enacted the California Consumer Privacy Act, or CCPA, which went into effect in January 2020 and became enforceable by the California Attorney General in July 2020. The CCPA established certain transparency requirements and individual rights and, among other things, requires companies covered by the legislation to provide new disclosures to California consumers and afford such consumers new rights with respect to their personal information, including the right to request deletion of their personal information, the right to receive the personal information on record for them, the right to know what categories of personal information generally are maintained about them, as well as the right to opt-out of certain sales of personal information. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches that result in the loss of personal information. This private right of action may increase the likelihood of, and risks associated with, data breach litigation.
Additionally, a new California ballot initiative, the California Privacy Rights Act, or CPRA, was passed in November 2020. Effective on January 1, 2023, the CPRA imposes additional obligations on companies covered by the legislation and will significantly modify the CCPA, including by expanding consumers’ rights with respect to certain sensitive personal
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information. The CPRA also creates a new state agency that will be vested with authority to implement and enforce the CCPA and the CPRA. The effects of the CCPA and the CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation.
Certain other state laws impose similar privacy obligations and we also anticipate that more states will increasingly enact legislation similar to the CCPA. The CCPA has prompted a number of proposals for new federal and state-level privacy legislation and in some states efforts to pass comprehensive privacy laws have been successful. For example, on March 2, 2021, Virginia enacted the Consumer Data Protection Act, or CDPA. The CDPA will become effective January 1, 2023. The CDPA will regulate how businesses (which the CDPA refers to as “controllers”) collect and share personal information. While the CDPA incorporates many similar concepts of the CCPA and CPRA, there are also several key differences in the scope, application, and enforcement of the law that will change the operational practices of controllers. The new law will impact how controllers collect and process personal sensitive data, conduct data protection assessments, transfer personal data to affiliates, and respond to consumer rights requests.
Also, on July 8, 2021, Colorado’s governor signed the Colorado Privacy Act, or CPA, into law. The CPA is rather similar to Virginia’s CDPA, but also contains additional requirements. The new measure applies to companies conducting business in Colorado or who produce or deliver commercial products or services intentionally targeted to residents of the state that either: (1) control or process the personal data of at least 100,000 consumers during a calendar year; or (2) derive revenue or receive a discount on the price of goods or services from the sale of personal data and process or control the personal data of at least 25,000 consumers.
With the CPA, Colorado became the third state to enact a comprehensive privacy law. A number of additional other states have proposed bills for comprehensive consumer privacy laws and it is quite possible that certain of these bills will pass. The existence of comprehensive privacy laws in different states in the country, if enacted, will add additional complexity, variation in requirements, restrictions and potential legal risk, require additional investment of resources in compliance programs, impact strategies and the availability of previously useful data, and has resulted in and will result in increased compliance costs and/or changes in business practices and policies.
Internationally, virtually every jurisdiction in which we operate has established its own data security and privacy legal framework with which we or our customers must comply. In May 2018, the European General Data Protection Regulation, or GDPR, came into effect and established requirements applicable to the handling of personal data and may result in fines up to €20 million or up to 4% of annual global turnover in the preceding financial year, whichever is higher, and other administrative penalties. Compliance with GDPR has and will continue to require valuable management and employee time and resources. In many European jurisdictions enforcement actions and consequences for non-compliance are also rising.
In February 2016, the European Union and U.S. officials announced an agreement, which established the EU-U.S. Privacy Shield Framework, or the Privacy Shield, as a means for legitimating the transfer of personal data from the European Economic Area to the U.S. We have in the past relied on various transfer safeguards, including the Privacy Shield, to legitimize data transfers from the EU to the U.S. However, in July 2020, the Court of Justice of the European Union, or the CJEU, in Case C-311/18 (Data Protection Commissioner v Facebook Ireland and Maximillian Schrems or Schrems II) invalidated the Privacy Shield on the grounds that the Privacy Shield failed to offer adequate protections to EU personal data transferred to the U.S. The CJEU, in the same decision, deemed that the Standard Contractual Clauses, or SCCs, remain valid. However, the CJEU ruled that transfers made pursuant to the SCCs need to be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, and required businesses to assess whether supplementary measures that provide privacy protections additional to those provided under SCCs need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EU. Subsequent guidance published by the European Data Protection Board, or EDPB, in June 2021 described what such supplementary measures must be, and stated that businesses should avoid or cease transfers of personal data if, in the absence of supplementary measures, equivalent protections cannot be afforded. Additionally, the EDPB guidance clarified that the CJEU’s requirements regarding the SCCs also apply to other transfer mechanisms, such as the Binding Corporate Rules, which serve as Zendesk’s primary mechanism to legitimize data transfers from the EU to other jurisdictions, including the U.S. In June 2021, the European Commission published new versions of the SCCs, which seek to address items identified by the CJEU’s Schrems II decision and provide further details regarding the transfer assessments that the parties are required to conduct when implementing the new SCCs. The new SCCs must be used for relevant new data transfers from September 27, 2021; existing SCCs arrangements must be migrated to the new SCCs by December 27, 2022. Similarly, the Swiss data protection authority determined the Swiss-U.S. Privacy Shield framework was no longer a valid mechanism for Swiss-U.S. data transfers.
Outside of the EU, on August 27, 2021, the Swiss Federal Data Protection and Information Commissioner (FDPIC) announced that the new EU SCCs could be relied upon to legitimize transfers of personal data out of Switzerland to third countries that have not been deemed to provide “adequate” protection to personal data. The new EU SCCs must be used for any new contract entered into as of September 27, 2021 and implemented in existing contracts that incorporate the prior version of
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the SCCs by January 1, 2023. In the UK, following Brexit, the UK is no longer subject to the EC’s new standard contractual clauses but has published a draft version of a UK-specific transfer mechanism, which, once finalized, will enable transfers from the UK. We will be required to implement these new safeguards when conducting restricted data transfers and doing so will require significant effort and cost.These and other future developments regarding the flow of data across borders could increase the cost and complexity of delivering our services in some markets and may lead to governmental enforcement actions, litigation, fines, and penalties or adverse publicity, which could adversely affect our business and financial position.
Jurisdictions outside of Europe are also considering and/or enacting comprehensive data protection legislation. For example, as of August 2020, the Brazilian General Data Protection Law imposes requirements similar to GDPR on products and services offered to users in Brazil. Cross-border data transfers and other future developments regarding local data residency could increase the cost and complexity of delivering our services in some markets and may lead to governmental enforcement actions, litigation, fines, and penalties or adverse publicity, which could adversely affect our business and financial position, could greatly increase our cost of providing our products and services, require significant changes to our operations, or even prevent us from offering certain services in specific jurisdictions.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that either legally or contractually apply to us. Further, our customers or potential customers may require us to comply with more stringent privacy and data security contractual requirements or decide not to do business with us. For example, some of our customers or potential customers who do business in the European Union may require us to host all personal data within the European Union and may decide to do business with one of our competitors who hosts personal data within the European Union instead of doing business with us. Particularly in this regulatory environment, if we or other SaaS providers experience data security incidents, loss of customer data, disruptions in delivery, or other problems, the market for SaaS business applications, including our solutions, may be negatively affected.
We also continue to see jurisdictions imposing data localization laws, which may require personal information of citizens of a jurisdiction to be, among other data processing operations, initially collected, stored, and modified locally within such jurisdiction. These regulations may deter customers from using services such as ours, and may inhibit our ability to expand into those markets or prohibit us from continuing to offer services in those markets without significant additional costs.
Because the interpretation and application of many privacy and data protection laws, commercial frameworks, and standards are uncertain, it is possible that these laws, frameworks, and standards may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of our solutions. If so, in addition to the possibility of fines, lawsuits, breach of contract claims, and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our solutions, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and security or data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business.
Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our customers may limit the use and adoption of, and reduce the overall demand for, our solutions. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our solutions, particularly in certain industries and foreign countries.
Real or perceived errors, failures, or bugs in our solutions could adversely affect our operating results and growth prospects.
