DATADOG, INC. 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , or the Annual Report. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy, plans and objectives of management for future operations and the potential impact that the ongoing COVID-19 pandemic may have on our business, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. OverviewDatadog is the monitoring and analytics platform for developers, IT operations teams and business users in the cloud age. Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management and security monitoring to provide unified, real-time observability of our customers' entire technology stack.Datadog is used by organizations of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations and business teams, accelerate time to market for applications, reduce time to problem resolution, understand user behavior and track key business metrics. We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual. Customers also have the option to purchase additional products, such as additional containers to monitor, custom metrics packages, anomaly detection and app analytics. Professional services are generally not required for the implementation of our products and revenue from such services has been immaterial to date. We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our customers can expand their footprint with us on a self-service basis. Our customers often significantly increase their usage of the products they initially buy from us and expand their usage to other products we offer on our platform. We grow with our customers as they expand their workloads in the public and private cloud. As ofSeptember 30, 2021 , we had$290.5 million in cash, cash equivalents and restricted cash and$1,180.2 million in marketable securities. We generated revenue of$270.5 million and$154.7 million in the three months endedSeptember 30, 2021 and 2020, respectively, representing year-over-year growth of 75%. For the nine months endedSeptember 30, 2021 and 2020, our revenue was$702.6 million and$425.9 million , respectively, representing year-over-year growth of 65%. Substantially all of our revenue is subscription software sales. Our net loss was$(5.5) million and$(15.2) million for the three months endedSeptember 30, 2021 and 2020, respectively, and$(27.9) million and$(8.4) million for the nine months endedSeptember 30, 2021 and 2020, respectively. We generated operating cash flow of$170.8 million and$85.3 million in the nine months endedSeptember 30, 2021 and 2020, respectively. Our free cash flow was$143.8 million and$66.6 million in the nine months endedSeptember 30, 2021 and 2020, respectively. See the section titled "-Liquidity and Capital Resources-Non-GAAP Free Cash Flow" for additional information. SinceDecember 2019 , a novel strain of coronavirus, which we refer to, together with other related strains of coronavirus, as "COVID-19", has spread across the world, including tothe United States and other countries in which we and our customers, partners, suppliers, vendors and other parties with whom we do business operate. The extent of the impact of the COVID-19 pandemic on our operational and financial performance depends on certain developments, including the duration and spread of the outbreak, especially in light of the emergence of new variant strains of COVID-19, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, and the availability, distribution and acceptance of vaccines, all of which are uncertain and cannot be predicted at this time. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and employee work locations and cancelling or holding virtuallyDatadog marketing events. We are continuing to actively monitor the rapidly evolving situation related to COVID-19 and may take further actions that alter our business operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, vendors and stockholders. The extent to which the COVID-19 pandemic may impact our results of operations and financial condition remains uncertain. In addition, due to our subscription model, the effect of the COVID-19 pandemic, if any, may not be fully reflected in our results of operations until future periods. 24 -------------------------------------------------------------------------------- Factors Affecting Our Performance Acquiring New Customers We believe there is substantial opportunity to continue to grow our customer base. We intend to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness and drive adoption of our platform and products. We also plan to continue to invest in building brand awareness within the development and operations communities. As ofSeptember 30, 2021 , we had approximately 17,500 customers spanning organizations of a broad range of sizes and industries, compared to approximately 13,100 as ofSeptember 30, 2020 . Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, offerings of our competitors and the effectiveness of our marketing efforts. We define the number of customers as the number of accounts with a unique account identifier for which we have an active subscription in the period indicated. Users of our free trials or tier are not included in our customer count. A single organization with multiple divisions, segments or subsidiaries is generally counted as a single customer. However, in some cases where they have separate billing terms, we may count separate divisions, segments or subsidiaries as multiple customers.
