Datadog(DDOG) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Datadog's unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures Item 1. Financial Statements Datadog's unaudited condensed consolidated financial statements for Q2 2025 show a 26% revenue increase, decreased net income, and significant cash usage in financing activities Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity as of June 30, 2025, and December 31, 2024 Condensed Consolidated Balance Sheet Highlights (in thousands of USD) | Balance Sheet Item | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $5,822,415 | $5,785,339 | | Cash and cash equivalents | $489,030 | $1,246,983 | | Marketable securities | $3,421,940 | $2,942,076 | | Goodwill | $530,982 | $360,381 | | Total Liabilities | $2,626,658 | $3,070,976 | | Deferred revenue, current | $966,442 | $961,853 | | Convertible senior notes, net | $981,357 | $1,613,305 | | Total Stockholders' Equity | $3,195,757 | $2,714,363 | Condensed Consolidated Statements of Operations This section outlines the company's financial performance, including revenue, gross profit, operating income, and net income for the reported periods Statement of Operations Summary (in thousands of USD, except per share data) | Metric | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $826,760 | $645,279 | $1,588,313 | $1,256,532 | | Gross Profit | $660,782 | $521,780 | $1,264,707 | $1,022,935 | | Operating (Loss) Income | $(35,500) | $12,618 | $(47,920) | $24,614 | | Net Income | $2,647 | $43,824 | $27,289 | $86,455 | | Diluted Net Income Per Share | $0.01 | $0.12 | $0.08 | $0.24 | Condensed Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the reported periods Cash Flow Summary for the Six Months Ended June 30 (in thousands of USD) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $471,596 | $376,694 | | Net cash used in investing activities | $(634,475) | $(320,919) | | Net cash (used in) provided by financing activities | $(603,801) | $26,426 | | Net (Decrease) Increase in Cash | $(757,953) | $80,624 | - Significant cash usage in financing activities in 2025 was primarily due to the $635.5 million repayment of the 2025 Convertible Senior Notes[32] Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, significant acquisitions, convertible note conversions, revenue recognition by geography, and stock-based compensation - In January 2025, the company increased the estimated useful life of capitalized software development costs from two to three years, representing a change in accounting estimate[40] - During Q2 2025, the company completed three business acquisitions for an aggregate purchase price of $178.4 million, resulting in $16.3 million of intangible assets and $164.5 million of goodwill[50] - The remaining $634.1 million of the 0.125% Convertible Senior Notes due 2025 were converted prior to maturity, settled with cash and 1,354,569 shares of Class A common stock[59] - As of June 30, 2025, remaining performance obligations (RPO) were $2.43 billion, up from $2.27 billion at year-end 2024, with substantial recognition expected over the next 24 months[82] Revenue by Geographic Area (in thousands of USD) | Region | Q2 2025 | Q2 2024 | Six Months 2025 | Six Months 2024 | | :--- | :--- | :--- | :--- | :--- | | North America | $586,689 | $448,002 | $1,120,504 | $873,602 | | International | $240,071 | $197,277 | $467,809 | $382,930 | | Total | $826,760 | $645,279 | $1,588,313 | $1,256,532 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses 26% revenue growth driven by existing customers, strong KPI trends, operating loss due to R&D and S&M investments, and robust liquidity despite note repayment Overview and Key Performance Metrics This section provides an overview of the company's business model and key operational metrics, including customer growth and retention rates Key Business Metrics as of June 30 | Metric | 2025 | 2024 | | :--- | :--- | :--- | | Total Customers | ~31,400 | ~28,700 | | Customers with ARR ≥ $100,000 | ~3,850 | 3,390 | | Trailing 12-Month Dollar-Based Net Retention Rate | ~120% | Mid-110%'s | - Product adoption continues to expand, with 52% of customers using four or more products and 29% using six or more products as of June 30, 2025[128] - For the six months ended June 30, 2025, revenue grew 26% year-over-year to $1.59 billion, generating $409.7 million in free cash flow[120] Results of Operations Comparison This section compares the company's financial results for the three and six-month periods ended June 30, 2025, and 2024 Comparison of Three Months Ended June 30, 2025 and 2024 (in thousands of USD) | Item | Q2 2025 | Q2 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $826,760 | $645,279 | $181,481 | 28% | | Gross Profit | $660,782 | $521,780 | $138,902 | 27% | | R&D Expense | $387,482 | $274,599 | $112,883 | 41% | | S&M Expense | $239,026 | $187,005 | $52,021 | 28% | | G&A Expense | $69,774 | $47,558 | $22,216 | 47% | | Operating (Loss) Income | $(35,500) | $12,618 | $(48,118) | N/A | Comparison of Six Months Ended June 30, 2025 and 2024 (in thousands of USD) | Item | H1 2025 | H1 2024 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,588,313 | $1,256,532 | $331,781 | 26% | | Gross Profit | $1,264,707 | $1,022,935 | $241,772 | 24% | | R&D Expense | $728,543 | $544,587 | $183,956 | 34% | | S&M Expense | $453,317 | $360,886 | $92,431 | 26% | | G&A Expense | $130,767 | $92,848 | $37,919 | 41% | | Operating (Loss) Income | $(47,920) | $24,614 | $(72,534) | N/A | - Revenue growth for both periods was driven approximately 80% by existing customers and 20% by new customers[152][162] - The increase in R&D expense was primarily due to higher personnel costs from increased headcount and increased cloud infrastructure-related investments[157][165] Liquidity and Capital Resources This section assesses the company's financial liquidity, capital resources, and ability to meet its short-term and long-term obligations - As of June 30, 2025, the company held $489.0 million in cash and cash equivalents and $3.4 billion in marketable securities, deemed sufficient for future requirements[170] - During the first half of 