Because our solutions are complex, undetected errors, failures, vulnerabilities, or bugs may occur, especially when updates are deployed. Our solutions are often used in connection with large-scale computing environments with different operating systems, system management software, equipment, and networking configurations, which may cause errors or failures of our solutions or other aspects of the computing environment into which they are deployed. In addition, deployment of our solutions into complicated, large-scale computing environments may expose undetected errors, failures, vulnerabilities, or bugs in our solutions. We have discovered, and expect to continue to discover, software errors, failures, vulnerabilities, and bugs in our solutions, some of which have been or may only be discovered and remediated after deployment to customers. Real or perceived errors, failures, vulnerabilities, or bugs in our solutions could result in negative publicity, loss of or delay in market acceptance of our solutions, loss of competitive position, or claims by customers for losses sustained by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources in order to help correct the problem.
Incorrect or improper implementation or use of our product and platform solutions could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition, and growth prospects.
Our product and platform solutions are deployed in a wide variety of technology environments and into a broad range of complex workflows. Increasingly, our solutions have been, and will continue to be, integrated into large-scale, complex
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technology environments and specialized use cases, and we believe our future success will depend on our ability to increase use of our solutions in such deployments. We often assist our customers in implementing our solutions, but many customers attempt to implement deployments, including complex deployments, themselves. If we or our customers are unable to implement our solutions successfully, or are unable to do so in a timely manner, customer perceptions of our solutions and of our company may be impaired, our reputation and brand may suffer, and customers may choose not to renew or expand the use of our solutions.
Our customers and third-party partners may need training in the proper use of our solutions to maximize their potential. If our solutions are not implemented or used correctly or as intended, inadequate performance may result. Because our customers rely on our solutions to manage a wide range of operations and to drive a number of their internal processes, the incorrect or improper implementation or use of our solutions, our failure to train customers on how to efficiently and effectively use our solutions, or our failure to provide adequate product support to our customers, may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for additional subscriptions to our solutions.
Indemnity provisions in various agreements potentially expose us to substantial liability for intellectual property infringement and other losses.
Our agreements with customers and other third parties may include indemnification or other provisions under which we agree to indemnify or otherwise be liable to them for losses suffered or incurred as a result of claims of intellectual property infringement, damages caused by us to property or persons, or other liabilities relating to or arising from our solutions or other acts or omissions. The term of these contractual provisions often survives termination or expiration of the applicable agreement. Large indemnity payments or damage claims from contractual breach could harm our business, operating results, and financial condition. From time to time, customers require us to indemnify or otherwise be liable to them for breach of confidentiality or failure to implement adequate security measures with respect to their data stored, transmitted, or processed by our product and platform solutions. Although we normally contractually limit our liability with respect to such obligations, we may still incur substantial liability related to them. Any dispute with a customer with respect to such obligations could have adverse effects on our relationship with that customer and other current and prospective customers, reduce demand for our solutions, and harm our business and operating results.
Our use of “open source” software could negatively affect our ability to sell our solutions and subject us to possible litigation.
We use open source software in our solutions and expect to continue to use open source software in the future. We may face claims from others claiming ownership of, or seeking to enforce the terms of, an open source license, including by demanding release of the open source software, derivative works, or our proprietary source code that was developed using such software. These claims could also result in litigation, require us to purchase a costly license, or require us to devote additional research and development resources to change our solutions, any of which would have a negative effect on our business and operating results. In addition, if the license terms for the open source software we utilize change, we may be forced to reengineer our solutions or incur additional costs. Although we have implemented policies to regulate the use and incorporation of open source software into our solutions, we cannot be certain that we have not incorporated open source software in our solutions in a manner that is inconsistent with such policies.
Any failure to protect our intellectual property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in part upon our intellectual property. We currently have fivefourteen issued patents and have a limited number of pending patent applications, none of which may result in an issued patent. We rely on copyright, trade secret, and trademark laws, patents, and confidentiality or license agreements with our employees, customers, partners, and others to protect our intellectual property rights. However, the steps we take to protect our intellectual property rights may be inadequate.
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In order to protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming, and distracting to management, and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims, and countersuits attacking the validity and enforceability of our intellectual property rights. Our failure to secure, protect, and enforce our intellectual property rights could adversely affect our brand and adversely impact our business.
We have been, and may in the future be, sued by third parties for alleged infringement of their proprietary rights.
There is considerable patent and other intellectual property development activity in our industry. Our future success depends in part on not infringing upon the intellectual property rights of others. From time to time, our competitors or other third parties have claimed, and may in the future claim, that we, our solutions or our underlying technology are infringing upon or otherwise violating their intellectual property rights, and we may be found to be infringing or violating upon such rights. We may be unaware of the intellectual property rights of others that may cover some or all of our technology. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering one or more of our solutions, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify our solutions, or refund subscription fees, which could further exhaust our resources. In addition, we may incur substantial costs to resolve claims or litigation, whether or not successfully asserted against us, which could include payment of significant settlement, royalty, or license fees, modification of our solutions, or refunds to customers of subscription fees. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and other employees from our business operations. Such disputes could also disrupt our solutions, adversely impacting our customer satisfaction and ability to attract customers.
Risks Related to Tax and Accounting Matters
Taxing authorities may successfully assert that we should have collected, or in the future should collect, sales and use, value added, or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our results of operations.
We do not collect sales and use, value added, or similar taxes in all jurisdictions in which we have sales, based on our understanding that such taxes are not applicable. Sales and use, value added, and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes may assert that such taxes are applicable, which could result in tax assessments, penalties, and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties, and interest, or future requirements, may adversely affect our results of operations.
Our international operations subject us to potentially adverse tax consequences.
We were founded in Denmark in 2007 and were headquartered in Denmark until we reincorporated in Delaware in 2009. Today, we generally conduct our international operations through subsidiaries and report our taxable income in various jurisdictions worldwide based upon our business operations in those jurisdictions. Our intercompany relationships and transactions are subject to complex regulations, including but not limited to transfer pricing regulations administered by taxing authorities in various jurisdictions. Our tax returns are generally subject to audit and/or further examination by taxing authorities and the relevant taxing authorities have and will disagree with our transfer pricing practices and procedures, including our determinations as to the value of assets sold or acquired or income and expenses attributable to specific jurisdictions or transactions. If our position were not sustained, we could be required to pay additional taxes, interest, and penalties, which could result in one-time tax charges, higher effective tax rates, reduced cash flows, and lower overall profitability of our operations.
Additionally, tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. The United States continuously enacts tax legislation, including regulations related to the significant tax reform legislation enacted in 2017, and certain tax provisions may potentially adversely affect us in the future. For example, U.S. President Joseph Biden’s plan to increase the U.S. federal corporate income tax rate could materially increase the amount of taxes we owe, thereby negatively impacting our results of operations as well as our cash flows from operations.In addition, governmental tax authorities are increasingly scrutinizing the tax positions of companies. Many countries in the European Union, as well as a number of other countries and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in
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countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition, or results of operations may be adversely impacted.
If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.
We review our intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be ablerecoverable. Goodwill is required to secure additional financing on favorable terms,be tested for impairment at least annually. As of December 31, 2021, we had a net balance of $197 million of goodwill and intangible assets related to business acquisitions. An adverse change in market conditions, particularly a change resulting in a significant decrease in our share price, or at all, to meet our future capital needs.
Our ability to use our net operating losses to offset future taxable income may be subject to certain limitations.
