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Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

(a)Basis of Presentation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

(b)Principles of Consolidation

The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

(c)Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are used for, but not limited to, recoverability of long‑lived and intangible assets; capitalization and useful life of the Company’s capitalized internal‑use software development costs; fair value of acquired intangible assets and goodwill; accruals and contingencies. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ materially from those estimates. Management periodically evaluates such estimates and they are adjusted prospectively based upon such periodic evaluation.

(d)Concentration of Credit Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, restricted cash and accounts receivable. The Company maintains cash, cash equivalents, restricted cash and marketable securities with financial institutions that management believes are financially sound and have minimal credit risk exposure although the balances will exceed insured limits.

The Company sells its services to a wide variety of customers. If the financial condition or results of operations of any significant customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not require collateral from its credit customers and maintains reserves for estimated credit losses on customer accounts when considered necessary. Actual credit losses may differ from the Company’s estimates. During the years ended December 31, 2018 and 2017, there was no customer organization that accounted for more than 10% of the Company’s total revenue. During the year ended December 31, 2016, one customer organization represented approximately 14% of the Company’s total revenue.

As of December 31, 2018 and 2017, there was no customer organization that represented more than 10% of the Company’s gross accounts receivable.

(e)Revenue Recognition

Adoption of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”, which replaced the existing revenue recognition guidance, ASC 605, and outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP. Among other things, ASC 606 requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenue, which is referred to as a performance obligation. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

The Company adopted ASC 606 using the modified retrospective method with a cumulative catch-up adjustment to the opening retained earnings as of January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting policies prior to adoption. In adopting the standard, the Company elected to apply the new guidance only to those contracts which were not completed as of the date of the adoption.

The impact of adopting the new standard on the Company’s consolidated financial statements was insignificant. The Company recorded a net cumulative catch-up adjustment to the beginning retained earnings as of January 1, 2018, of $0.7 million.

The primary impact relates to the deferral of incremental commission costs of obtaining new contracts. Under ASC 605, the Company deferred only direct and incremental commission costs to obtain a contract and amortized those costs on a straight-line basis over the term of the related subscription contract. Under the new standard, the Company defers all incremental commission costs to obtain the contract and amortizes these costs on a straight-line basis over the expected term of benefit of the underlying asset, which was determined to be five years.

The impact on the Company’s revenue recognition policies was insignificant. Prior to the adoption of ASC 606, the Company recognized the majority of its revenue according to the usage by its customers in the period in which that usage occurred. ASC 606 continues to support the recognition of revenue over time, and on a usage basis, for the majority of the Company’s contracts due to continuous transfer of control to the customer.

There was not a significant tax impact to the Company’s consolidated statements of operations and consolidated balance sheet relating to the adoption of the new standard as there is a full valuation allowance due to the Company’s history of continued losses.

Revenue Recognition Policy

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of allowances for credits and any taxes collected from customers, which are subsequently remitted to governmental authorities.

The Company determines revenue recognition through the following steps:

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

Identification of the performance obligations in the contract;

Determination of the transaction price;

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

Recognition of revenue when, or as, the Company satisfies a performance obligation.

Nature of Products and Services

The Company’s revenue is primarily derived from usage-based fees earned from customers accessing the Company’s enterprise cloud computing services. Platform access is considered a monthly series comprising of one performance obligation and usage-based fees are recognized as revenue in the period in which the usage occurs. In the years ended December 31, 2018, 2017 and 2016, the revenue from usage-based fees represented 84%, 83% and 83% of total revenue, respectively.

Subscription-based fees are derived from certain term-based contracts, such as with the sales of short codes and customer support. Term-based contracts revenue is recognized on a ratable basis over the contractual term of the arrangement beginning on the date that the service is made available to the customer. In the years ended December 31, 2018 and 2017, the revenue from term-based fees represented 16% and 17% of total revenue, respectively.

The Company applied the optional exemption of not disclosing the transaction price allocated to the remaining performance obligations for its usage-based contracts and contracts with original duration of one year or less. The majority of the Company’s contracts have a duration of one year or less.

No significant judgments are required in determining whether products and services are considered distinct performance obligations and should be accounted for separately versus together, or to determine the stand-alone selling price (“SSP”).

The Company’s arrangements do not contain general rights of return. However, credits may be issued on a case-by-case basis. The contracts do not provide customers with the right to take possession of the software supporting the applications. Amounts that have been invoiced are recorded in accounts receivable and in revenue or deferred revenue depending on whether the revenue recognition criteria have been met.

The reserve for sales credits is included in accounts receivable and is calculated based on historical trends and any specific risks identified in processing transactions. Changes in the reserve are recorded against revenue.

Deferred Revenue and Customer Deposits

Deferred revenue is recorded when cash payments are received in advance of future usage on non-cancellable contracts. Customer refundable prepayments are recorded as customer deposits. As of December 31, 2018, the Company recorded $10.3 million and $9.3 million as its deferred revenue and customer deposits, respectively. In the year ended December 31, 2018, the Company recognized $10.5 million of revenue, that was included in the deferred revenue and customer deposits balance as of January 1, 2018.

Deferred Sales Commissions

The Company records an asset for the incremental costs of obtaining a contract with a customer, for example, sales commissions that are earned upon execution of contracts. The Company uses the portfolio of data method to determine the estimated period of benefit of capitalized commissions which is determined to be five years. Amortization expense related to these capitalized costs related to initial contracts, upsells and renewals, is recognized on a straight line basis over the estimated period of benefit of the capitalized commissions. Total net capitalized costs as of December 31, 2018 were $9.4 million and are included in prepaid expenses and other current and long-term assets in the accompanying consolidated balance sheet. Amortization of these assets was $1.4 million in the year ended December 31, 2018, and is included in sales and marketing expense in the accompanying consolidated statement of operations.

(f)Cost of Revenue

Cost of revenue consists primarily of costs of communications services purchased from network service providers. Cost of revenue also includes fees to support the Company’s cloud infrastructure, personnel costs, such as salaries and stock-based compensation for the customer care and support services employees, and non-personnel costs, such as amortization of capitalized internal-use software development costs and amortization of acquired intangibles.

(g)Research and Development Expenses

Research and development expenses consist primarily of personnel costs, cloud infrastructure fees for staging and development, outsourced engineering services, amortization of capitalized internal-use software development costs and an allocation of general overhead expenses. The Company capitalizes the portion of its software development costs that meets the criteria for capitalization.

(h)Internal-Use Software Development Costs

Certain costs of platform and other software applications developed for internal use are capitalized. The Company capitalizes qualifying internal-use software development costs that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditures will result in additional functionality and expenses costs incurred for maintenance and minor upgrades and enhancements. Costs related to preliminary project activities and post-implementation operating activities are also expensed as incurred.

Capitalized costs of platform and other software applications are included in property and equipment. These costs are amortized over the estimated useful life of the software on a straight-line basis over three years. Management evaluates the useful life of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. The amortization of costs related to the platform applications is included in cost of revenue, while the amortization of costs related to other software applications developed for internal use is included in operating expenses.

(i)Advertising Costs

Advertising costs are expensed as incurred and were $10.6 million, $4.9 million and $3.5 million in the years ended December 31, 2018, 2017 and 2016, respectively. Advertising costs are included in sales and marketing expenses in the accompanying consolidated statements of operations.

(j)Stock-Based Compensation

All stock-based compensation to employees, including the purchase rights issued under the Company’s 2016 Employee Stock Purchase Plan (the “ESPP”), is measured on the grant date based on the fair value of the awards on the date of grant. This cost is recognized as an expense following straight-line attribution method over the requisite service period. The Company uses the Black-Scholes option pricing model to measure the fair value of its stock options and the purchase rights issued under the ESPP. The fair value of the restricted stock units is determined using the fair value of the Company’s Class A common stock on the date of grant and recognized as an expense following straight-line attribution method over the requisite service period. Prior to adoption of ASU 2016-09, the stock-based compensation was recorded net of estimated forfeitures.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which aligns the measurement and classification for share-based payments to non-employees with the accounting guidance for share-based payments to employees. Among other requirements, the measurement of non-employee awards will now be fixed at the grant date, rather than remeasured at every reporting date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. The Company early-adopted this guidance in the quarter ended December 31, 2018 which did not have a material impact to its financial statements.

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting”, ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. ASU 2017-09 allows companies to make certain changes to awards, such as vesting conditions, without accounting for them as modifications. It does not change the accounting for modifications. ASU 2017-09 should be applied prospectively to awards modified on or after the adoption date. The Company adopted ASU 2017-09 in the first quarter of 2018. The adoption of this guidance did not have an impact on the Company’s financial position, results of operations or cash flows.

In March 2016, FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share -Based Payment Accounting.” This new guidance was intended to simplify several areas of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. The Company early adopted this guidance in the quarter ended December 31, 2016. The new guidance allows entities to account for forfeitures as they occur. The Company elected to account for forfeitures as they occur and adopted this provision on a modified retrospective basis. The $0.1 million of cumulative prior years’ impact as well as the impact on the first three quarters of 2016 of $75,000 was recognized as an increase to stock-based compensation during the quarter ended December 31, 2016, as the impact on prior periods was insignificant. Adoption of all other changes in the new guidance did not have a significant impact on the Company’s consolidated financial statements.

Compensation expense for stock options granted to nonemployees is calculated using the Black-Scholes option pricing model and is recognized in expense over the service period.

The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. These assumptions include:

Fair value of the common stock. Prior to the Company’s IPO, the board of directors considered numerous objective and subjective factors to determine the fair value of the Company’s common stock at each meeting at which awards are approved. The factors included, but were not limited to: (i) contemporaneous valuations of the Company’s common stock by an unrelated third party; (ii) the prices at which the Company sold shares of its convertible preferred stock to outside investors in arms-length transactions; (iii) the rights, preferences and privileges of the Company’s convertible preferred stock relative to those of its common stock; (iv) the Company’s results of operations, financial position and capital resources; (v) current business conditions and projections; (vi) the lack of marketability of the Company’s common stock; (vii) the hiring of key personnel and the experience of management; (viii) the introduction of new products; (ix) the risk inherent in the development and expansion of the Company’s products; (x) the Company’s stage of development and material risks related to its business; (xi) the fact that the option grants involve illiquid securities in a private company; and (xii) the likelihood of achieving a liquidity event, such as an initial public offering or sale of the Company, in light of prevailing market conditions;

After the IPO, the Company uses the market closing price of its Class A common stock, as reported on the New York Stock Exchange, for the fair value.

Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company uses the simplified calculation of expected term, as the Company does not have sufficient historical data to use any other method to estimate expected term;

Expected volatility. The expected volatility is derived from an average of the historical volatilities of the common stock of several entities with characteristics similar to those of the Company, such as the size and operational and economic similarities to the Company’s principal business operations;

Risk -free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term of the stock-based awards; and

Expected dividend. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.

If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants.

(k)Income Taxes

The Company accounts for income taxes in accordance with authoritative guidance which requires the use of the asset and liability approach. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as net operating loss and tax credit carry-forwards. Deferred tax amounts are determined by using the enacted tax rates expected to be in effect when the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance reduces the deferred tax assets to the amount that is more likely than not to be realized.

The Company recognizes the effect of uncertain income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations.

(l)Foreign Currency Translation

The functional currency of the Company’s foreign subsidiaries is generally the U.S. dollar. Accordingly, the subsidiaries remeasure monetary assets and liabilities at period-end exchange rates, while non-monetary items are remeasured at historical rates. Revenue and expense accounts are remeasured at the average exchange rate in effect during the year. Remeasurement adjustments are recognized in the consolidated statements of operations as other income or expense in the year of occurrence. Foreign currency transaction gains and losses were insignificant for all periods presented.

For those entities where the functional currency is a foreign currency, adjustments resulting from translating the financial statements into U.S. dollars are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Monetary assets and liabilities denominated in a foreign currency are translated into US dollars at the exchange rate on the balance sheet date. Revenue and expenses are translated at the weighted average exchange rates during the period. Equity transactions are translated using historical exchange rates. Foreign currency transaction gains and losses are included in other income (expense), net in the consolidated statements of operations.

(m)Comprehensive Income (Loss)

Comprehensive income (loss) refers to net income (loss) and other revenue, expenses, gains and losses that, under generally accepted accounting principles, are recorded as an element of stockholders' equity but are excluded from the calculation of net income (loss).

For the year ended December 31, 2016, the Company's operations did not give rise to any material items includable in comprehensive income (loss), which were not already in net income (loss). Accordingly, for that period, the Company's comprehensive income (loss) is the same as its net income (loss).

