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    DDOG   US23804L1035

DATADOG, INC.

(DDOG)
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DATADOG : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/07/2021 | 04:01pm EDT
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 December 31, 2020, or the
Annual Report. This discussion, particularly information with respect to our
future results of operations or financial condition, business strategy, plans
and objectives of management for future operations and the potential impact that
the ongoing COVID-19 pandemic may have on our business, includes forward-looking
statements that involve risks and uncertainties as described under the heading
"Special Note Regarding Forward-Looking Statements" in this Quarterly Report on
Form 10-Q. You should review the disclosure under the heading "Risk Factors" in
this Quarterly Report on Form 10-Q for a discussion of important factors that
could cause our actual results to differ materially from those anticipated in
these forward-looking statements.
Overview
Datadog is the monitoring and analytics platform for developers, IT operations
teams and business users in the cloud age.
Our SaaS platform integrates and automates infrastructure monitoring,
application performance monitoring, log management, and security monitoring to
provide unified, real-time observability of our customers' entire technology
stack. Datadog is used by organizations of all sizes and across a wide range of
industries to enable digital transformation and cloud migration, drive
collaboration among development, operations and business teams, accelerate time
to market for applications, reduce time to problem resolution, understand user
behavior and track key business metrics.
We generate revenue from the sale of subscriptions to customers using our
cloud-based platform. The terms of our subscription agreements are primarily
monthly or annual. Customers also have the option to purchase additional
products, such as additional containers to monitor, custom metrics packages,
anomaly detection and app analytics. Professional services are generally not
required for the implementation of our products and revenue from such services
has been immaterial to date. We employ a land-and-expand business model centered
around offering products that are easy to adopt and have a very short time to
value. Our customers can expand their footprint with us on a self-service basis.
Our customers often significantly increase their usage of the products they
initially buy from us and expand their usage to other products we offer on our
platform. We grow with our customers as they expand their workloads in the
public and private cloud.
As of March 31, 2021, we had $373.3 million in cash, cash equivalents and
restricted cash and $1,178.2 million in marketable securities. We generated
revenue of $198.5 million and $131.2 million in the three months ended March 31,
2021 and 2020, respectively, representing year-over-year growth of 51%.
Substantially all of our revenue is subscription software sales. Our net (loss)
income was $(13.1) million and $6.5 million for the three months ended March 31,
2021 and 2020, respectively. We generated operating cash flow of $51.7 million
and $24.3 million in the three months ended March 31, 2021 and 2020. Our free
cash flow was $44.5 million and $19.3 million in the three months ended
March 31, 2021 and 2020. See the section titled "-Liquidity and Capital
Resources-Non-GAAP Free Cash Flow" for additional information.
Since December 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, including the 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 virtually Datadog 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.
                                       23
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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 March 31, 2021, we had
approximately 15,200 customers spanning organizations of a broad range of sizes
and industries, compared to approximately 11,500 as of March 31, 2020. Our
ability to attract new customers will depend on a number of factors, including
the effectiveness and pricing of our products, offerings of our competitors, and
the effectiveness of our marketing efforts.
We define the number of customers as the number of accounts with a unique
account identifier for which we have an active subscription in the period
indicated. Users of our free trials or tier are not included in our customer
count. A single organization with multiple divisions, segments or subsidiaries
is generally counted as a single customer. However, in some cases where they
have separate billing terms, we may count separate divisions, segments or
subsidiaries as multiple customers.
Expanding Within Our Existing Customer Base
Our base of customers represents a significant opportunity for further sales
expansion. As of March 31, 2021, we had 1,437 customers with annual run-rate
revenue, or ARR, of $100,000 or more, representing 79% of our ARR, up from 960
customers as of March 31, 2020, representing 76% 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 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 of March 31, 2021 and 2020, our dollar-based net retention rate was above
130%. We calculate dollar-based net retention rate as of a period end by
starting with the ARR from the cohort of all customers as of 12 months prior to
such period-end, or the Prior Period ARR. We then calculate the ARR from these
same customers as of the current period-end, or the Current Period ARR. Current
Period ARR includes any expansion and is net of contraction or attrition over
the last 12 months, but excludes ARR from new customers in the current period.
We then divide the total Current Period ARR by the total Prior Period ARR to
arrive at the point-in-time dollar-based net retention rate. We then calculate
the weighted average of the trailing 12-month point-in-time dollar-based net
retention rates, to arrive at the dollar-based net retention rate.
We believe that our land-and-expand business model allows us to efficiently
increase revenue from our existing customer base. Our customers often expand the
deployment of our platform across large teams and more broadly within the
enterprise as they migrate more workloads to the cloud, find new use cases for
our platform, and generally realize the benefits of our platform. We intend to
continue to invest in enhancing awareness of our brand and developing more
products, features and functionality, which we believe are important factors to
achieve widespread adoption of our platform. Our ability to increase sales to
existing customers will depend on a number of factors, including our customers'
satisfaction with our solution, competition, pricing and overall changes in our
customers' spending levels.
Sustaining Innovation and Technology Leadership
Our success is dependent on our ability to sustain innovation and technology