As of December 31, 2021, we had federal and state net operating loss carryforwards, or NOLs, of $1,601 million and $665 million, respectively, due to prior period losses. In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally defined as a greater than 50-percentage-point cumulative change (by value) in the equity ownership of certain stockholders over a rolling three-year period) is subject to limitations on its ability to utilize its NOLs to offset future taxable income. Our existing NOLs may be subject to limitations arising from previous ownership changes, including in connection with our initial public and private equity financings. We do not know whenoffering or if our operations will generate sufficient cashfollow-on public offering. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Furthermore, our ability to fund our ongoing operations. Inutilize NOLs of companies that we may acquire in the future may be subject to limitations. Our NOLs generated before fiscal year 2018 are subject to a 20-year carryover limitation and may expire if unused within that period. There is also a risk that due to legislative changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities. Our NOLs may also be subject to limitations under state law. For example, California recently enacted legislation suspending the use of NOLs for taxable years 2020, 2021 and 2022 for many taxpayers. In addition, under the Tax Cuts and Jobs Act of 2017, as modified by the Coronavirus Aid, Relief, and Economic Security Act, the amount of NOLs that we may require additional capitalare permitted to responddeduct in any taxable year is limited to business opportunities, challenges, acquisitions, a decline80% of our taxable income in such year, where taxable income is determined without regard to the level of subscriptions for our solutions, or unforeseen circumstances. We may not be able to timely secure additional debt or equity financing on favorable terms, or at all. Any additional debt financing obtained by us could involve restrictive covenants relating to financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Additionally,NOL deduction itself. For these reasons, we may not be able to generate sufficient cashrealize a tax benefit from the use of our NOLs, whether or not we attain profitability.
Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.
Generally accepted accounting principles, or GAAP, in the United States are subject to service any debt financing obtainedinterpretation by us,the Financial Accounting Standards Board, or FASB, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results and could affect the reporting of transactions completed before the announcement of a change. For example, on January 1, 2018, we adopted Accounting Standards Codification, or ASC, 606, “Revenue from Contracts with Customers,” which changed our accounting policies regarding revenue recognition and incremental costs to acquire customer contracts. We also adjusted our consolidated financial statements from amounts previously reported to reflect the adoption. Certain other standards that become effective in the future may forcehave a material impact on our consolidated financial statements. See Note 2 of the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding the effect of new accounting pronouncements on our consolidated financial statements. Any difficulties in implementing these standards could cause us to reducefail to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us.
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We depend and rely upon SaaS technologies from third parties to operate our business and interruptions or delay capital expenditures or sell assets or operations. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity,performance problems with these technologies may adversely affect our existing stockholders could suffer significant dilutionbusiness and operating results.
We rely heavily on hosted SaaS applications from third parties in their percentage ownershiporder to operate critical functions of our company,business, including billing and any new equity securities we issueorder management, enterprise resource planning, and financial accounting processes. If these services become unavailable due to extended outages or interruptions, or because they are no longer available on commercially reasonable terms, our expenses could have rights, preferences, and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it,increase, our ability to continue to grow or support our business and to respond to business challengesmanage finances could be significantly limited.interrupted, and our processes for managing sales of our solutions and supporting our customers could be impaired until equivalent services, if available, are identified, obtained, and implemented, all of which could adversely affect our business.
We face exposure to foreign currency exchange rate fluctuations.
As our international operations expand, our exposure to the effects of fluctuations in currency exchange rates grows. While we have primarily transacted with customers in U.S. dollars historically, we expect to continue to expand the number of transactions with our customers that are denominated in foreign currencies in the future. Fluctuations in the value of the U.S. dollar and foreign currencies may make our subscriptions more expensive for international customers, which could harm our business. Additionally, we incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency for such locations. Fluctuations in the exchange rates between the U.S. dollar and other currencies could result in an increase to the U.S. dollar equivalent of such expenses. These fluctuations could cause our results of operations to differ from our expectations or the expectations of our investors. Additionally, such foreign currency exchange rate fluctuations could make it more difficult to detect underlying trends in our business and results of operations.
Our international subsidiaries maintain net assets that are denominated in currencies other than the functional operating currencies of these entities. Accordingly, changes in the value of foreign currencies relative to the U.S. dollar can affect our operating results due to transactional and translational remeasurements that are reflected in our results of operations. To the extent that fluctuations in foreign currency exchange rates cause our results of operations to differ from our expectations or the expectations of our investors, the trading price of our common stock could be adversely affected.
We currently operate a hedging program to mitigate the impact of foreign currency exchange rate fluctuations on our cash flows and earnings. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign currency exchange rates over the limited time the hedges are in place. Moreover, the use of hedging instruments may introduce additional risks if we are unable to structure effective hedges with such instruments, which could adversely affect our financial condition and operating results.
The COVID-19 pandemic has and may successfully assertcontinue to cause harm to our business, results of operations, and financial condition.
In March 2020, the World Health Organization declared the novel coronavirus and resulting COVID-19 disease a global pandemic. The COVID-19 pandemic has caused adverse public health developments, including orders to shelter-in-place, travel restrictions, and mandated business closures, which have adversely affected workforces, organizations, customers, economies, and financial markets globally. In light of the uncertain and rapidly evolving situation relating to the spread of COVID-19, we have taken precautionary measures, including imposing travel restrictions for our employees, mandating a global work from home policy, and shifting customer events to virtual-only experiences. Operationally, we have increased our focus on being prudent in managing operating expenses. Although we continue to monitor the situation and may adjust our current policies as more information and public health guidance become available, precautionary measures that we should have collected or in the future should collectbeen adopted could negatively affect our customer success efforts, customer retention, sales and use, value added,marketing efforts, delay and lengthen our sales cycles, affect our revenue growth rate, or similar taxes, and we could be subject to liability with respect to pastcreate operational or future sales,other challenges, any of which could adversely affectharm our business and results of operations. Additionally, our customers and potential customers may and have been exposed to similar operational considerations, resulting in significant pressures on their expenditures, and subsequently resulting in a decreased demand for our solutions.
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Table of ContentsIn addition, governmental tax authorities are increasingly scrutinizing
It is not possible for us to estimate the tax positionsduration or magnitude of companies. Many countries in the European Union, as well as a numberadverse results of other countriesthe outbreak and organizations such as the Organization for Economic Cooperation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business. If U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, andits effects on our business, financial condition, or results of operations, or financial condition at this time as the impact will depend on future developments, which are highly uncertain and cannot be predicted. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may be adversely impacted.
Unfavorable conditions in our critical assumptionsindustry or estimates,the global economy or reductions in information technology spending could result in a changelimit our ability to the estimation of fair value that could result in an impairment charge togrow our goodwill or intangible assets. Any such charges may have a material negative impact onbusiness and negatively affect our operating results.
Our ability to use our net operating losses to offset future taxable incomeresults may be subject to certain limitations.
Catastrophic events may disrupt, and have disrupted, our business.
Our corporate headquarters are located in San Francisco, California and we operate in or utilize hosting resources that are located in North America, Europe, Asia, and Australia. Key features and functionality of our solutions are enabled by third parties that are headquartered in California and operate in or utilize data centers in the United States and Europe. Additionally, we rely on our network and third-party infrastructure and enterprise applications, internal technology systems, and our website for our development, marketing, operational support, hosted services, and sales activities. In the event of a major earthquake, hurricane, or catastrophic event such as fire, pandemic, flood, power loss, telecommunications failure, cyber-attack, war, or terrorist attack, we may be unable to continue our operations and may endure system interruptions, reputational harm, delays in our application development, lengthy interruptions in our solutions, breaches of data security, disruption to our customer success efforts, and loss of critical data, all of which could have an adverse effect on our future operating results.
Risks Related to Ownership of Our Common Stock
Our stock price has been, and may continue to be, volatile or may decline regardless of our operating performance, resulting in substantial losses for our stockholders.
The trading price of our common stock has been, and may continue to be, volatile and could fluctuate widely regardless of our operating performance. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our operating results;
•the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
•failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates, and publication of other news by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•ratings changes by any securities analysts who follow our company;
•announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments;
•changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;
•price and volume fluctuations in the overall stock market from time to time, including as a result of trends in the economy as a whole;
•the short and long-term impact of the COVID-19 pandemic, including on the global economy, our results of operations, software spending and business continuity;
•changes in accounting standards, policies, guidelines, interpretations, or principles;
•actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
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•developments or disputes concerning our intellectual property or our solutions, or third-party proprietary rights;
•announced or completed acquisitions of businesses or technologies by us or our competitors;
•new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
•any major change in our board of directors or management;
•sales of shares of our common stock by us or our stockholders;
•lawsuits threatened or filed against us; and
•other events or factors, including those resulting from war, incidents of terrorism, public health crises or responses to these events.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation in the future or if we are unsuccessful in defending securities-related litigation currently filed against us, it could subject us to substantial costs, make it more expensive for us to obtain director and officer liability insurance, divert resources and the attention of management from operating our business, and adversely affect our business, results of operations, financial condition, and cash flows.
