Datadog, Inc. 10-Q Summary
Business Context and Reporting Period
Datadog provides a cloud-based SaaS monitoring and analytics platform integrating infrastructure monitoring, application performance monitoring, log management, security monitoring and related observability products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021, with comparisons to the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Revenue | $233.5 million | $140.0 million | $432.1 million | $271.3 million |
| Revenue growth | 67% | — | 59% | — |
| Gross profit | $176.5 million | $111.1 million | $328.3 million | $215.9 million |
| Gross margin | 76% | 79% | 76% | 80% |
| Operating income (loss) | $(9.9) million | $0.7 million | $(22.7) million | $4.4 million |
| Net income (loss) | $(9.4) million | $0.3 million | $(22.4) million | $6.8 million |
| Diluted EPS | $(0.03) | — | $(0.07) | $0.02 |
| Operating cash flow | Not separately provided | Not separately provided | $103.4 million | $49.0 million |
| Free cash flow | Not separately provided | Not separately provided | $86.8 million | $37.9 million |
Revenue growth was driven approximately 70% by existing customers and 30% by new customers. Approximately 16,400 customers were active at June 30, 2021, compared with approximately 12,100 a year earlier. Customers generating at least $100,000 of ARR increased to 1,610 from 1,015 and represented 80% of ARR, compared with 76% in the prior-year period. Dollar-based net retention remained above 130%.
At June 30, 2021, cash and cash equivalents were $247.4 million, restricted cash was $3.7 million and marketable securities were $1.163 billion. Deferred revenue totaled $265.9 million, including $264.7 million current. Total assets were $2.077 billion and stockholders’ equity was $912.9 million.
Datadog had $747.5 million principal amount of 0.125% convertible senior notes due June 2025, carried at $733.8 million net. The notes were not convertible during the quarter. The company believes available cash, marketable securities and operating cash flow are sufficient to fund working capital and capital expenditures for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue increased 67% in the quarter and 59% for the six-month period.
- Gross margin declined to 76% from 79% in the quarter and to 76% from 80% for the six-month period, primarily because of higher third-party cloud infrastructure and software costs.
- Research and development expense increased 108% in the quarter and 101% year to date, reflecting higher engineering headcount, acquisition-related service costs and cloud hosting costs.
- Sales and marketing expense increased 37% in the quarter and 40% year to date, while its percentage of revenue declined to 30% and 31%, respectively, from 36% and 37%.
- The company moved from operating income and net income in the prior-year periods to operating and net losses, reflecting substantial investments in growth.
- Stock-based compensation increased to $36.6 million in the quarter and $67.6 million year to date, from $17.0 million and $29.2 million, respectively.
- Operating cash flow increased to $103.4 million from $49.0 million; free cash flow increased to $86.8 million from $37.9 million.
- Datadog paid $200.3 million in cash for acquisitions during the first six months and issued $51.5 million of restricted shares in acquisition consideration. Goodwill increased to $258.7 million from $17.6 million at year-end 2020.
- The company early adopted ASU 2020-06 on January 1, 2021. Adoption increased convertible notes, net by $156.3 million and reduced opening additional paid-in capital by $173.1 million.
Outlook, Management Commentary, Risks and Unusual Items
The filing does not provide a clear numerical revenue, margin or earnings guidance figure. Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and strategic acquisitions. Management also expects operating expenses to increase as the business grows and does not state that sustained profitability has been achieved or assured.
COVID-19 continued to create uncertainty around customer spending, usage growth, sales cycles, marketing events, remote work, recruiting and global operations. Subscription accounting may delay the impact of changes in bookings or renewals on reported revenue.
Key operating risks include intense competition, dependence on customer renewal and expansion, third-party cloud infrastructure providers, service interruptions, cybersecurity incidents, evolving privacy and data-transfer regulations, international expansion, foreign currency exposure, difficulty managing rapid growth, acquisition integration, employee retention and the company’s history of operating losses.
Unusual or notable items include a one-time $1.3 million severance charge related to an April 2021 acquisition, preliminary purchase-price allocations for 2021 acquisitions, a $0.6 million quarterly tax benefit from release of a tax reserve, and substantial non-cash stock-based compensation. The company reported no material pending legal proceedings, no off-balance-sheet financing arrangements and effective disclosure controls as of June 30, 2021.
Important Facts for Investors to Verify
- Whether rapid revenue growth can continue as the company scales and as prior-period comparisons normalize.
- Whether cloud infrastructure investments and acquisitions cause further gross-margin pressure.
- Progress toward sustainable GAAP profitability, including the effect of stock-based compensation.
- Customer retention, expansion, ARR concentration and dollar-based net retention above 130%.
- Integration performance and future financial effects of the 2021 acquisitions.
- Liquidity and potential dilution or cash requirements associated with the 2025 convertible notes.
- Exposure to cybersecurity, service availability, privacy regulation and third-party hosting-provider risks.
- The impact of COVID-19, macroeconomic conditions and international expansion on usage, bookings and operating expenses.