Datadog, Inc. — Q3 2019 Form 10-Q Summary
Business Context and Reporting Period
Datadog provides a cloud-based monitoring and analytics platform integrating infrastructure monitoring, application performance monitoring, log management and related observability products. The company operates as one reportable segment.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Datadog completed its initial public offering (IPO) in September 2019 and became listed on Nasdaq under the symbol DDOG.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $95.9 million | $51.1 million | $249.1 million | $136.5 million |
| Revenue growth | 88% | — | 83% | — |
| Gross profit | $72.6 million | $39.0 million | $185.9 million | $105.8 million |
| Gross margin | 76% | 76% | 75% | 78% |
| Operating loss | $(4.2) million | $(4.6) million | $(17.9) million | $(4.4) million |
| Net loss | $(4.2) million | $(4.7) million | $(17.6) million | $(4.2) million |
| Net loss per share | $(0.04) | $(0.06) | $(0.20) | $(0.06) |
| Operating cash flow | Not separately provided | Not separately provided | $6.8 million | $15.4 million |
| Free cash flow | Not separately provided | Not separately provided | $(10.1) million | $2.6 million |
Quarterly operating expenses were $76.8 million, including $28.7 million of research and development, $38.8 million of sales and marketing, and $9.3 million of general and administrative expense. Nine-month operating expenses were $203.8 million, or 82% of revenue, compared with 81% in the prior-year period.
As of September 30, 2019, Datadog had cash and cash equivalents of $760.9 million and total cash, cash equivalents and restricted cash of $770.9 million. The company stated that it had sufficient liquidity to support working capital and capital expenditures for at least the next 12 months.
The filing does not report funded debt. Operating lease liabilities totaled $60.7 million on a present-value basis, consisting of $10.2 million current and $51.7 million non-current liabilities. Deferred revenue was $121.8 million, including $117.0 million current.
Material Changes Versus the Prior Comparable Period
- Revenue increased 88% in Q3 and 83% for the first nine months, primarily from expansion among existing customers and, to a lesser extent, new customer additions.
- Gross margin was stable at 76% in Q3 but declined to 75% for the nine months from 78%, principally because of investments in third-party cloud infrastructure capacity.
- Q3 research and development expense increased 103%, while sales and marketing increased 55% and general and administrative expense increased 114%. Management attributed the increases primarily to hiring, infrastructure investment, marketing, professional fees and costs of scaling the business.
- Nine-month operating cash flow declined to $6.8 million from $15.4 million, while free cash flow declined to $(10.1) million from $2.6 million, reflecting higher capital expenditures, capitalized software development costs and working-capital investment.
- The company completed its IPO of 27.6 million Class A shares at $27.00 per share, generating $705.9 million of net proceeds. Outstanding convertible preferred stock converted into Class B common stock, and the company adopted a dual-class structure with one vote per Class A share and ten votes per Class B share.
- Datadog recognized a $5.0 million benefit during the nine months after the statute of limitations expired on a contingent federal payroll-tax liability recorded in 2015.
- The company adopted the new lease standard in 2019 and recognized operating lease assets and liabilities. No material impact to accumulated deficit or cash flow was reported.
Operating Trends, Outlook and Management Commentary
- Datadog reported approximately 9,500 customers as of September 30, 2019, including approximately 727 customers with annual run-rate revenue of at least $100,000, compared with 377 one year earlier.
- Approximately 50% of customers used more than one product, compared with approximately 15% one year earlier. Management emphasized continued investment in new products, platform functionality, customer expansion and international growth.
- International revenue represented 25% of nine-month revenue, based on customer billing address. The company plans continued investment in Europe, the Middle East, Africa and Asia-Pacific.
- Remaining performance obligations were $206.4 million at September 30, 2019, with the company expecting to recognize substantially all over the following 24 months, although timing for usage-based drawdown contracts is uncertain.
- No specific quantitative revenue, margin or earnings guidance is provided in the filing. Management expects operating expenses, particularly sales and marketing, research and development and public-company compliance costs, to increase in absolute dollars.
Risks, Contingencies and Unusual Items
- The company has incurred net losses since inception and had an accumulated deficit of $124.5 million at September 30, 2019. Management cautions that rapid historical growth may not continue and profitability may not be achieved or sustained.
- Datadog relies substantially on third-party cloud infrastructure providers and has cloud-hosting purchase commitments of $262.5 million over three years under agreements described in the filing, including a $37.5 million minimum commitment to Google Cloud Platform through September 2022.
- Key risks include customer retention and expansion, competition from established software vendors and cloud providers, pricing pressure, service interruptions, cybersecurity incidents, privacy regulation, international expansion, foreign exchange exposure and the ability to scale operations efficiently.
- The company disclosed a prior 2016 security incident involving unauthorized access to infrastructure resources and customer credentials. It also warns that future breaches could result in liabilities, reputational damage and customer losses.
- Datadog had no material pending legal proceedings and no off-balance-sheet financing arrangements. It disclosed ordinary-course indemnification obligations for which maximum potential exposure cannot be determined.
- The dual-class structure concentrates voting control: Class B holders collectively represented approximately 99% of voting power at September 30, 2019, limiting Class A holders’ influence over corporate matters.
- The company is an emerging growth company and has elected extended transition periods for certain accounting standards, which may reduce comparability with other public companies.
Investor Verification Checklist
- Verify the sustainability of revenue growth, customer expansion, renewal rates and multi-product adoption.
- Monitor gross margin trends as cloud-hosting usage and infrastructure commitments increase.
- Reconcile operating cash flow and free cash flow, including the effects of deferred revenue, accounts receivable, deferred contract costs and capitalized software.
- Assess the impact of the IPO, stock-based compensation, outstanding options and the dual-class voting structure on dilution and governance.
- Review the $262.5 million cloud-hosting commitments, operating lease obligations and future capital requirements.
- Evaluate the path to profitability in light of continued investments in research and development, sales and marketing, international expansion and public-company compliance.
- Review cybersecurity, privacy, service availability, competition and third-party infrastructure risks before relying on historical growth rates.