leadership in order to maintain our competitive advantage. We believe that we
have built a highly differentiated platform that will position us to further
extend the adoption of our platform and products. Datadog is frequently deployed
across a customer's entire infrastructure, making it ubiquitous. Datadog is a
daily part of the lives of developers, operations engineers and business
leaders. We employ a land-and-expand business model centered around offering
products that are easy to adopt and have a very short time to value. Our
efficient go-to-market model enables us to prioritize significant investment in
innovation. We have proven initial success of our 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 in April 2020. As of March 31,
                                       24
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2021, approximately 75% of our customers were using more than one product, up
from approximately 60% 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 of North America. Revenue, as determined based on the billing address of
our customers, from regions outside of North America was approximately 28% and
24% of total revenue for the three months ended March 31, 2021 and 2020,
respectively. In addition, we have made and plan to continue to make significant
investments to expand geographically, particularly in Europe, the Middle East,
Africa and in the Asia 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. Beyond North America, we now have sales
presence internationally, including in Dublin, London, Amsterdam, Paris,
Singapore, Sydney, Seoul and Tokyo.
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.
                                       25
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We intend to continue to invest additional resources in our platform
infrastructure and our customer support and success organizations to expand the
capability of our platform and ensure that our customers are realizing the full
benefit of our platform and products. The level, timing and relative investment
in our infrastructure could affect our cost of revenue in the future.
Gross Profit and Gross Margin
Gross profit represents revenue less cost of revenue. Gross margin is gross
profit expressed as a percentage of revenue. Our gross margin may fluctuate from
period to period as our revenue fluctuates, and as a result of the timing and
amount of investments to expand our products and geographical coverage.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. Personnel costs are the most
significant component of operating expenses and consist of salaries, benefits,
bonuses, stock-based compensation expense and sales commissions. Operating
expenses also include overhead costs for facilities and shared IT related
expenses, including depreciation expense.
Research and Development
Research and development expense consists primarily of personnel costs for our
engineering, service and design teams. Additionally, research and development
expense includes contractor fees, depreciation and amortization and allocated
overhead costs. Research and development costs are expensed as incurred. We
expect that our research and development expense will increase in absolute
dollars as our business grows, particularly as we incur additional costs related
to continued investments in our platform.
Sales and Marketing
Sales and marketing expense consists primarily of personnel costs for our sales
and marketing organization, costs of general marketing and promotional
activities, including the free tier and free introductory trials of our
products, travel-related expenses and allocated overhead costs. Sales
commissions earned by our sales force are deferred and amortized on a
straight-line basis over the expected period of benefit, which we have
determined to be four years. We expect that our sales and marketing expense will
increase in absolute dollars as we expand our sales and marketing efforts.
General and Administrative
General and administrative expense consists primarily of personnel costs and
contractor fees for finance, legal, human resources, information technology and
other administrative functions. In addition, general and administrative expense
includes non-personnel costs, such as legal, accounting and other professional
fees, hardware and software costs, certain tax, license and insurance-related
expenses and allocated overhead costs.
We have incurred, and expect to continue to incur, additional expenses as a
result of operating as a public company, including costs to comply with the
rules and regulations applicable to companies listed on a national securities
exchange, costs related to compliance and reporting obligations, and increased
expenses for insurance, investor relations and professional services. We expect
that our general and administrative expense will increase in absolute dollars as
our business grows. 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 interest expense due on the 2025 Notes,
and amortization of premiums on our marketable securities, partially offset by
interest income, primarily due to income earned on money market funds included
in cash and cash equivalents and on marketable securities.
Provision for Income Taxes
Provision for income taxes consists of U.S. federal and state income taxes and
income taxes in certain foreign jurisdictions in which we conduct business. We
recorded a full valuation allowance on our federal and state deferred tax assets
as we have concluded that it is not more likely than not that the deferred tax
assets will be realized.
                                       26
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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,
                                                      2021           2020
                                                         (in thousands)
Revenue                                            $ 198,549      $ 131,248
Cost of revenue (1)(2)(3)                             46,666         26,479
Gross profit                                         151,883        104,769
Operating expenses
Research and development (1)(3)                       79,266         40,824
Sales and marketing (1)(3)                            64,353         45,215
General and administrative (1)(3)                     21,094         14,952
Total operating expenses                             164,713        100,991
Operating (loss) income                              (12,830)         3,778
Other income:
Interest expense (4)                                  (5,472)          (707)
Interest income and other income, net                  5,773          3,603
Other income, net                                        301          2,896
(Loss) income before provision for income taxes      (12,529)         6,674
Provision for income taxes                              (539)          (195)
Net (loss) income                                  $ (13,068)     $   6,479


