Datadog, Inc. — 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 products. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $509.5 million | $406.1 million | $991.2 million | $769.2 million |
| Revenue growth | 25% | — | 29% | — |
| Gross profit | $407.6 million | $324.2 million | $789.4 million | $612.8 million |
| Gross margin | 80% | 80% | 80% | 80% |
| Operating income (loss) | $(22.0) million | $(3.1) million | $(57.0) million | $7.3 million |
| Operating margin | (4.3%) | (0.8%) | (5.7%) | 0.9% |
| Net income (loss) | $(4.0) million | $(4.9) million | $(28.1) million | $4.9 million |
| Net margin | (0.8%) | (1.2%) | (2.8%) | 0.6% |
| Operating cash flow | Not separately provided | Not separately provided | $286.9 million | $220.3 million |
| Free cash flow | Not separately provided | Not separately provided | $258.1 million | $190.1 million |
As of June 30, 2023, cash and cash equivalents were $291.3 million and marketable securities were $1.894 billion. Total assets were $3.312 billion, total liabilities were $1.663 billion and stockholders’ equity was $1.649 billion.
Convertible senior notes had a net carrying value of $740.5 million and a principal amount of $747.5 million. The 0.125% notes mature in June 2025. The conditional conversion feature was not triggered for the July–September 2023 period.
Material changes versus the prior comparable period
- Quarterly revenue increased $103.3 million, or 25%; management attributed approximately 60% of the increase to existing customers and 40% to new customers. Six-month revenue increased $222.0 million, or 29%, with approximately 65% from existing customers and 35% from new customers.
- Gross margin remained approximately 80% in both comparable periods, while third-party cloud infrastructure costs increased substantially.
- Quarterly research and development expense increased 35% to $239.5 million, sales and marketing increased 28% to $147.5 million, and general and administrative expense increased 24% to $42.7 million.
- Six-month operating results moved from $7.3 million of operating income to a $57.0 million operating loss, primarily as operating expenses grew faster than revenue.
- Interest income increased significantly because of higher earnings on marketable securities, reaching $41.9 million for the six months versus $12.3 million in the prior-year period.
- Stock-based compensation increased to $231.1 million for the six months from $149.3 million, and represented a significant component of operating costs and operating cash flow.
- Customers increased to approximately 26,100 from approximately 21,200. Customers with at least $100,000 of annual run-rate revenue increased to approximately 2,990 from 2,420, while representing 85% of ARR in both periods.
- Trailing 12-month dollar-based net retention remained above 120%, but management stated that it had declined as business growth decelerated.
Cash flow, liquidity and outlook
Operating cash flow for the first six months was $286.9 million, up from $220.3 million, while free cash flow was $258.1 million, up from $190.1 million. Capital expenditures were $11.1 million and capitalized software development costs were $17.8 million. Investing activities used $366.3 million, primarily reflecting net purchases of marketable securities.
Remaining performance obligations were $1.253 billion at June 30, 2023, compared with $1.057 billion at December 31, 2022. The company expects to recognize substantially all of this amount over the following 24 months, although timing is uncertain for drawdown contracts.
Management stated that cash, marketable securities and operating cash flow should be sufficient to support requirements for the next 12 months and beyond. The filing does not provide a specific revenue or earnings guidance range.
Management commentary, risks and unusual items
- Management cited macroeconomic uncertainty, higher interest rates and reduced information technology spending as potential pressures. The company has observed slower usage growth from existing customers.
- A widespread platform outage affecting multiple products and regions occurred in March 2023 and was substantially resolved in approximately one day.
- The company completed a non-material business acquisition in April 2023, increasing goodwill by approximately $2.0 million.
- Legal proceedings are described as arising in the ordinary course; management does not believe current proceedings will have a material adverse effect.
- Key risks include customer renewal and expansion, competition, cloud infrastructure dependence, cybersecurity and service interruptions, privacy regulation, international operations, employee retention, continued operating losses and dilution from equity awards or convertible debt.
- The dual-class structure gives Class B holders ten votes per share and represented approximately 46% of voting power at June 30, 2023.
- Disclosure controls and procedures were assessed as effective at the reasonable assurance level, with no material change in internal control over financial reporting reported during the quarter.
Important facts for investors to verify
- Whether revenue growth and dollar-based net retention continue to decelerate, particularly amid slower customer usage growth.
- Whether research and development, sales and marketing and stock-based compensation growth can moderate relative to revenue growth.
- The sustainability of free cash flow, including the significant contribution from non-cash stock-based compensation and working-capital movements.
- Liquidity and refinancing or settlement plans for the $747.5 million principal amount of convertible notes due in June 2025.
- Customer and platform impacts from the March 2023 outage and the effectiveness of related reliability improvements.
- Exposure to cybersecurity, privacy, cloud-provider concentration, regulatory and international operating risks.
- The potential dilution from outstanding equity awards, the convertible notes and the dual-class voting structure.