(n)Net Loss Per Share Attributable to Common Stockholders

The Company calculates its basic and diluted net loss per share attributable to common stockholders in conformity with the two-class method required for companies with participating securities. All series of convertible preferred stock are considered to be participating securities as the holders of the preferred stock are entitled to receive a non-cumulative dividend on a pro rata pari passu basis in the event that a dividend is declared or paid on common stock. Shares of common stock issued upon early exercise of stock options that are subject to repurchase are also considered to be participating securities, because holders of such shares have non-forfeitable dividend rights in the event a dividend is declared or paid on common stock. Under the two-class method, in periods when the Company has net income, net income attributable to common stockholders is determined by allocating undistributed earnings, calculated as net income less current period convertible preferred stock non-cumulative dividends, between common stock and the convertible preferred stock. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. The Company’s basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. The dilutive effect of these potential common shares is reflected in diluted earnings per share by application of the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchase common stock, unvested restricted stock units, common stock issued subject to future vesting, any shares of stock committed under the ESPP, any shares of stock held in escrow and any shares of stock reserved for future donations are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is antidilutive.

Since the Company’s IPO in 2016, Class A and Class B common stock are the only outstanding equity of the Company. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder on a one-for-one basis, and are automatically converted into Class A common stock upon sale or transfer, subject to certain limited exceptions. Shares of Class A common stock are not convertible.

(o)Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of funds deposited into money market funds and reverse repurchase agreements. All credit and debit card transactions that process as of the last day of each month and settle within the first few days of the subsequent month are also classified as cash and cash equivalents as of the end of the month in which they were processed.

(p)Restricted Cash

Restricted cash consists of cash deposited into a savings account with a financial institution as collateral for the Company’s obligations under its facility leases of premises located in San Francisco, California. The facility lease for the Company’s old office space expired in January 2017 and the facility leases for the Company’s current offices expire at various dates between October 2024 and June 2028.

In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, “Statement of Cash Flows (Topic 230)—Restricted Cash”. This standard provides guidance on the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. Restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statements of cash flows. The amendments of this ASU should be applied using a retrospective transition method and are effective for reporting periods beginning after December 15, 2017. The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s consolidated statement of cash flows with the following impact (in thousands):


	Year Ended				Year Ended
	December 31, 2017				December 31, 2016
	As Originally				As Originally
	Reported		As Adjusted		Reported		As Adjusted
Cash provided by (used in) operating activities	$	(3,260)	$	(3,255)	$	10,091	$	10,097
Cash used in investing activities	$	(223,630)	$	(226,748)	$	(42,425)		(34,986)
Cash, cash equivalents and restricted cash — beginning of period		305,665		314,280		108,835		110,005
Cash, cash equivalents and restricted cash — end of period	$	115,286	$	120,788	$	305,665	$	314,280

Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on the Company’s financial position and results of operations.

The restricted cash balances as of December 31, 2018 and December 31, 2017 were $18.1 million and $5.5 million, respectively.

(q)Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded net of the allowance for doubtful accounts and the reserve for sales credits. The allowance for doubtful accounts is estimated based on the Company’s assessment of its ability to collect on customer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, credit quality, age of accounts receivable balances and other known conditions that may affect a customer’s ability to pay. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet their financial obligations, a specific allowance is recorded against amounts due from the customer which reduces the net recognized receivable to the amount the Company reasonably believe will be collected. The Company writes-off accounts receivable against the allowance when a determination is made that the balance is uncollectible and collection of the receivable is no longer being actively pursued. The allowance for doubtful accounts was $4.9 million and $1.0 million as of December 31, 2018 and 2017, respectively.

(r)Costs Related to the Public Offerings

Costs related to the public offerings, which consist of direct incremental legal, printing and accounting fees, are deferred until the offering is completed. Upon completion of the offering, these costs are offset against the offering proceeds within the consolidated statements of stockholders’ equity. In the year ended December 31, 2016, the Company recorded in its consolidated statement of stockholders’ equity $5.7 million in total offering costs.

(s)Property and Equipment

Property and equipment, both owned and under capital lease, is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Maintenance and repairs are charged to expenses as incurred.

The useful lives of property and equipment are as follows:


Capitalized software development costs		3 years
Office equipment		3 years
Furniture and fixtures		5 years
Software		3 years
Assets under capital lease		5 years or remaining lease term
Leasehold improvements		5 years or remaining lease term

(t)Intangible Assets

Intangible assets recorded by the Company are costs directly associated with securing legal registration of patents and trademarks, acquiring domain names and the fair value of identifiable intangible assets acquired in business combinations.

Intangible assets with determinable economic lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful life of each asset on a straight-line basis. The Company determines the useful lives of identifiable intangible assets after considering the specific facts and circumstances related to each intangible asset. Factors the Company considers when determining useful lives include the contractual term of any agreement related to the asset, the historical performance of the asset, the Company’s long-term strategy for using the asset, any laws or other local regulations which could impact the useful life of the asset and other economic factors, including competition and specific market conditions. Intangible assets without determinable economic lives are carried at cost, not amortized and reviewed for impairment at least annually.

The useful lives of the intangible assets are as follows:


Developed technology		3 - 4 years
Customer relationships		2 - 8 years
Supplier relationships		5 years
Trade names		2 years
Patents		20 years
Trademarks		Indefinite
Domain names		Indefinite

(u)Goodwill

Goodwill represents excess of the aggregate purchase price over the fair value of net identifiable assets acquired in a business combination. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as one reporting unit and has selected November 30 as the date to perform its annual impairment test. In the valuation of goodwill, management must make assumptions regarding estimated future cash flows to be derived from the Company’s business. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. Management may first evaluate qualitative factors to assess if it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to determine if a two-step impairment test is necessary. Management may choose to proceed directly to the two-step evaluation, bypassing the initial qualitative assessment. The first step of the impairment test involves comparing the fair value of the reporting unit to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss would be calculated by comparing the implied fair value of the goodwill to its net book value. In calculating the implied fair value of goodwill, the fair value of the entity would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the entity over the amount assigned to other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. No goodwill impairment charges have been recorded for any period presented.

(v)Impairment of Long-Lived Assets

The Company evaluates long-lived assets, including property and equipment and intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If such evaluation indicates that the carrying amount of the asset or the asset group is not recoverable, any impairment loss would be equal to the amount the carrying value exceeds the fair value. There was no impairment during the years ended December 31, 2018, 2017 and 2016. The Company wrote off $1.7 million, $0.6 million and $0.7 million of internally developed software in the years ended December 31, 2018, 2017 and 2016, respectively, due to abandonment.

(w)Business Combinations

The Company recognizes identifiable assets acquired and liabilities assumed at their acquisition date fair values. Goodwill is measured as the excess of the consideration transferred over the fair value of assets acquired and liabilities assumed on the acquisition date. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed, these estimates are inherently uncertain and subject to refinement. The authoritative guidance allows a measurement period of up to one year from the date of acquisition to make adjustments to the preliminary allocation of the purchase price. As a result, during the measurement period the Company may record adjustments to the fair values of assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that it identifies adjustments to the preliminary purchase price allocation. Upon conclusion of the measurement period or final determination of the values of the assets acquired and liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statement of operations.

(x)Segment Information

The Company’s Chief Executive Officer is the chief operating decision maker, who reviews the Company’s financial information presented on a consolidated basis for purposes of allocating resources and evaluating the Company’s financial performance. Accordingly, the Company has determined that it operates in a single reporting segment.

(y)Fair Value of Financial Instruments

The Company applies fair value accounting for all financial instruments on a recurring basis. The Company’s financial instruments, which include cash, cash equivalents, accounts receivable and accounts payable are recorded at their carrying amounts, which approximate their fair values due to their short-term nature. Restricted cash is long-term in nature and consists of cash in a savings account, hence its carrying amount approximates its fair value. Marketable securities consist of U.S. treasury securities, high credit quality corporate debt securities and reverse repurchase agreements. All marketable securities are considered to be available-for-sale and recorded at their estimated fair values. Unrealized gains and losses for available-for-sale securities are recorded in other comprehensive income (loss). In valuing these items, the Company uses inputs and assumptions that market participants would use to determine their fair value, utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of the convertible senior notes due 2023 (the “Notes”) is determined based on the closing price for the Notes on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the security will be sold before the recovery of its cost basis. Realized gains and losses and declines in value deemed to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net.

The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

(z)Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-15, “Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. The amendments under ASU 2018-13 remove, add and modify certain disclosure requirements on fair value measurements in ASC 820. The amendments are effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the new standard will have on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements”, which does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB ASC areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017‑04, “Simplifying the Test for Goodwill Impairment”, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This guidance is effective prospectively for interim and annual reporting periods beginning after December 15, 2019. The Company will adopt this guidance upon its effective date. The Company does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016‑13, “Financial Instruments–Credit Losses: Measurement of Credit Losses on Financial Instruments”, which changes the impairment model for most financial assets. The new model uses a forward‑looking expected loss method, which will generally result in earlier recognition of allowances for losses. In November 2018, the FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses”, which clarifies that receivables arising from operating leases are not within the scope of Topic 326, Financial Instruments – Credit Losses. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. These ASUs are effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is evaluating the impact of this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases”, which was further clarified by ASU 2018-10, “Codification Improvements to Topic 842, Leases”, and ASU 2018-11, “Leases - Targeted Improvements”, both issued in July 2018. ASU 2016-02 affects all entities that lease assets and will require lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of less than one year) as of the date on which the lessor makes the underlying asset available to the lessee. For lessors, accounting for leases is substantially the same as in prior periods. ASU 2018-10 clarifies or corrects unintended application of guidance related to ASU 2016-02. The amendment affects narrow aspects of ASU 2016-02 related to the implicit rate in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments. ASU 2018-11 adds a transition option for all entities and a practical expedient only for lessors. The transition option allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. Under the transition option, entities can opt to continue to apply the legacy guidance in ASC 840, “Leases”, including its disclosure requirements, in the comparative periods presented in the year they adopt the new leases standard. Entities that elect this transition option will still be required to adopt the new leases standard using the modified retrospective transition method required by the standard, but they will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The practical expedient provides lessors with an option to not separate the non-lease components from the associated lease components when certain criteria are met and requires them to account for the combined component in accordance with the revenue recognition standard in ASC 606 if the associated non-lease components are the predominant components. The new standards are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. For leases existing at, or entered into after the beginning of the earliest comparative period presented in the financial statements, lessees and lessors must apply a modified retrospective transition approach. While the Company expects the adoption of these standards to result in a material increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its consolidated financial statements.

Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Measurements

Fair Value Measurements

3. Fair Value Measurements

The following tables provide the assets measured at fair value on a recurring basis as of December 31, 2018 and 2017 (in thousands):


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost or		Gross		Losses		Losses More		Fair Value Hierarchy as of
	Carrying		Unrealized		Less Than		Than		December 31, 2018						Aggregate
	Value		Gains		12 Months		12 Months		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	420,234	$	—	$	—	$	—	$	420,234	$	—	$	—	$	420,234
Reverse repurchase agreements		35,000		—		—		—		—		35,000		—		35,000
Commercial paper		9,983		—		—		—		—		9,983		—		9,983
Total included in cash and cash equivalents		465,217		—		—		—		420,234		44,983		—		465,217
Marketable securities:
U.S. Treasury securities		59,785		—		(7)		(9)		59,769		—		—		59,769
Corporate debt securities and commercial paper		201,683		23		(123)		(224)		—		201,359		—		201,359
Total marketable securities		261,468		23		(130)		(233)		59,769		201,359		—		261,128
Total financial assets	$	726,685	$	23	$	(130)	$	(233)	$	480,003	$	246,342	$	—	$	726,345


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost or		Gross		Losses		Losses More		Fair Value Hierarchy as of
	Carrying		Unrealized		Less Than		Than		December 31, 2017						Aggregate
	Value		Gains		12 Months		12 Months		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	95,432	$	—	$	—	$	—	$	95,432	$	—	$	—	$	95,432
Total included in cash and cash equivalents		95,432		—		—		—		95,432		—		—		95,432
Marketable securities:
U.S. Treasury securities		59,962		—		(216)		—		59,746		—		—		59,746
Corporate debt securities and commercial paper		116,223		—		(382)		—		—		115,841		—		115,841
Total marketable securities		176,185		—		(598)		—		59,746		115,841		—		175,587
Total financial assets	$	271,617	$	—	$	(598)	$	—	$	155,178	$	115,841	$	—	$	271,019

As of December 31, 2018, the fair value of the 0.25% convertible senior notes due 2023 (the “Notes”), as further described in Note 8 below, was approximately $743.4 million.