_________________

(1)Includes stock-based compensation expense as follows:

                                 Three Months Ended
                                     March 31,
                                 2021           2020
                                   (in thousands)
Cost of revenue              $      701      $    231
Research and development         16,069         5,847
Sales and marketing               7,010         3,074

General and administrative 5,081 2,908 Total

                        $   28,861      $ 12,060


_________________

(2)Includes amortization of acquired intangibles expense as follows:

                        Three Months Ended
                             March 31,
                          2021             2020
                          (in thousands)
Cost of revenue   $      355              $ 247


_________________

(3)Includes employer payroll taxes on employee stock transactions as follows:

                                       27
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                                   Three Months Ended
                                       March 31,
                                    2021             2020
                                     (in thousands)
Cost of revenue              $        95            $   -
Research and development           1,771               37
Sales and marketing                1,179              151
General and administrative           124               58
Total                        $     3,169            $ 246


_________________

(4)Includes amortization of issuance costs as follows:

                             Three Months Ended
                                 March 31,
                               2021               2020
                               (in thousands)
Interest expense     $        835                $  -

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,
                                                                                2021                  2020
                                                                          (as a percentage of total revenue(1))
Revenue                                                                             100  %                100  %
Cost of revenue                                                                      24                    20
Gross profit                                                                         76                    80
Operating expenses
Research and development                                                             40                    31
Sales and marketing                                                                  32                    35
General and administrative                                                           11                    11
Total operating expenses                                                             83                    77
Operating loss                                                                       (6)                    3
Other income:
Interest expense                                                                     (3)                   (1)
Interest income and other income, net                                                 3                     3
Other income, net                                                                     0                     2
(Loss) income before provision for income taxes                                      (6)                    5
Provision for income taxes                                                           (1)                   (1)
Net loss (income)                                                                    (7) %                  4  %


_________________
(1)Certain items may not total due to rounding.
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
                 Three Months Ended
                      March 31,
                 2021              2020          Change       % Change
               (dollars in thousands)
Revenue   $    198,549          $ 131,248      $ 67,301           51  %


                                       28
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Revenue increased by $67.3 million, or 51%, for the three months ended March 31,
2021 compared to the three months ended March 31, 2020. 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
                            March 31,
                       2021             2020          Change       % Change
                      (dollars in thousands)
Cost of revenue   $    46,666        $ 26,479       $ 20,187           76  %
Gross margin               76   %          80  %


Cost of revenue increased by $20.2 million, or 76%, for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020. This increase
was primarily due to an increase of $18.2 million in third-party cloud
infrastructure hosting and software costs and $1.6 million of personnel expenses
as a result of increased headcount.
Our gross margin decreased by 4% for the three months ended March 31, 2021
compared to the three months ended March 31, 2020, primarily as a result of
increased spend with our third-party cloud infrastructure providers.
Research and Development
                                 Three Months Ended
                                     March 31,
                                2021             2020          Change       % Change
                               (dollars in thousands)
Research and development   $    79,266        $ 40,824       $ 38,442           94  %
Percentage of revenue               40   %          31  %


