Summary

• Datadog, Inc. is an observability and security platform designed for cloud applications. It is breaking down silos between Development and Operations by constructing a real-time data integration platform aimed at transforming the chaos of uncorrelated data from disparate sources into digestible and actionable insights.
• Datadog platform consists of products that can be used individually or as a unified solution, and includes a Marketplace where customers can access products built by their partners on top of the Datadog platform.
• These sales regions are organized into four primary operational areas: the Americas, Asia-Pacific (APAC), and Europe, the Middle East, and Africa (EMEA) regions.
• Datadog rely on a combination of patent, copyright, trademark and trade secret license agreements, confidentiality procedures, non-disclosure agreements with third parties, and other contractual protections, to protect its intellectual property, including proprietary technology, software, know-how and brand.
• In 2022, the company achieved remarkable growth in sales, with total sales reaching $1,675.10 million. This marked a substantial increase of $646.32 million or 63% compared to the sales figure of $1,028.78 million in 2021.
• The company's gross profit for 2022 amounted to $1,328.36 million, reflecting a significant difference of $533.82 million or 67.2% from the gross profit of $794.54 million in the previous year, 2021.
• The company's operating loss increased in 2022, totaling $58.70 million, which was higher by $39.54 million or 206.6% compared to the operating loss of $19.16 million in 2021.
• The net loss for the year 2022 was $50.16 million, representing an increase of $29.42 million or 141.9% compared to the net loss of $20.74 million in 2021.

Brief Company Overview

Datadog, Inc. (NASDAQ: DDOG) is an observability and security platform designed for cloud applications. It’s Software as a Service (SaaS) platform integrates and automates infrastructure monitoring, application performance monitoring, log management, real-user monitoring, and numerous other capabilities, offering customers a unified, real-time observability and security solution for their technology stack. Datadog's services enable digital transformation and cloud migration, foster collaboration among development, operations, security, and business teams, expedite time-to-market for applications, reduce time-to-problem resolution, fortify applications and infrastructure, analyze user behavior, and track critical business metrics. As of December 31, 2022, Datadog boasted a customer base of approximately 23,200 clients spanning across more than 100 countries.

Datadog is breaking down silos between Development and Operations by constructing a real-time data integration platform aimed at transforming the chaos of uncorrelated data from disparate sources into digestible and actionable insights¹.

Their proprietary platform harnesses the capabilities of metrics, traces, logs, and other data derived from over 600 integrations, delivering a unified perspective on infrastructure, application performance, and the real-time events impacting performance. Designed to be cloud-agnostic and easy to deploy, it offers hundreds of out-of-the-box integrations, an inherent understanding of contemporary technology stacks, and extensive customization options. Customers have the flexibility to deploy this platform across their entire infrastructure, making it an omnipresent and integral part of the daily routines of developers, operations engineers, and business leaders.

As of September 2023, the company had a 52-week share price range of $61.34 to $118.02. The trailing P/E ratio of the company is 1970 times, the price-to-sales ratio (ttm) is 16.38 times, the profit margin is -4.38%, the operating margin is -6.48%, the return on assets (ttm) is -2.58%, the return on equity is -5.80%, and the diluted earnings per share (ttm) is $-0.26. The Company has two classes of common stock, Class A and Class B. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Shares of Class B common stock may be converted into Class A common stock at any time at the option of the stockholder and are automatically converted to Class A common stock upon sale or transfer, subject to certain limited exceptions. During the year ended December 31, 2022, 24,517,506 shares of Class B common stock were converted into Class A common stock. As of December 31, 2022, the Company had authorized 2,000,000,000 shares of Class A common stock and 310,000,000 shares of Class B common stock, each at a par value per share of $0.00001.

Recent Developments

• During the year ended December 31, 2022, the Company entered into four purchase agreements for acquisitions of businesses, each of which were accounted for as business combinations in accordance with ASC 805,Business Combinations. The total purchase price was allocated to intangible assets in the amount of $8.2 million and goodwill in the amount of $56.6 million based on the respective estimated fair values. The resulting goodwill from each of the agreements is not deductible for income tax purposes. Pro forma results of operations from these acquisitions have not been presented because they were not material to the consolidated results of operations.
• During the years ended December 31, 2022, the Company issued 316,875, 291,871 shares of Class A common stock under the Employee Stock Purchase Plan.
• In 2022, Datadog launched Application Security Management to detect attacks on web applications and APIs, Cloud Security Management to provide visibility, threat detection, and configuration audits across the entire cloud infrastructure, Audit Trail to maintain and enforce compliance and governance, Observability Pipelines to collect, transform and route data, Cloud Cost Management to take control of cloud costs, and Universal Service Monitoring to discover and monitor every service².

Financial Performance Highlights

Q2 2023 Highlights

In the second quarter of 2022, the company reported sales of $509.46 million, reflecting a notable increase of $103.27 million or 25.4% compared to the second quarter of 2021, which had sales of $406.19 million. Despite this increase in revenue, the company managed to improve its financial performance during the same period. The net loss for the second quarter of 2022 was $-3.97 million, showing a significant reduction of $0.91 million or 18.6% when compared to the net loss of $-4.88 million in the second quarter of 2021. Furthermore, the company's diluted earnings per share (EPS) for the second quarter of 2022 improved to $-0.01, a positive change of $0.01 or 50% compared to the diluted EPS of $-0.02 in the second quarter of 2021.

