Datadog, Inc. — Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Datadog provides a cloud-based monitoring and analytics platform integrating infrastructure monitoring, application performance monitoring, log management and security monitoring. The filing covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results are unaudited and presented under U.S. GAAP.
The company reported approximately 12,100 customers at June 30, 2020, versus approximately 8,800 a year earlier. Approximately 68% of customers used more than one product, compared with approximately 40% in the prior year. Dollar-based net retention exceeded 130% in both periods.
Financial Performance and Liquidity
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Revenue | $140.0 million | $83.2 million | $271.3 million | $153.3 million |
| Revenue growth | 68% | — | 77% | — |
| Gross profit | $111.1 million | $62.2 million | $215.9 million | $113.3 million |
| Gross margin | 79% | 75% | 80% | 74% |
| Operating income (loss) | $0.7 million | $(4.0) million | $4.4 million | $(13.7) million |
| Net income (loss) | $0.3 million | $(3.9) million | $6.8 million | $(13.4) million |
| Operating cash flow | Not separately provided | Not separately provided | $49.0 million | $3.0 million |
| Free cash flow | Not separately provided | Not separately provided | $37.9 million | $(6.4) million |
Six-month operating expenses were $211.5 million, including research and development of $86.5 million, sales and marketing of $96.5 million, and general and administrative expenses of $28.5 million. Stock-based compensation was $16.8 million in the quarter and $28.9 million for the six months, compared with $2.9 million and $5.3 million, respectively, in the prior-year periods.
At June 30, 2020, Datadog held $206.2 million of cash and cash equivalents, $1.260 billion of marketable securities and $209.7 million of cash, cash equivalents and restricted cash. Deferred revenue totaled $165.3 million, including $162.9 million current. Remaining performance obligations were $286.7 million, of which the company expects to recognize substantially all over the next 24 months.
The company issued $747.5 million principal amount of 0.125% convertible senior notes due 2025 for approximately $730.2 million of net proceeds. The notes had a $559.6 million carrying value at quarter-end, with an estimated fair value of approximately $882.6 million. Datadog also paid $89.6 million for capped calls intended to partially offset potential dilution.
Material Changes Versus the Prior Comparable Period
- Revenue increased 68% in Q2 and 77% for the six months, with management attributing approximately 60% of growth to existing customers and 40% to new customers.
- Gross margin expanded by 4 percentage points in Q2 and 6 percentage points for the six months, primarily due to revenue scale and lower third-party cloud infrastructure costs.
- The company moved from operating and net losses to modest profitability, despite substantial increases in research and development and sales and marketing investment.
- Operating cash flow improved to $49.0 million from $3.0 million, while free cash flow improved to $37.9 million from negative $6.4 million.
- Marketable securities increased to $1.260 billion from $176.7 million at December 31, 2019, largely reflecting investment of IPO and convertible-note proceeds.
- Datadog completed an acquisition, recording $7.8 million of goodwill and $1.5 million of intangible assets; consideration included $2.4 million of cash and $5.2 million of restricted Class A shares.
- On April 15, 2020, the company was released from a previously recorded federal payroll tax contingency and recognized a $5.6 million benefit in the six-month results.
- Class B shares continued converting into Class A shares; 117.6 million shares converted during the six months. Class B shares retained ten votes per share, and holders represented approximately 86% of voting power at June 30, 2020.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
The filing does not provide a clear numerical revenue or earnings guidance table. Management stated that existing cash, marketable securities and operating cash flow should support working capital and capital expenditure needs for at least the next 12 months, while noting that future capital needs depend on growth, hiring, product development, international expansion, customer renewals and COVID-19 effects.
Management continued to emphasize a land-and-expand strategy, investment in product innovation, increased adoption of multiple products, international expansion and additional sales and marketing capacity. Security monitoring was introduced in April 2020.
- COVID-19: Existing customer usage continued to expand, but the company experienced some impact to the rate of usage growth. Remote work, canceled or virtual events, longer sales cycles, reduced customer IT spending and future economic conditions could adversely affect results.
- Subscription timing: Much of the revenue is recognized ratably over subscription terms, so changes in bookings, renewals or usage may affect future periods rather than the current quarter.
- Debt and dilution: The 2025 Notes create contractual and non-cash interest expense, potential cash settlement obligations and possible future dilution. Conversion becomes economically relevant if the stock price exceeds the initial conversion price of approximately $92.30 per share.
- Operating investment: Continued hiring and spending on research and development, sales and marketing, infrastructure and international operations may pressure profitability.
- Technology and security: Service interruptions, cybersecurity incidents, data privacy requirements, third-party cloud infrastructure failures and intellectual property claims could result in lost customers, liabilities or higher costs.
- Commitments: The company has a $21.0 million cloud-hosting purchase commitment through January 2023, significant operating lease obligations, and a new Boston lease requiring approximately $19.0 million over its term.
- Equity compensation: Unrecognized compensation cost was approximately $75.2 million for options and $179.2 million for unvested restricted stock and RSUs at June 30, 2020.
- Corporate status: Datadog expects to cease qualifying as an emerging growth company on December 31, 2020, which will increase reporting, compliance and accounting costs.
Most Important Facts for Investors to Verify
- Reconcile reported revenue growth, customer additions, dollar-based net retention and the mix of growth from existing versus new customers.
- Assess whether gross-margin expansion is sustainable as usage, cloud-hosting costs and product breadth increase.
- Separate recurring operating performance from the $5.6 million payroll-tax contingency benefit, interest income and convertible-note accounting effects.
- Review the $747.5 million convertible-note terms, cash-settlement intentions, conversion thresholds, capped-call coverage and potential dilution.
- Monitor the unusually high growth in stock-based compensation and the resulting future expense and dilution.
- Evaluate the effect of COVID-19 on usage growth, renewals, new bookings, sales cycles and customer IT budgets.
- Review liquidity after considering marketable-security maturities, lease and cloud commitments, capitalized software spending and potential debt settlement obligations.
- Verify the acquisition’s integration, purchase-price allocation and any subsequent goodwill or intangible-asset impairment risk.
- Consider the concentration of voting control in Class B shares and the expected increase in public-company compliance costs after emerging-growth-company status ends.