As the Company views its marketable securities as available to support current operations, it has classified all available for sale securities as short-term. As of December 31, 2018, for fixed income securities that were in unrealized loss positions, the Company has determined that (i) it does not have the intent to sell any of these investments, and (ii) it is not more likely than not that it will be required to sell any of these investments before recovery of the entire amortized cost basis. In addition, as of December 31, 2018, the Company anticipates that it will recover the entire amortized cost basis of such fixed income securities and has determined that no other-than-temporary impairments associated with credit losses were required to be recognized during the years ended December 31, 2018 and 2017. Interest earned on marketable securities was $3.0 million and $2.6 million in the years ended December 31, 2018 and 2017, respectively. The interest is recorded as other income (expense), net, in the accompanying consolidated statements of operations.

The following table summarizes the contractual maturities of marketable securities as of December 31, 2018 and 2017 (in thousands):


	As of December 31, 2018				As of December 31, 2017
	Amortized		Aggregate Fair		Amortized		Aggregate Fair
	Cost		Value		Cost		Value
Financial Assets:
Less than one year	$	261,468	$	261,128	$	108,584	$	108,360
One to two years		—		—		67,601		67,227
Total	$	261,468	$	261,128	$	176,185	$	175,587

The Company enters into reverse securities repurchase agreements, primarily for short-term investments with maturities of 90 days or less. As of December 31, 2018, the Company was party to reverse repurchase agreements totaling $35.0 million, which were reported in cash and equivalents in the accompanying consolidated balance sheet. Under these reverse securities repurchase agreements, the Company typically lends available cash at a specified rate of interest and holds U.S. government securities as collateral during the term of the agreement. Collateral value is in excess of the amounts loaned under these agreements.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Property and Equipment

12 Months Ended

Dec. 31, 2018

Property and Equipment

Property and Equipment

4. Property and Equipment

Property and equipment consisted of the following (in thousands):


	As of December 31,
	2018		2017
Capitalized internal-use software development costs	$	72,647	$	49,177
Leasehold improvements		15,293		14,246
Office equipment		13,563		9,652
Furniture and fixtures		2,440		1,976
Assets under capital lease (1)		2,478		—
Software		1,849		1,675
Total property and equipment		108,270		76,726
Less: accumulated depreciation and amortization		(44,736)		(26,185)
Total property and equipment, net	$	63,534	$	50,541

(1)Assets under capital lease relate to a sub-lease agreement that commenced in the fourth quarter of 2018, as further described in Note 11(a), and consist primarily of furniture that will be acquired at a bargain purchase option at the end of the lease term.

Depreciation and amortization expense was $18.9 million, $13.1 million and $7.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The Company capitalized $25.3 million, $21.5 million and $13.5 million in internal-use software development costs in the years ended December 31, 2018, 2017 and 2016, respectively, of which $5.7 million, $4.2 million and $2.0 million, respectively, was stock‑based compensation expense. Amortization of capitalized software development costs was $13.0 million, $8.4 million and $5.5 million in the years ended December 31, 2018, 2017 and 2016, respectively. The amortization expense was allocated as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Cost of revenue	$	6,898	$	4,788	$	3,304
Research and development		5,437		3,619		2,182
General and administrative		689		—		—
Total	$	13,024	$	8,407	$	5,486

Business Combinations

12 Months Ended

Dec. 31, 2018

Goodwill and Intangible Assets

Business Combinations

5. Business Combinations

Fiscal 2018 Acquisitions

VAI Technologies, LLC

In November 2018, the Company acquired certain assets from VAI Technologies, LLC, a Delaware corporation and a developer of a natural language processing platform. The purchase price consisted of $1.2 million in cash, of which $0.3 was withheld by the Company for a period from 18 months to 4 years and can be extended under certain circumstances.

The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquired based on their respective fair values on the acquisition date. The excess of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill. The estimated fair value of the intangible assets acquired was determined by the Company.

The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Intangible assets(1)	$	517
Goodwill(2)		683
Total purchase price	$	1,200

⁽¹⁾

The intangible assets consist of developed technology with the estimated useful life of 4 years on the date of acquisition.

⁽²⁾

The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology and the future development initiatives of the acquired workforce. The Company intends to file elections that make the goodwill deductible for U.S. tax purposes.

The Company incurred cost related to this acquisition of $0.1 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operations.

Ytica.com a.s.

In September 2018, the Company acquired all outstanding shares of Ytica.com a.s. (“Ytica”), a developer and provider of a contact center reporting and analytics based in the Czech Republic, for a total purchase price of $21.8 million, paid in cash, of which $3.2 million was held in escrow with a term of 18 months.

Additionally, the Company granted 47,574 restricted stock units of the Company’s Class A common stock to a former shareholder of Ytica that had a value of $3.6 million and is subject to vesting over a period of three years. The Company is recording stock-based compensation expense as the shares are vesting.

The acquisition was accounted for as a business combination and the total purchase price was allocated to the net tangible and intangible assets and liabilities based on their fair values on the acquisition date and the excess was recorded as goodwill. The acquired entity’s results of operations have been included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of December 31, 2018 (in thousands):


	Total
Net tangible assets	$	(1,538)
Intangible assets (1)		9,920
Goodwill(2)		13,375
Total purchase price	$	21,757

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	9,090	4
Customer relationships		830	2
Total intangible assets acquired	$	9,920

⁽²⁾

The goodwill is primarily attributable to the future cash flows to be realized from the acquired technology platform as well as operational synergies. The Company intends to file elections that make the goodwill deductible for U.S. tax purposes.

The Company acquired a net deferred tax liability of $1.7 million in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet.

The Company incurred costs related to this acquisition of $0.6 million that were expensed as incurred and recorded in general and administrative expenses in the accompanying consolidated statement of operation.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s consolidated financial statements is immaterial.

Core Network Dynamics GmbH

In August 2018, the Company acquired all outstanding shares of Core Network Dynamics GmbH (“CND”), a developer and provider of a complete software mobile network infrastructure based in Germany, for a total purchase price of $11.1 million, paid in cash, of which $2.0 million was withheld by the Company for a term of 18 months and is recorded in other long-term liabilities in the accompanying consolidated balance sheet.

Additionally, the Company granted 35,950 restricted stock units of the Company’s Class A common stock to a former shareholder of CND that had a value of $2.2 million and is subject to vesting over a period of three years. The Company is recording a stock-based compensation expense as the shares are vesting.

The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of December 31, 2018 (in thousands):


	Total
Net tangible assets	$	(313)
Intangible assets(1)		4,500
Goodwill(2)		6,869
Total purchase price	$	11,056

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	3,910	4
Customer relationships		590	0.5
Total intangible assets acquired	$	4,500

⁽²⁾

The goodwill is primarily attributable to the future cash flows to be realized from the operating synergies between the acquired technology platform and the Company’s Programmable Wireless products. The Company intends to file elections that make the goodwill deductible for U.S. tax purposes.

The Company acquired a net deferred tax liability of $1.2 million in this business combination that is included in long-term liabilities in the accompanying consolidated balance sheet.

The Company incurred costs related to this acquisition of $0.8 million that were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statement of operation.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s consolidated financial statements is immaterial.

Fiscal 2017 Acquisitions

Beepsend, AB

In February 2017, the Company completed its acquisition of Beepsend AB, a messaging provider based in Sweden, specializing in messaging and SMS solutions, for a total purchase price of $23.0 million, paid in cash, of which $5.0 million was held in escrow with a term of 18 months and was fully released at the escrow expiration date.

Additionally, the Company deposited $2.0 million into a separate escrow account that was subject to certain service conditions and was released to certain employees on the first and second anniversaries of the closing date as the conditions were met. This amount was recorded as prepaid compensation in the accompanying consolidated balance sheet and was amortized into expense as the services were rendered.

The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the preliminary net tangible and intangible assets and liabilities based on their preliminary fair values on the acquisition date. The prepaid compensation subject to service conditions was accounted for as a post-acquisition compensation expense and recorded as research and development expense in the accompanying consolidated statements of operations.

The acquired entity’s results of operations were included in the consolidated financial statements of the Company from the date of acquisition.

The following table presents the purchase price allocation, as adjusted, recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Net tangible liabilities	$	(3,575)
Intangible assets(1)		13,700
Goodwill(2)		12,837
Total purchase price	$	22,962

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following:


			Estimated
			life
	Total		(in years)
Developed technology	$	5,000	4
Customer relationships		6,100	7 - 8
Supplier relationships		2,600	5
Total intangible assets acquired	$	13,700

(2)Goodwill represents the excess of purchase price over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed. The goodwill in this transaction is primarily attributable to the future cash flows to be realized from the acquired technology platform, existing customer and supplier relationships as well as operational synergies. Goodwill is deductible for tax purposes.

The Company acquired a net deferred tax liability of $2.6 million in this business combination that is included in the long-term liabilities in the accompanying consolidated balance sheet.

The estimated fair value of the intangible assets acquired was determined by the Company, and the Company considered or relied in part upon a valuation report of a third-party expert. The Company used income approaches to estimate the fair values of the identifiable intangible assets. Specifically, the developed technology asset class was valued using the-relief-from royalty method, while the customer relationships asset class was valued using a multi-period excess earnings method and the supplier relationships asset class was valued using an incremental cash flow method.

The Company incurred costs related to this acquisition of $0.7 million, of which $0.3 million and $0.4 million were incurred during fiscal years 2017 and 2016, respectively. All acquisition related costs were expensed as incurred and have been recorded in general and administrative expenses in the accompanying consolidated statements of operations.

Pro forma results of operations for this acquisition are not presented as the financial impact to the Company’s consolidated financial statements is immaterial.

Kurento Open Source Project

In November 2016, the Company acquired certain assets from Tikal Technologies S.L., a Spanish corporation, behind the Kurento Open Source Project. The acquired assets consisted of (a) proprietary WebRTC media processing technologies, (b) certain licenses, patents and trademarks and (c) certain employee relationships behind the WebRTC technology. The purchase price consisted of $8.5 million in cash, of which $1.5 million was placed into escrow to indemnify the Company against breaches of general representations, warranties, claims and tax compliance matters. The escrow is effective for 24 months and 10 days from the acquisition date and may be extended under certain circumstances.

The acquisition was accounted for as a business combination and, accordingly, the total purchase price was allocated to the identifiable intangibles assets acquired based on their respective fair values on the acquisition date. The excess of the purchase price over the fair values of the identifiable assets acquired was recorded as goodwill. The Company considered or relied in part upon a valuation report of a third-party expert.

The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Intangible assets(1)	$	8,100
Goodwill(2)		400
Total purchase price	$	8,500

⁽¹⁾

The intangible assets consist of developed technology with the estimated useful life of 3 years on the date of acquisition.

⁽²⁾

Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2018

Goodwill and Intangible Assets

6. Goodwill and Intangible Assets

Goodwill

Goodwill balance as of December 31, 2018 and 2017 was as follows (in thousands):


	Total
Balance as of December 31, 2016	$	3,565
Goodwill recorded in connection with 2017 acquisition		12,688
Measurement period adjustment		149
Effect of exchange rate		1,449
Balance as of December 31, 2017	$	17,851
Goodwill recorded in connection with 2018 acquisitions		20,356
Measurement period adjustment		571
Effect of exchange rate		(613)
Balance as of December 31, 2018	$	38,165

Intangible assets

Intangible assets consisted of the following (in thousands):


	As of December 31, 2018
			Accumulated
	Gross		Amortization		Net
Amortizable intangible assets:
Developed technology	$	28,209	$	(10,497)	$	17,712
Customer relationships		8,153		(2,411)		5,742
Supplier relationships		2,696		(973)		1,723
Trade name		60		(60)		—
Patent		2,264		(178)		2,086
Total amortizable intangible assets		41,382		(14,119)		27,263
Non-amortizable intangible assets:
Domain names		32		—		32
Trademarks		263		—		263
Total	$	41,677	$	(14,119)	$	27,558


	As of December 31, 2017
			Accumulated
	Gross		Amortization		Net
Amortizable intangible assets:
Developed technology	$	14,941	$	(5,476)	$	9,465
Customer relationships		7,159		(1,006)		6,153
Supplier relationships		2,881		(500)		2,381
Trade name		60		(60)		—
Patent		1,878		(108)		1,770
Total amortizable intangible assets		26,919		(7,150)		19,769
Non-amortizable intangible assets:
Domain names		32		—		32
Trademarks		263		—		263
Total	$	27,214	$	(7,150)	$	20,064

Amortization expense was $7.2 million, $5.7 million and $0.9 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Total estimated future amortization expense was as follows (in thousands):


	As of
	December 31,
	2018
2019	$	9,724
2020		6,337
2021		4,922
2022		3,198
2023		892
Thereafter		2,190
Total	$	27,263

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References + Details

Accrued Expenses and Other Liabilities

12 Months Ended

Dec. 31, 2018

Accrued Expenses and Other Liabilities

Accrued Expenses and Other Liabilities

7. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	As of
	December 31,
	2018		2017
Accrued payroll and related	$	9,886	$	4,898
Accrued bonus and commission		8,564		4,777
Accrued cost of revenue		29,901		10,876
Sales and other taxes payable		23,631		20,877
ESPP contributions		2,672		1,338
Deferred rent		1,418		1,048
Nonrefundable deposits		3,415		162
VAT liability		2,217		2,515
Accrued other expense		18,054		7,123
Total accrued expenses and other current liabilities	$	99,758	$	53,614

Other long-term liabilities consisted of the following (in thousands):


	As of
	December 31,
	2018		2017
Deferred rent	$	7,569	$	8,480
Deferred tax liability		5,181		2,452
Acquisition holdback		2,290		—
Capital lease obligation		2,170		—
Accrued other expense		959		477
Total other long-term liabilities	$	18,169	$	11,409

Convertible Senior Notes and Capped Call Transactions

12 Months Ended

Dec. 31, 2018

Convertible Senior Notes and Capped Call Transactions

Convertible Senior Notes and Capped Call Transactions

8. Convertible Senior Notes and Capped Call Transactions

In May 2018, the Company issued $550.0 million aggregate principal amount of 0.25% convertible senior notes due 2023 in a private placement, including $75.0 million aggregate principal amount of such Notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (collectively, the “Notes”). The interest on the Notes is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018.

