Datadog, Inc. — 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, security monitoring and related observability products. Revenue is generated primarily from subscription agreements, generally billed monthly or annually, with usage-based expansion.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The filing was signed November 12, 2020. Datadog reported approximately 13,100 customers, up from approximately 9,500 at September 30, 2019.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $154.7 million | $95.9 million | Up 61% |
| Gross profit | $120.7 million | $72.6 million | Up 66% |
| Gross margin | 78% | 76% | Up 2 percentage points |
| Operating loss | $(9.3) million | $(4.2) million | Loss increased |
| Net loss | $(15.2) million | $(4.2) million | Loss increased |
| Net loss per share | $(0.05) | $(0.04) | Loss increased |
| Metric | Nine months 2020 | Nine months 2019 | Change |
|---|---|---|---|
| Revenue | $425.9 million | $249.1 million | Up 71% |
| Gross profit | $336.6 million | $185.9 million | Up 81% |
| Gross margin | 79% | 75% | Up 4 percentage points |
| Operating loss | $(4.8) million | $(17.9) million | Improved |
| Net loss | $(8.4) million | $(17.6) million | Improved |
| Operating cash flow | $85.3 million | $6.8 million | Improved |
| Free cash flow | $66.6 million | $(10.1) million | Improved |
Q3 operating expenses were $130.0 million, or 84% of revenue, compared with $76.8 million, or 81%, in the prior-year quarter. Research and development increased 97% to $56.4 million, sales and marketing increased 47% to $57.1 million, and general and administrative expense increased 77% to $16.4 million. Stock-based compensation increased to $20.7 million in Q3 and $49.6 million for the nine-month period, excluding capitalized amounts.
As of September 30, 2020, cash and cash equivalents were $198.5 million, marketable securities were $1.296 billion, and restricted cash was $3.6 million. Deferred revenue was $166.5 million, including $164.0 million current. Total assets were $1.814 billion and total stockholders’ equity was $936.2 million.
Material changes versus the prior comparable period
- Revenue growth was driven approximately 60% by existing customers and 40% by new customers in both the quarter and nine-month period.
- Dollar-based net retention exceeded 130% at both September 30, 2020 and September 30, 2019. Customers with annual run-rate revenue of at least $100,000 increased to 1,107 from 727 and represented 77% of ARR, compared with 73% a year earlier.
- Approximately 71% of customers used more than one product at September 30, 2020, compared with approximately 50% a year earlier.
- Gross margin improved primarily because of revenue scale and cost savings from third-party cloud infrastructure providers.
- Datadog issued $747.5 million principal amount of 0.125% convertible senior notes due 2025, receiving approximately $730.2 million of net proceeds. The notes had a $567.7 million net carrying amount at September 30, 2020 because of the accounting discount and issuance costs.
- Interest expense related to the notes was $12.4 million in Q3 and $17.4 million for the nine-month period, primarily reflecting non-cash amortization of the debt discount and issuance costs.
- The company purchased capped calls for $89.6 million, intended to partially offset potential dilution from note conversions. The notes were not convertible during Q3 under the stated conditions.
- Cash invested in marketable securities was $1.477 billion during the nine-month period, resulting in $1.144 billion of net cash used in investing activities.
- Datadog completed an acquisition during the nine months, allocating approximately $1.5 million to intangible assets and $7.8 million to goodwill. Cash paid, net of cash acquired, was $2.4 million, with additional equity consideration disclosed.
Guidance, outlook, commentary and risks
The filing text provided does not contain a clear numerical revenue, margin, earnings or cash-flow forecast. Management stated that existing cash, marketable securities and operating cash flow should be sufficient to support working capital and capital expenditures for at least the next 12 months, while noting that future capital needs could require additional financing.
Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and acquisitions. Remaining performance obligations were $316.3 million at September 30, 2020, with substantially all expected to be recognized over the following 24 months, although timing for usage-based drawdown contracts is uncertain.
COVID-19 remained a significant uncertainty. The company reported remote-work and event-related operating changes and stated that the pandemic had affected usage growth from existing customers during the second quarter. Future effects on customer spending, renewals, usage, sales cycles, hiring, international expansion and financial markets remained difficult to predict.
Other notable commitments included $97.7 million of cloud-hosting purchase commitments entered into in January and September 2020, operating lease obligations with a present value of $64.7 million, and the $747.5 million principal amount of convertible notes due in 2025.
Principal risks include continued operating losses, dependence on customer renewals and expansion, intense competition, reliance on third-party cloud infrastructure, cybersecurity and data-privacy obligations, service interruptions, international operations and foreign exchange exposure, acquisition integration, rapidly changing technology, and potential dilution or liquidity requirements associated with the convertible notes. Class B shares carried ten votes per share and represented approximately 83% of voting power at September 30, 2020.
A $5.6 million benefit was recognized during the nine months after the statute of limitations expired on a contingent federal payroll-tax liability. The company also recorded a full valuation allowance against substantially all U.S. deferred tax assets. No material legal proceedings were reported.
Important facts for investors to verify
- Reconcile the reported GAAP losses with the substantial non-cash effects of stock-based compensation and convertible-note discount amortization.
- Monitor customer growth, dollar-based net retention, multi-product adoption and the 77% ARR contribution from customers with at least $100,000 of ARR.
- Assess whether gross-margin improvements persist as third-party cloud usage and platform scale increase.
- Review the $747.5 million convertible notes, conversion triggers, cash-settlement intent, capped-call coverage and potential future dilution or cash requirements.
- Evaluate liquidity using both cash and marketable securities, while considering cloud-hosting, lease and debt commitments.
- Track the continuing effects of COVID-19 on usage growth, renewals, customer budgets and sales cycles.
- Consider the effect of stock-based compensation and the significant unrecognized equity-award expense remaining to be recognized.
- Confirm the acquisition’s integration progress, goodwill carrying value and any future impairment exposure.
- Review the transition out of emerging-growth-company status effective December 31, 2020 and the related increase in reporting and compliance requirements.