Datadog, Inc. Form 10-Q Summary
Business context and reporting period
Datadog provides a cloud-based SaaS monitoring and analytics platform covering infrastructure monitoring, application performance monitoring, log management, security monitoring and related observability products. The filing reports unaudited results for the three months ended March 31, 2021, compared with the same period in 2020.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $198.5 million | $131.2 million | Up 51% |
| Gross profit | $151.9 million | $104.8 million | Up 45% |
| Gross margin | 76% | 80% | Down 4 percentage points |
| Operating income (loss) | $(12.8) million | $3.8 million | Declined |
| Net income (loss) | $(13.1) million | $6.5 million | Declined |
| Operating cash flow | $51.7 million | $24.3 million | Up 113% |
| Free cash flow | $44.5 million | $19.3 million | Up 130% |
Revenue was approximately 60% attributable to expansion from existing customers and 40% to new customers. International revenue represented approximately 28% of total revenue, compared with 24% in the prior-year quarter.
Operating expenses were $164.7 million, or 83% of revenue, compared with $101.0 million, or 77%, in Q1 2020. Research and development increased 94% to $79.3 million, sales and marketing increased 42% to $64.4 million, and general and administrative expense increased 41% to $21.1 million. Stock-based compensation increased to $28.9 million from $12.1 million, excluding $2.2 million capitalized in software development.
At March 31, 2021, Datadog had $369.7 million of cash and cash equivalents, $1.178 billion of marketable securities, and $373.3 million of cash, cash equivalents and restricted cash. Convertible senior notes had a net carrying value of $733.0 million and principal of $747.5 million, consisting of 0.125% notes due 2025. Deferred revenue totaled $229.3 million, including $223.6 million current.
Material changes versus the prior comparable period
- Revenue increased $67.3 million, driven by both customer expansion and new customer additions.
- Customer count rose to approximately 15,200 from 11,500. Customers with annual run-rate revenue of at least $100,000 increased to 1,437 from 960 and represented 79% of ARR, versus 76% previously.
- Dollar-based net retention remained above 130% at both period ends; approximately 75% of customers used more than one product, compared with approximately 60% a year earlier.
- Gross margin declined primarily because third-party cloud infrastructure and software costs increased, including an $18.2 million increase in hosting costs.
- Datadog moved from operating income and net income in Q1 2020 to operating and net losses in Q1 2021 as investment in product development, infrastructure and personnel accelerated.
- Operating cash flow improved despite the net loss, helped by $28.9 million of stock-based compensation and a $21.0 million increase in deferred revenue.
- Investing cash flow was positive $90.7 million, compared with negative $429.8 million in Q1 2020, primarily because marketable-security maturities exceeded purchases in Q1 2021.
Guidance, outlook, commentary and unusual items
The filing does not provide a clear quantitative revenue or earnings guidance outlook. Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and new products. It believes existing cash, marketable securities and operating cash flow will be sufficient for working-capital and capital-expenditure needs for at least the next 12 months.
Datadog early adopted ASU 2020-06 on January 1, 2021. The modified retrospective adoption reduced opening additional paid-in capital by $173.1 million, reduced opening accumulated deficit by $16.8 million, and increased convertible senior notes, net by $156.3 million. The company also acquired a business during the quarter, paying $11.5 million in cash and issuing $20.2 million of restricted shares; the acquisition added $31.3 million of goodwill and $1.7 million of intangible assets.
In April 2021, Datadog completed the acquisition of Sqreen, Inc. for approximately $260 million in cash and stock, with approximately 25% deferred, subject to customary adjustments. The purchase price allocation was not complete at the filing date.
COVID-19 remained an uncertainty affecting customer spending, usage growth, sales cycles, marketing events, remote work and global operations. Other principal risks include competition, cloud infrastructure dependence, cybersecurity and privacy incidents, service interruptions, international expansion, customer retention and expansion, acquisition integration, continued operating losses, dilution and potential liquidity requirements related to the 2025 notes. The company reported no material pending legal proceedings and stated that disclosure controls were effective as of March 31, 2021.
Subsequent management changes disclosed in the filing include the planned June 2, 2021 departure of Chief Revenue Officer Dan Fougere and the May 10, 2021 appointment of Adam Blitzer as Chief Operating Officer.
Important facts for investors to verify
- Whether revenue growth and dollar-based net retention remain above historical levels as comparisons become more difficult.
- Whether cloud infrastructure costs can be controlled and gross margin can stabilize or recover from 76%.
- The pace at which increased research and development and sales-and-marketing spending converts into durable revenue and operating leverage.
- The effect of stock-based compensation, outstanding equity awards and the potential conversion of approximately 8.1 million shares underlying the 2025 notes.
- The integration, purchase-price allocation and financial contribution of the Sqreen acquisition.
- COVID-19 effects on customer usage, renewals, sales cycles and international operations.
- Liquidity and potential cash or equity requirements associated with the $747.5 million principal amount of convertible notes due in 2025.