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, 2019 , 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 worldwide 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.
Overview
Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring and log management 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. Our paid subscriptions are available in Pro and Enterprise tiers. 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 ofMarch 31, 2020 , we had$198.2 million in cash, cash equivalents and restricted cash, and$600.4 million in marketable securities. We generated revenue of$131.2 million and$70.1 million in the three months endedMarch 31, 2020 and 2019, respectively, representing year-over-year growth of 87%. Substantially all of our revenue is subscription software sales. Our net income (loss) was$6.5 million and$(9.5) million for the three months endedMarch 31, 2020 and 2019, respectively. We generated operating cash flow of$24.3 million and$3.4 million in the three months endedMarch 31, 2020 and 2019, respectively. Our free cash flow was$19.3 million and$(0.9) million in the three months endedMarch 31, 2020 and 2019, 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 to multiple countries, includingthe 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 will depend on certain developments, including the duration and spread of the outbreak, its impact on industry events, and its effect on our customers, partners, suppliers and vendors and other parties with whom we do business, 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 will continue 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. At this point, the extent to which the COVID-19 pandemic may impact our results of operations and financial condition is uncertain. Furthermore, 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. 19
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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 ofMarch 31, 2020 , we had approximately 11,500 customers spanning organizations of a broad range of sizes and industries. 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 ofMarch 31, 2020 , we had 960 customers with annual run-rate revenue, or ARR, of$100,000 or more, up from 508 as ofMarch 31, 2019 . 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 and monthly subscriptions. ARR and MRR should be viewed independently of revenue, and do not represent our revenue under generally accepted accounting principles inthe United States , or 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. 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 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 security monitoring inApril 2020 . As ofMarch 31, 2020 , approximately 60% of our customers were using more than one product, up from approximately 30% 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 24% for each of the three months endedMarch 31, 2020 and 2019. 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 now have sales presence internationally, including inDublin ,London ,Amsterdam ,Paris ,Singapore ,Sydney andTokyo . 20
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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. 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.
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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 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 and continue to be our largest operating expense for the foreseeable future as we expand our sales and marketing efforts. However, we expect that our sales and marketing expense will decrease as a percentage of our revenue over the long term.
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. However, we expect that our general and administrative expense will decrease as a percentage of our revenue as our revenue grows over the longer term. Other Income, Net
Other income, net consists of income earned on our money market funds included in cash and cash equivalents and 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 maintain 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. 22
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Results of Operations
The following table sets forth our consolidated statements of operations data
for the periods indicated:
Three Months Ended
March 31,
2020 2019
(in thousands)
Revenue $ 131,248 $ 70,050
Cost of revenue (1)(2) 26,479 18,950
Gross profit 104,769 51,100
Operating expenses
Research and development (1) 40,824 22,815
Sales and marketing (1) 45,215 30,107
General and administrative (1) 14,952 7,840
Total operating expenses 100,991 60,762
Operating income (loss) 3,778 (9,662 )
Other income, net 2,896 230
Income (loss) before provision for income taxes 6,674 (9,432 )
Provision for income taxes (195 )
(59 )
Net income (loss) $ 6,479 $ (9,491 ) (1) Includes stock-based compensation expense as follows:
Three Months Ended
March 31,
2020 2019
(in thousands)
Cost of revenue $ 231 $ 99
Research and development 5,847 786
Sales and marketing 3,074 729
General and administrative 2,908 831
Total $ 12,060 $ 2,445 (2) Includes amortization of acquired intangibles expense as follows:
Three Months Ended
March 31,
2020 2019
(in thousands)
Cost of revenue $ 247 $ 175
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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended
March 31,
2020 2019
(as a percentage of total revenue)
Revenue 100 % 100 %
Cost of revenue 20 27
Gross profit 80 73
Operating expenses
Research and development 31 33
Sales and marketing 35 43
General and administrative 11 11
Total operating expenses 77 87
Operating income (loss) 3 (14 )
Other income, net 2 1
Income (loss) before provision for income taxes 5 (13 )
Provision for income taxes (1 ) (1 )
Net income (loss) 4 % (14 %)
Comparison of the Three Months Ended
Revenue
Three Months Ended
March 31,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 131,248 $ 70,050 $ 61,198 87 %
Revenue increased by $61.2 million , or 87% for the three months ended March 31,
2020 compared to the three months ended March 31, 2019 . The increase in revenue
was primarily due to growth from existing customers, with the remaining increase
attributable to new customers.