Expanding Within Our Existing Customer Base
Our base of customers represents a significant opportunity for further sales expansion. As ofSeptember 30, 2021 , we had 1,800 customers with annual run-rate revenue, or ARR, of$100,000 or more, representing 82% of our ARR, up from 1,082 customers as ofSeptember 30, 2020 , representing 77% of our ARR. We monitor our number of customers with ARR of$100,000 or more, and believe it is useful to investors, as an indicator of our ability to grow the number of customers that are exceeding this ARR threshold. We define ARR as the annual run-rate revenue of subscription agreements from all customers at a point in time. We calculate ARR by taking the monthly run-rate revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage, usage from subscriptions for a committed contractual amount of usage that is delivered as used and monthly subscriptions. We updated the definition of MRR as of the quarter endedSeptember 30, 2021 to capture usage from subscriptions with committed contractual amounts and applied this change retroactively. ARR and MRR should be viewed independently of revenue, and do not represent our revenue under GAAP on a monthly or annualized basis, as they are operating metrics that can be impacted by contract start and end dates and renewal rates. ARR and MRR are not intended to be replacements or forecasts of revenue. A further indication of the propensity of our customer relationships to expand over time is our dollar-based net retention rate, which compares our ARR from the same set of customers in one period, relative to the year-ago period. As of each ofSeptember 30, 2021 and 2020, our dollar-based net retention rate was above 130%. We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period-end, or the Prior Period ARR. We then calculate the ARR from these same customers as of the current period-end, or the Current Period ARR. Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months, but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time dollar-based net retention rate. We then calculate the weighted average of the trailing 12-month point-in-time dollar-based net retention rates, to arrive at the dollar-based net retention rate. We believe that our land-and-expand business model allows us to efficiently increase revenue from our existing customer base. Our customers often expand the deployment of our platform across large teams and more broadly within the enterprise as they migrate more workloads to the cloud, find new use cases for our platform, and generally realize the benefits of our platform. We intend to continue to invest in enhancing awareness of our brand and developing more products, features and functionality, which we believe are important factors to achieve widespread adoption of our platform. Our ability to increase sales to existing customers will depend on a number of factors, including our customers' satisfaction with our solution, competition, pricing and overall changes in our customers' spending levels. Sustaining Innovation and Technology Leadership Our success is dependent on our ability to sustain innovation and technology leadership in order to maintain our competitive advantage. We believe that we have built a highly differentiated platform that will position us to further extend the adoption of our platform and products.Datadog is frequently deployed across a customer's entire infrastructure, making it ubiquitous.Datadog is a daily part of the lives of developers, operations engineers and business leaders. We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our efficient go-to-market model enables us to prioritize significant investment in innovation. We have proven initial success of our 25 -------------------------------------------------------------------------------- platform approach, through expansion beyond our initial infrastructure monitoring solution, to include APM in 2017, logs in 2018, user experience and network performance monitoring in 2019 and our security platform in 2020. As ofSeptember 30, 2021 , approximately 77% of our customers were using more than one product, up from approximately 71% a year earlier. We believe these metrics indicate strong momentum in the uptake of our newer platform products. We intend to continue to invest in building additional products, features and functionality that expand our capabilities and facilitate the extension of our platform to new use cases. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing customers. Expanding Internationally We believe there is a significant opportunity to expand usage of our platform outside ofNorth America . Revenue, as determined based on the billing address of our customers, from regions outside ofNorth America was approximately 28% and 25% of total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly inEurope , theMiddle East ,Africa and in theAsia Pacific region. Although these investments may adversely affect our operating results in the near term, we believe that they will contribute to our long-term growth. BeyondNorth America , we have sales presence internationally, including inDublin ,London ,Amsterdam ,Paris ,Singapore ,Sydney ,Seoul andTokyo . Components of Results of Operations Revenue We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual, with the majority of our revenue coming from annual subscriptions. Our customers can enter into a subscription for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, a