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 ended
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.
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 of
Since
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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 of
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 of
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 of
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.
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.
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Expanding Internationally
We believe there is a significant opportunity to expand usage of our platform
outside of
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.
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 (Expense) Income, Net
Other (expense) income, net consists primarily of interest expense due to our 0.125% convertible senior notes due 2025, or the 2025 Notes, and amortization of premiums on our marketable securities, partially offset by interest income, primarily due to income earned from investments in marketable securities and money market funds.
Provision for Income Taxes
Provision for income taxes consists of
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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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Revenue $ 154,675 $ 95,864 $ 425,935 $ 249,136
Cost of revenue (1)(2)(4) 33,984 23,297 89,340 63,225
Gross profit 120,691 72,567 336,595 185,911
Operating expenses
Research and development (1)(3)(4) 56,440 28,684 142,928 75,531
Sales and marketing (1)(3)(4) 57,142 38,836 153,626 105,061
General and administrative (1)(3)(4) 16,376 9,265 44,876 23,193
Total operating expenses 129,958 76,785 341,430 203,785 Operating loss (9,267 ) (4,218 ) (4,835 ) (17,874 )
Other (expense) income, net:
Interest expense (5) (12,423 ) - (17,424 ) - Interest income and other income, net 7,135 90 15,204 646 Other (expense) income, net (5,288 ) 90 (2,220 ) 646
Loss before provision for income taxes (14,555 ) (4,128 ) (7,055 ) (17,228 )
Provision for income taxes (595 ) (33 ) (1,332 ) (373 ) Net loss$ (15,150 ) $ (4,161 ) $ (8,387 ) $ (17,601 )
(1) Includes stock-based compensation expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 529 $ 161 $ 1,167 $ 372
Research and development 10,173 1,934 24,723 3,709
Sales and marketing 6,068 1,540 13,683 3,276
General and administrative 3,946 1,042 10,037 2,659
Total $ 20,716 $ 4,677 $ 49,610 $ 10,016 (2) Includes amortization of acquired intangibles expense as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 274 $ 179 $ 668 $ 531 (3) Includes non-cash benefit related to tax adjustment as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Research and development $ - $ - $ (2,729 ) $ (2,344 )
Sales and marketing - - (449 ) (397 )
General and administrative - - (2,383 ) (2,266 )
Total $ - $ - $ (5,561 ) $ (5,007 ) (4) Includes employer payroll taxes on employee stock transactions as follows:
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Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Cost of revenue $ 32 $ - $ 154 $ -
Research and development 418 - 1,877 262
Sales and marketing 1,354 88 3,014 279
General and administrative 282 - 552 19
Total $ 2,086 $ 88 $ 5,597 $ 560 (5) Includes amortization of debt discount and issuance costs as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(in thousands)
Interest expense $ 8,062 $ - $ 10,546 $ -
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(as a percentage of total revenue(1))
Revenue 100 % 100 % 100 % 100 %
Cost of revenue 22 24 21 25
Gross profit 78 76 79 75
Operating expenses
Research and development 36 30 34 31
Sales and marketing 37 41 36 42
General and administrative 11 10 11 9
Total operating expenses 84 81 80 82
Operating loss (6 ) (4 ) (1 ) (7 )
Other (expense) income, net:
Interest expense (8 ) 0 (4 ) 0
Interest income and other income, net 5 0 4 0
Other (expense) income, net (3 ) 0 0 0
Loss before provision for income taxes (9 ) (4 ) (2 ) (7 )
Provision for income taxes 0 (1 ) 0 (1 )
Net loss (10 )% (5 )% (2 )% (8 )%
(1) Certain items may not total due to rounding.