The Notes may bear special interest under specified circumstances relating to the Company’s failure to comply with its reporting obligations under the indenture relating to the issuance of Notes (the “indenture”) or if the Notes are not freely tradeable as required by the indenture. The Notes will mature on June 1, 2023, unless earlier repurchased or redeemed by the Company or converted pursuant to their terms. The total net proceeds from the debt offering, after deducting initial purchaser discounts and debt issuance costs, paid or payable by us, were approximately $537.0 million.

Each $1,000 principal amount of the Notes is initially convertible into 14.1040 shares of the Company’s Class A common stock par value $0.001, which is equivalent to an initial conversion price of approximately $70.90 per share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid special interest. In addition, upon the occurrence of a make-whole fundamental change, as defined in the indenture, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change or during the relevant redemption period.

Prior to the close of business on the business day immediately preceding March 1, 2023, the Notes may be convertible at the option of the holders only under the following circumstances:

(1) during any calendar quarter commencing after September 30, 2018, and only during such calendar quarter, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) in a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is more than or equal to 130% of the conversion price on each applicable trading day;

(2) during the five business days period after any five consecutive trading day period in which, for each trading day of that period, the trading price per $1,000 principal amount of Notes for such trading day was less than 98% of the product of the last reported sale price of the Class A common stock and the conversion rate on each such trading day;

(3) upon the Company’s notice that it is redeeming any or all of the Notes; or

(4) upon the occurrence of specified corporate events.

On or after March 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Notes may, at their option, convert all or a portion of their Notes regardless of the foregoing conditions.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock, or a combination of cash and shares of Class A Common Stock, at the Company’s election. It is the Company’s current intent to settle the principal amount of the Notes with cash.

During the year ended December 31, 2018, the conditions allowing holders of the Notes to convert were not met. The Company may redeem the Notes, in whole or in part, at its option, on or after June 1, 2021 but before the 35th scheduled trading day before the maturity date, at a cash redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, if the last reported sale price of the Class A Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including, the trading day immediately before the date the redemption notices were sent; and the trading day immediately before such notices were sent.

No sinking fund is provided for the Notes. Upon the occurrence of a fundamental change (as defined in the indenture) prior to the maturity date, holders may require the Company to repurchase all or a portion of the Notes for cash at a price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively subordinated to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.

The foregoing description is qualified in its entirety by reference to the text of the indenture and the form of 0.25% convertible senior notes due 2023, which were filed as exhibits to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and are incorporated herein by reference.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was $119.4 million and was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense at an annual effective interest rate of 5.7% over the contractual terms of the Notes.

In accounting for the transaction costs related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on the proportion of the proceeds allocated to the debt and equity components. Issuance costs attributable to the liability component were approximately $10.2 million, were recorded as an additional debt discount and are amortized to interest expense using the effective interest method over the contractual terms of the Notes. Issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.

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


	As of
	December 31,
	2018
Principal	$	550,000
Unamortized discount		(106,484)
Unamortized issuance costs		(9,020)
Net carrying amount	$	434,496

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


	As of
	December 31,
	2018
Proceeds allocated to the conversion options (debt discount)	$	119,435
Issuance costs		(2,819)
Net carrying amount	$	116,616

The following table sets forth the interest expense recognized related to the Notes (in thousands):


	Year Ended
	December 31,
	2018
Contractual interest expense	$	852
Amortization of debt issuance costs		1,102
Amortization of debt discount		12,951
Total interest expense related to the Notes	$	14,905

In connection with the offering of the Notes, the Company entered into privately-negotiated capped call transactions with certain counterparties (the “capped calls”). The capped calls each have an initial strike price of approximately $70.90 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The capped calls have initial cap prices of $105.04 per share, subject to certain adjustments. The capped calls cover, subject to anti-dilution adjustments, approximately 7,757,200 shares of Class A Common Stock. The capped calls are generally intended to reduce or offset the potential dilution to the Class A Common Stock upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The capped calls expire on the earlier of (i) the last day on which any convertible securities remain outstanding and (ii) June 1, 2023, subject to earlier exercise. The capped calls are subject to either adjustment or termination upon the occurrence of specified extraordinary events affecting the Company, including a merger event, a tender offer, and a nationalization, insolvency or delisting involving the Company. In addition, the capped calls are subject to certain specified additional disruption events that may give rise to a termination of the capped calls, including changes in law, insolvency filings, and hedging disruptions. The capped call transactions are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $58.5 million incurred to purchase the capped call transactions was recorded as a reduction to additional paid-in capital in the accompanying consolidated balance sheet.

Supplemental Balance Sheet Information

12 Months Ended

Dec. 31, 2018

Supplemental Balance Sheet Information

Supplemental Balance Sheet Information

9. Supplemental Balance Sheet Information

A roll-forward of the Company’s reserves for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):

(a) Allowance for doubtful accounts:


	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	1,033	$	1,076	$	486
Additions		4,085		580		1,145
Write-offs		(173)		(623)		(555)
Balance, end of period	$	4,945	$	1,033	$	1,076

(b) Sales credit reserve:


	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	1,761	$	544	$	714
Additions		5,560		2,531		1,348
Deductions against reserve		(4,306)		(1,314)		(1,518)
Balance, end of period	$	3,015	$	1,761	$	544

Revenue by Geographic Area

12 Months Ended

Dec. 31, 2018

Revenue by Geographic Area

Revenue by Geographic Area

10. Revenue by Geographic Area

Revenue by geographic area is based on the IP address at the time of registration. The following table sets forth revenue by geographic area (in thousands):


	Year Ended December 31,
	2018		2017		2016
Revenue by geographic area:
United States	$	484,809	$	308,612	$	233,922
International		165,258		90,408		43,413
Total	$	650,067	$	399,020	$	277,335


Percentage of revenue by geographic area:
United States	75	%	77	%	84	%
International	25	%	23	%	16	%

Long-lived assets outside the United States were not significant.

Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Commitments and Contingencies

11. Commitments and Contingencies

(a) Lease Commitments

The Company entered into various non‑cancelable operating lease agreements for its facilities that expire over the next ten years. Certain operating leases contain provisions under which monthly rent escalates over time. When lease agreements contain escalating rent clauses or free rent periods, the Company recognizes rent expense on a straight‑line basis over the term of the lease.

In September 2018, the Company entered into a sub-lease agreement (“Sub-lease”) for a total of 259,416 rentable square feet of office space at 101 Spear Street in San Francisco, California. The Sub-lease covers several floors for which the terms commence on December 1, 2018 and April 1, 2020, and will be expiring at various dates between March 2025 and June 2028. The Company secured its lease obligation with a $14.7 million letter of credit, which it designated as restricted cash on its balance sheet as of December 31, 2018. The Company intends for this location to become its headquarters at some time in 2019. The total lease payments range from $0.8 million per month to $2.2 million per month. The Sub-lease contains a bargain purchase option for the Company to acquire the existing furniture in the leased space for $1 at the end of the lease term. This option was treated as a capital lease under ASC 840--“Leases” and as of December 31, 2018, $2.5 million was recorded as assets under capital lease within the property, plant and equipment balance in the accompanying consolidated balance sheet. The corresponding capital lease obligation was recorded as current and long-term liabilities.

In January 2016, the Company entered into a lease agreement ("Lease"), as subsequently amended, for approximately 90,000 square feet of new office space at 375 Beale Street in San Francisco, California, that houses its principal executive office. The term of the Lease is approximately 96 months following the commencement in October 2016, and the lease payments range from $0.4 million per month in the first 60 months to $0.5 million per month thereafter. The Lease included a tenant improvement allowance to cover construction of certain leasehold improvements for up to $8.3 million. All applicable amounts were collected from the landlord as of December 31, 2017. Based on the terms of the landlord incentive and involvement of the Company in the construction process, the leasehold improvements were determined to be property of the Company. The Company initially secured its lease obligation with a $7.4 million letter of credit, which was designated as restricted cash on its balance sheet as of December 31, 2016. This amount is periodically reduced as stipulated in the lease agreement.

Rent expense was $10.3 million, $8.1 million and $7.3 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):


	As of
	December 31,
Year Ending December 31:	2018
2019	$	24,128
2020		29,527
2021		30,898
2022		30,492
2023		30,122
Thereafter		81,316
Total minimum lease payments	$	226,483

Future minimum lease payments under the capital lease were as follows (in thousands):


	As of
	December 31,
Year Ending December 31:	2018
2019	$	306
2020		512
2021		573
2022		590
2023		608
Thereafter		1,939
Total minimum lease payments	$	4,528

Additionally, the Company has noncancellable contractual commitments with its cloud infrastructure provider, network service providers and other vendors that are non‑cancellable and expire within one to four years. Future minimum payments under these noncancellable purchase commitments were as follows (in thousands). Unrecognized tax benefits are not included in these amounts because any amounts expected to be settled in cash are not material:


	As of
	December 31,
Year Ending December 31:	2018
2019	$	37,623
2020		2,337
2021		1,023
2022		2,000
2023		5,000
Total payments	$	47,983

(b) Legal Matters

On April 30, 2015 and March 28, 2016, Telesign Corporation (“Telesign”) filed lawsuits (which were subsequently consolidated) against the Company in the United States District Court, Central District of California (“Telesign I/II”). Telesign alleges in Telesign I/II that the Company is infringing four U.S. patents that it holds: U.S. Patent No. 7,945,034 (“034”), U.S. Patent No. 8,462,920 (“920”), U.S. Patent No. 8,687,038 (“038”) and U.S. Patent No. 9,300,792 (“792”). The consolidated Telesign I/II actions have been transferred to the United States District Court, Northern District. The patent infringement allegations in the lawsuit relate to the Company’s two-factor authentication use case, Authy, and an API tool to find information about a phone number. Telesign seeks, among other things, to enjoin us from allegedly infringing the patents, along with damages for lost profits.

On March 8, 2017, in response to a petition by the Company, the U.S. Patent and Trademark Officer (“PTO”) issued an order instituting an inter partes review for the ‘792 patent. On March 6, 2018, the PTO found all claims challenged by the Company in the inter partes review unpatentable. On October 19, 2018, the district court granted the Company’s motion that all asserted claims of the asserted patents are invalid under 35 U.S.C. § 101 and entered judgment in the Company’s favor. On November 8, 2018, Telesign appealed the judgment to the United States Court of Appeals for the Federal Circuit where the case is now pending. Based on, among other things, final judgment being entered by the district court in the Company’s favor, the Company does not believe a loss is reasonably possible or estimable.

On December 1, 2016, the Compamy filed a patent infringement lawsuit against Telesign in the United States District Court, Northern District of California (“Telesign III”), alleging indirect infringement of United States Patent No. 8,306,021 (“021”), United States Patent No. 8,837,465 (“465”), United States Patent No. 8,755,376 (“376”), United States Patent No. 8,736,051 (“051”), United States Patent No. 8,737,962 (“962”), United States Patent No. 9,270,833 (“833”), and United States Patent No. 9,226,217 (“217”). Telesign filed a motion to dismiss the complaint on January 25, 2017. In two orders, issued on March 31, 2017 and April 17, 2017, the court granted Telesign’s motion to dismiss with respect to the ‘962, ‘833, ‘051 and ‘217 patents, but denied Telesign’s motion to dismiss as to the ‘021, ‘465 and ‘376 patents. On August 23, 2017, Telesign petitioned the PTO for inter partes review of the ‘021, ‘465, and ‘376 patents. On March 9, 2018, the PTO denied Telesign’s petition for inter partes review of the ‘021 patent and granted Telesign’s petitions for inter partes review of the ‘465 and ‘376 patents. Telesign III is currently stayed pending resolution of the inter partes reviews of the ‘465 and ‘376 patents. The Company is seeking a judgment of infringement, a judgment of willful infringement, monetary and injunctive relief, enhanced damages, and an award of costs and expenses against Telesign.

