Datadog, Inc. 2019 Form 10-K 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 fiscal year ended December 31, 2019; fourth-quarter information is included as unaudited quarterly data. Datadog completed its initial public offering in September 2019 and began trading on Nasdaq under “DDOG.”
- Approximately 10,500 customers in more than 100 countries at year-end.
- 858 customers had annual run-rate revenue of at least $100,000, compared with 453 in 2018.
- Approximately 60% of customers used more than one product, compared with approximately 25% a year earlier.
- Employees increased to 1,403 from 886 at December 31, 2018.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $362.8 million | $198.1 million | 83% increase |
| Gross profit | $273.8 million | $151.5 million | 81% increase |
| Gross margin | 75% | 77% | Down 2 percentage points |
| Operating loss | $(20.1) million | $(11.0) million | Loss increased |
| Net loss | $(16.7) million | $(10.8) million | Loss increased |
| Net loss per share | $(0.12) | $(0.15) | Improved on a per-share basis |
| Operating cash flow | $24.2 million | $10.8 million | Increase |
| Free cash flow | $0.8 million | $(5.0) million | Improved |
- Fourth-quarter revenue was $113.6 million, up from $61.6 million in the fourth quarter of 2018. Fourth-quarter net income was $0.9 million versus a $6.6 million net loss in the prior-year quarter.
- Sales and marketing expense was $146.7 million, or 40% of revenue; research and development was $111.4 million, or 31%; and general and administrative expense was $35.9 million, or 10%.
- Stock-based compensation totaled $19.0 million, compared with $5.2 million in 2018.
- Cash and cash equivalents were $597.3 million, marketable securities were $176.7 million, and total cash, cash equivalents and restricted cash were $601.2 million at year-end.
- Working capital was $703.7 million and total stockholders’ equity was $782.3 million, compared with a $76.0 million deficit in 2018, primarily reflecting IPO proceeds.
- The company disclosed no borrowings or debt facilities; liabilities included $60.4 million of operating lease liabilities at present value.
- Deferred revenue was $138.5 million, including $134.1 million classified as current. Remaining performance obligations were $243.8 million.
Material changes versus the prior comparable period
- Revenue growth remained strong, driven primarily by expansion within existing customers, with the remainder from new customers.
- Cost of revenue grew 91%, exceeding revenue growth, mainly because of $35.2 million of additional third-party cloud infrastructure and software costs. Gross margin declined from 77% to 75%.
- Research and development increased 102% as Datadog expanded engineering personnel and infrastructure investment.
- Sales and marketing increased 65%, although it declined as a percentage of revenue from 45% to 40%, indicating some operating leverage.
- Operating losses widened in absolute dollars as the company continued aggressive investment in product development, infrastructure, sales and marketing, and international expansion.
- Cash from operations increased, but capital expenditures and capitalized software costs of $23.4 million reduced free cash flow to $0.8 million.
- The IPO generated approximately $706.3 million of net cash proceeds and converted the outstanding preferred stock into Class B common stock.
- Datadog adopted the new lease standard in 2019, recording approximately $47.9 million of right-of-use assets and $51.4 million of lease liabilities at adoption.
- A $5.0 million contingent federal payroll tax liability was released in 2019 when the assessment period expired, benefiting operating expenses.
Guidance, outlook, commentary, risks and unusual items
The 10-K does not provide formal quantitative revenue or earnings guidance. Management expects continued substantial investment in infrastructure, research and development, sales and marketing, international expansion and public-company compliance. Management states that revenue growth is expected to decline as the business scales, while sales and marketing expense is expected to decline as a percentage of revenue over the long term.
- Management expects existing cash, marketable securities and operating cash flow to fund working capital and capital expenditures for at least the next 12 months.
- Contractual commitments totaled $280.1 million at year-end, including $66.8 million of operating lease commitments and $213.2 million of purchase commitments, mainly for cloud hosting and enterprise software.
- In January 2020, Datadog agreed to purchase at least $21.0 million of Microsoft Azure services through January 2023; this commitment was not included in the year-end contractual obligations table.
- Key risks include intense competition from established vendors, cloud providers and open-source technologies; dependence on customer renewal and expansion; service outages and third-party cloud infrastructure; cybersecurity and privacy incidents; rapid technology change; international and foreign-exchange exposure; regulatory and tax compliance; and difficulty achieving sustained profitability.
- A July 2016 security incident involving unauthorized access to infrastructure resources and customer credentials remains a disclosed historical risk.
- The dual-class structure gives Class B holders ten votes per share. Class B holders collectively controlled approximately 97% of voting power at December 31, 2019, limiting other stockholders’ influence.
- Approximately 20% of IPO lock-up shares became eligible for sale in December 2019, with most remaining shares expected to become eligible in March 2020, subject to applicable restrictions.
- The company had no material pending legal proceedings and no off-balance-sheet financing arrangements disclosed.
Most important facts for investors to verify
- Whether customer expansion, renewal rates, ARR growth and multi-product adoption sustain the 2019 revenue trajectory.
- Whether cloud infrastructure costs can be optimized sufficiently to restore or expand gross margin.
- The pace at which operating losses and stock-based compensation grow relative to revenue.
- Cash conversion after capitalized software costs, capital expenditures and required cloud-hosting commitments.
- The effect of the March 2020 lock-up expiration and the dual-class voting structure on share supply, governance and valuation.
- Potential financial or reputational effects from cybersecurity, privacy, service-level, intellectual-property and regulatory contingencies.
- Future accounting effects from operating leases, deferred contract costs, remaining performance obligations and adoption of new accounting standards.