Our directors, officers, and principal stockholders beneficially own a significant percentage of our stock and will be able to exert significant influence over matters subject to stockholder approval.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management, and limit the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:
•authorize our board of directors to issue, without further action by our stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock;
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, the Chair of our board of directors, or our Chief Executive Officer;
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, Class I, Class II, and Class III, with each class serving three-year staggered terms;
•prohibit cumulative voting in the election of directors;
•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and
•require the approval of our board of directors or the holders of at least 75% of our outstanding shares of capital stock to amend our bylaws and certain provisions of our certificate of incorporation.
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These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware (“Section 203”), which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. The provisions of our certificate of incorporation and bylaws cited above and the applicability of Section 203 may tend to delay, defer or prevent a potential unsolicited offer or takeover attempt that is not approved by our board of directors but that our stockholders might consider to be in their best interest, including an attempt that might result in stockholders receiving a premium over the market price for their shares. Any delay or prevention of a change of control transaction or changes in our management could cause the market price of our common stock to decline.
The requirements ofchanging laws and regulations related to being a public company may strain our resources and divert management’s attention, and affect our ability to attract and retain executive management and qualified board members.attention.
We do not intend to pay dividends on our common stock so any returns will be limited to changes in the value of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business, and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, our ability to pay cash dividends on our common stock may be prohibited or limited by the terms of our future debt financing arrangements. Any return to stockholders will therefore be limited to the increase, if any, of our stock price, which may never occur.
If securities or industry analysts do not continue to publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.
Our charter documents designate the Court of Chancery of the State of Delawarespecific courts as the sole and exclusive forum for certain types of actions and proceedingslitigation that may be initiated by ourthe Company’s stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.us.
Our certificate of incorporation and bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall beis the sole and exclusive forum for state law claims for (A) any derivative action or proceeding brought on our behalf,behalf; (B) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders,stockholders; (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law of the State of Delaware,or our certificate of incorporation or our bylaws (including the interpretation, validity or enforceability thereof); or (D) any action asserting a claim against us governed by the internal affairs doctrine. Anydoctrine (the “Delaware Forum Provision”). The Delaware Forum Provision will not apply to any causes of action arising under the Securities Act or the Exchange Act. Our bylaws further provide that unless we consent in writing to the selection of an alternative forum, the district courts of the United States shall be the sole and exclusive forum for resolving any complaint
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asserting a cause of action arising under the Securities Act (the “Federal Forum Provision”). In addition, our bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall beis deemed to have notice of and consented to the provisions ofDelaware Forum Provision and the Federal Forum Provision; provided, however, that stockholders cannot and will not be deemed to have waived our certificate of incorporation described above. This choice ofcompliance with the U.S. federal securities laws and the rules and regulations thereunder.
The Delaware Forum Provision and the Federal Forum Provision in our bylaws may impose additional litigation costs on stockholders in pursuing any such claims. Additionally, these forum provisionselection clauses may limit a stockholder’sour stockholders’ ability to bring a claim in a judicial forum that it findsthey find favorable for disputes with us or our directors, officers or other employees, which may discourage suchthe filing of lawsuits against us and our directors, officers and other employees. Alternatively,employees, even though an action, if a court were to find these provisions ofsuccessful, might benefit our certificate of incorporation inapplicable to, or unenforceable in respect of, one or morestockholders. In addition, Section 22 of the specified types of actionsSecurities Act creates a concurrent jurisdiction for state and federal courts over all suits brought concerning a duty or proceedings,liability created by the securities laws, rules and regulations thereunder. While the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court are “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our Federal Forum Provision. If the Federal Forum Provision is found to be unenforceable, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition,matters. The Federal Forum Provision may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid. The Court of Chancery of the State of Delaware and the federal district courts of the United States may also reach different judgments or results of operations.
Risks Related to our Outstanding Convertible Notes
Servicing our debt may require a significant amount of cash. We may not have sufficient cash flow from our business to pay our indebtedness, and we may not have the ability to raise the funds necessary to settle cash conversions of the Notes or to repurchase the Notes for cash upon a fundamental change, which could adversely affect our business and results of operations.
In March 2018, we issued $575 million in aggregate principal amount of 0.25% convertible senior notes due 2023 or Notes,(the “2023 Notes”), in a private offering. The interest rate on the 2023 Notes is fixed at 0.25% per annum and is payable semi-annually in arrears on March 15 and September 15 of each year. In June 2020, we issued $1,150 million aggregate principal amount of 0.625% convertible senior notes due 2025 in a private offering (the “2025 Notes,” and together with the 2023 Notes, the “Notes”). The interest rate on the 2025 Notes is fixed at 0.625% per annum and is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2020. In connection with the offering of the 2025 Notes, the Company used $618 million of the net proceeds from the offering of the 2025 Notes to repurchase $426 million aggregate principal amount of the 2023 Notes in cash through individual privately negotiated transactions (the “2023 Notes Partial Repurchase”). 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. As of December 31, 2021, $149 million of principal remains outstanding on the 2023 Notes. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flows from operations in the future that are sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional debt financing or equity capital on terms that may be onerous or highly dilutive. Our ability to refinance any future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Holders of the Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental change (as defined in the indenture governing the Notes) at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Notes being converted. We may not have enough available cash or be able to obtain financing at the time we are required to make repurchases in connection with such conversion and our ability to pay may additionally be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase the Notes at a time when the repurchase is required by the indenture governing the Notes or to pay any cash payable on future conversions as required by such indenture would constitute a default under such indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the
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indebtedness and repurchase the Notes or make cash payments upon conversions thereof. Additionally, subject to certain exceptions, if we fail to timely file any document or report required under the Securities and Exchange Act of 1934, in certain circumstances we may be required to pay additional interest of up to 0.50% per annum on our Notes in order to avoid an event of default under the indenture, which may affect our ability to repay the Notes. Furthermore, if we do not remedy such failure within 360 days after receiving notice thereof from the noteholders, there would be an event of default under the indenture.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. If one or more holders elect to convert their Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash,
which could adversely affect our liquidity. As disclosed in Note 9 of the Notes to our consolidated financial statements,Consolidated Financial Statements included in this Annual Report on Form 10-K, the conditional conversion feature of the 2023 Notes that is based on the closing stock price of our common stock during the last 30 trading days of a calendar quarter was triggered as of June 30, 2019,December 31, 2021, and the 2023 Notes wereare convertible at the option of the holders, in whole or in part, between July 1, 2019 and September 30, 2019. The conditional conversion feature of the Notes was not triggered as of December 31, 2019, and the notes are not convertible between January 1, 20202022 and March 31, 2020.2022. Whether the 2023 Notes will be convertible following such calendar quarter will depend on the satisfaction of this conditional conversion feature or another conversion condition in the future.
In addition, even if holders do not elect to convert their Notes at a time when they are convertible, we could beare required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes that are convertible as a current rather than long-term liability, which would resultresulting in a material reduction of our net working capital. We have classified the 2023 Notes as a long-termcurrent liability on the consolidated balance sheet as of December 31, 2019. As of the date of this filing, we have received one request for conversion for an immaterial amount.
Transactions relating to our Notes may affect the value of our common stock.
The conversion of some or all of the Notes would dilute the ownership interests of existing stockholders to the extent we satisfy our conversion obligation by delivering shares of our common stock upon any conversion of such Notes. Our Notes may become in the future convertible at the option of their holders under certain circumstances. If holders of our Notes elect to convert their Notes, we may settle our conversion obligation by delivering to them a significant number of shares of our common stock, which would cause dilution to our existing stockholders.
