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 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.
Overview
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 ofJune 30, 2020 , we had$209.7 million in cash, cash equivalents and restricted cash. We generated revenue of$140.0 million and$83.2 million in the three months endedJune 30, 2020 and 2019, respectively, representing year-over-year growth of 68%. For the six months endedJune 30, 2020 and 2019, our revenue was$271.3 million and$153.3 million , respectively, representing year-over-year growth of 77%. Substantially all of our revenue is subscription software sales. Our net income (loss) was$0.3 million and$(3.9) million for the three months endedJune 30, 2020 and 2019, respectively, and$6.8 million and$(13.4) million for the six months endedJune 30, 2020 and 2019, respectively. We generated operating cash flow of$49.0 million and$3.0 million in the six months endedJune 30, 2020 and 2019, respectively. Our free cash flow was$37.9 million and$(6.4) million in the six months endedJune 30, 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 depends 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 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. 25
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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 ofJune 30, 2020 , we had approximately 12,100 customers spanning organizations of a broad range of sizes and industries, compared to approximately 8,800 as ofJune 30, 2019 . 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 ofJune 30, 2020 , we had 1,015 customers with annual run-rate revenue, or ARR, of$100,000 or more, representing 76% of our ARR, up from 594 customers as ofJune 30, 2019 , representing 72% 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 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. 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 ofJune 30, 2020 and 2019, 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 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 ofJune 30, 2020 , approximately 68% of our customers were using more than one product, up from approximately 40% 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. 26
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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 the six months endedJune 30, 2020 , compared to 25% for the six months endedJune 30, 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 .
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.
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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 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.
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 primarily of income earned on our money market funds included in cash and cash equivalents and on our marketable securities, offset by interest expense. 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. As ofJune 30, 2020 , we were in a net deferred tax liability position and released our valuation allowance through additional paid-in capital in direct connection with the convertible debt issuance. For more information on the convertible debt issuance, see Note 7, Convertible Senior Notes, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 28
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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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Revenue $ 140,012 $ 83,222 $ 271,260 $ 153,272
Cost of revenue (1)(2)(4) 28,878 20,978 55,357 39,928
Gross profit 111,134 62,244 215,903 113,344
Operating expenses
Research and development
(1)(3)(4) 45,664 24,032 86,488 46,847
Sales and marketing
(1)(3)(4) 51,269 36,118 96,484 66,225
General and administrative
(1)(3)(4) 13,547 6,088 28,499 13,928
Total operating expenses 110,480 66,238 211,471 127,000
Operating income (loss) 654 (3,994 ) 4,432 (13,656 )
Other income (expense):
Interest expense (4,294 ) - (5,001 ) -
Interest income and other
income, net 4,466 326 8,069 556
Other income, net (5) 172 326 3,068 556
Income (loss) before
provision for income taxes 826 (3,668 ) 7,500 (13,100 )
Provision for income taxes (542 ) (281 ) (737 ) (340 )
Net income (loss) $ 284 $ (3,949 ) $ 6,763 $ (13,440 ) (1) Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 407 $ 112 $ 638 $ 211
Research and development 8,703 989 14,550 1,775
Sales and marketing 4,541 1,007 7,615 1,736
General and administrative 3,183 786 6,091 1,617
Total $ 16,834 $ 2,894 $ 28,894 $ 5,339 (2) Includes amortization of acquired intangibles expense as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 147 $ 177 $ 394 $ 352 (3) Includes non-cash benefit related to tax adjustment as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Research and development $ (2,729 ) $ (2,344 ) $ (2,729 ) $ (2,344 )
Sales and marketing (449 ) (397 ) $ (449 ) (397 )
General and administrative (2,383 ) (2,266 ) $ (2,383 ) (2,266 )
Total $ (5,561 ) $ (5,007 ) $ (5,561 ) $ (5,007 ) (4) Includes employer payroll taxes on employee stock transactions as follows:
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Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 121 $ - $ 121 $ -
Research and development 1,423 262 1,460 262
Sales and marketing 1,508 191 1,659 191
General and administrative 212 7 270 19
Total $ 3,264 $ 460 $ 3,510 $ 472 (5) Includes amortization of debt discount and issuance costs as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(in thousands)
Interest expense $ 2,484 $ - $ 2,484 $ -
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(as a percentage of total revenue(1))
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 21 25 20 26
Gross profit 79 75 80 74
Operating expenses
Research and development 33 29 32 31
Sales and marketing 36 43 36 43
General and administrative 10 7 11 9
Total operating expenses 79 79 78 83
Operating income (loss) 0 (4 ) 2 (9 )
Other income (expense):
Interest expense (3 ) 0 (2 ) 0
Interest income and other
income, net 3 0 3 1
Other income, net 0 0 1 1
Income (loss) before
provision for income taxes 0 (4 ) 3 (8 )
Provision for income taxes 0 (1 ) (1 ) (1 )
Net income (loss) 0 % (5 )% 2 % (9 )%
(1) Certain items may not total due to rounding.