subscription for a committed contractual amount of usage that is delivered as used, or a monthly subscription based on usage. To the extent that our customers' usage exceeds the committed contracted amounts under their subscriptions, either on a monthly basis in the case of a ratable subscription or once the entire commitment is used in the case of a delivered-as-used subscription, they are charged for their incremental usage. Usage is measured primarily by the number of hosts or by the volume of data indexed. A host is generally defined as a server, either in the cloud or on-premise. Our infrastructure monitoring, APM and network performance monitoring products are priced per host, our logs product is priced primarily per log events indexed and secondarily by events ingested. Customers also have the option to purchase additional products, such as additional container or serverless monitoring, custom metrics packages, anomaly detection, synthetic monitoring and app analytics. In the case of subscriptions for committed contractual amounts of usage, revenue is recognized ratably over the term of the subscription agreement, generally beginning on the date that our platform is made available to a customer. As a result, much of our revenue is generated from subscriptions entered into during previous periods. Consequently, any decreases in new subscriptions or renewals in any one period may not be immediately reflected as a decrease in revenue for that period, but could negatively affect our revenue in future quarters. This also makes it difficult for us to rapidly increase our revenue through the sale of additional subscriptions in any period, as revenue is recognized over the term of the subscription agreement. In the case of a subscription for a committed contractual amount of usage that is delivered as used, a monthly subscription based on usage, or usage in excess of a ratable subscription, we recognize revenue as the product is used, which may lead to fluctuations in our revenue and results of operations. In addition, historically, we have experienced seasonality in new customer bookings, as we typically enter into a higher percentage of subscription agreements with new customers in the fourth quarter of the year. Due to ease of implementation of our products, professional services generally are not required and revenue from such services has been immaterial to date. Cost of Revenue Cost of revenue primarily consists of expenses related to providing our products to customers, including payments to our third-party cloud infrastructure providers for hosting our software, personnel-related expenses for operations and global support, including salaries, benefits, bonuses and stock-based compensation, payment processing fees, information technology, depreciation and amortization related to the amortization of acquired intangibles and internal-use software and other overhead costs such as allocated facilities. 26 -------------------------------------------------------------------------------- We intend to continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our platform and products. The level, timing and relative investment in our infrastructure could affect our cost of revenue in the future. Gross Profit and Gross Margin Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our products and geographical coverage. Operating Expenses Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Operating expenses also include overhead costs for facilities and shared IT related expenses, including depreciation expense. Research and Development Research and development expense consists primarily of personnel costs for our engineering, service and design teams. Additionally, research and development expense includes contractor fees, depreciation and amortization and allocated overhead costs. Research and development costs are expensed as incurred. We expect that our research and development expense will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform. Sales and Marketing Sales and marketing expense consists primarily of personnel costs for our sales and marketing organization, costs of general marketing and promotional activities, including the free tier and free introductory trials of our products, travel-related expenses, amortization of acquired customer relationships and allocated overhead costs. Sales commissions earned by our sales force are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expense will increase in absolute dollars as we expand our sales and marketing efforts. General and Administrative General and administrative expense consists primarily of personnel costs and contractor fees for finance, legal, human resources, information technology and other administrative functions. In addition, general and administrative expense includes non-personnel costs, such as legal, accounting and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses and allocated overhead costs. We have incurred, and expect to continue to incur, additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expense will increase in absolute dollars as our business grows. Other Income (Loss), Net Other income (loss), net consists of interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities, partially offset by interest expense due on the 2025 Notes and amortization of premiums on our marketable securities. Provision for Income Taxes Provision for income taxes consists ofU.