Datadog, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Datadog provides a SaaS observability and security platform for cloud applications, including infrastructure monitoring, application performance monitoring, log management and related products. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $481.7 million | $363.0 million | 33% increase |
| Gross profit | $381.8 million | $288.6 million | 32% increase |
| Gross margin | 79% | 79% | Flat |
| Operating income (loss) | $(35.0) million | $10.4 million | Declined |
| Net income (loss) | $(24.1) million | $9.7 million | Declined |
| Diluted net income (loss) per share | $(0.08) | $0.03 | Declined |
| Operating cash flow | $133.8 million | $147.4 million | 9% decrease |
| Free cash flow | $116.3 million | $129.9 million | 10% decrease |
Operating expenses were $416.8 million, or 87% of revenue, compared with 77% in the prior-year quarter. Research and development increased 52% to $229.5 million, sales and marketing increased 43% to $145.0 million, and general and administrative expense increased 60% to $42.3 million.
Interest income and other income, net increased to $16.7 million from $5.7 million, primarily because of higher income from marketable securities. Stock-based compensation expense increased to $112.7 million from $66.9 million, excluding $4.2 million of capitalized stock-based compensation.
At March 31, 2023, Datadog had cash and cash equivalents of $222.5 million and marketable securities of $1.8 billion. Total assets were $3.14 billion and total stockholders’ equity was $1.51 billion. The company had $747.5 million principal amount of 0.125% convertible senior notes due 2025, with a net carrying amount of $739.7 million.
Material changes versus the prior comparable period
- Revenue increased $118.7 million, with approximately 65% of the increase from existing customers and 35% from new customers.
- Gross margin remained stable at 79%, despite a $25.5 million increase in cost of revenue, primarily from higher cloud infrastructure and personnel costs.
- The company moved from operating income of $10.4 million to an operating loss of $35.0 million as operating expenses grew faster than revenue.
- Net income changed to a net loss, while interest income provided a larger offset to operating losses than in the prior year.
- Operating cash flow declined by $13.6 million, principally due to lower deferred-revenue and accrued-liability changes, partly offset by higher non-cash charges, especially stock-based compensation.
- Investing cash outflows increased to $256.2 million, primarily reflecting greater purchases of marketable securities. Capital expenditures were $8.7 million and capitalized software development costs were $8.7 million.
- Customer count increased to approximately 25,500 from 19,800. Customers with annual run-rate revenue of at least $100,000 increased to approximately 2,910 from 2,250 and represented 85% of ARR in both periods.
- Trailing 12-month dollar-based net retention remained above 130%, although management stated that it had declined as business growth decelerated.
Outlook, management commentary, risks and unusual items
The filing does not provide a clear quarterly or annual financial guidance table. Management expects continued investment in research and development, sales and marketing, infrastructure, international expansion and additional products. The company states that existing cash, marketable securities and operating cash flow should be sufficient to support cash requirements for the next 12 months and beyond.
Management reported slower usage growth from some existing customers, which may be associated with macroeconomic uncertainty, reduced information-technology spending, inflation, higher interest rates and banking-sector disruptions. Subscription accounting may delay the effect of weaker bookings or renewals on reported revenue.
In March 2023, Datadog experienced widespread outages across multiple products and regions that were substantially resolved in approximately one day. Risks include service interruptions, reliance on third-party cloud infrastructure, cybersecurity and privacy incidents, competition, customer renewal and expansion rates, international operations, regulatory changes, employee retention and continued operating losses.
The company recorded a net loss despite strong revenue growth. Stock-based compensation was a significant expense and increased materially year over year. The 2025 Notes were not convertible at the holder’s option from April 1 through June 30, 2023 because the applicable conversion condition was not met at quarter-end. The notes mature on June 15, 2025 unless earlier converted, redeemed or repurchased.
Datadog reported no material adverse legal proceedings, no material changes to commitments outside the ordinary course, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether revenue growth and dollar-based net retention continue to decelerate amid customer usage optimization and macroeconomic pressure.
- Whether operating expenses, particularly research and development, sales and marketing and stock-based compensation, moderate relative to revenue growth.
- The sustainability of operating and free cash flow after considering working-capital movements, capital expenditures and capitalized software costs.
- The timing and liquidity implications of the $747.5 million convertible notes due in 2025, including potential cash or equity settlement and dilution.
- The financial and customer-retention effects of the March 2023 platform outages and any future availability or cybersecurity incidents.
- The composition, maturity profile and credit quality of the $1.8 billion marketable-securities portfolio.
- The impact of macroeconomic conditions, cloud infrastructure costs, competition and international expansion on future gross margins and profitability.
- The effect of the dual-class share structure, under which Class B shares carry ten votes per share and represented approximately 46% of voting power at March 31, 2023.