On February 18, 2016, a putative class action complaint was filed in the Alameda County Superior Court in California, entitled Angela Flowers v. Twilio Inc. The complaint alleges that the Company’s products permit the interception, recording and disclosure of communications at a customer’s request and are in violation of the California Invasion of Privacy Act. The complaint seeks injunctive relief as well as monetary damages. On January 2, 2018, the court issued an order granting in part and denying in part the plaintiff’s class certification motion. The court certified two classes of individuals who, during specified time periods, allegedly sent or received certain communications involving the accounts of three of the Company’s customers that were recorded. Following mediation, on January 7, 2019, the parties signed a long-form settlement agreement, providing for a payment of $10 million into a common fund and injunctive relief involving certain updates to Twilio’s Acceptable Use Policy and customer documentation. On January 15, 2019, the court entered an order granting preliminary approval of the settlement, and the parties signed an amended settlement agreement to conform to the court’s order. A final approval hearing is scheduled for June 11, 2019. Given insurance coverage, the Company currently estimates its potential liability in the Flowers matter to be $1.7 million and reserved this amount in its consolidated balance sheet as of December 31, 2018 , presented elsewhere in this Annual Report on Form 10-K.

On September 1, 2015, Twilio was named as a defendant in a First Amended Complaint in a putative class action captioned Jeremy Bauman v. David Saxe, et al. pending in the United States District Court, District of Nevada relating to the alleged sending of unsolicited text messages to the plaintiffs and putative class members. The Company filed a motion to dismiss, which was granted, and on September 20, 2016 the plaintiff filed a Second Amended Complaint with additional allegations that the Company violated the Telephone Consumer Protection Act (“TCPA”), and the Nevada Deceptive Trade Practices Act (“NDTPA”), NRS 41.600(2)(e). On January 10, 2019, the court granted Plaintiffs’ motion for class certification under the TCPA and denied plaintiff’s request to certify a class under the NDTPA. On February 13, 2019, the court issued an order denying the Company’s motion to dismiss as to Plaintiffs’ TCPA claim and granting dismissal as to Plaintiffs’ NDTPA claim. The Company intends to vigorously defend itself against and believes it has meritorious defenses to this lawsuit. It is too early in these matters to reasonably predict the probability of the outcomes or to estimate the range of possible loss, if any.

SendGrid Stockholder Litigation

On December 5, 2018, purported stockholders of SendGrid filed putative class action complaints in the United States District Court for the District of Delaware, Rosenblatt v. SendGrid, Inc., et al., Case No. 1:18-cv-01931-UNA (the “Rosenblatt Complaint”), and in the United States District Court for the District of Colorado, Chen v. SendGrid, Inc., et al., Case No. 1:18-cv-03131-MEH (the “Chen Complaint”), against SendGrid, the individual members of the SendGrid board of directors (the “Individual Defendants”), Twilio and Topaz Merger Subsidiary, Inc. Thereafter, on December 19, 2018 and January 3, 2019, purported stockholders of SendGrid filed putative class action complaints against SendGrid and the Individual Defendants in the United States District Court for the District of Colorado, respectively, Bushansky v. SendGrid, Inc., et al., 1:18-cv-03260-SKC (the “Bushansky Complaint”), and Conner v. SendGrid, Inc., et al., 1:19-cv-00016-PAB-SKC (the “Conner Complaint”). As of February 11, 2019, all four complaints have been voluntarily dismissed.

Among other things, the Rosenblatt Complaint alleges that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Rosenblatt Complaint alleges that the Individual Defendants and Twilio acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective registration statement on Form S-4. The Rosenblatt Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to file a registration statement on Form S-4 that does not contain any untrue statements of material fact and states all material facts, a declaration that the defendants violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 11, 2019, the Rosenblatt Complaint was voluntarily dismissed.

Among other things, the Chen Complaint alleges that the defendants misrepresented and/or omitted material information in a registration statement on Form S-4, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Chen Complaint alleges that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Form S-4. The Chen Complaint also alleges that the Individual Defendants breached their fiduciary duties to SendGrid stockholders, and that the other defendants aided and abetted such breaches, by seeking to sell SendGrid through an allegedly unfair process and for an unfair price and on unfair terms, and by failing to disclose all material information. The Chen Complaint seeks, among other things, rescission of the merger or rescissory damages, an order directing the SendGrid board of directors to commence a new sale process, a declaration that the merger agreement was agreed to in breach of the Individual Defendants’ fiduciary duties and is therefore unlawful and unenforceable, an order directing the defendants to account to the putative class for damages allegedly sustained, and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 4, 2019, the Chen Complaint was voluntarily dismissed.

Among other things, the Bushansky and Conner Complaints allege that SendGrid and the Individual Defendants misrepresented and/or omitted material information in a Schedule 14A Definitive Proxy Statement, rendering it false and misleading and in violation of the Exchange Act and related regulations. In addition, the Bushansky and Conner Complaints allege that the Individual Defendants acted as controlling persons within the meaning and in violation of Section 20(a) of the Exchange Act to influence and control the dissemination of the allegedly defective Schedule 14A Definitive Proxy Statement. The Bushansky and Conner Complaints seek, among other things, rescission of the merger or rescissory damages, and an award of plaintiff costs, including reasonable attorneys’ and experts’ fees. On February 4, 2019, the Bushansky Complaint was voluntarily dismissed. On February 11, 2019, the Conner Complaint was voluntarily dismissed.

In addition to the litigation matters discussed above, from time to time, the Company is a party to legal action and subject to claims that arise in the ordinary course of business. The claims are investigated as they arise and loss estimates are accrued, when probable and reasonably estimable. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that these legal proceedings will not have a material adverse effect on its financial position or results of operations.

Legal fees and other costs related to litigation and other legal proceedings are expensed as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations.

The Company has signed indemnification agreements with all of its board members and executive officers. The agreements indemnify the board members and executive officers from claims and expenses on actions brought against the individuals separately or jointly with the Company for certain indemnifiable events. Indemnifiable Events generally mean any event or occurrence related to the fact that the board member or the executive officer was or is acting in his or her capacity as a board member or an executive officer for the Company or was or is acting or representing the interests of the Company.

In the ordinary course of business, the Company enters into contractual arrangements under which it agrees to provide indemnification of varying scope and terms to business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of the breach of such agreements, intellectual property infringement claims made by third parties and other liabilities relating to or arising from the Company’s various products, or its acts or omissions. In these circumstances, payment may be conditional on the other party making a claim pursuant to the procedures specified in the particular contract. Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments. The terms of such obligations may vary.

As of December 31, 2018 and 2017, no amounts were accrued.

(d) Other Taxes

The Company conducts operations in many tax jurisdictions throughout the United States. In many of these jurisdictions, non-income-based taxes, such as sales and use and telecommunications taxes are assessed on the Company’s operations. Prior to March 2017, the Company had not billed nor collected these taxes from its customers and, in accordance with U.S. GAAP, recorded a provision for its tax exposure in these jurisdictions when it was both probable that a liability had been incurred and the amount of the exposure could be reasonably estimated. These estimates included several key assumptions including, but not limited to, the taxability of the Company’s services, the jurisdictions in which its management believes it has nexus, and the sourcing of revenues to those jurisdictions. Starting in March 2017, the Company began collecting these taxes from customers in certain jurisdictions, and since then, has expanded the number of jurisdictions where these taxes are being collected. Effective January 2018, the Company began to collect taxes in one additional jurisdiction and accordingly, from January 2018, the Company is not recording an additional provision for its exposure for new activities in that jurisdiction. The Company expects to continue to expand the number of jurisdictions where these taxes will be collected in the future. Simultaneously, the Company was and continues to be in discussions with certain states regarding its prior state sales and other taxes, if any, that the Company may owe.

During 2017, the Company revised its estimates of its tax exposure based on settlements reached with various states indicating that certain revisions to the key assumptions including, but not limited to, the sourcing of revenue and the taxability of the Company’s services were appropriate in the current period. In the year ended December 31, 2017, the total impact of these changes on the net loss attributable to common stockholders was a reduction of $13.4 million. As of December 31, 2018 and 2017, the liability recorded for these taxes was $22.6 million and $20.9 million, respectively.

In the event other jurisdictions challenge management’s assumptions and analysis, the actual exposure could differ materially from the current estimates.

Stockholders' Equity

12 Months Ended

Dec. 31, 2018

Stockholders' Equity

Stockholders' Equity

12. Stockholders’ Equity

(a)Preferred Stock

As of December 31, 2018 and 2017, the Company had authorized 100,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.

(b)Common Stock

In June 2016, the Company completed an initial public offering (“IPO”) in which the Company sold 11,500,000 shares of its newly authorized Class A common stock, which included 1,500,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at the public offering price of $15.00 per share. The Company received net proceeds of $155.5 million, after deducting underwriting discounts and offering expenses paid by the Company, from the sale of its shares in the IPO. Immediately prior to the completion of the IPO, all shares of common stock then outstanding were reclassified as shares of Class B common stock and all shares of convertible preferred stock then outstanding were converted into 54,508,441 shares of common stock on a one-to-one basis, and then reclassified as shares of Class B common stock.

In October 2016, the Company completed a follow-on public offering (“FPO”) in which the Company sold 1,691,222 shares of its Class A common stock, which included 1,050,000 shares sold pursuant to the exercise by the underwriters of an option to purchase additional shares, at a public offering price of $40.00 per share. In addition, another 6,358,778 shares of the Company’s Class A common stock were sold by the selling stockholders of the Company, which included 906,364 shares sold pursuant to the exercise of employee stock options by certain selling stockholders. The Company received aggregate proceeds of $64.4 million, after deducting underwriting discounts and offering expenses paid and payable by the Company. The Company did not receive any of the net proceeds from the sales of shares by the selling stockholders.

As of December 31, 2018 and 2017, the Company had authorized 1,000,000,000 shares of Class A common stock and 100,000,000 shares of Class B common stock, each par value $0.001 per share. As of December 31, 2018, 80,769,763 shares of Class A common stock and 19,310,465 shares of Class B common stock were issued and outstanding. As of December 31, 2017, 69,906,550 shares of Class A common stock and 24,063,246 shares of Class B common stock were issued and outstanding. Holders of Class A and Class B common stock are entitled to one vote per share and 10 votes per share, respectively, and the shares of Class A common stock and Class B common stock are identical, except for voting and conversion rights. The outstanding Class B common stock as of the year ended December 31, 2017 included 180,000 shares related to the Authy acquisition which was released from escrow during 2018.

The Company had reserved shares of common stock for issuance as follows:


	As of December 31,	As of December 31,
	2018	2017
Stock options issued and outstanding	7,978,369	10,710,427
Nonvested restricted stock units issued and outstanding	8,262,902	5,665,459
Class A common stock reserved for Twilio.org	572,676	635,014
Stock-based awards available for grant under 2016 Plan	9,313,354	10,200,189
Stock-based awards available for grant under 2016 ESPP	3,092,779	2,478,343
Class A common stock reserved for the convertible senior notes	10,472,165	—
Total	39,692,245	29,689,432

(c)Twilio.org

In September 2015, the Company’s board of directors approved the establishment of Twilio.org and committed 1% of the Company’s outstanding capital stock to fund Twilio.org’s activities. Through Twilio.org, which is a part of the Company and not a separate legal entity, the Company donates and discounts its products to nonprofits, who use the Company’s products to engage their audience, expand their reach and focus on making a meaningful change in the world. In the years ended December 31, 2018 and 2017, Twilio.org donated $7.1 million and $1.2 million to the qualified recipients consistent with its philanthropic mission. As of December 31, 2018, the Company had 572,676 shares reserved for Twilio.org activities.

Stock-Based Compensation

12 Months Ended

Dec. 31, 2018

Net Loss Per Share Attributable to Common Stockholders

Stock-Based Compensation

13. Stock‑Based Compensation

2008 Stock Option Plan

The Company maintained a stock plan, the 2008 Stock Option Plan, as amended and restated (the “2008 Plan”), which allowed the Company to grant incentive (“ISO”), non-statutory (“NSO”) stock options and restricted stock units (“RSU”) to its employees, directors and consultants to participate in the Company’s future performance through stock-based awards at the discretion of the board of directors. Under the 2008 Plan, options to purchase the Company’s common stock could not be granted at a price less than fair value in the case of ISOs and NSOs. Fair value was determined by the board of directors, in good faith, with input from valuation consultants. On June 22, 2016, the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under the 2008 Plan. The 2008 Plan continues to govern outstanding equity awards granted thereunder. The Company’s right of first refusal for outstanding equity awards granted under the 2008 Plan terminated upon completion of the IPO. Options granted include provisions for early exercisability.