In addition, in connection with the issuance of the Notes, we entered into capped call transactions with certain financial institutions, or the Option Counterparties. The capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion or settlement of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. From time to time, the Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivative transactions with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes. This activity could cause a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The Option Counterparties are financial institutions, and we are subject to the risk that any or all of them may default under the capped call transactions. Our exposure to the credit risk of the Option Counterparties will not be secured by collateral. Global economic conditions have resulted in actual or perceived failure or financial difficulties of many institutions. If an Option Counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under our transactions with the Option Counterparty. Our exposure will depend on many factors, but generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon default by an Option Counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the Option Counterparties.
The accounting method for convertible debt securities, that may be settled in cash, such as the Notes, could have a material effect on our reported financial results.
Under Financial Accounting Standards Board Accounting Standards CodificationFASB ASC 470-20, Debt with Conversion and Other Options, or ASC 470-20, an entity must separately account for the liability and equity components of convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. ASC 470-20 requires the value of
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the conversion option of the Notes, representing the equity component, to be recorded as additional paid-in capital within stockholders’ equity in our consolidated balance sheet and as a discount to the Notes, which reduces their initial carrying value. The carrying value of the Notes, net of the discount recorded, will beis accreted up to the principal amount of the Notes from the issuance date until maturity, which will resultresults in non-cash charges to interest expense in our consolidated statement of operations. Accordingly, we will reporthave reported lower net income or higher net loss in our financial results because ASC 470-20 requires interest to include both the current period’s accretion of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion
value of the Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot
In August 2020, the FASB published an Accounting Standard Update that, for most convertible instruments (such as the Notes), requires the entire debt amount to be sure thatclassified as a liability. This would eliminate the accounting standardsrecognition of non-cash charges to interest expense, and accordingly, would result in higher net income or lower net loss in our financial statements. Additionally, the future will continue to permit the use ofnew guidance eliminates the treasury stock method for most convertible instruments and instead requires application of the “if-converted” method. IfUnder that method, diluted earnings per share would generally be calculated assuming that all the Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be antidilutive. Upon adoption of the standard, which we arewill adopt in fiscal year 2022, we will be unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, thenNotes. Accordingly, our diluted earnings per share wouldis expected to be adversely affected in periods when we report net income.income after adoption of the standard.
Risks Related to the Proposed Acquisition of Momentive
We may not complete the proposed acquisition of Momentive within the time frame we anticipate or at all.
On October 28, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Milky Way Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Momentive Global Inc., a Delaware corporation (“Momentive”), whereby Merger Sub will be merged with and into Momentive (the “Merger”), with Momentive continuing as a wholly owned subsidiary of the Company.
The completion of the Merger is subject to a number of conditions, including approval of the Company’s stockholders, approval of Momentive’s stockholders, and customary closing conditions. The failure to satisfy all of the required conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring at all. A delay in completing the Merger could prevent us from realizing some or all of the expected benefits of the Merger within the time frame currently anticipated or at all, which could result in additional transaction costs or in other negative effects associated with uncertainty about the completion of the Merger.
Furthermore, either the Company or Momentive may terminate the Merger Agreement under certain circumstances, including, among others, if the Merger is not completed by July 28, 2022. If the Merger is not completed, we would not realize any of the anticipated benefits of the Merger, and we may suffer other consequences that could adversely affect our business, results of operations and stock price, including the payment of a termination fee of $150 million under specified circumstances, transaction costs that are payable by us whether or not the Merger is completed, and possible legal proceedings related to the Merger or the failure to complete the Merger.
We may fail to realize all of the anticipated benefits of the proposed acquisition of Momentive or those benefits may take longer to realize than expected.
We believe that there are significant benefits and synergies that may be realized through leveraging the products, platforms, scale and combined customer bases of the Company and Momentive. However, the efforts to realize these benefits and synergies will be a complex process and may disrupt both companies’ existing operations if not implemented in a timely and efficient manner. The full benefits of the transactions contemplated by the Merger Agreement, including the anticipated sales or growth opportunities, may not be realized as expected or may not be achieved within the anticipated time frame, or at all. Failure to achieve the anticipated benefits of the Merger could adversely affect our results of operations or cash flows, cause dilution to our earnings per share, decrease or delay any accretive effect of the Merger and negatively impact the price of our common stock.
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Following completion of the Merger, our success will depend, in part, on our ability to manage our expansion, which poses numerous risks and uncertainties, including the need to integrate the operations and business of Momentive into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with industry contacts and business partners.
In addition, we and Momentive will be required to devote significant attention and resources prior to closing to prepare for the post-closing integration and operation of the combined company, and we will be required post-closing to devote significant attention and resources to successfully align our business practices and operations with those of Momentive. This process may disrupt the businesses and, if ineffective, would limit the anticipated benefits of the Merger.
Uncertainty about the proposed acquisition of Momentive may adversely affect relationships with our customers, partners, suppliers, and employees, whether or not the Merger is completed.
In response to the announcement of our proposed acquisition of Momentive, our existing or prospective customers, partners, or suppliers may:
•delay, defer, or cease purchasing products or services from, or providing products or services to, us or the combined company;
•delay or defer other decisions concerning us or the combined company; or
•otherwise seek to change the terms on which they do business with us or the combined company.
Any such delays or changes to terms could materially harm our business or, if the Merger is completed, the business of the combined company.
In addition, as a result of the announcement of our proposed acquisition of Momentive, our current and prospective employees could experience uncertainty about their future with us or the combined company. As a result, key employees may depart because of issues relating to such uncertainty or a desire not to remain with the Company following the completion of the Merger.
Losses of customers, partners, employees, or other important strategic relationships could have a material adverse effect on our business, results of operations, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Merger for any reason, including delays associated with obtaining the approval of our and Momentive’s stockholders.
Our existing stockholders will experience dilution if the Merger is completed.
The Merger, if completed, will dilute the ownership position of our existing stockholders. Upon completion of the Merger, our existing stockholders are expected to own approximately 78% of our outstanding shares of common stock and former Momentive stockholders are expected to own approximately 22% of our outstanding shares of common stock. Consequently, our existing stockholders may have less influence over our management and policies if the Merger is completed than they currently have over our management and policies.
Stockholder litigation could negatively affect our business and operations.
Transactions such as the Merger are frequently subject to litigation or other legal proceedings. As of the date of this Annual Report on Form 10-K, nine complaints have been filed by purported stockholders of the Company and purported stockholders of Momentive, each of which seeks to enjoin the Merger and other relief. The complaints assert claims against certain defendants under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder for allegedly false and misleading statements in the joint proxy statement/prospectus and against certain defendants under Section 20(a) of the Exchange Act for alleged “control person” liability with respect to such allegedly false and misleading statements. The Company and Momentive intend to defend against the lawsuits filed, but might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have an adverse effect on our business, results of operation or financial position, including through the possible diversion of the Company’s resources or distraction of key personnel.
Furthermore, one of the conditions to the completion of the Merger is that no injunction by any governmental body of competent jurisdiction will be in effect that prevents the consummation of the Merger. As such, if any of the plaintiffs are successful in obtaining an injunction preventing the consummation of the Merger, that injunction may prevent the Merger from becoming effective or from becoming effective within the expected time frame.
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Actions of activist shareholders or unsolicited bidders could impair our ability to consummate the Merger or otherwise negatively affect our business.
We value constructive input from investors and regularly engage in dialogue with our shareholders regarding strategy and performance. Our board of directors and management team are committed to acting in the best interests of all of our shareholders. There is no assurance that the actions taken by our board of directors and management in seeking to maintain constructive engagement with certain shareholders will be successful.
Recently, an activist shareholder holding shares of the Company’s stock has publicly opposed the Merger. The actions of this or other shareholder activists may make it more difficult to obtain approvals from the Company’s and Momentive’s respective stockholders for the Merger.