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We recorded a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized. 27 -------------------------------------------------------------------------------- Results of Operations The following table sets forth our consolidated statements of operations data for the periods indicated: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in thousands) Revenue$ 270,488 $ 154,675 $ 702,586 $ 425,935 Cost of revenue (1)(2)(4) 63,332 33,984 167,096 89,340 Gross profit 207,156 120,691 535,490 336,595 Operating expenses Research and development (1)(3)(4) 112,675 56,440 286,720 142,928 Sales and marketing (1)(2)(3)(4) 75,827 57,142 210,592 153,626 General and administrative (1)(3)(4) 23,549 16,376 65,789 44,876 Total operating expenses 212,051 129,958 563,101 341,430 Operating loss (4,895) (9,267) (27,611) (4,835) Other income (loss): Interest expense (5) (4,912) (12,423) (15,448) (17,424) Interest income and other income, net 5,040 7,135 16,105 15,204 Other income (loss), net 128 (5,288) 657 (2,220) Loss before provision for income taxes (4,767) (14,555) (26,954) (7,055) Provision for income taxes (717) (595) (960) (1,332) Net loss$ (5,484) $ (15,150) $ (27,914) $ (8,387) _________________
(1)Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 1,427 $ 529 $ 2,957 $ 1,167
Research and development 27,239 10,173 64,947 24,723
Sales and marketing 9,739 6,068 23,355 13,683
General and administrative 5,590 3,946 16,112 10,037
Total $ 43,995 $ 20,716 $ 107,371 $ 49,610
_________________(2)Includes amortization of acquired intangibles expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 1,311 $ 274 $ 2,574 $ 668
Sales and marketing 229 $ - 392 $ -
Total $ 1,540 $ 274 $ 2,966 $ 668
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_________________
(3) Includes non-cash benefit related to tax adjustment as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Research and development $ - $ - $ - $ (2,729)
Sales and marketing - - - (449)
General and administrative - - - (2,383)
Total $ - $ - $ - $ (5,561)
_________________
(4) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Cost of revenue $ 62 $ 32 $ 253 $ 154
Research and development 1,523 418 5,395 1,877
Sales and marketing 1,275 1,354 5,230 3,014
General and administrative 520 282 838 552
Total $ 3,380 $ 2,086 $ 11,716 $ 5,597
_________________(5) Includes amortization of issuance costs as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Interest expense $ 838 $ 8,062 $ 2,510 $ 10,546 The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(as a percentage of total revenue(1))
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 23 22 24 21
Gross profit 77 78 76 79
Operating expenses
Research and development 42 36 41 34
Sales and marketing 28 37 30 36
General and administrative 9 11 9 11
Total operating expenses 78 84 80 80
Operating loss (2) (6) (4) (1)
Other income (loss):
Interest expense (2) (8) (2) (4)
Interest income and other income, net 2 5 2 4
Other income (loss), net 0 (3) 0 0
Loss before provision for income taxes (2) (9) (4) (2)
Provision for income taxes 0 0 0 0
Net loss (2) % (10) % (4) % (2) %
_________________(1)Certain items may not total due to rounding.
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Comparison of the Three Months Ended September 30, 2021 and 2020
Revenue
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 270,488 $ 154,675 $ 115,813 75 %
Revenue increased by $115.8 million , or 75%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 .
Approximately 70% of the increase in revenue was attributable to growth from
existing customers, and the remaining 30% was attributable to growth from new
customers.
Cost of Revenue and Gross Margin
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 63,332 $ 33,984 $ 29,348 86 %
Gross margin 77 % 78 %
Cost of revenue increased by $29.3 million , or 86%, for the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 . This
increase was primarily due to an increase of $24.5 million in third-party cloud
infrastructure hosting and software costs, an increase of $2.3 million in
personnel expenses as a result of increased headcount and an increase of $1.4
million in depreciation and amortization.
Our gross margin decreased by 1% for the three months ended September 30, 2021
compared to the three months ended September 30, 2020 , primarily as a result of
increased spend with our third-party cloud infrastructure providers.
Research and Development
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Research and development $ 112,675 $ 56,440 $ 56,235 100 %
Percentage of revenue 42 % 36 %
Research and development expense increased by $56.2 million , or 100%, for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020 . This increase was primarily due to an increase of $40.0
million in personnel costs for our engineering, product and design teams as a
result of increased headcount, an increase of $13.9 million in cloud hosting
costs and an increase of $1.7 million in overhead costs.
Sales and Marketing
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Sales and marketing $ 75,827 $ 57,142 $ 18,685 33 %
Percentage of revenue 28 % 37 %
Sales and marketing expense increased by $18.7 million , or 33%, for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 . This increase was primarily due to an increase of $17.2 million in
personnel costs for our sales and marketing organization as a result of
increased headcount and increased variable compensation for our sales personnel.