2016 Stock Option Plan

The Company’s 2016 Stock Option and Incentive Plan (the “2016 Plan”) became effective on June 21, 2016. The 2016 Plan provides for the grant of ISOs, NSOs, restricted stock, RSUs, stock appreciation rights, unrestricted stock awards, performance share awards, dividend equivalent rights and cash-based awards to employees, directors and consultants of the Company. A total of 11,500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 Plan. These available shares automatically increase each January 1, beginning on January 1, 2017, by 5% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31, or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018 and 2017, the shares available for grant under the 2016 Plan were automatically increased by 4,698,490 shares and 4,362,427 shares, respectively.

Under the 2016 Plan, the stock options are granted at a price per share not less than 100% of the fair market value per share of the underlying common stock on the date of grant. Under both plans, stock options generally expire 10 years from the date of grant and vest over periods determined by the board of directors. The vesting period for new-hire options and restricted stock units is generally a four-year term from the date of grant, at a rate of 25% after one year, then monthly or quarterly, respectively, on a straight-line basis thereafter. In July 2017, the Company began granting restricted stock units to existing employees that vest in equal quarterly installments over a four year service period.

2016 Employee Stock Purchase Plan

The Company’s Employee Stock Purchase Plan (“2016 ESPP”) became effective on June 21, 2016. A total of 2,400,000 shares of the Company’s Class A common stock were initially reserved for issuance under the 2016 ESPP. These available shares will automatically increase each January 1, beginning on January 1, 2017, by the lesser of 1,800,000 shares of the common stock, 1% of the number of shares of the Company’s Class A and Class B common stock outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the Company’s compensation committee. On January 1, 2018 and 2017, the shares available for grant under the 2016 Plan were automatically increased by 939,698 and 872,485 shares, respectively.

The 2016 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock at a discount of up to 15% through payroll deductions of their eligible compensation, subject to any plan limitations. Except for the initial offering period, the 2016 ESPP provides for separate six-month offering periods beginning in May and November of each fiscal year, starting in May 2017.

On each purchase date, eligible employees will purchase the Company’s stock at a price per share equal to 85% of the lesser of (i) the fair market value of the Company’s Class A common stock on the offering date or (ii) the fair market value of the Company’s Class A common stock on the purchase date.

In the years ended December 31, 2018 and 2017, 325,262 shares and 794,142 shares of Class A common stock were purchased under the 2016 ESPP and 113,312 shares are expected to be purchased in the second quarter of 2019. As of December 31, 2018, total unrecognized compensation cost related to the 2016 ESPP was $2.2 million, which will be amortized over a weighted-average period of 0.4 years.

Stock options activity under the 2008 Plan and 2016 Plan was as follows:

Stock Options


				Weighted-
		Weighted-		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	options	price		term	value
	outstanding	(per share)		(in years)	(in thousands)
Outstanding options as of December 31, 2017	10,155,427	$	10.31	7.12	$	145,763
Granted	1,330,118		39.77
Exercised	(3,628,032)		8.20
Forfeited and cancelled	(434,144)		19.70
Outstanding options as of December 31, 2018	7,423,369	$	16.07	6.80	$	543,640
Options vested and exercisable as of December 31, 2018	4,529,504	$	9.38	5.96	$	362,017

Aggregate intrinsic value represents the difference between the Company’s estimated fair value of its common stock and the exercise price of outstanding “in-the-money” options. Prior to the IPO, the fair value of the Company's common stock was estimated by the Company's board of directors. After the IPO, the fair value of the Company's common stock is the Company's Class A common stock price as reported on the New York Stock Exchange. The aggregate intrinsic value of stock options exercised was $178.5 million, $132.0 million and $54.4 million during the years ended December 31, 2018, 2017 and 2016, respectively.

The total estimated grant date fair value of options vested was $21.8 million, $15.8 million and $15.3 million during the years ended December 31, 2018, 2017 and 2016, respectively. The weighted‑average grant‑date fair value of options granted was $18.40, $13.33 and $5.52 during the years ended December 31, 2018, 2017 and 2016, respectively.

On February 28, 2017, the Company granted a total of 555,000 shares of performance-based stock options in three distinct awards to an employee with grant date fair values of $13.48, $10.26 and $8.41 per share for a total grant value of $5.9 million. The first half of each award vests upon satisfaction of a performance condition and the remainder vests thereafter in equal monthly installments over a 24-month period. The achievement window expires after 4.3 years from the date of grant and the stock options expire seven years after the date of grant. The stock options are amortized over a derived service period, as adjusted, of 3.1 years, 3.9 years and 4.6 years, respectively. The stock options value and the derived service period were estimated using the Monte-Carlo simulation model. The following table summarizes the details of the performance options:


				Weighted‑
		Weighted‑		average
		average		remaining
	Number of	exercise		contractual	Aggregate
	options	price		term	intrinsic value
	outstanding	(per share)		(in years)	(in thousands)
Outstanding options as of December 31, 2017	555,000	$	31.72	6.0	$	—
Granted	—		—
Exercised	—		—
Forfeited and cancelled	—		—
Outstanding options as of December 31, 2018	555,000	$	31.72	6.0	$	—
Options vested and exercisable as of December 31, 2018	185,000	$	31.72	5.16	$	10,652

As of December 31, 2018, total unrecognized compensation cost related to nonvested stock options was $35.4 million, which will be amortized on a ratable basis over a weighted‑average period of 2.02 years.

Restricted Stock Units


		Weighted‑
		average		Aggregate
	Number of	grant date		intrinsic
	options	fair value		value
	outstanding	(per share)		(in thousands)
Nonvested RSUs as of December 31, 2017	5,665,459	$	29.29	$	133,648
Granted	5,556,817		49.70
Vested	(2,142,776)		29.50
Forfeited and cancelled	(816,598)		31.96
Nonvested RSUs as of December 31, 2018	8,262,902	$	42.70	$	729,373

Prior to the completion of the Company’s IPO, the Company granted RSUs (“Pre-IPO RSUs”) under its 2008 Plan to its employees that vested upon the satisfaction of both a time-based service condition and a liquidity condition. The time-based service condition for the majority of these awards will be satisfied over a period of four years. The liquidity condition was satisfied upon occurrence of the Company’s IPO in June 2016. RSUs granted on or after the completion of the Company’s IPO (“Post-IPO RSUs”) are granted under the 2016 Plan and are subject to a time-based vesting condition only. The compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable service period. The Post-IPO RSUs are generally earned over a service period of four years.

As of December 31, 2018, total unrecognized compensation cost related to nonvested RSUs was $325.3 million, which will be amortized over a weighted-average period of 3.03 years.

Valuation Assumptions

The fair value of employee stock options was estimated on the date of grant using the following assumptions in the Black‑Scholes option pricing model:


	Year Ended December 31,
	2018	2017	2016
Employee Stock Options
Fair value of common stock	$33.01-$76.63	$23.60 - $31.96	$10.09 - $15.00
Expected term (in years)	1-6.08	6.08	6.08
Expected volatility	38.6%-44.2%	44.3% - 47.6%	51.4% - 53.0%
Risk-free interest rate	2.9%-3.0%	1.9% - 2.3%	1.3% - 1.5%
Dividend rate	0%	0%	0%
Employee Stock Purchase Plan
Expected term (in years)	0.5	0.5	0.90
Expected volatility	39.8%-47.5%	33.2% - 33.9%	52%
Risk-free interest rate	2.1%-2.5%	1.1% - 1.4%	0.6%
Dividend rate	0%	0%	0%

The following assumptions were used in the Monte Carlo simulation model to estimate the fair value and the derived service period of the performance options:


Asset volatility		40	%
Equity volatility		45	%
Discount rate		14	%
Stock price at grant date	$	31.72

Stock‑Based Compensation Expense

The Company recorded the total stock‑based compensation expense as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Cost of revenue	$	1,126	$	650	$	291
Research and development		42,277		22,808		12,946
Sales and marketing		23,616		9,822		4,972
General and administrative		26,254		16,339		6,016
Total	$	93,273	$	49,619	$	24,225

Net Loss Per Share Attributable to Common Stockholders

12 Months Ended

Dec. 31, 2018

Net Loss Per Share Attributable to Common Stockholders

14. Net Loss Per Share Attributable to Common Stockholders

The following table sets forth the calculation of basic and diluted net loss per share attributable to common stockholders during the periods presented (in thousands, except per share data):


	Year Ended December 31,
	2018		2017		2016
Net loss attributable to common stockholders	$	(121,949)	$	(63,708)	$	(41,324)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted		97,130,339		91,224,607		53,116,675
Net loss per share attributable to common stockholders, basic and diluted	$	(1.26)	$	(0.70)	$	(0.78)

The following outstanding shares of common stock equivalents were excluded from the calculation of the diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive:


	Year Ended December 31,
	2018	2017	2016
Stock options issued and outstanding	7,978,369	10,710,427	14,649,276
Nonvested restricted stock units issued and outstanding	8,262,902	5,665,459	2,034,217
Class A common stock reserved for Twilio.org	572,676	635,014	680,397
Class A common stock committed under 2016 ESPP	113,312	235,372	597,038
Conversion spread*	233	—	—
Unvested shares subject to repurchase	1,250	5,214	49,580
Total	16,829,742	17,251,486	18,010,508

* Since the Company expects to settle the principal amount of its outstanding convertible senior notes in cash and any excess in shares of the Company’s Class A common stock, the Company uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The conversion spread will have a dilutive impact on diluted net income per share of Class A common stock when the average market price of the Company’s Class A common stock for a given period exceeds the conversion price of $70.90 per share for the Notes. The conversion spread is calculated using the average market price of Class A common stock during the period, consistent with the treasury stock method.

Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes

Income Taxes

15. Income Taxes

The following table presents domestic and foreign components of loss before income taxes for the periods presented (in thousands):


	Year Ended December 31,
	2018		2017		2016
United States	$	(96,448)	$	(46,737)	$	(14,002)
International		(24,710)		(16,266)		(26,996)
Loss before provision for income taxes	$	(121,158)	$	(63,003)	$	(40,998)

Provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2018		2017		2016
Current:
Federal	$	—	$	99	$	—
State		139		78		83
Foreign		881		823		214
Total		1,020		1,000		297
Deferred:
Federal		29		28		2
State		19		10		—
Foreign		(277)		(333)		27
Total		(229)		(295)		29
Provision for income taxes	$	791	$	705	$	326

The following table presents a reconciliation of the statutory federal tax rate and the Company’s effective tax rate for the years ended December 31, 2018, 2017 and 2016:


	Year Ended
	December 31,
	2018		2017		2016
Tax benefit at federal statutory rate	21	%	34	%	34	%
State tax, net of federal benefit	15		10		11
Stock-based compensation	31		47		23
Credits	8		8		2
Foreign rate differential	(4)		(8)		(23)
Reserve for uncertain tax positions	—		—		(12)
Change in valuation allowance	(68)		(46)		(34)
Change in federal statutory rate	—		(45)		—
Other	(3)		(1)		(2)
Effective tax rate	0	%	(1)	%	(1)	%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table presents the significant components of the Company’s deferred tax assets and liabilities (in thousands):


	As of December 31,
	2018		2017		2016
Deferred tax assets:
Net operating loss carryforwards	$	116,190	$	56,138	$	31,090
Accrued and prepaid expenses		11,594		9,140		16,698
Stock-based compensation		11,147		7,131		5,368
Research and development credits		32,206		16,212		7,807
Charitable contributions		3,100		1,233		1,458
Capped call		13,175		—		—
Debt issuance cost		638		—		—
Other		194		472		—
Gross deferred tax assets		188,244		90,326		62,421
Valuation allowance		(147,354)		(78,900)		(49,601)
Net deferred tax assets		40,890		11,426		12,820
Deferred tax liabilities:
Capitalized software		(10,686)		(7,664)		(7,086)
Prepaid expenses		(838)		(1,015)		(452)
Acquired intangibles		(2,997)		(2,101)		(152)
Property and equipment		(1,990)		(2,380)		(4,931)
Convertible debt		(27,164)		—		—
Deferred commissions		(2,396)		(718)		(201)
Net deferred tax asset (liability)	$	(5,181)	$	(2,452)	$	(2)

As of December 31, 2018, the Company had approximately $452.7 million in federal net operating loss carryforwards and $26.7 million in federal tax credits. If not utilized, the federal net operating loss and tax credit carryforwards will expire at various dates beginning in 2029.