Responding to actions by activist shareholders and third parties making unsolicited bids to acquire the Company or a portion of its business may be costly and time-consuming, disrupt our operations and divert the attention of management, our board of directors and our employees. A proxy contest or other activist campaign and related actions could also require us to incur substantial legal, public relations and other advisor fees and proxy solicitation expenses.
Additionally, perceived uncertainties as to our future strategy, performance, operations or governance as a result of shareholder activism, changes to the composition of our board of directors, or an unsolicited bid for the Company or a portion of its business may lead to the perception of a change in the direction of our business or other instability, which may be exploited by our competitors and/or other activist shareholders or other unsolicited bidders and cause concern to our current or potential customers, employees, investors, strategic partners and other constituencies. This could result in lost sales and the loss of business opportunities, including the anticipated benefits of the Merger, and make it more difficult to attract and retain qualified personnel and business partners. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us, then our business, financial condition and operating results would be adversely affected. In addition, our share price could experience periods of increased volatility as a result of shareholder activism.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters are located in San Francisco, California, where we lease approximately 199,000108,000 square feet of total space under multiple leases.
We also maintain offices in various locations in North America, South America, Europe, Australia, and Asia. All of our properties are currently leased. We believe our existing facilities are adequate to meet our current requirements. See Note 7 in the notesNotes to our consolidated financial statementsConsolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more information about our lease commitments. We expect tomay expand our facilities capacity as our employee base grows. We believe we will be able to obtain such space on acceptable and commercially reasonable terms.
Item 3. Legal Proceedings.
From time to time, we may be subject to other legal proceedings, claims, investigations, and government inquiries in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting, among other things, infringement of their intellectual property rights, defamation, labor and employment rights, privacy, and contractual rights. Legal risk is enhanced in certain jurisdictions outside the United States where our protection from liability for content added to our product and platform solutionsproducts by third parties may be unclear and where we may be less protected under local laws than we are in the United States. Future litigation may be necessary to defend ourselves, our partners, and our customers by determining the scope, enforceability, and validity of third-party proprietary rights, or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. In general, the resolution of a legal matter could prevent the Company from offering its service to others, could be material to the Company’s financial condition or cash flows, or both, or could otherwise adversely affect the Company’s operating results.
For more information regarding legal proceedings, such as the Reidinger securities class action, see Note 10 in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
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It is not possible for the Company to quantify the extent of potential liability to the individual defendants, if any. Management believes that the lawsuits currently filed against us lack merit and intends to vigorously defend the actions. We cannot predict the outcome of or estimate the possible loss or range of loss from the described matters.
In management’s opinion, resolution of all current matters is not expected to have a material adverse impact on the business, consolidated balance sheets, results of operations, comprehensive loss, or cash flows. However, the outcome of these matters is inherently uncertain. Therefore, if one or more of these matters were resolved against us for amounts in excess of
management's expectations, our results of operations and financial condition, including in a particular reporting period in which any such outcome becomes probable and estimable, could be materially adversely affected.
Item 4. Mine Safety Disclosures.
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information for Common Stock
Our common stock has been listed on the New York Stock Exchange under the symbol “ZEN” since May 15, 2014, the date of our initial public offering. Prior to that date, there was no public trading market for our common stock.
Holders
As of December 31, 2019,2021, there were approximately 3332 holders of record of our common stock. However, because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to accurately estimate the total number of stockholders represented by these record holders.
Dividends
We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, operating results, capital requirements, contractual restrictions, general business conditions, and other factors that our board of directors may deem relevant.
Issuer Purchases of Equity Securities
No shares of our common stock were repurchased during the three months ended December 31, 2019.2021.
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information regarding securities authorized for issuance.
Stock Performance Graph
The following stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
The following stock performance graph compares total stockholder returns for Zendesk, Inc. from December 31, 2014,2016, through December 31, 2019,2021, against the S&P 500 Index and the S&P 500 Software & Services Index, assuming a $100 investment made on December 31, 2014.2016. The S&P 500 Software & Services Index is the official name of the index referred to in prior Annual Reports on Form 10-K as the S&P 500 Composite/Software Index. This change to refer to such index's official name has no effect on the identity or values of the index. Each of the two comparative measures of cumulative total return assumes reinvestment of dividends. The stock performance shown in the graph below is not necessarily indicative of future price performance.
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Item 6. Selected Financial Data.[Reserved]
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Revenue | $ | 816,416 | $ | 598,746 | $ | 430,165 | $ | 312,844 | $ | 208,768 | |||||||||
| Cost of revenue (1) | 234,282 | 181,255 | 127,422 | 93,900 | 67,184 | ||||||||||||||
| Gross profit | 582,134 | 417,491 | 302,743 | 218,944 | 141,584 | ||||||||||||||
| Operating expenses (1): | |||||||||||||||||||
| Research and development | 207,548 | 160,260 | 115,291 | 91,067 | 62,615 | ||||||||||||||
| Sales and marketing | 396,514 | 291,668 | 211,918 | 161,653 | 114,052 | ||||||||||||||
| General and administrative | 141,076 | 103,491 | 81,680 | 64,371 | 47,902 | ||||||||||||||
| Total operating expenses | 745,138 | 555,419 | 408,889 | 317,091 | 224,569 | ||||||||||||||
| Operating loss | (163,004 | ) | (137,928 | ) | (106,146 | ) | (98,147 | ) | (82,985 | ) | |||||||||
| Other income (expense), net | |||||||||||||||||||
| Interest income | 20,561 | 15,086 | 3,542 | 1,821 | 575 | ||||||||||||||
| Interest expense | (26,708 | ) | (19,882 | ) | — | (148 | ) | (503 | ) | ||||||||||
| Other income (expense), net | 848 | (467 | ) | (1,055 | ) | (153 | ) | (801 | ) | ||||||||||
| Total other income (expense), net | (5,299 | ) | (5,263 | ) | 2,487 | 1,520 | (729 | ) | |||||||||||
| Loss before provision for (benefit from) income taxes | (168,303 | ) | (143,191 | ) | (103,659 | ) | (96,627 | ) | (83,714 | ) | |||||||||
| Provision for (benefit from) income taxes | 1,350 | (12,107 | ) | (1,518 | ) | 993 | 338 | ||||||||||||
| Net loss | (169,653 | ) | (131,084 | ) | (102,141 | ) | (97,620 | ) | (84,052 | ) | |||||||||
| Net loss per share, basic and diluted | $ | (1.53 | ) | $ | (1.24 | ) | $ | (1.02 | ) | $ | (1.05 | ) | $ | (0.99 | ) | ||||
| Weighted-average shares used to compute net loss per share, basic and diluted | 110,606 | 105,567 | 99,918 | 93,161 | 84,926 | ||||||||||||||
| __________ | |||||||||||||||||||
| (1) Includes share-based compensation expense as follows: | |||||||||||||||||||
| Year Ended December 31, | |||||||||||||||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Cost of revenue | $ | 20,858 | $ | 14,835 | $ | 9,040 | $ | 7,045 | $ | 4,541 | |||||||||
| Research and development | 46,965 | 41,365 | 29,970 | 27,083 | 19,414 | ||||||||||||||
| Sales and marketing | 53,964 | 37,882 | 24,279 | 22,693 | 14,759 | ||||||||||||||
| General and administrative | 34,943 | 25,401 | 21,263 | 16,608 | 13,842 | ||||||||||||||
| As of December 31, | |||||||||||||||||||
| Consolidated Balance Sheet Data: | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Cash and cash equivalents | $ | 196,591 | $ | 126,518 | $ | 109,370 | $ | 93,677 | $ | 216,226 | |||||||||
| Marketable securities, current and noncurrent | 648,906 | 693,884 | 235,023 | 206,358 | 51,750 | ||||||||||||||
| Working capital | 214,142 | 229,833 | 114,631 | 125,589 | 165,832 | ||||||||||||||
| Total assets | 1,514,589 | 1,237,879 | 591,370 | 497,627 | 422,686 | ||||||||||||||
| Deferred revenue, current and noncurrent | 323,962 | 247,962 | 174,360 | 122,829 | 85,615 | ||||||||||||||
| Long-term obligations | 483,464 | 458,176 | — | — | — | ||||||||||||||
| Total liabilities | 1,056,605 | 820,958 | 237,186 | 174,153 | 129,396 | ||||||||||||||
| Stockholders' equity | 457,984 | 416,921 | 354,184 | 323,474 | 293,290 | ||||||||||||||
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Consolidated Financial Data” and consolidated financial statements and related notes thereto included elsewhereappearing in this Annual Report on Form 10-K. ThisAs 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. Our actualuncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results couldto differ materially from those discussed below.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 elsewhere in this Annual Report on Form 10-K.