Comparison of the Three Months Ended
Revenue
Three Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 140,012 $ 83,222 $ 56,790 68 %
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-------------------------------------------------------------------------------- Revenue increased by$56.8 million , or 68%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . Approximately 60% of the increase in revenue was attributable to growth from existing customers, and the remaining 40% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Three Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 28,878 $ 20,978 $ 7,900 38 %
Gross margin 79 % 75 % 4 %
Cost of revenue increased by $7.9 million , or 38%, for the three months ended
June 30, 2020 compared to the three months ended June 30, 2019 . This increase
was primarily due to an increase of $6.4 million in third-party cloud
infrastructure hosting and software costs, $1.1 million of personnel expenses as
a result of increased headcount, $0.3 million of depreciation and amortization
and $0.1 million of credit card processing fees and other fees.
Our gross margin increased 4% for the three months ended June 30, 2020 compared
to the three months ended June 30, 2019 , primarily as a result of increased
revenue and cost savings from our third-party cloud infrastructure providers.
Research and Development
Three Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Research and development $ 45,664 $ 24,032 $ 21,632 90 %
Percentage of revenue 33 % 29 %
Research and development expense increased by $21.6 million , or 90%, for the
three months ended June 30, 2020 compared to the three months ended June 30,
2019 . This increase was primarily due to an increase of $19.8 million in
personnel costs for our engineering, product and design teams as a result of
increased headcount and an increase of $1.8 million in cloud infrastructure
related investments and in allocated overhead costs necessary for supporting the
growth of the business.
Sales and Marketing
Three Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Sales and marketing $ 51,269 $ 36,118 $ 15,151 42 %
Percentage of revenue 36 % 43 %
Sales and marketing expense increased by $15.2 million , or 42%, for the three
months ended June 30, 2020 compared to the three months ended June 30, 2019 .
This increase was primarily due to an increase of $14.0 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 $1.2 million related to marketing and promotional activities and
overhead costs.
General and Administrative
Three Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
General and administrative $ 13,547 $ 6,088 $ 7,459 123 %
Percentage of revenue 10 % 7 %
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-------------------------------------------------------------------------------- General and administrative expense increased by$7.5 million , or 123%, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . This increase was primarily due to an increase of$4.4 million in personnel costs as a result of increased headcount, an increase of$1.7 million related to insurance fees, an increase of$0.6 million related to overhead costs, and an increase of$0.4 million related to bad debt expense. These amounts were partially offset by a decrease of$0.3 million related to professional fees. In addition, general and administrative expense includes a one-time donation in the amount of$0.7 million fromDatadog and its employees in support of various organizations during the ongoing COVID-19 outbreak. Other Income, Net Three Months Ended June 30, 2020 2019 Change % Change (dollars in thousands) Other income, net$ 172 $ 326 $ (154 ) (47 %)
Percentage of revenue 0 % 0 %
Other income, net decreased by $0.2 million in the three months ended June 30,
2020 compared to the three months ended June 30, 2019 . The decrease was
primarily due to a $2.6 million interest expense related to our 0.125%
convertible senior notes due 2025, or the 2025 Notes, a $1.7 million interest
expense related to amortization of premiums on our marketable securities. These
amounts were partially offset by a $3.6 million interest income earned from
investments in marketable securities and a $0.6 million of other income, mainly
due to accretion income from marketable securities.