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General and Administrative
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 23,549 $ 16,376 $ 7,173 44 %
Percentage of revenue 9 % 11 %
General and administrative expense increased by $7.2 million , or 44%, for the
three months ended September 30, 2021 compared to the three months ended
September 30, 2020 . This increase was primarily due to an increase of $5.5
million in personnel costs as a result of increased headcount and an increase of
$0.3 million related to information system and services costs.
Other Income (Loss), Net
Three Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Other income (loss), net $ 128 $ (5,288) $ 5,416 102 %
Percentage of revenue 0 % (3) %
Other income (loss), net increased by $5.4 million in the three months ended
September 30, 2021 compared to the three months ended September 30, 2020 . This
increase was primarily due to a decrease of $7.2 million in interest expense
related to our 2025 Notes. The overall increase was partially offset by a
decrease of $1.6 million in interest income earned on our investments.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenue
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Revenue $ 702,586 $ 425,935 $ 276,651 65 %
Revenue increased by $276.7 million , or 65%, in the nine months ended September
30, 2021 compared to the nine months ended September 30, 2020 . Approximately 70%
of the increase in revenue was attributable to growth from existing customers,
and the remaining 30% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Cost of revenue $ 167,096 $ 89,340 $ 77,756 87 %
Gross margin 76 % 79 %
Cost of revenue increased by $77.8 million , or 87%, in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 . This
increase was primarily due to an increase of $67.4 million in third-party cloud
infrastructure hosting and software costs, an increase of $5.5 million in
personnel expenses as a result of increased headcount, an increase of $2.7
million of depreciation and amortization and an increase of $1.9 million of
credit card processing fees and allocated overhead costs.
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Our gross margin decreased 3% for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 , primarily as a result of
increased investments to expand the capacity of our third-party cloud
infrastructure providers.
Research and Development
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Research and development $ 286,720 $ 142,928 $ 143,792 101 %
Percentage of revenue 41 % 34 %
Research and development expense increased by $143.8 million , or 101%, in the
nine months ended September 30, 2021 compared to the nine months ended September
30, 2020 . This increase was primarily due to an increase of $104.9 million in
personnel costs for our engineering, product and design teams as a result of
increased headcount and acquisition-related service costs and an increase of
$35.9 million in cloud hosting costs.
Sales and Marketing
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Sales and marketing $ 210,592 $ 153,626 $ 56,966 37 %
Percentage of revenue 30 % 36 %
Sales and marketing expense increased by $57.0 million , or 37%, in the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 . This increase was primarily due to an increase of $49.9 million in
personnel costs for our sales and marketing organization as a result of
increased headcount and increased variable compensation for our sales personnel
and an increase of $5.9 million in marketing and promotional activities.
General and Administrative
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
General and administrative $ 65,789 $ 44,876 $ 20,913 47 %
Percentage of revenue 9 % 11 %
General and administrative expense increased by $20.9 million , or 47%, in the
nine months ended September 30, 2021 compared to the nine months ended September
30, 2020 . This increase was primarily due to an increase of $16.3 million in
personnel expenses as a result of increased headcount and an increase of $2.1
million related to other costs and allocated overhead costs to support the
growing business.
Other Income (Loss), Net
Nine Months Ended
September 30,
2021 2020 Change % Change
(dollars in thousands)
Other income (loss), net $ 657 $ (2,220) $ 2,877 130 %
Percentage of revenue 0 % 0 %
Other income (loss), net increased by
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decrease of $7.6 million in interest expense related to our 2025 Notes. The
overall increase was partially offset by a $5.7 million increase in the
amortization of premiums on our marketable securities.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales of
subscriptions and the net proceeds we have received from issuance of equity and
debt securities.
In June 2020 , we issued $747.5 million aggregate principal amount of the 2025
Notes in a private placement to qualified institutional buyers pursuant to Rule
144A under the Securities Act. The 2025 Notes will mature on June 15, 2025 ,
unless earlier converted, redeemed or repurchased.