Research and development expense increased by $38.4 million, or 94%, for the
three months ended March 31, 2021 compared to the three months ended March 31,
2020. This increase was primarily due to an increase of $28.7 million in
personnel costs for our engineering, product and design teams as a result of
increased headcount, an increase of $10.6 million in cloud hosting costs, and an
increase of $0.4 million in other research and development costs. These amounts
were partially offset by a decrease of $1.3 million related to allocated
overhead costs.
Sales and Marketing
                              Three Months Ended
                                  March 31,
                             2021             2020          Change       % Change
                            (dollars in thousands)
Sales and marketing     $    64,353        $ 45,215       $ 19,138           42  %
Percentage of revenue            32   %          35  %


Sales and marketing expense increased by $19.1 million, or 42%, for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020.
This increase was primarily due to an increase of $17.4 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 $3.3 million in marketing and promotional activities. These amounts
were partially offset by a decrease of $1.4 million related to allocated
overhead costs.
General and Administrative
                                       29
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                                   Three Months Ended
                                       March 31,
                                  2021             2020         Change       % Change
                                 (dollars in thousands)
General and administrative   $    21,094        $ 14,952       $ 6,142           41  %
Percentage of revenue                 11   %          11  %


General and administrative expense increased by $6.1 million, or 41%, for the
three months ended March 31, 2021 compared to the three months ended March 31,
2020. This increase was primarily due to an increase of $3.9 million in
personnel costs as a result of increased headcount, an increase of $2.0 million
related to outside professional fees primarily related to insurance, finance and
legal fees, and an increase of $1.2 million related to other costs and allocated
overhead costs to support the growing business. These amounts were partially
offset by a decrease of $1.0 million related to bad debt expense.
Other Income, Net
                              Three Months Ended
                                  March 31,
                              2021             2020         Change       % Change
                            (dollars in thousands)
Other income, net       $       301         $ 2,896       $ (2,595)         (90) %
Percentage of revenue             -    %          2  %


Other income, net decreased by $2.6 million in the three months ended March 31,
2021 compared to the three months ended March 31, 2020. This decrease was
primarily due to a decrease of $1.0 million interest expense related to our 2025
Notes and and a decrease of $3.7 million in amortization of premiums on our
marketable securities. These amounts were partially offset by an increase of
$2.1 million in interest income, mainly due to income earned from investments in
marketable securities and money market funds.
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales of
subscriptions and the net proceeds we have received from issuance of equity and
debt securities.
In June 2020, we issued $747.5 million aggregate principal amount of the 2025
Notes in a private placement to qualified institutional buyers pursuant to Rule
144A under the Securities Act. The 2025 Notes will mature on June 15, 2025,
unless earlier converted, redeemed or repurchased.
As of March 31, 2021, we had $369.7 million in cash and cash equivalents, and
$1,178.2 million in marketable securities.
Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our marketable securities consist of commercial debt securities,
certificates of deposit, U.S. government treasury and commercial paper.
We believe that our existing cash and cash equivalents, marketable securities,
and cash flow from operations will be sufficient to support working capital and
capital expenditure requirements for at least the next 12 months. Our future
capital requirements will depend on many factors, including our subscription
growth rate, subscription renewal activity, including the timing and the amount
of cash received from customers, the expansion of sales and marketing
activities, the timing and extent of spending to support development efforts,
the introduction of new and enhanced products, the continuing market adoption of
our platform, and the current uncertainty in the global markets resulting from
the ongoing COVID-19 pandemic on our customers' businesses and operations. We
may, in the future, enter into arrangements to acquire or invest in
complementary businesses, products, and technologies. We may be required to seek
additional equity or debt financing. In the event that we require additional
financing, we may not be able to raise such financing on terms acceptable to us
or at all. If we are unable to raise additional capital or generate cash flows
necessary to expand our operations and invest in continued innovation, we may
not be able to compete successfully, which would harm our business, operations
and financial condition.
A substantial source of our cash from operations is from our deferred revenue,
which is included in the liabilities section of our condensed consolidated
balance sheet. Deferred revenue consists of the unearned portion of customer
billings, which will
                                       30
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be recognized as revenue in accordance with our revenue recognition policy. As
of March 31, 2021, we had deferred revenue of $229.3 million, of which $223.6
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,
                                                       2021           2020
                                                         (in thousands)
Cash provided by operating activities              $   51,650      $  