Cost of Revenue and Gross Margin
Three Months Ended
March 31,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 26,479 $ 18,950 $ 7,529 40 %
Gross margin 80 % 73 % 7 %
Cost of revenue increased by $7.5 million , or 40%, for the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 . This increase
was primarily due to an increase of $5.5 million in third-party cloud
infrastructure hosting and software costs, $1.1 million in personnel expenses as
a result of increased headcount, and $0.9 million of depreciation and
amortization, credit card processing fees and other fees, and allocated overhead
costs as a result of an increase in overall costs necessary to support the
growth of the business and related infrastructure.
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Our gross margin increased by 7% in the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 , primarily as a result of increased revenue and cost savings from our third-party cloud infrastructure providers. Research and Development Three Months Ended March 31, 2020 2019 Change % Change (dollars in thousands) Research and development$ 40,824 $ 22,815 $ 18,009 79 % Percentage of revenue 31 % 33 % Research and development expense increased by$18.0 million , or 79%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . This increase was primarily due to an increase of$15.7 million in personnel costs for our engineering, product and design teams as a result of increased headcount, and an increase of$3.0 million in allocated overhead costs necessary for supporting the growth of the business, partially offset by a decrease of$0.7 million in cloud infrastructure related investments. Sales and Marketing Three Months Ended March 31, 2020 2019 Change % Change (dollars in thousands) Sales and marketing$ 45,215 $ 30,107 $ 15,108 50 % Percentage of revenue 35 % 43 % Sales and marketing expense increased by$15.1 million , or 50%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . This increase was primarily due to an increase of$10.8 million in personnel costs for our sales and marketing organization as a result of increased headcount and increased amortization of deferred contract costs related to increased variable compensation for sales personnel due to increased sales, an increase of$2.5 million in allocated overhead costs as a result of increased overall costs necessary to support the growth of the business and related infrastructure, an increase of$1.0 million in hosting for free trials, and an increase of$0.8 million in marketing and promotional activities. General and Administrative Three Months Ended March 31, 2020 2019 Change % Change (dollars in thousands) General and administrative$ 14,952 $ 7,840 $ 7,112 91 % Percentage of revenue 11 % 11 % General and administrative expense increased by$7.1 million , or 91%, for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . This increase was primarily due to an increase of$3.9 million in personnel costs due to an increased headcount and an increase in stock-based compensation, an increase of$1.9 million in allocated overhead costs as a result of an increase in overall costs necessary to support the growth of the business and related infrastructure, and an increase of$1.3 million related to outside professional fees primarily related to financial services.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales of
subscriptions and the net proceeds we have received from sales of equity
securities. As of
Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our marketable securities consist of commercial debt, certificates
of deposit,
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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 worldwide 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 consolidated balance sheet.
Deferred revenue consists of the unearned portion of customer billings, which is
recognized as revenue in accordance with our revenue recognition policy. As of
March 31, 2020 , we had deferred revenue of $145.2 million , of which $141.2
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:
Three Months Ended
March 31,
2020 2019
(in thousands)
Cash provided by operating activities $ 24,255 $ 3,418
Cash used in investing activities (429,805 ) (4,293 )
Cash provided by financing activities 2,660 1,776
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
securities.
Cash provided by operating activities for the three months ended March 31, 2020
of $24.3 million was primarily related to our net income of $6.5 million ,
adjusted for non-cash charges of $22.5 million , and net cash outflows of $4.7
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 capitalized software,
and amortization of acquired intangibles. The main drivers of the changes in
operating assets and liabilities were related to a $7.1 million increase in
accounts receivable, net, due to increases in sales, a $4.6 million increase in
deferred contract costs related to commissions paid on new bookings, a $1.4
million increase in prepaid expenses and other current assets, primarily driven
by prepaid hosting services, and a $1.4 million decrease in accounts payable.
