Datadog, Inc. — Q3 2022 Form 10-Q Summary
Business context and reporting period
Datadog provides a cloud monitoring and security platform integrating infrastructure monitoring, application performance monitoring, log management and security monitoring. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
- Approximately 22,200 customers at September 30, 2022, up from approximately 17,500 a year earlier.
- Approximately 2,600 customers had annual run-rate revenue of at least $100,000, representing 85% of ARR, versus 1,800 customers and 82% of ARR a year earlier.
- Approximately 80% of customers used more than one product, compared with approximately 77% a year earlier.
- Dollar-based net retention remained above 130% at both September 30, 2022 and September 30, 2021.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $436.5 million | $270.5 million | $1,205.7 million | $702.6 million |
| Gross profit | $342.9 million | $207.2 million | $955.7 million | $535.5 million |
| Gross margin | 78.6% | 76.6% | 79.3% | 76.2% |
| Operating loss | $(31.3) million | $(4.9) million | $(24.1) million | $(27.6) million |
| Operating margin | (7.2)% | (1.8)% | (2.0)% | (3.9)% |
| Net loss | $(26.0) million | $(5.5) million | $(21.1) million | $(27.9) million |
| Net loss per diluted share | $(0.08) | $(0.02) | $(0.07) | $(0.09) |
- Q3 revenue increased 61% year over year; nine-month revenue increased 72%. Management attributed approximately 80% of growth to existing customers and 20% to new customers.
- Nine-month operating cash flow was $304.0 million, compared with $170.8 million in 2021. Non-GAAP free cash flow was $257.2 million, compared with $143.8 million.
- At September 30, 2022, cash and cash equivalents were $294.8 million, restricted cash was $3.0 million and marketable securities were $1.47 billion, with substantially all marketable securities due within one year.
- Total assets were $2.80 billion and total liabilities were $1.51 billion. Deferred revenue totaled $488.2 million, compared with $385.9 million at December 31, 2021.
- The company had $747.5 million principal amount of 0.125% convertible senior notes due 2025, carried at $738.0 million net. The notes were not convertible at the holder’s option during October 1 through December 31, 2022.
- Stock-based compensation was $105.3 million in Q3 and $261.4 million for the nine months, compared with $46.5 million and $114.1 million, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Gross margin expanded by approximately 2 percentage points in Q3 and 3 percentage points for the nine-month period, primarily from revenue scale and lower costs from third-party cloud infrastructure providers.
- Q3 operating expenses increased 76% year over year to $374.3 million. Research and development rose 82%, sales and marketing 71% and general and administrative 67%, largely due to increased headcount, infrastructure investment and related overhead.
- Despite strong revenue growth, Q3 operating loss widened because operating expenses grew faster than revenue. Nine-month net loss improved because of operating leverage and higher interest income, although the company remained loss-making.
- Interest income and other income, net increased to $12.0 million in Q3 from $5.0 million and to $25.4 million for the nine months from $16.1 million, reflecting higher returns on investments and foreign-exchange-related items.
- Investing cash outflows increased to $295.6 million for the nine months, including $1.07 billion of marketable-security purchases, $25.2 million of property and equipment purchases, $21.6 million of capitalized software development and $40.3 million of acquisition cash payments.
- During 2022, Datadog completed two acquisitions that were not material individually or in aggregate; the transactions added approximately $44.4 million of goodwill and $5.6 million of intangible assets.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear quantitative revenue, margin or earnings outlook for future periods.
- Management stated that existing cash, marketable securities and operating cash flow should be sufficient to support cash requirements for the next 12 months and beyond.
- Management observed slower usage growth from some existing customers, potentially related to macroeconomic uncertainty, rising inflation, higher interest rates, the war in Ukraine and reduced information-technology spending.
- Increased office activity, travel, in-person events, hiring and additional office capacity may increase costs and reduce margins in future quarters.
- Subscription revenue is recognized over contract terms, so changes in new bookings, renewals and usage may affect reported revenue with a delay. The company also expects seasonal strength in fourth-quarter new-customer bookings.
- Remaining performance obligations were $941.0 million at September 30, 2022, versus $815.0 million at December 31, 2021; substantially all are expected to be recognized over the next 24 months, although drawdown-contract timing is uncertain.
- Key risks include customer renewal and expansion, competition, platform availability, dependence on third-party cloud infrastructure, cybersecurity and privacy incidents, international operations, employee retention, acquisitions, continued operating losses and potential dilution or cash requirements associated with the 2025 Notes.
- The company reported no material pending legal proceedings and stated that its disclosure controls and procedures were effective as of September 30, 2022.
Important facts for investors to verify
- Whether customer usage growth, dollar-based net retention and the mix of revenue from existing versus new customers remain resilient amid macroeconomic pressure.
- Whether elevated research and development, sales and marketing and stock-based compensation expenses translate into sustained growth and eventual GAAP profitability.
- The effect of interest rates on the $1.47 billion investment portfolio and unrealized losses, including $16.1 million of unrealized losses at September 30, 2022.
- Future liquidity requirements and potential settlement, refinancing or dilution related to the $747.5 million convertible notes due in 2025.
- Execution and integration of acquisitions, expansion of office and international operations, and the company’s ability to manage third-party infrastructure, cybersecurity and data-privacy risks.