24,255

Cash provided by (used in) investing activities 90,710 (429,805) Cash provided by financing activities

                   3,030          

2,660



Operating Activities
Our largest source of operating cash is cash collection from sales of
subscriptions to our customers. Our primary uses of cash from operating
activities are for personnel expenses, marketing expenses, hosting expenses and
overhead expenses. We have generated positive cash flows and have supplemented
working capital requirements through net proceeds from the sale of equity and
debt securities.
Cash provided by operating activities for the three months ended March 31, 2021
of $51.7 million was primarily related to our net loss of $13.1 million,
adjusted for non-cash charges of $46.2 million and net cash outflows of $18.5
million provided by changes in our operating assets and liabilities. Non-cash
charges primarily consisted of stock-based compensation, depreciation and
amortization of property and equipment, amortization of acquired intangibles,
amortization of discounts or premiums on marketable securities, non-cash lease
expense, amortization of deferred contract costs, and amortization of issuance
costs related to our 2025 Notes. The main drivers of the changes in operating
assets and liabilities were related to a $21.0 million increase in deferred
revenue, resulting primarily from increased billings for subscriptions, a $9.7
million increase in accrued expenses and other liabilities, a $9.2 million
decrease in accounts receivable, due to increased collections from customers,
and a $0.6 million decrease in other assets. These amounts were partially offset
by a $9.2 million decrease in accounts payable, a $6.7 million increase in
deferred contract costs related to commissions paid on new bookings, and a $6.0
million increase in prepaid expenses and other current assets, primarily driven
by prepaid hosting services.
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, 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.
Investing Activities
Cash provided by investing activities for the three months ended March 31, 2021
was $90.7 million, and was primarily the result of investment in marketable
securities of $150.3 million, a $6.2 million increase in capitalization of
software development costs, a $1.0 million increase in capital expenditures to
purchase property and equipment to support office space and site operations, and
$11.5 million paid for an acquisition. These amounts were partially offset by
proceeds of $253.2 million and $6.5 million from maturities and sales of
marketable securities, respectively.
Cash used in investing activities for the three months ended March 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.
                                       31
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Financing Activities
Cash provided by financing activities for the three months ended March 31, 2021
was $3.0 million and was primarily the result of proceeds from the exercise of
stock options in the amount of $3.3 million. These amounts were partially offset
by $0.2 million of taxes paid in connection with the ESPP.
Cash provided by financing activities for the three months ended March 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.
Non-GAAP Free Cash Flow
We report our financial results in accordance with GAAP. To supplement our
condensed consolidated financial statements, we provide investors with the
amount of free cash flow, which is a non-GAAP financial measure. Free cash flow
represents net cash used in operating activities, reduced by capital
expenditures and capitalized software development costs, if any. Free cash flow
is a measure used by management to understand and evaluate our liquidity and to
generate future operating plans. The reduction of capital expenditures and
amounts capitalized for software development facilitates comparisons of our
liquidity on a period-to-period basis and excludes items that we do not consider
to be indicative of our liquidity. We believe that free cash flow is a measure
of liquidity that provides useful information to our management, board of
directors, investors and others in understanding and evaluating the strength of
our liquidity and future ability to generate cash that can be used for strategic
opportunities or investing in our business. Nevertheless, our use of free cash
flow has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our financial results as reported
under GAAP. Further, our definition of free cash flow may differ from the
definitions used by other companies and therefore comparability 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,
                                                   2021           2020
                                                     (in thousands)

Net cash provided by operating activities $ 51,650 $ 24,255 Less: Purchases of property and equipment

            (998)       (1,526)

Less: Capitalized software development costs (6,183) (3,417) Free cash flow

                                 $   44,469      $ 19,312


Contractual Obligations and Commitments
Our principal commitments consist of obligations under our operating leases,
purchase commitments to our cloud hosting providers and other vendors, and
obligations to pay the 2025 Notes' coupons and principal.
During the three months ended March 31, 2021, other than certain non-cancelable
operating leases described in Note 9, Leases, 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 of March 31, 2021 we did not have any off-balance sheet financing
arrangements or any relationships with unconsolidated entities or financial
partnerships, including entities sometimes referred to as structured finance or
special purpose entities, that were established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.
Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with
GAAP. The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities,
                                       32

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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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