These amounts were partially offset by a $6.9 million increase in deferred
revenue, resulting primarily from increased billings for subscriptions, a $2.0
million increase in accrued expenses and other liabilities, and a $0.9 million
decrease in other current assets.
Cash provided by operating activities for the three months ended March 31, 2019
of $3.4 million primarily related to our net loss of $9.5 million , adjusted
for non-cash charges of $5.8 million , and net cash inflows of $7.1 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 capitalized software, and
amortization of acquired intangibles. The main drivers of the changes in
operating assets and liabilities related to a $18.9 million increase in deferred
revenue, resulting primarily from increased billings for subscriptions, a
$14.5 million increase in accounts payable, and a $1.4 million increase in
accrued expenses and other liabilities due to an increase in headcount. These
amounts were partially offset by a $7.6 million increase in accounts receivable,
net, due to increases in sales, a $8.5 million increase in prepaid expenses and
other current assets, primarily driven by prepaid hosting services, a $3.4
million increase in deferred contract costs related to commissions paid on new
bookings, and $8.2 million increase in other assets.
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Investing Activities
Cash used in investing activities for the three months endedMarch 31, 2020 was$429.8 million , and was primarily the result of investment in marketable securities, increases in capital expenditures to purchase property and equipment to support additional office space and site operations and increases in capitalization of software development costs. Cash used in investing activities for the three months endedMarch 31, 2019 was$4.3 million , and was the result of increases in capital expenditures to purchase property and equipment to support additional office space and site operations and increases in capitalization of software development costs.
Financing Activities
Cash provided by financing activities for the three months endedMarch 31, 2020 was$2.7 million and was primarily the result of proceeds from the exercise of stock options in the amount of$2.8 million . Cash provided by financing activities for the three months endedMarch 31, 2019 was$1.8 million and was the result of proceeds from the exercise of stock options.
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, 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 in the same manner as our management and board of
directors. 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 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:
Three Months Ended
March 31,
2020 2019
(in thousands)
Net cash provided by operating activities
Less: Purchases of property and equipment (1,526 ) (2,197 )
Less: Capitalized software development costs (3,417 ) (2,096 )
Free cash flow $ 19,312 $ (875 ) Contractual Obligations and Commitments
Our principal commitments consist of obligations under our operating leases, which are primarily for office space, and purchase commitments to our cloud hosting providers and other vendors. InJanuary 2020 , we entered into an agreement with Microsoft Azure, pursuant to which we are required to purchase an aggregate of at least$21.0 million of cloud services throughJanuary 2023 . There were no other material changes outside the ordinary course of business in 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 ofMarch 31, 2020 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 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.
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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, 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.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
item 3. quantitative and qualitative disclosures about market risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates and foreign currency exchange rates. Interest Rate Risk As ofMarch 31, 2020 , we had$181.4 million in cash equivalents, and$600.4 million in marketable securities, which consisted of commercial debt, certificates of deposit,U.S. government treasury and agency securities, and commercial paper. In addition, we had$3.8 million of restricted cash due to the outstanding letters of credit established in connection with lease agreements for our facilities. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. As ofMarch 31, 2020 , a hypothetical 10% relative change in interest rates would not have a material impact on our condensed consolidated financial statements.
Foreign Currency Exchange Risk
Our reporting currency and the functional currency of our wholly owned foreign subsidiaries is theU.S. dollar. All of our sales are denominated inU.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily inthe United States ,Canada ,France , theUnited Kingdom ,Japan andAustralia . Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% increase or decrease in the relative value of theU.S. dollar to other currencies would not have a material effect on our operating results.
item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain "disclosure controls and procedures," as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in theSEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. 28 -------------------------------------------------------------------------------- Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as ofMarch 31, 2020 . Based on the evaluation of our disclosure controls and procedures as ofMarch 31, 2020 , our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial
Officer, believes that our disclosure controls and procedures and internal
control over financial reporting are designed to provide reasonable assurance of
achieving their objectives and are effective at the reasonable assurance level.
However, our management does not expect that our disclosure controls and
procedures or our internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people or by
management override of the controls. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with policies or procedures may deteriorate. Because of the inherent limitations
in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected.
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