2025, the company repaid its 2025 Convertible Senior Notes, settling conversions with approximately $634.1 million in cash and issuing 1,354,569 shares of Class A common stock[173] Reconciliation of Net Cash from Operations to Free Cash Flow (in thousands of USD) | Description | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net cash provided by operating activities | $471,596 | $376,694 | | Less: Purchases of property and equipment | $(23,900) | $(18,573) | | Less: Capitalized software development costs | $(37,952) | $(27,594) | | Free cash flow (Non-GAAP) | $409,744 | $330,527 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on investments and foreign currency exchange rates on international operating expenses, with no material impact from a hypothetical 10% change - Primary market risk exposures stem from interest rate fluctuations on $439.5 million in cash equivalents and $3.4 billion in marketable securities, and foreign currency exchange rates on international operating expenses[186][187] - All sales are U.S. dollar-denominated, mitigating revenue currency risk, but operating expenses in France, Ireland, and the UK are subject to foreign exchange risk[188] - The company has not utilized hedging instruments for foreign currency or interest rate risk to date, but may consider them in the future[189] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2025[191] - No material changes to internal control over financial reporting occurred during the quarter[192] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and other relevant information Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - Datadog is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial position[195] Item 1A. Risk Factors This section details various risks, including economic dependency, growth challenges, security breaches, competition, regulatory compliance, and the dual-class stock structure - Key risks include economic downturns affecting IT spending, failure to sustain growth, historical operating losses, and dependence on customer renewals and expansion[197] - Cyber-attacks and security breaches pose a significant threat, potentially harming reputation, reducing demand, and incurring liabilities[197] - The company faces intense competition from diversified technology companies, native cloud provider solutions, and other specialized vendors[200] - The dual-class stock structure concentrates voting power with Class B shareholders, limiting Class A shareholders' influence[200] Strategic and Operational Risks This section outlines risks related to business strategy, customer retention, security, service reliability, and reliance on third-party providers - Business depends on existing customer renewals and expansions; AI-native cohort revenue contributed approximately ten percentage points to Q2 2025 growth but may introduce future usage volatility[210] - The company is vulnerable to security breaches, as evidenced by an April 2025 unauthorized access to source code repositories via compromised employee credentials[222] - Widespread platform outages in March 2023 highlight the risk of interruptions and performance problems, potentially leading to customer loss and legal claims[228] - Reliance on third-party cloud providers means any disruption, capacity limitation, or termination of these services could significantly harm operations[232][233] Legal and Regulatory Risks This section addresses risks arising from evolving data privacy laws, AI-specific regulations, intellectual property disputes, and international trade compliance - The company is subject to stringent and evolving global data privacy laws like GDPR and CCPA, with non-compliance potentially leading to significant fines and reputational harm[262][264][272] - AI product integration introduces new risks concerning intellectual property rights, cybersecurity, and compliance with emerging AI-specific regulations, such as the EU's Artificial Intelligence Act[257][259] - Indemnity provisions in customer agreements expose the company to substantial liability for intellectual property infringement and data protection violations, potentially exceeding insurance coverage[261] - Operations are subject to U.S. and international export controls, sanctions, and anti-corruption laws like the FCPA, with violations leading to severe penalties[276][281][282] Risks Related to Ownership of Our Class A Common Stock This section discusses risks associated with the company's dual-class stock structure, potential impacts of convertible notes, dividend policy, and anti-takeover provisions - The dual-class stock structure concentrates approximately 44% of voting power with Class B stockholders as of June 30, 2025, enabling considerable influence over corporate matters[312] - The conditional conversion feature of the 2029 Notes could adversely affect financial condition if holders convert, potentially requiring cash payments impacting liquidity[330][332] - The company does not intend to pay dividends in the foreseeable future, requiring investors to rely on stock price appreciation for returns[320][321] - Anti-takeover provisions in the company's charter and Delaware law could delay or prevent a change of control and limit the stock's market price[324] Item 2. Unregistered Sales of Equity Securities This section details the issuance of unregistered Class A common stock for acquisitions and the retirement of shares from capped call settlements related to 2025 Notes - In the first half of 2025, Datadog issued 771,355 unregistered shares of Class A common stock for acquisition activities[336] - In June 2025, the company acquired and retired 1,360,738 shares of Class A common stock following capped call settlements related to the matured 2025 Notes[337] Item 5. Other Information This section discloses that several directors and officers adopted or modified Rule 10b5-1 trading plans during Q2 2025 for future securities sales - During Q2 2025, several directors and officers, including the General Counsel, CTO, and directors Amit Agarwal and Shardul Shah, adopted or modified Rule 10b5-1 trading plans for selling company stock[340][341]