Overview
We are a software development company that provides software as a service solutions that are intended to help organizations and their customers build better experiences. Our customer experience solutions are built upon a modern architecture that enables us and our customers to rapidly innovate, adapt our technology in novel ways, and easily integrate with other products and applications. With our origins in customer service, we have evolved our offerings over time to product and platform solutions that work together to help organizations understand the broader customer journey, improve communications across all channels, and engage where and when it’s needed most.
We believe in developing solutions that serve organizations of all sizes and across all industries. Our flagship product solution, Zendesk Support, provides organizations with the ability to track, prioritize, and solve customer support tickets across
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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 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 phonevoice 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. Additionally, we
We additionally offer Zendesk Suite, an omnichannel offering which provides Support, Chat, Talk,Gather, a product solution that enables companies to provide trusted and Guide togethertransparent support to customers through online community forums, Zendesk Explore, a solution to provide analytics for a single price,organizations to measure and improve the entire customer experience, Zendesk Sell, sales customer relationship management software that complements our mission in delivering solutions that provide a better customer experience, Zendesk Duet, an offering which provides Support and Sell together for a single price, Zendesk Sunshine, a customer relationship management platform which enables organizations to connect and integrate customer data generated through our product solutions, Zendeskand Sunshine Conversations, a messaging platform solution that allows businesses to integrate messaging through social channels and directly interact and transact with customers,customers. For a service solution which provides Support, Chat, Talk, Guide, Explore, and Sunshine together, we offer the Zendesk Gather, a product solution that enables companies to provide trusted and transparent support to customers through online community forums.Suite.
We offer a range of subscription account plans for our solutions that vary in price based on functionality, type, and the amount of product support we offer. We also offer a range of additional features that customers can purchase and add to their subscriptions.
For the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, our revenue was $816$1,339 million, $599$1,030 million, and $430$816 million, respectively, representing a 36%30% growth rate from 20182020 to 20192021 and a 39%26% growth rate from 20172019 to 2018.2020. For the years ended
December 31, 2019, 2018,2021, 2020, and 20172019, we derived $389$659 million, or 48%49%, $289$493 million, or 48%, and $200$389 million, or 47%48%, respectively, of our revenue from customers located outside of the United States. We expect that the rate of growth in our revenue will decline as our business scales, even if our revenue continues to grow in absolute terms. For the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, we generated net losses of $224 million, $218 million, and $170 million, $131 million, and $102 million, respectively.
The growth of our business and our future success depend on many factors, including our ability to continue to innovate, further develop our 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 medium-sizedmidsized 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 expandinvest in our operations and headcount in the near term.operations. The expected expenditures that we anticipate will be necessary to manage our anticipated growth, including personnel costs, expenditures relating to hosting capabilities, leasehold improvements, and related fixed assets, will make it more difficult for us to achieve profitability in the near term. Many of these investments will occur in advance of us experiencing any direct benefit and will make it difficult to determine if we are allocating our resources efficiently.
We have focused on rapidly growing our business and plan to continue to invest for long-term growth. We expect to continue to develop our hosting capabilities primarily through expenditures for third-party managed hosting services. The amount and timing of these expenditures will vary based on our estimates of projected growth and planned use of hosting resources. Over time, we anticipate that we will continue to gain economies of scale by efficiently utilizing our hosting and personnel resources to support the growth inof our number of customers.customer base. 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 expandinvest in our sales and marketing organizations, particularly in connection with our efforts to expand our customer base.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 global, public company.
COVID-19 Update
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We are continuing to ascertain the long-term impact of the novel coronavirus and resulting disease ("COVID-19") pandemic on our business. The full effect on our results of operations in future quarters is uncertain, but in the near to intermediate term, we expect our financial performance to continue to be impacted by the economic crisis arising from COVID-19. We continue to focus on supporting our employees, customers, and community.
As organizations and governments continue to adapt to changing conditions related to the COVID-19 pandemic worldwide, 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. As we adjust to that new normal, we will continue to evaluate conditions in each region we operate. We continue to reassess local restrictions across the globe, focusing on leveraging technology to bring employees together virtually, while being more thoughtful when we ask people to come together in person.
As commercial, personal, and social spheres continue to increasingly rely on digital interactions and experiences worldwide, some of our customers’ businesses have continued to see increased activity, while other customers may have seen a decrease in previously heightened activity as businesses adjust to a new normal. We may continue to experience curtailed customer demand for our solutions that could materially adversely impact our business, results of operations, and overall financial performance in future periods. 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.
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 paid customer account,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 paid customer account,logo, upgrades in subscription plans, and the purchase of additional products as offset by contraction and churn contraction in authorized agents associated with a paid customer account,logo, and downgrades in subscription plans. We do not currently incorporate operating metrics associated with our legacy analytics product, our legacy Outbound product, our Sell product, our legacy Starter plan, our Sell product, Sunshine Conversations, Gather, our legacy Smooch product, free trials, or other free services into our measurement of dollar-based net expansion rate.
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Our dollar-based net expansion rate is based upon our annual recurring revenue for a set of paid customer accountslogos on our products. Annual recurring revenue is determined by multiplying monthly recurring revenue by 12. Monthly recurring revenue for a paid customer account is a legal and contractual determination made by assessing the contractual terms, of each paid customer account, as of the date of determination, as to the revenue we expect to generate in the next monthly period, for that paid customer account, assuming no changes to the subscription and without taking into account any usage above the subscription base, if any, that may be applicable to such subscription. Beginning with the quarter ended June 30, 2019, we excludedWe exclude the impact of revenue that we expect to generate from fixed-term contracts that are each associated with an existing account, are solely for additional temporary agents, and are not contemplated to last for the duration of the primary contract for the existing account from our determination of monthly recurring revenue. We additionally exclude the impact of accounts that are free-trial accounts that did not result in paid subscriptions, and temporary coupons, such as short-term discounts that were applied to certain accounts due to the COVID-19 pandemic, from our annual recurring revenue. Monthly recurring revenue is not determined by reference to historical revenue, deferred revenue, or any other United States generally accepted accounting principles, or GAAP, financial measure over any period. It is forward-looking and contractually derived as of the date of determination.
We calculate our dollar-based net expansion rate by dividing our retained revenue net of contraction and churn by our base revenue. We define our base revenue as the aggregate annual recurring revenue across our products from paid customer accountslogos 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 is also adjusted to eliminate the effect of certain activities that we identify involving consolidation of customer accounts, or the split of a single paid customer account into multiple paid customer accounts. In addition, our dollar-based net expansion rate is adjusted to include paid customer accounts in the customer base used to determine retained revenue net of contraction and churn that share common corporate information with customers in the customer base that is used to determine our base revenue. Giving effect to this consolidation would result in our dollar-based net expansion rate being calculated across approximately 106,300 customers, as compared to the approximately 157,000 total paid customer accounts as of December 31, 2019. To the extent that we can determine that the underlying customers do not share common corporate information, we do not aggregate paid customer accounts associated with reseller and other similar channel arrangements for the purposes of determining our dollar-based net expansion rate. While not material, we believe the failure to account for these activities would otherwise skew our dollar-based net expansion metrics associated with customers that maintain multiple paid customer accounts across their products, and paid customer accounts associated with reseller and other similar channel arrangements.