As of December 31, 2018, the Company had approximately $347.1 million in state net operating loss carryforwards and $19.9 million in state tax credits. If not utilized, the state net operating loss carryforwards will expire at various dates beginning in 2026 The California state tax credits can be carried forward indefinitely.

As of December 31, 2018, the Company had foreign net operating loss carryovers of $8.1 million. The foreign net operating loss carryovers can be carried forward indefinitely.

A limitation may apply to the use of the net operating loss and credit carryforwards, under provisions of the Internal Revenue Code of 1986, as amended, and similar state tax provisions that are applicable if the Company experiences an “ownership change.” An ownership change may occur, for example, as a result of issuance of new equity. Should these limitations apply, the carryforwards would be subject to an annual limitation, resulting in a potential reduction in the gross deferred tax assets before considering the valuation allowance.

The Company’s accounting for deferred taxes involves the evaluation of a number of factors concerning the realizability of its net deferred tax assets. The Company primarily considered such factors as its history of operating losses, the nature of the Company’s deferred tax assets, and the timing, likelihood and amount, if any, of future taxable income during the periods in which those temporary differences and carryforwards become deductible. At present, the Company does not believe that it is more likely than not that the net deferred tax assets will be realized, accordingly, a full valuation allowance has been established. The valuation allowance increased by approximately $68.5 million and $29.3 million during the years ended December 31, 2018 and 2017, respectively.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Unrecognized tax benefit, beginning of year	$	9,445	$	12,275	$	1,679
Gross increases for tax positions of prior years		1,233		493		1,996
Gross decrease for tax positions of prior years		(4)		(6,331)		—
Gross increases for tax positions of current years		4,961		3,008		8,600
Unrecognized tax benefit, end of year	$	15,635	$	9,445	$	12,275

As of December 31, 2018, the Company had approximately $15.6 million of unrecognized tax benefits. If the $15.6 million is recognized, $0.9 million would affect the effective tax rate. The remaining amount would be offset by the reversal of related deferred tax assets which are subject to a full valuation allowance.

The Company recognizes interest and penalties, if any, related to uncertain tax positions in its income tax provision. As of December 31, 2018, the Company has accumulated $0.1 million in both interest and penalties related to uncertain tax positions.

The Company does not anticipate any significant changes within 12 months of December 31, 2018, in its uncertain tax positions that would be material to the consolidated financial statements taken as a whole because nearly all of the unrecognized tax benefit has been offset by a deferred tax asset, which has been reduced by a valuation allowance.

The Company files U.S. federal income tax returns as well as income tax returns in many U.S. states and foreign jurisdictions. As of December 31, 2018, the tax years 2008 through the current period remain open to examination by the major jurisdictions in which the Company is subject to tax. Fiscal years outside the normal statute of limitation remain open to audit by tax authorities due to tax attributes generated in those early years, which have been carried forward and may be audited in subsequent years when utilized. The Company is not currently subject to U.S. federal, state and local, or non-U.S. income tax examinations by any tax authorities.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act reduces the U.S. statutory corporate tax rate to 21%, effective January 1, 2018. Consequently, we recorded a decrease to the Company’s federal deferred tax assets of $28.0 million, which was fully offset by a reduction in the Company’s valuation allowance for the year ended December 31, 2017. The other provisions of the Tax Act, including the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings, did not have a material impact on the Company’s financial statements as of December 31, 2018.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allowed companies to record provisional amounts .during a measurement period not to extend beyond one year of the enactment date. The Company’s accounting for the Tax Act is complete and we did not have any signification adjustments to provisional amounts recorded as of December 31, 2017.

The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by controlled foreign corporations (CFCs) must be included currently in the gross income of the CFCs’ U.S. shareholder. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the measurement of its deferred taxes (the “deferred method”). The Company selected the period cost method.

Subsequent Events	12 Months Ended
Subsequent Events	Dec. 31, 2018
Subsequent Events
Subsequent Events	16. Subsequent Events On February 1, 2019, the Company acquired all outstanding shares of capital stock of SendGrid, the leading email API platform, by issuing 23.4 million shares of its Class A common stock for a total value of $2.6 billion. Pursuant to the Agreement and Plan of Merger and Reorganization, as amended, each outstanding share of SendGrid common stock was converted into 0.485 of a share of the Company’s Class A common stock. Pursuant to the acquisition method of accounting, the purchase price that was paid for SendGrid will be allocated to the underlying SendGrid tangible and intangible assets acquired and liabilities assumed based on their respective fair market values with any excess purchase price allocated to goodwill. The acquisition method of accounting is dependent upon certain valuations and other studies that have not yet been completed. During the year ended December 31, 2018, the Company incurred $3.6 million in expenses related to this transaction.

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Principles of Consolidation

Basis of Presentation

(a)Basis of Presentation

The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

(b)Principles of Consolidation

The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

(c)Use of Estimates

Concentration of Credit Risk

(d)Concentration of Credit Risk

As of December 31, 2018 and 2017, there was no customer organization that represented more than 10% of the Company’s gross accounts receivable.

Revenue Recognition

(e)Revenue Recognition

Adoption of Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”

Revenue Recognition Policy

The Company determines revenue recognition through the following steps:

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

Identification of the performance obligations in the contract;

Determination of the transaction price;

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

Recognition of revenue when, or as, the Company satisfies a performance obligation.

Nature of Products and Services

Deferred Revenue and Customer Deposits

Deferred Sales Commissions

Cost of Revenue

(f)Cost of Revenue

Research and Development Expenses

(g)Research and Development Expenses

Internal-Use Software Development Costs

(h)Internal-Use Software Development Costs

Advertising Costs

(i)Advertising Costs

Stock-Based Compensation

(j)Stock-Based Compensation

Compensation expense for stock options granted to nonemployees is calculated using the Black-Scholes option pricing model and is recognized in expense over the service period.

The Black-Scholes option pricing model requires the use of complex assumptions, which determine the fair value of stock-based awards. These assumptions include:

After the IPO, the Company uses the market closing price of its Class A common stock, as reported on the New York Stock Exchange, for the fair value.

Expected dividend. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock.

If any of the assumptions used in the Black-Scholes model changes, stock-based compensation for future options may differ materially compared to that associated with previous grants.

Income Taxes

(k)Income Taxes

The Company records interest and penalties related to uncertain tax positions in the provision for income taxes in the consolidated statements of operations.

Foreign Currency Translation

(l)Foreign Currency Translation

Comprehensive Income (Loss)

(m)Comprehensive Income (Loss)

Net Loss Per Share Attributable to Common Stockholders

(n)Net Loss Per Share Attributable to Common Stockholders

Cash and Cash Equivalents

(o)Cash and Cash Equivalents

Restricted Cash

(p)Restricted Cash


	Year Ended				Year Ended
	December 31, 2017				December 31, 2016
	As Originally				As Originally
	Reported		As Adjusted		Reported		As Adjusted
Cash provided by (used in) operating activities	$	(3,260)	$	(3,255)	$	10,091	$	10,097
Cash used in investing activities	$	(223,630)	$	(226,748)	$	(42,425)		(34,986)
Cash, cash equivalents and restricted cash — beginning of period		305,665		314,280		108,835		110,005
Cash, cash equivalents and restricted cash — end of period	$	115,286	$	120,788	$	305,665	$	314,280

Other than the revised statement of cash flows presentation of restricted cash, the adoption of ASU 2016-18 did not have an impact on the Company’s financial position and results of operations.

The restricted cash balances as of December 31, 2018 and December 31, 2017 were $18.1 million and $5.5 million, respectively.

Accounts Receivable and Allowance for Doubtful Accounts

(q)Accounts Receivable and Allowance for Doubtful Accounts

Costs Related to the Public Offerings

(r)Costs Related to the Public Offerings

Property and Equipment

(s)Property and Equipment

The useful lives of property and equipment are as follows:


Capitalized software development costs		3 years
Office equipment		3 years
Furniture and fixtures		5 years
Software		3 years
Assets under capital lease		5 years or remaining lease term
Leasehold improvements		5 years or remaining lease term

Intangible Assets

(t)Intangible Assets

The useful lives of the intangible assets are as follows:


Developed technology		3 - 4 years
Customer relationships		2 - 8 years
Supplier relationships		5 years
Trade names		2 years
Patents		20 years
Trademarks		Indefinite
Domain names		Indefinite

Goodwill

(u)Goodwill

Impairment of Long-Lived Assets

(v)Impairment of Long-Lived Assets

Business Combinations

(w)Business Combinations

Segment Information

(x)Segment Information

Fair Value of Financial Instruments

(y)Fair Value of Financial Instruments

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Recent Accounting Pronouncements Not Yet Adopted

(z)Recent Accounting Pronouncements Not Yet Adopted

Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2018

Summary of useful lives of property and equipment


Capitalized software development costs		3 years
Office equipment		3 years
Furniture and fixtures		5 years
Software		3 years
Assets under capital lease		5 years or remaining lease term
Leasehold improvements		5 years or remaining lease term

Useful lives of intangible assets


Developed technology		3 - 4 years
Customer relationships		2 - 8 years
Supplier relationships		5 years
Trade names		2 years
Patents		20 years
Trademarks		Indefinite
Domain names		Indefinite

ASU 2016-18 - Restricted Cash

Schedule of impact from adoption of guidance

The Company adopted ASU 2016-18 in the first quarter of 2018 and applied the guidance retrospectively to the prior period’s consolidated statement of cash flows with the following impact (in thousands):


	Year Ended				Year Ended
	December 31, 2017				December 31, 2016
	As Originally				As Originally
	Reported		As Adjusted		Reported		As Adjusted
Cash provided by (used in) operating activities	$	(3,260)	$	(3,255)	$	10,091	$	10,097
Cash used in investing activities	$	(223,630)	$	(226,748)	$	(42,425)		(34,986)
Cash, cash equivalents and restricted cash — beginning of period		305,665		314,280		108,835		110,005
Cash, cash equivalents and restricted cash — end of period	$	115,286	$	120,788	$	305,665	$	314,280

Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2018

Fair Value Measurements

Schedule of financial assets measured at fair value on a recurring basis

The following tables provide the assets measured at fair value on a recurring basis as of December 31, 2018 and 2017 (in thousands):


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost or		Gross		Losses		Losses More		Fair Value Hierarchy as of
	Carrying		Unrealized		Less Than		Than		December 31, 2018						Aggregate
	Value		Gains		12 Months		12 Months		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	420,234	$	—	$	—	$	—	$	420,234	$	—	$	—	$	420,234
Reverse repurchase agreements		35,000		—		—		—		—		35,000		—		35,000
Commercial paper		9,983		—		—		—		—		9,983		—		9,983
Total included in cash and cash equivalents		465,217		—		—		—		420,234		44,983		—		465,217
Marketable securities:
U.S. Treasury securities		59,785		—		(7)		(9)		59,769		—		—		59,769
Corporate debt securities and commercial paper		201,683		23		(123)		(224)		—		201,359		—		201,359
Total marketable securities		261,468		23		(130)		(233)		59,769		201,359		—		261,128
Total financial assets	$	726,685	$	23	$	(130)	$	(233)	$	480,003	$	246,342	$	—	$	726,345


					Gross		Gross
	Amortized				Unrealized		Unrealized
	Cost or		Gross		Losses		Losses More		Fair Value Hierarchy as of
	Carrying		Unrealized		Less Than		Than		December 31, 2017						Aggregate
	Value		Gains		12 Months		12 Months		Level 1		Level 2		Level 3		Fair Value
Financial Assets:
Cash and cash equivalents:
Money market funds	$	95,432	$	—	$	—	$	—	$	95,432	$	—	$	—	$	95,432
Total included in cash and cash equivalents		95,432		—		—		—		95,432		—		—		95,432
Marketable securities:
U.S. Treasury securities		59,962		—		(216)		—		59,746		—		—		59,746
Corporate debt securities and commercial paper		116,223		—		(382)		—		—		115,841		—		115,841
Total marketable securities		176,185		—		(598)		—		59,746		115,841		—		175,587
Total financial assets	$	271,617	$	—	$	(598)	$	—	$	155,178	$	115,841	$	—	$	271,019

Schedule of contractual maturities of marketable securities


	As of December 31, 2018				As of December 31, 2017
	Amortized		Aggregate Fair		Amortized		Aggregate Fair
	Cost		Value		Cost		Value
Financial Assets:
Less than one year	$	261,468	$	261,128	$	108,584	$	108,360
One to two years		—		—		67,601		67,227
Total	$	261,468	$	261,128	$	176,185	$	175,587

Property and Equipment (Tables)

12 Months Ended

Dec. 31, 2018

Property and Equipment

Schedule of property and equipment

Property and equipment consisted of the following (in thousands):


	As of December 31,
	2018		2017
Capitalized internal-use software development costs	$	72,647	$	49,177
Leasehold improvements		15,293		14,246
Office equipment		13,563		9,652
Furniture and fixtures		2,440		1,976
Assets under capital lease (1)		2,478		—
Software		1,849		1,675
Total property and equipment		108,270		76,726
Less: accumulated depreciation and amortization		(44,736)		(26,185)
Total property and equipment, net	$	63,534	$	50,541

Schedule of amortization expense

The amortization expense was allocated as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Cost of revenue	$	6,898	$	4,788	$	3,304
Research and development		5,437		3,619		2,182
General and administrative		689		—		—
Total	$	13,024	$	8,407	$	5,486

Business Combinations (Tables)

12 Months Ended

Dec. 31, 2018

VAI Technologies, LLC

The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Intangible assets(1)	$	517
Goodwill(2)		683
Total purchase price	$	1,200

⁽¹⁾

The intangible assets consist of developed technology with the estimated useful life of 4 years on the date of acquisition.

