Datadog, Inc. 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, user experience monitoring and network performance monitoring. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $131.2 million | $70.1 million | Up 87% |
| Gross profit | $104.8 million | $51.1 million | Up 105% |
| Gross margin | 80% | 73% | Up 7 percentage points |
| Operating income (loss) | $3.8 million | $(9.7) million | Improved by $13.4 million |
| Net income (loss) | $6.5 million | $(9.5) million | Improved by $16.0 million |
| Diluted EPS | $0.02 | $(0.12) | Improved |
| Operating cash flow | $24.3 million | $3.4 million | Up $20.8 million |
| Free cash flow | $19.3 million | $(0.9) million | Improved by $20.2 million |
- Operating expenses were $101.0 million, or 77% of revenue, compared with $60.8 million, or 87%, in the prior-year period. Research and development, sales and marketing, and general and administrative expenses increased 79%, 50% and 91%, respectively.
- Stock-based compensation increased to $12.1 million from $2.4 million and represented a significant non-cash expense.
- Cash, cash equivalents and restricted cash totaled $198.2 million at March 31, 2020. Cash and cash equivalents were $194.4 million, and marketable securities were $600.4 million.
- Deferred revenue was $145.2 million, including $141.2 million classified as current. Remaining performance obligations were $256.1 million, expected to be recognized substantially over the next 24 months.
- The filing reports no debt arrangements. Principal liabilities included $59.5 million of operating lease liabilities and $145.2 million of deferred revenue.
- Cash used in investing activities was $429.8 million, primarily reflecting $427.5 million of purchases of marketable securities, plus $1.5 million of property and equipment purchases and $3.4 million of capitalized software development costs.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by expansion within existing customers, with the remainder attributable to new customers.
- Customer count reached approximately 11,500, while customers with annual run-rate revenue of at least $100,000 increased to 960 from 508 at March 31, 2019.
- Approximately 60% of customers used more than one Datadog product, compared with approximately 30% a year earlier.
- International revenue remained 24% of total revenue. North American revenue was $99.4 million and international revenue was $31.9 million.
- Gross margin improved primarily because of revenue scale and cost savings from third-party cloud infrastructure providers.
- The company moved from an operating loss and net loss in Q1 2019 to operating and net income in Q1 2020.
- Marketable securities increased materially from $176.7 million at December 31, 2019 to $600.4 million at March 31, 2020, while cash and cash equivalents declined from $597.3 million to $194.4 million as cash was invested in securities.
- Class B shares representing 87.5 million shares were converted into Class A shares during the quarter. Class B shares retain ten votes per share compared with one vote per Class A share.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear numerical revenue or earnings outlook in the supplied text. Management states that existing cash, marketable securities and operating cash flow are expected to support working capital and capital expenditures for at least the next 12 months.
- COVID-19 created substantial uncertainty. Datadog required employees to work remotely, suspended non-essential travel and canceled, postponed or moved events online. Management could not predict the duration or financial impact, and noted that subscription economics may delay the effect on reported results.
- Key risks include reduced customer IT spending, slower new-customer acquisition or renewals, longer sales cycles, competition from cloud providers and specialized vendors, service outages, cybersecurity incidents, privacy regulation, reliance on third-party cloud infrastructure, international expansion and difficulty sustaining profitability.
- The company entered into a cloud-hosting commitment requiring at least $21.0 million of purchases through January 2023. Operating lease payments totaled $65.4 million, with $59.5 million recorded as the present value of lease liabilities.
- Available-for-sale marketable securities had $2.1 million of unrealized losses at March 31, 2020. Management did not believe the losses were credit-related.
- The company maintains a full valuation allowance against substantially all U.S. deferred tax assets. The CARES Act had no material tax impact as of March 31, 2020.
- Management concluded that disclosure controls and procedures were effective at the reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether COVID-19 materially affected bookings, customer usage, renewals, collections and subsequent-quarter revenue, given the delayed effect of subscription accounting.
- Whether the Q1 profitability and positive free cash flow are sustainable after excluding the effects of stock-based compensation, deferred revenue growth and other working-capital movements.
- The composition, credit quality, maturity profile and subsequent fair-value changes of the $600.4 million marketable-securities portfolio.
- Customer retention, expansion rates, usage growth and the continuing increase in customers with ARR of at least $100,000.
- The impact of elevated stock-based compensation and outstanding equity awards, including approximately $83.1 million of unrecognized option compensation and $56.4 million related to RSUs and restricted shares.
- The company’s ability to maintain gross-margin improvement while scaling third-party hosting capacity and meeting its cloud-hosting purchase commitment.
- The effect of Datadog’s dual-class structure, under which Class B holders collectively controlled approximately 90% of voting power as of March 31, 2020.