Our dollar-based net expansion rate was 116%122% as of December 31, 20192021. We expect that, among other factors, our continued focus on adding larger paid customer accountslogos at the time of addition and the growth in our revenue will result in an overall decline in our dollar-based net expansion rate over time as our aggregate annual recurring revenue grows.
Components of Results of Operations
Revenue
We derivegenerate substantially all of our revenue from subscription services, which are comprised of subscription fees from customer accounts on Zendesk Support and, to a lesser extent, Chat, Talk, Guide, Gather, Explore, Sell, Sunshine, and Sell,Sunshine Conversations and includes related support services. We also derive revenue from Zendesk Suite, our omnichannel offering, which provides a subsetcombines many of these existing solutions for a single price.into easy to purchase plans. 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 solution 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
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Cost of Revenue. Cost of revenue consists primarily of personnel costs (including(primarily including salaries, share-based compensation, and benefits) for employees associated with our infrastructure, product support, and professional service organizations, and expenses for hosting capabilities, primarily for third-party managed hosting services located in North America, Europe, Asia and costs associated with our self-managed colocation data centers.Australia. Cost of revenue also includes third-party license fees, payment processing fees, amortization expense associated with acquired intangible assets, amortization expense associated with capitalized internal-use software, and allocated shared costs. We allocate shared costs such as facilities, information technology, and security costs to all departments based on headcount. As such, allocated shared costs are reflected in cost of revenue and each operating expense category.
We intend to continue to invest additional resources in our infrastructure, professional service organizations, and product support organically and through acquisitions. We expect that recent and future business acquisitions will result in increased amortization expense of intangible assets such as acquired technology. As we continue to invest in technology innovation, we expect to continue to incur capitalized internal-use software costs and related amortization. We expect these investments in technology to not only expand the capabilities of our solutions but also to increase the efficiency of how we deliver these services, enabling us to improve our gross margin over time, although our gross margin may decrease in the near-term and may vary from period to period as our revenue fluctuates and as a result of the timing and amount of these investments. To the extent that we continue to rely on third-party technology to provide certain functionality within our solutions or for certain subscription plans or integrations, we expect third-party license fees for technology that is incorporated in such solutions and subscription plans to remain significant over time.
Gross Margin. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates and as a result of the timing and amount of usage of third-party managed hosting resources, investments to expand our product support and professional services teams, investments in additional personnel, increased share-based compensation expense, as well as the amortization of certain acquired intangible assets, costs associated with capitalized internal-use software, and third-party license fees.
Research and Development. Research and development expenses consist primarily of personnel costs (including(primarily including salaries, share-based compensation, and benefits) for employees associated with our research and development organization and allocated shared costs.
We focus our research and development efforts on the continued development of our solutions, including the development and deployment of new features and functionality and enhancements to our software architecture and integration across our solutions. We expect that, in the future, research and development expenses will increase in absolute dollars. However, we expect our research and development expenses to decrease modestly as a percentage of our revenue in the long-term, although this may fluctuate from period to period depending on fluctuations in revenue and the timing and the extent of our research and development expenses.
Sales and Marketing. Sales and marketing expenses consist of personnel costs (including(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 both online and offline marketing initiatives, including digital advertising, such as search engine, paid social, e-mail and product marketing, content marketing, user events, conferences, corporate communications, web marketing and optimization, and outbound list and contact generation. Sales commissions are considered incremental costs of obtaining customer contracts and are capitalized and amortized on a straight-line basis over thetheir 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, and sponsoring additional marketing events, which we believe will enable us to add new customers and increase penetration within our existing customer base. Because we do not have a long history of undertaking or growing many of these activities, we cannot predict whether, or to what extent, our revenue will increase as we invest in these strategies. We expect our sales and marketing expenses to continue to increase in absolute dollars and continue to be our largest operating expense category for the foreseeable future. Our sales and marketing expenses as a percentage of our revenue over time may fluctuate from period to period depending on fluctuations in revenue and the timing and extent of our sales and marketing expenses.
General and Administrative. General and administrative expenses consist primarily of personnel costs (including(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,
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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, and the infrastructure required to be a public company. Such costs include increases in our finance, legal, and human resources personnel, additional legal, accounting, tax, and compliance-related services fees, insurance costs, and costs of executing significant transactions, including business acquisitions, and other costs associated with being a public company.expansion. As a result, we expect our general and administrative expenses to continue to increase in absolute dollars for the foreseeable future. However, we expect ourOur general and administrative expenses to decrease modestly as a percentage of our revenue in the long-term, although thisover 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.notes, and loss on early extinguishment of debt. 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, and a non-cash benefit in 2018 related to the issuance of our convertible senior notes.
Results of Operations for Fiscal Years 2019, 2018,2021, 2020, and 20172019
The following tables set forth our results of operations for the periods presented in dollars and as a percentage of our revenue (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | 2021 | 2020 | 2019 | |||||||||||||||||||||||||
| 2019 | 2018 | 2017 | ||||||||||||||||||||||||||
| Revenue | $ | 816,416 | $ | 598,746 | $ | 430,165 | Revenue | $ | 1,338,603 | $ | 1,029,564 | $ | 816,416 | |||||||||||||||
| Cost of revenue (1) | 234,282 | 181,255 | 127,422 | Cost of revenue (1) | 274,883 | 251,255 | 234,282 | |||||||||||||||||||||
| Gross profit | 582,134 | 417,491 | 302,743 | Gross profit | 1,063,720 | 778,309 | 582,134 | |||||||||||||||||||||
| Operating expenses (1): | Operating expenses (1): | |||||||||||||||||||||||||||
| Research and development | 207,548 | 160,260 | 115,291 | Research and development | 352,049 | 255,400 | 207,548 | |||||||||||||||||||||
| Sales and marketing | 396,514 | 291,668 | 211,918 | Sales and marketing | 679,801 | 512,339 | 396,514 | |||||||||||||||||||||
| General and administrative | 141,076 | 103,491 | 81,680 | General and administrative | 198,554 | 166,469 | 141,076 | |||||||||||||||||||||
| Total operating expenses | 745,138 | 555,419 | 408,889 | Total operating expenses | 1,230,404 | 934,208 | 745,138 | |||||||||||||||||||||
| Operating loss | (163,004 | ) | (137,928 | ) | (106,146 | ) | Operating loss | (166,684) | (155,899) | (163,004) | ||||||||||||||||||
| Other income (expense), net | Other income (expense), net | |||||||||||||||||||||||||||
| Interest income | 20,561 | 15,086 | 3,542 | |||||||||||||||||||||||||
| Interest expense | (26,708 | ) | (19,882 | ) | — | Interest expense | (58,721) | (43,319) | (26,708) | |||||||||||||||||||
| Other income (expense), net | 848 | (467 | ) | (1,055 | ) | |||||||||||||||||||||||
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | — | (25,950) | — | ||||||||||||||||||||||||
| Interest and other income (expense), net | Interest and other income (expense), net | 8,637 | 12,751 | 21,409 | ||||||||||||||||||||||||
| Total other income (expense), net | (5,299 | ) | (5,263 | ) | 2,487 | Total other income (expense), net | (50,084) | (56,518) | (5,299) | |||||||||||||||||||
| Loss before provision for (benefit from) income taxes | (168,303 | ) | (143,191 | ) | (103,659 | ) | ||||||||||||||||||||||
| Provision for (benefit from) income taxes | 1,350 | (12,107 | ) | (1,518 | ) | |||||||||||||||||||||||
| Loss before provision for income taxes | Loss before provision for income taxes | (216,768) | (212,417) | (168,303) | ||||||||||||||||||||||||
| Provision for income taxes | Provision for income taxes | 6,876 | 5,761 | 1,350 | ||||||||||||||||||||||||
| Net loss | $ | (169,653 | ) | $ | (131,084 | ) | $ | (102,141 | ) | Net loss | $ | (223,644) | $ | (218,178) | $ | (169,653) | ||||||||||||