⁽²⁾

Ytica.com a.s.

Schedule of identifiable finite-lived intangible assets

The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of December 31, 2018 (in thousands):


	Total
Net tangible assets	$	(1,538)
Intangible assets (1)		9,920
Goodwill(2)		13,375
Total purchase price	$	21,757

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	9,090	4
Customer relationships		830	2
Total intangible assets acquired	$	9,920

⁽²⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	9,090	4
Customer relationships		830	2
Total intangible assets acquired	$	9,920

Core Network Dynamics GmbH

Schedule of identifiable finite-lived intangible assets

The following table presents the preliminary purchase price allocation recorded in the Company’s consolidated balance sheet as of December 31, 2018 (in thousands):


	Total
Net tangible assets	$	(313)
Intangible assets(1)		4,500
Goodwill(2)		6,869
Total purchase price	$	11,056

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	3,910	4
Customer relationships		590	0.5
Total intangible assets acquired	$	4,500

⁽²⁾

Identifiable finite-lived intangible assets were comprised of the following (in thousands):


			Estimated
			life
	Total		(in years)
Developed technology	$	3,910	4
Customer relationships		590	0.5
Total intangible assets acquired	$	4,500

Beepsend AB, a messaging provider based in Sweden

Schedule of identifiable finite-lived intangible assets

The following table presents the purchase price allocation, as adjusted, recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Net tangible liabilities	$	(3,575)
Intangible assets(1)		13,700
Goodwill(2)		12,837
Total purchase price	$	22,962

⁽¹⁾

Identifiable finite-lived intangible assets were comprised of the following:


			Estimated
			life
	Total		(in years)
Developed technology	$	5,000	4
Customer relationships		6,100	7 - 8
Supplier relationships		2,600	5
Total intangible assets acquired	$	13,700

Identifiable finite-lived intangible assets were comprised of the following:


			Estimated
			life
	Total		(in years)
Developed technology	$	5,000	4
Customer relationships		6,100	7 - 8
Supplier relationships		2,600	5
Total intangible assets acquired	$	13,700

Kurento Open Source Project

Schedule of goodwill balance

The following table presents the final purchase price allocation recorded in the Company’s consolidated balance sheet (in thousands):


	Total
Intangible assets(1)	$	8,100
Goodwill(2)		400
Total purchase price	$	8,500

⁽¹⁾

The intangible assets consist of developed technology with the estimated useful life of 3 years on the date of acquisition.

⁽²⁾

Goodwill and Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2018

Goodwill and Intangible Assets

Goodwill balance as of December 31, 2018 and 2017 was as follows (in thousands):


	Total
Balance as of December 31, 2016	$	3,565
Goodwill recorded in connection with 2017 acquisition		12,688
Measurement period adjustment		149
Effect of exchange rate		1,449
Balance as of December 31, 2017	$	17,851
Goodwill recorded in connection with 2018 acquisitions		20,356
Measurement period adjustment		571
Effect of exchange rate		(613)
Balance as of December 31, 2018	$	38,165

Schedule of intangible assets

Intangible assets consisted of the following (in thousands):


	As of December 31, 2018
			Accumulated
	Gross		Amortization		Net
Amortizable intangible assets:
Developed technology	$	28,209	$	(10,497)	$	17,712
Customer relationships		8,153		(2,411)		5,742
Supplier relationships		2,696		(973)		1,723
Trade name		60		(60)		—
Patent		2,264		(178)		2,086
Total amortizable intangible assets		41,382		(14,119)		27,263
Non-amortizable intangible assets:
Domain names		32		—		32
Trademarks		263		—		263
Total	$	41,677	$	(14,119)	$	27,558


	As of December 31, 2017
			Accumulated
	Gross		Amortization		Net
Amortizable intangible assets:
Developed technology	$	14,941	$	(5,476)	$	9,465
Customer relationships		7,159		(1,006)		6,153
Supplier relationships		2,881		(500)		2,381
Trade name		60		(60)		—
Patent		1,878		(108)		1,770
Total amortizable intangible assets		26,919		(7,150)		19,769
Non-amortizable intangible assets:
Domain names		32		—		32
Trademarks		263		—		263
Total	$	27,214	$	(7,150)	$	20,064

Schedule of total estimated future amortization expense

Total estimated future amortization expense was as follows (in thousands):


	As of
	December 31,
	2018
2019	$	9,724
2020		6,337
2021		4,922
2022		3,198
2023		892
Thereafter		2,190
Total	$	27,263

Accrued Expenses and Other Liabilities (Tables)

12 Months Ended

Dec. 31, 2018

Accrued Expenses and Other Liabilities

Schedule of accrued expenses and other current liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	As of
	December 31,
	2018		2017
Accrued payroll and related	$	9,886	$	4,898
Accrued bonus and commission		8,564		4,777
Accrued cost of revenue		29,901		10,876
Sales and other taxes payable		23,631		20,877
ESPP contributions		2,672		1,338
Deferred rent		1,418		1,048
Nonrefundable deposits		3,415		162
VAT liability		2,217		2,515
Accrued other expense		18,054		7,123
Total accrued expenses and other current liabilities	$	99,758	$	53,614

Schedule of other long-term liabilities

Other long-term liabilities consisted of the following (in thousands):


	As of
	December 31,
	2018		2017
Deferred rent	$	7,569	$	8,480
Deferred tax liability		5,181		2,452
Acquisition holdback		2,290		—
Capital lease obligation		2,170		—
Accrued other expense		959		477
Total other long-term liabilities	$	18,169	$	11,409

Convertible Senior Notes and Capped Call Transactions (Tables)

12 Months Ended

Dec. 31, 2018

Convertible Senior Notes and Capped Call Transactions

Schedule of net carrying amount of the liability and equity components of the Notes

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


	As of
	December 31,
	2018
Principal	$	550,000
Unamortized discount		(106,484)
Unamortized issuance costs		(9,020)
Net carrying amount	$	434,496

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


	As of
	December 31,
	2018
Proceeds allocated to the conversion options (debt discount)	$	119,435
Issuance costs		(2,819)
Net carrying amount	$	116,616

Schedule of interest expense recognized related to the Notes

The following table sets forth the interest expense recognized related to the Notes (in thousands):


	Year Ended
	December 31,
	2018
Contractual interest expense	$	852
Amortization of debt issuance costs		1,102
Amortization of debt discount		12,951
Total interest expense related to the Notes	$	14,905

Supplemental Balance Sheet Information (Tables)

12 Months Ended

Dec. 31, 2018

Supplemental Balance Sheet Information

Schedule of the allowance for doubtful accounts

A roll-forward of the Company’s reserves for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):

(a) Allowance for doubtful accounts:


	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	1,033	$	1,076	$	486
Additions		4,085		580		1,145
Write-offs		(173)		(623)		(555)
Balance, end of period	$	4,945	$	1,033	$	1,076

Schedule of the sales credit reserve

A roll-forward of the Company’s reserves for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):

(b) Sales credit reserve:


	Year Ended December 31,
	2018		2017		2016
Balance, beginning of period	$	1,761	$	544	$	714
Additions		5,560		2,531		1,348
Deductions against reserve		(4,306)		(1,314)		(1,518)
Balance, end of period	$	3,015	$	1,761	$	544

Revenue by Geographic Area (Tables)

12 Months Ended

Dec. 31, 2018

Revenue by Geographic Area

Schedule of revenue by geographic area

The following table sets forth revenue by geographic area (in thousands):


	Year Ended December 31,
	2018		2017		2016
Revenue by geographic area:
United States	$	484,809	$	308,612	$	233,922
International		165,258		90,408		43,413
Total	$	650,067	$	399,020	$	277,335


Percentage of revenue by geographic area:
United States	75	%	77	%	84	%
International	25	%	23	%	16	%

Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Schedule of future minimum lease payments under non-cancelable operating leases

Future minimum lease payments under non-cancelable operating leases were as follows (in thousands):


	As of
	December 31,
Year Ending December 31:	2018
2019	$	24,128
2020		29,527
2021		30,898
2022		30,492
2023		30,122
Thereafter		81,316
Total minimum lease payments	$	226,483

Schedule of future minimum payments under other existing non-cancelable purchase commitments

Future minimum lease payments under the capital lease were as follows (in thousands):


	As of
	December 31,
Year Ending December 31:	2018
2019	$	306
2020		512
2021		573
2022		590
2023		608
Thereafter		1,939
Total minimum lease payments	$	4,528

Schedule of future minimum lease payments under the capital lease

Future minimum lease payments under the capital lease were as follows (in thousands):


	As of
	December 31,
Year Ending December 31:	2018
2019	$	306
2020		512
2021		573
2022		590
2023		608
Thereafter		1,939
Total minimum lease payments	$	4,528

Stockholders' Equity (Tables)

12 Months Ended

Dec. 31, 2018

Stockholders' Equity

Schedule of reserved shares of common stock for issuance


	As of December 31,	As of December 31,
	2018	2017
Stock options issued and outstanding	7,978,369	10,710,427
Nonvested restricted stock units issued and outstanding	8,262,902	5,665,459
Class A common stock reserved for Twilio.org	572,676	635,014
Stock-based awards available for grant under 2016 Plan	9,313,354	10,200,189
Stock-based awards available for grant under 2016 ESPP	3,092,779	2,478,343
Class A common stock reserved for the convertible senior notes	10,472,165	—
Total	39,692,245	29,689,432

Stock-Based Compensation (Tables)

12 Months Ended

Dec. 31, 2018

Schedule of restricted stock unit activity


		Weighted‑
		average		Aggregate
	Number of	grant date		intrinsic
	options	fair value		value
	outstanding	(per share)		(in thousands)
Nonvested RSUs as of December 31, 2017	5,665,459	$	29.29	$	133,648
Granted	5,556,817		49.70
Vested	(2,142,776)		29.50
Forfeited and cancelled	(816,598)		31.96
Nonvested RSUs as of December 31, 2018	8,262,902	$	42.70	$	729,373

Schedule of valuation assumptions for ESPP



	Year Ended December 31,
	2018	2017	2016
Employee Stock Purchase Plan
Expected term (in years)	0.5	0.5	0.90
Expected volatility	47.54%	33.2% - 33.9%	52%
Risk-free interest rate	2.5%	1.1% - 1.4%	0.6%
Dividend rate	0%	0%	0%

Schedule of stock based compensation expense

The Company recorded the total stock‑based compensation expense as follows (in thousands):


	Year Ended December 31,
	2018		2017		2016
Cost of revenue	$	1,126	$	650	$	291
Research and development		42,277		22,808		12,946
Sales and marketing		23,616		9,822		4,972
General and administrative		26,254		16,339		6,016
Total	$	93,273	$	49,619	$	24,225

Employee and Nonemployee Stock Options

Schedule of stock options activity


				Weighted-
		Weighted-		average
		average		remaining	Aggregate
	Number of	exercise		contractual	intrinsic
	options	price		term	value
	outstanding	(per share)		(in years)	(in thousands)
Outstanding options as of December 31, 2017	10,155,427	$	10.31	7.12	$	145,763
Granted	1,330,118		39.77
Exercised	(3,628,032)		8.20
Forfeited and cancelled	(434,144)		19.70
Outstanding options as of December 31, 2018	7,423,369	$	16.07	6.80	$	543,640
Options vested and exercisable as of December 31, 2018	4,529,504	$	9.38	5.96	$	362,017

Employee Stock Options

Schedule of valuation assumptions



	Year Ended December 31,
	2018	2017	2016
Employee Stock Options
Fair value of common stock	$76.63	$23.60 - $31.96	$10.09 - $15.00
Expected term (in years)	6.08	6.08	6.08
Expected volatility	43.71%	44.3% - 47.6%	51.4% - 53.0%
Risk-free interest rate	3.01%	1.9% - 2.3%	1.3% - 1.5%
Dividend rate	0%	0%	0%

Performance-based stock options