As of September 30, 2021 , we had $287.0 million in cash and cash equivalents and
$1,180.2 million in marketable securities.
Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our marketable securities consist of commercial debt securities,
certificates of deposit, U.S. government treasury and commercial paper.
We believe that our existing cash and cash equivalents, marketable securities
and cash flow from operations will be sufficient to support working capital and
capital expenditure requirements for at least the next 12 months. Our future
capital requirements will depend on many factors, including our subscription
growth rate, subscription renewal activity, including the timing and the amount
of cash received from customers, the expansion of sales and marketing
activities, the timing and extent of spending to support development efforts,
the introduction of new and enhanced products, the continuing market adoption of
our platform and the current uncertainty in the global markets resulting from
the ongoing COVID-19 pandemic on our customers' businesses and operations. We
may, in the future, enter into arrangements to acquire or invest in
complementary businesses, products and technologies. We may be required to seek
additional equity or debt financing. In the event that we require additional
financing, we may not be able to raise such financing on terms acceptable to us
or at all. If we are unable to raise additional capital or generate cash flows
necessary to expand our operations and invest in continued innovation, we may
not be able to compete successfully, which would harm our business, operations
and financial condition.
A substantial source of our cash from operations is from our deferred revenue,
which is included in the liabilities section of our condensed consolidated
balance sheet. Deferred revenue consists of the unearned portion of customer
billings, which will be recognized as revenue in accordance with our revenue
recognition policy. As of September 30, 2021 , we had deferred revenue of $304.2
million , of which $301.0 million was recorded as a current liability and
expected to be recognized as revenue in the next 12 months, provided all other
revenue recognition criteria have been met.
The following table shows a summary of our cash flows for the periods presented:
Nine Months Ended
September 30,
2021 2020
(in thousands)
Cash provided by operating activities
659,218
Operating Activities
Our largest source of operating cash is cash collection from sales of
subscriptions to our customers. Our primary uses of cash from operating
activities are for personnel expenses, marketing expenses, hosting expenses and
overhead expenses. We have generated positive cash flows and have supplemented
working capital requirements through net proceeds from the sale of equity and
debt securities.
Cash provided by operating activities for the nine months ended September 30,
2021 of $170.8 million was primarily related to our net loss of $27.9 million ,
adjusted for non-cash charges of $164.4 million and net cash inflows of $34.2
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of stock-based compensation, depreciation and
amortization of property and equipment, amortization of acquired intangibles,
amortization of discounts or premiums on marketable securities, non-cash lease
expense, amortization of deferred contract costs and amortization of
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issuance costs related to our 2025 Notes. The main drivers of the changes in
operating assets and liabilities were related to a $94.9 million increase in
deferred revenue, resulting primarily from increased billings for subscriptions,
a $12.4 million increase in accounts payable and a $19.2 million increase in
accrued expenses and other liabilities. These amounts were partially offset by a
$61.9 million increase in accounts receivable, due to increases in sales, $27.6
million increase in deferred contract costs related to commissions paid on new
bookings, a $0.9 million increase in prepaid expenses and other current assets,
primarily driven by prepaid rent and a $1.8 million increase in other assets.
Cash provided by operating activities for the nine months ended September 30,
2020 of $85.3 million was primarily related to our net loss of $8.4 million ,
adjusted for non-cash charges of $96.9 million and net cash outflows of $3.2
million used in changes in our operating assets and liabilities. Non-cash
charges primarily consisted of stock-based compensation, depreciation and
amortization of property and equipment and amortization of acquired intangibles.
The main drivers of the changes in operating assets and liabilities were related
to a $21.3 million increase in accounts receivable, net, due to increases in
sales, a $15.8 million increase in deferred contract costs related to
commissions paid on new bookings, a $6.8 million increase in prepaid expenses
and other current assets, primarily driven by prepaid hosting services and a
$0.6 million increase in other assets. These amounts were partially offset by a
$28.0 million increase in deferred revenue, resulting primarily from increased
billings for subscriptions, a $6.4 million increase in accounts payable and a
$6.9 million increase in accrued expenses and other liabilities.
