Datadog, Inc. quarterly report, Q3 FY2023

Datadog, Inc. 2023 Q3 Form 10-Q Summary

Business context and reporting period

Datadog provides a cloud-based observability and security platform integrating infrastructure monitoring, application performance monitoring, log management, real-user monitoring and related capabilities. The filing covers the unaudited quarter and nine months ended September 30, 2023, compared with the corresponding 2022 periods.

Approximately 26,800 customers at September 30, 2023, versus approximately 22,200 one year earlier.
Approximately 3,130 customers had annual run-rate revenue of at least $100,000, representing 86% of ARR, versus 2,600 customers and 85% of ARR in the prior year.
Trailing 12-month dollar-based net retention was slightly below 120%, down from above 130% in the prior-year period.
Approximately 82% of customers used more than one product, 46% used more than four products and 21% used more than six products.

Financial performance and key metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Revenue	$547.5 million	$436.5 million	$1,538.7 million	$1,205.7 million
Revenue growth	25%	—	28%	—
Gross profit	$444.2 million	$342.9 million	$1,233.6 million	$955.7 million
Gross margin	81%	79%	80%	79%
Operating loss	$4.2 million	$31.3 million	$61.2 million	$24.1 million
Net income (loss)	$22.6 million	$(26.0) million	$(5.4) million	$(21.1) million
Diluted EPS	$0.06	$(0.08)	$(0.02)	$(0.07)
Operating cash flow	Not separately provided	Not separately provided	$439.7 million	$304.0 million
Free cash flow	Not separately provided	Not separately provided	$396.3 million	$257.2 million

Q3 revenue growth was driven approximately 65% by existing customers and 35% by new customers. International revenue represented approximately 30% of nine-month revenue, compared with 28% in the prior-year period.

Q3 cost of revenue increased 10% to $103.3 million, below revenue growth, primarily reflecting cloud infrastructure cost savings and operating leverage.
Q3 research and development increased 17% to $240.2 million; sales and marketing increased 21% to $156.9 million; and general and administrative increased 30% to $51.4 million.
Stock-based compensation was $123.1 million in Q3 and $354.2 million for the nine months, compared with $101.4 million and $250.6 million, respectively, in the prior-year periods.
Interest income and other income increased substantially, primarily because of higher interest income on marketable securities. Q3 other income, net was $28.5 million, versus $8.3 million in the prior year.

Liquidity, cash flow and debt

At September 30, 2023, cash and cash equivalents were $261.3 million and marketable securities were $2.080 billion, compared with $339.0 million and $1.545 billion, respectively, at December 31, 2022.
Total current assets were $2.819 billion and total current liabilities were $842.5 million. Deferred revenue totaled $654.0 million, including $636.5 million current and $17.5 million non-current.
Nine-month operating cash flow increased to $439.7 million from $304.0 million. Free cash flow increased to $396.3 million from $257.2 million after $17.2 million of capital expenditures and $26.3 million of capitalized software development costs.
Investing activities used $557.3 million, primarily reflecting net purchases of marketable securities, capital expenditures, capitalized software and $6.4 million of net cash paid for an acquisition.
The company had $747.5 million principal amount of 0.125% convertible senior notes due June 2025, carried net at $741.4 million. The notes were not convertible at the holders’ option from October 1 through December 31, 2023 because the applicable stock-price trigger was not met.
Management states that cash, marketable securities and operating cash flow are sufficient to support cash requirements for the next 12 months and beyond.

Material changes versus the prior comparable period

Revenue growth remained strong but decelerated from the prior-year growth rate, while dollar-based net retention declined to slightly below 120% from above 130%.
Gross margin improved by approximately two percentage points in Q3 and one percentage point for the nine-month period.
Q3 operating loss narrowed materially, and the company reported quarterly GAAP net income, although the nine-month period remained loss-making.
Operating cash flow and free cash flow increased substantially, aided in part by higher stock-based compensation and timing of collections.
Marketable securities increased by approximately $535 million from year-end, while cash and cash equivalents declined by approximately $78 million.
Remaining performance obligations increased to $1.446 billion from $1.057 billion at December 31, 2022; substantially all are expected to be recognized over the next 24 months, subject to usage-related timing variability.

Guidance, outlook, management commentary, risks and unusual items

The filing text does not provide a clear numerical revenue, margin, earnings or cash-flow guidance update. Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and potential acquisitions. The company notes that fourth-quarter bookings and renewals have historically benefited from customer procurement and budgeting cycles.

Management observed slower usage growth from existing customers, which may be related to macroeconomic uncertainty, reduced information technology spending and higher interest rates.
Key risks include customer contraction or non-renewal, declining expansion rates, intense competition, pricing pressure, platform outages, cybersecurity incidents, third-party cloud infrastructure dependence, privacy and data-transfer regulation, international execution and difficulty sustaining profitability.
The company disclosed a widespread platform outage in March 2023 that was substantially resolved in approximately one day.
The company continues to have an accumulated deficit of $207.7 million and states that it has incurred annual operating losses since inception, despite the Q3 GAAP profit.
Legal proceedings are described as ordinary-course matters that management does not believe will have a material adverse effect. No material changes to contractual obligations outside the ordinary course were reported.
Two insiders adopted Rule 10b5-1 trading plans during the quarter, including a plan covering 3,307,972 Class A shares for the Chief Technology Officer and director, of which approximately 2.7 million shares relate to sell-to-cover transactions and exercise costs.
Class B shares have ten votes per share and represented approximately 47% of voting power at September 30, 2023, creating concentrated voting control.

Important facts for investors to verify

Whether the decline in dollar-based net retention and slower existing-customer usage stabilizes or continues.
The sustainability of revenue growth, gross-margin improvement and quarterly profitability excluding the benefit of elevated interest income.
The magnitude and recurring effect of stock-based compensation, which was $365.5 million including capitalized amounts for the first nine months.
Cash requirements and refinancing or settlement options for the $747.5 million principal amount of convertible notes due in 2025.
Exposure to cybersecurity incidents, platform outages and third-party cloud infrastructure disruptions.
The effect of macroeconomic conditions, information technology budget reductions, competition and pricing pressure on customer acquisition and expansion.
Potential dilution from outstanding equity awards, conversion of the 2025 Notes and future equity issuance.
The filing’s statement that disclosure controls and procedures were effective at the reasonable-assurance level as of September 30, 2023.