Comparison of the Six Months Ended
Revenue
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 271,260 $ 153,272 $ 117,988 77 %
Revenue increased by $118.0 million , or 77%, in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 . Approximately 60% of the
increase in revenue was attributable to the growth from existing customers, and
the remaining 40% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 55,357 $ 39,928 $ 15,429 39 %
Gross margin 80 % 74 % 6 %
Cost of revenue increased by $15.5 million , or 39%, in the six months ended June
30, 2020 compared to the six months ended June 30, 2019 . This increase was
primarily due to an increase of $11.9 million in third-party cloud
infrastructure hosting and software costs, an increase of $2.2 million in
personnel expenses as a result of increased headcount, and an increase of $1.4
million of depreciation and amortization, credit card processing fees and
overhead costs as a result of an increase in overall costs necessary to support
the growth of the business and related infrastructure.
Our gross margin increased 6% for the six months ended June 30, 2020 compared to
the six months ended June 30, 2019 , primarily as a result of increased revenue
and cost savings from our third-party cloud infrastructure providers.
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Research and Development
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Research and development $ 86,488 $ 46,847 $ 39,641 85 %
Percentage of revenue 32 % 31 %
Research and development expense increased by $39.6 million , or 85% in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 . This
increase was primarily due to an increase of $35.5 million in personnel costs
for our engineering, product and design teams as a result of increased
headcount, and an increase of $4.1 million in cloud infrastructure related
investments and in allocated overhead costs necessary for supporting the growth
of the business.
Sales and Marketing
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Sales and marketing $ 96,484 $ 66,225 $ 30,259 46 %
Percentage of revenue 36 % 43 %
Sales and marketing expense increased by $30.3 million , or 46%, in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019 . This
increase was primarily due to an increase of $24.8 million in personnel costs
for our sales and marketing organization as a result of increased headcount and
increased variable compensation for our sales personnel, an increase of $2.7
million in marketing and promotional activities, and an increase of $2.8 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.
General and Administrative
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
General and administrative $ 28,499 $ 13,928 $ 14,571 105 %
Percentage of revenue 11 % 9 %
General and administrative expense increased by $14.6 million , or 105%, in the
six months ended June 30, 2020 compared to the six months ended June 30, 2019 .
This increase was primarily due to an increase of $8.2 million in personnel
expenses as a result of increased headcount, an increase of $3.3 million related
to insurance fees, an increase of $1.5 million in overhead expenses, and an
increase of $1.5 million related to bad debt expense. These amounts were
partially offset by a decrease of $0.6 million related to professional fees. In
addition, general and administrative expense includes a one-time donation in the
amount of $0.7 million from Datadog and its employees in support of various
organizations during the ongoing COVID-19 outbreak.
Other Income, Net
Six Months Ended
June 30,
2020 2019 Change % Change
(dollars in thousands)
Other income, net $ 3,068 $ 556 $ 2,512 452 %
Percentage of revenue 1 % 1 %
Other income, net increased by $2.5 million in the six months ended June 30,
2020 compared to the six months ended June 30, 2019 . The increase was primarily
due to a $6.5 million interest income earned from investments in marketable
securities and a $1.0 million of other income, mainly due to accretion income
from marketable securities. These amounts were partially offset by a $2.6
million interest expense related to our 2025 Notes and $2.4 million interest
expense related to amortization of premiums on our marketable securities.
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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.
InJune 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 total net proceeds from the sale of the 2025 Notes, after deducting the initial purchasers' discounts and estimated debt issuance costs, were approximately$730.2 million .
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,
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 is recognized as revenue in accordance with our revenue recognition policy. As ofJune 30, 2020 , we had deferred revenue of$165.3 million , of which$162.9 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 summarizes our cash flows for the periods presented:
Six Months Ended
June 30,
2020 2019
(in thousands)
Cash provided by operating activities $ 48,993 $ 2,980
Cash used in investing activities (1,095,100 ) (9,387 )
Cash provided by financing activities 654,691 5,041
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.