Investing Activities
Cash used in investing activities for the nine months ended September 30, 2021
was $127.7 million and was primarily the result of investment in marketable
securities of $897.4 million , a $19.4 million increase in capitalization of
software development costs, a $7.6 million increase in capital expenditures to
purchase property and equipment to support office space and site operations and
$200.2 million paid for acquisitions. These amounts were partially offset by
proceeds of $935.7 million and $61.1 million from the maturities and sales of
marketable securities, respectively.
Cash used in investing activities for the nine months ended September 30, 2020
was $1,143.9 million and was primarily the result of investment in marketable
securities of $1,477.1 million , a $14.4 million increase in the capitalization
of software development costs, a $4.3 million increase in capital expenditures
to purchase property and equipment to support additional office space and site
operations and $2.4 million paid for an acquisition. These amounts were
partially offset by proceeds of $268.5 million and $85.7 million from the
maturities and sales of marketable securities, respectively.
Financing Activities
Cash provided by financing activities for the nine months ended September 30,
2021 was $20.2 million and was primarily the result of proceeds from the
issuance of Class A common stock under the ESPP in the amount of $9.8 million
and proceeds from the exercise of stock options in the amount of $10.7 million .
These amounts were partially offset by $0.2 million of taxes paid in connection
with the ESPP.
Cash provided by financing activities for the nine months ended September 30,
2020 was $659.2 million and was primarily attributable to proceeds from the
issuance of the 2025 Notes in the amount of $730.2 million , net of issuance
costs, proceeds from the issuance of Class A common stock under the ESPP in the
amount of $7.7 million and proceeds from the exercise of stock options in the
amount of $12.4 million . These amounts were partially offset by an $89.6 million
purchase of the capped call in connection with the issuance of the 2025 Notes,
$1.0 million of taxes paid in connection with the ESPP and $0.4 million of the
initial public offering, or IPO, costs.
Non-GAAP Free Cash Flow
We report our financial results in accordance with GAAP. To supplement our
condensed consolidated financial statements, we provide investors with the
amount of free cash flow, which is a non-GAAP financial measure. Free cash flow
represents net cash used in operating activities, reduced by capital
expenditures and capitalized software development costs, if any. Free cash flow
is a measure used by management to understand and evaluate our liquidity and to
generate future operating plans. The reduction of capital expenditures and
amounts capitalized for software development facilitates comparisons of our
liquidity on a period-to-period basis and excludes items that we do not consider
to be indicative of our liquidity. We believe that free cash flow is a measure
of liquidity that provides useful information to our management, board of
directors, investors and others in understanding and evaluating the strength of
our liquidity and future ability to generate cash that can be used for strategic
opportunities or investing in our business. Nevertheless, our use of free cash
flow has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our financial results as reported
under GAAP. Further, our definition of free cash flow may differ from the
definitions used by other companies and therefore comparability
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may be limited. You should consider free cash flow alongside our other
GAAP-based financial performance measures, such as net cash used in operating
activities, and our other GAAP financial results.
The following table presents our cash flows for the periods presented and a
reconciliation of free cash flow to net cash provided by operating activities,
the most directly comparable financial measure calculated in accordance with
GAAP:
Nine Months Ended
September 30,
2021 2020
(in thousands)
Net cash provided by operating activities
$ 143,837 $ 66,556 Contractual Obligations and Commitments Our principal commitments consist of obligations under our operating leases, purchase commitments to our cloud hosting providers and other vendors and obligations to pay the 2025 Notes' coupons and principal. During the nine months endedSeptember 30, 2021 , other than certain non-cancelable operating leases described in Note 9, Leases, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, there were no other material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Annual Report. Off-Balance Sheet Arrangements As ofSeptember 30, 2021 , we did not have any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. There have been no material changes to our critical accounting policies from those disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Annual Report. Recently Adopted Accounting Pronouncements See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.
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