Comparison of the Three Months Ended
Revenue
Three Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 154,675 $ 95,864 $ 58,811 61 %
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Revenue increased by
Cost of Revenue and Gross Margin
Three Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 33,984 $ 23,297 $ 10,687 46 %
Gross margin 78 % 76 % 2 %
Cost of revenue increased by
Our gross margin increased 2% for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 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 September 30, 2020 2019 Change % Change (dollars in thousands) Research and development$ 56,440 $ 28,684 $ 27,756 97 % Percentage of revenue 36 % 30 %
Research and development expense increased by
Sales and Marketing
Three Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Sales and marketing $ 57,142 $ 38,836 $ 18,306 47 %
Percentage of revenue 37 % 41 %
Sales and marketing expense increased by
General and Administrative
Three Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
General and administrative $ 16,376 $ 9,265 $ 7,111 77 %
Percentage of revenue 11 % 10 %
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General and administrative expense increased by
Other (Expense) Income, Net
Three Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Other (expense) income, net $ (5,288 ) $ 90 $ (5,378 ) (5,976 %)
Percentage of revenue (3 %) 0 %
Other (expense) income, net decreased by
Comparison of the Nine Months Ended
Revenue
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Revenue $ 425,935 $ 249,136 $ 176,799 71 %
Revenue increased by
Cost of Revenue and Gross Margin
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Cost of revenue $ 89,340 $ 63,225 $ 26,115 41 %
Gross margin 79 % 75 % 4 %
Cost of revenue increased by
Our gross margin increased 4% for the nine months ended
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Research and Development
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Research and development $ 142,928 $ 75,531 $ 67,397 89 %
Percentage of revenue 34 % 31 %
Research and development expense increased by
Sales and Marketing
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Sales and marketing $ 153,626 $ 105,061 $ 48,565 46 %
Percentage of revenue 36 % 42 %
Sales and marketing expense increased by
General and Administrative
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
General and administrative $ 44,876 $ 23,193 $ 21,683 93 %
Percentage of revenue 11 % 9 %
General and administrative expense increased by
Other (Expense) Income, Net
Nine Months Ended
September 30,
2020 2019 Change % Change
(dollars in thousands)
Other (expense) income, net $ (2,220 ) $ 646 $ (2,866 ) (444 %)
Percentage of revenue 0 % 0 %
Other (expense) income, net decreased by
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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.
In
As of
Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our marketable securities consist of commercial debt securities,
certificates of deposit,
We believe that our existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of our platform, and the current uncertainty in the global markets resulting from the ongoing COVID-19 pandemic on our customers' businesses and operations. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
A substantial source of our cash from operations is from our deferred revenue,
which is included in the liabilities section of our condensed consolidated
balance sheet. Deferred revenue consists of the unearned portion of customer
billings, which will be recognized as revenue in accordance with our revenue
recognition policy. As of
The following table summarizes our cash flows for the periods presented:
Nine Months Ended
September 30,
2020 2019
(in thousands)
Cash provided by operating activities $ 85,263 $ 6,804
Cash used in investing activities (1,143,933 ) (16,871 )
Cash provided by financing activities 659,218 715,965
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 nine months ended
Cash provided by operating activities for the nine months ended
Investing Activities
Cash used in investing activities for the nine months ended
Cash used in investing activities for the nine months ended
Financing Activities
Cash provided by financing activities for the nine months ended
Cash provided by financing activities for the nine months ended
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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 should not be considered 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. Free cash flow should be considered alongside our other GAAP-based financial performance measures, such as net cash used in operating activities, and our other GAAP financial results.
The following table presents our cash flows for the periods presented and a
reconciliation of free cash flow to net cash provided by operating activities,
the most directly comparable financial measure calculated in accordance with
GAAP:
Nine Months Ended
September 30,
2020 2019
(in thousands)
Net cash provided by operating activities $ 85,263 $ 6,804
Less: Purchases of property and equipment (4,336 ) (9,813 )
Less: Capitalized software development costs (14,371 ) (7,058 )
Free cash flow $ 66,556 $ (10,067 ) 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
In
In
In
In
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.
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Off-Balance Sheet Arrangements
As of
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.
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 of
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 of
On
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Foreign Currency Exchange Risk
Our reporting currency and the functional currency of our wholly owned foreign
subsidiaries is the
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 the
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 of
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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