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-------------------------------------------------------------------------------- Cash provided by operating activities for the six months endedJune 30, 2020 of$49.0 million was primarily related to our net income of$6.8 million , adjusted for non-cash charges of$53.4 million and net cash outflows of$11.2 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 capitalized software, and amortization of acquired intangibles. The main drivers of the changes in operating assets and liabilities were related to a$26.8 million increase in deferred revenue, resulting primarily from increased billings for subscriptions, a$2.7 million increase in accounts payable, and a$1.6 increase in accrued expenses and other liabilities. These amounts were partially offset by a$23.7 million increase in accounts receivable, net, due to increases in sales, a$11.2 million increase in deferred contract costs related to commissions paid on new bookings, a$6.5 increase in prepaid expenses and other current assets, primarily driven by prepaid hosting services, and a$0.9 million increase in other assets. Cash provided by operating activities for the six months endedJune 30, 2019 of$3.0 million was primarily related to our net loss of$(13.4) million , adjusted for non-cash charges of$17.5 million and net cash outflows of$1.1 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 were related to a$34.5 million increase in deferred revenue, resulting primarily from increased billings for subscriptions and a$7.5 million increase in accounts payable. These amounts were partially offset by a$8.6 million decrease in accrued expenses and other liabilities, a$12.2 million increase in accounts receivable, net, due to increases in sales, a$12.2 million increase in prepaid expenses and other current assets, primarily driven by prepaid hosting services, a$6.1 million increase in deferred contract costs related to commissions paid on new bookings, and a$4.0 million increase in other assets. Investing Activities Cash used in investing activities for the six months endedJune 30, 2020 was$1,095.1 million , and was primarily the result of investment in marketable securities of$1,203.5 million , a$8.2 million increase in capitalization of software development costs, a$2.9 million increase in capital expenditures to purchase property and equipment to support office space and site operations, and a$2.4 million paid for an acquisition. These amounts were partially offset by$121.9 million paid for maturities of marketable securities. For more information on the acquisition, see Note 6, Acquisition, Intangible Assets andGoodwill , in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Cash used in investing activities for the six months endedJune 30, 2019 was$9.4 million , and was the result of$5.0 million increase in capital expenditures to purchase property and equipment to support additional office space and site operations and$4.4 million increase in capitalization of software development costs.
Financing Activities
Cash provided by financing activities for the six months endedJune 30, 2020 was$654.7 million and was primarily attributable to proceeds from the issuance of the 2025 Notes in the amount of$730.7 million , net of issuance costs, proceeds from the issuance of common stock under the 2019 Employee Stock Purchase Plan, or ESPP in the amount of$7.7 million , and proceeds from the exercise of stock options in the amount of$7.2 million . These amounts were partially offset by a$89.6 million purchase of the capped call in connection with the issuance of the 2025 Notes,$0.9 million of taxes in connection with the ESPP, and$0.4 million of the initial public offering, or IPO, costs. Cash provided by financing activities for the six months endedJune 30, 2019 was$5.0 million and was the result of proceeds from the exercise of stock options, partially offset by a$0.2 million payment of 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, 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.
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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:
Six Months Ended
June 30,
2020 2019
(in thousands)
Net cash provided by operating activities
Less: Purchases of property and equipment (2,924 ) (4,979 )
Less: Capitalized software development costs (8,154 ) (4,408 )
Free cash flow $ 37,915 $ (6,407 ) 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.
In
InApril 2020 , we signed a new lease agreement with the existing landlord of our office inBoston . According to the agreement, we are required to pay an aggregate amount of$19.0 million over the course of the lease term fromSeptember 2021 throughMay 2029 for the new premises. Additionally, our existingBoston leases were extended fromNovember 2025 throughMay 2029 , requiring payment of an additional aggregate amount of$13.3 million to be paid over the course of the extended term for the covered space. InJune 2020 , we issued$747.5 million aggregate principal amount of our 2025 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2025 Notes will mature onJune 15, 2025 , unless earlier converted, redeemed or repurchased. For more information on the 2025 Notes, see Note 7, Convertible Senior Notes, 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 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 ofJune 30, 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 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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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. Based on the market value of our Class A common stock held by non-affiliates as ofJune 30, 2020 , we will cease to qualify as an emerging growth company, effective as ofDecember 31, 2020 .
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 ofJune 30, 2020 , we had$189.5 million in cash equivalents, and$1,259.6 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$3.5 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 ofJune 30, 2020 , a hypothetical 10% relative change in interest rates would not have a material impact on our condensed consolidated financial statements. OnJune 2, 2020 , we issued$747.5 million aggregate principal amount of the 2025 Notes. The fair value of the 2025 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2025 Notes will generally increase as our Class A common stock price increases and will generally decrease as our Class A common stock price declines. The interest and market value changes affect the fair value of the 2025 Notes but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the 2025 Notes at face value less unamortized discount and unamortized issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only.
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. 37 -------------------------------------------------------------------------------- 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 ofJune 30, 2020 . Based on the evaluation of our disclosure controls and procedures as ofJune 30, 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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