Datadog, Inc. 2021 Q3 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 three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Revenue | $270.5 million | $154.7 million | $702.6 million | $425.9 million |
| Gross profit | $207.2 million | $120.7 million | $535.5 million | $336.6 million |
| Gross margin | 77% | 78% | 76% | 79% |
| Operating loss | $(4.9) million | $(9.3) million | $(27.6) million | $(4.8) million |
| Net loss | $(5.5) million | $(15.2) million | $(27.9) million | $(8.4) million |
| Net loss per share | $(0.02) | $(0.05) | $(0.09) | $(0.03) |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $170.8 million | $85.3 million |
| Free cash flow | Not provided quarterly | Not provided quarterly | $143.8 million | $66.6 million |
Revenue was approximately 75% higher year over year in Q3 and 65% higher for the nine-month period. Approximately 70% of revenue growth came from existing customers and 30% from new customers. North America represented $192.3 million of Q3 revenue and international markets represented $78.2 million.
Operating expenses for Q3 were $212.1 million, including research and development of $112.7 million, sales and marketing of $75.8 million, and general and administrative expense of $23.5 million. Stock-based compensation was $46.5 million in Q3 and $114.1 million for the nine-month period.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $287.0 million at September 30, 2021; restricted cash was $3.6 million.
- Marketable securities totaled $1.180 billion, producing total cash, cash equivalents and restricted cash of $290.5 million and total cash and marketable securities of approximately $1.47 billion.
- Deferred revenue was $304.2 million, including $301.0 million classified as current.
- Convertible senior notes had a principal amount of $747.5 million and a net carrying value of $734.6 million. The 0.125% notes mature June 15, 2025.
- The notes became conditionally convertible at the holders’ option from October 1 through December 31, 2021. Conversion could require cash, shares, or a combination, at Datadog’s election.
- Management stated that existing liquidity and operating cash flow should be sufficient to fund working capital and capital expenditure requirements for at least the next 12 months.
Material changes versus the prior comparable period
- Q3 revenue increased $115.8 million, or 75%, while nine-month revenue increased $276.7 million, or 65%.
- Gross margin declined from 78% to 77% in Q3 and from 79% to 76% for the nine-month period, primarily because of higher third-party cloud infrastructure costs and capacity investments.
- Q3 operating loss narrowed by $4.4 million, but the nine-month operating loss increased to $27.6 million as research and development spending more than doubled year over year.
- Q3 net loss narrowed by $9.7 million, while the nine-month net loss increased by $19.5 million, partly reflecting higher growth investments and the absence of the prior-year tax-related benefit.
- Research and development expense increased 100% in Q3 and 101% for the nine-month period, primarily due to personnel, cloud hosting and acquisition-related costs.
- Sales and marketing expense grew 33% in Q3 and 37% for the nine-month period, but declined as a percentage of revenue from 37% to 28% in Q3 and from 36% to 30% for the nine-month period.
- Operating cash flow doubled to $170.8 million for the nine-month period, supported partly by a $94.9 million increase in deferred revenue and significant non-cash stock compensation.
- Datadog paid $200.2 million in cash for acquisitions during the nine-month period and issued $51.5 million of restricted stock in connection with acquisitions. Goodwill increased to $255.7 million from $17.6 million at December 31, 2020.
- The company early adopted ASU 2020-06, increasing convertible notes by $156.3 million and decreasing opening additional paid-in capital by $173.1 million.
Operating indicators and management commentary
- Customers increased to approximately 17,500 from 13,100 a year earlier.
- Customers with annual run-rate revenue of at least $100,000 increased to 1,800 from 1,082 and represented 82% of ARR, compared with 77% previously.
- Dollar-based net retention exceeded 130% at both September 30, 2021 and September 30, 2020.
- Approximately 77% of customers used more than one product, compared with approximately 71% a year earlier.
- Remaining performance obligations were $718.6 million at September 30, 2021, compared with $434.1 million at December 31, 2020; substantially all were expected to be recognized over the following 24 months.
- Management expects continued investment in research and development, sales and marketing, infrastructure, customer support, international expansion and potential acquisitions. No specific financial guidance for future periods is provided in the filing text.
Risks, contingencies and unusual items
- COVID-19 and potential new variants could affect customer spending, usage growth, marketing events, employee operations, sales cycles and international expansion.
- The company has a history of operating losses, an accumulated deficit of $159.3 million, and does not provide assurance that it will achieve or sustain profitability.
- Cloud infrastructure costs, service interruptions, capacity constraints and dependence on third-party hosting providers could pressure margins and customer retention.
- Cybersecurity incidents, data breaches, ransomware, privacy regulation and cross-border data-transfer requirements could result in service disruption, litigation, regulatory penalties, remediation costs and reputational damage.
- Competition includes large technology vendors, cloud providers, open-source technologies and specialized observability providers. Pricing pressure and changing technology could reduce demand or margins.
- The 2025 Notes’ conditional convertibility could create liquidity needs, current-liability reclassification and potential common-stock dilution. Capped calls cover approximately 8.1 million shares and are intended to partially offset dilution, subject to a cap.
- Goodwill and acquisition purchase-price allocations remain subject to measurement-period adjustments. The 2021 application-security acquisition included a $1.3 million one-time severance charge.
- The company reported no material pending legal proceedings and no off-balance-sheet financing arrangements.
- Class B shares had ten votes per share and represented approximately 69% of voting power at September 30, 2021, concentrating control among Class B holders.
Important facts for investors to verify
- Whether rapid revenue growth and customer expansion continue while gross margin remains under pressure from cloud infrastructure spending.
- The sustainability and quality of positive free cash flow, particularly the contribution from deferred revenue and the magnitude of stock-based compensation.
- Future operating leverage as research and development, sales and marketing and international investments continue to grow.
- The timing and form of any conversion or settlement of the 2025 Notes and the resulting cash requirements or dilution.
- Integration performance and potential impairment or measurement adjustments related to the 2021 acquisitions and the substantially higher goodwill balance.
- Customer retention, expansion, ARR concentration among larger customers and the reported dollar-based net retention rate.
- Exposure to cybersecurity, privacy, service availability, third-party hosting, competitive and COVID-19-related risks.