Annual Performance Highlights

In 2022, the company achieved remarkable growth in sales, with total sales reaching $1,675.10 million. This marked a substantial increase of $646.32 million or 63% compared to the sales figure of $1,028.78 million in 2021. The company's gross profit for 2022 amounted to $1,328.36 million, reflecting a significant difference of $533.82 million or 67.2% from the gross profit of $794.54 million in the previous year, 2021. Additionally, the company's operating loss increased in 2022, totaling $58.70 million, which was higher by $39.54 million or 206.6% compared to the operating loss of $19.16 million in 2021. The net loss for the year 2022 was $50.16 million, representing an increase of $29.42 million or 141.9% compared to the net loss of $20.74 million in 2021. Moreover, the diluted earnings per share (EPS) for 2022 were reported as $-0.16, which showed a decrease of $-0.09 or 128.6% compared to the diluted EPS of $-0.07 in 2021.

Revenue increased by $646.3 million or 63%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Approximately 75% of the increase in revenue was attributable to growth from existing customers, and the remaining 25% was attributable to growth from new customers.

Gross margin increased by 2% for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily as the result of revenue growth exceeding the growth of third-party cloud infrastructure provider costs due to cost savings.

In 2022, the company reported a net loss of $50.16 million, a significant 141.9% increase from the previous year's net loss of $20.74 million. This sharp rise in losses was primarily attributed to substantial increases in operating costs. The cost of revenue surged by $112.5 million, marking a 48% increase, driven by higher third-party cloud infrastructure and software costs, increased personnel expenses due to a larger workforce, and elevated depreciation and amortization expenses. Research and development expenses also saw a remarkable 79% increase, rising by $332.6 million, primarily due to expanded personnel costs, investments in cloud infrastructure, and higher overhead expenses to support business growth. Sales and marketing expenses rose by $195.8 million, a 65% increase, largely driven by higher personnel costs. These cost escalations played a significant role in the company's increased net loss for the year.

Net cash provided by operating activities for the year ended December 31, 2022 increased $131.9 million compared to the year ended December 31, 2021, primarily driven by an increase in non-cash charges of $218.3 million. The increase in non-cash charges related primarily to an increase of $199.4 million in stock-based compensation as we continued to increase headcount to support the growth of the business. The increase in cash provided by operating activities was partially offset by an increase in accounts receivable of $28.6 million due to an increase in sales, an increase in deferred contract costs of $8.3 million, a decrease in deferred revenue of $7.6 million, and an increase in prepaid expenses and other current assets of$5.8 million. Net cash used in investing activities for the year ended December 31, 2022 increased by $110.9 million compared to the year ended December 31, 2021, primarily driven by an increase in the investment in marketable securities of $288.2 million, a decrease in proceeds from the sale of marketable securities of $65.7 million, and an increase in purchases of property and equipment of $25.3 million. The increase in cash used in investing activities was partially offset by a decrease in cash paid for the acquisition of businesses net of cash acquired of $180.6 million and an increase in proceeds from maturities of marketable securities of $91.2 million. Net cash provided by financing activities for the year ended December 31, 2022 increased by $1.1 million compared to the year ended December 31, 2021, primarily due to an increase in proceeds from the issuance of Class A common stock under the ESPP of $5.7 million and was partially offset by a decrease in proceeds from the exercise of stock options of $4.9 million.

Business Overview

Datadog generate revenue from the sale of subscriptions to customers using its cloud-based platform. This proprietary platform provides real-time insights into software applications and IT infrastructure performance. This Platform consists of products that can be used individually or as a unified solution, and includes a Marketplace where customers can access products built by their partners on top of the Datadog platform. Products include:

1. Infrastructure Monitoring: Provides real-time monitoring of IT infrastructure across various environments, ensuring application performance and availability with automatic correlation of infrastructure data.

2. Application Performance Monitoring (APM): Offers visibility into application health and functionality across different deployment environments, including distributed tracing for deep insights.

3. Log Management: Ingests and indexes data for applications, systems, and cloud platforms, facilitating querying, visualization, and alerting for performance issues.

4. Digital Experience Monitoring: Comprises Synthetics and Real User Monitoring (RUM) to monitor the digital experience of customers through user-experience monitoring and front-end application performance analysis.

5. Continuous Profiler: Measures code-level performance in any environment, enabling quick identification and optimization of resource-consuming parts in application code.

7. Database Monitoring: Allows viewing of query metrics and execution details for all databases, aiding in pinpointing costly and slow queries.

8. Network Monitoring: Analyzes and visualizes network traffic flow in cloud-based or hybrid environments, including monitoring of network hardware.

9. Incident Management: Facilitates incident declaration, investigation, collaboration, and resolution, all within the Datadog platform.

10. Observability Pipelines: Enables efficient collection, transformation, and routing of logs, metrics, and traces from various sources to any destination at scale.

11. Cloud Cost Management: Provides granular visibility into cloud resource costs and helps identify cost inefficiencies.

12. Universal Service Monitoring: Automatically detects and monitors microservices across an organization's environment without code changes.

13. Cloud Security Management: Delivers real-time threat detection, configuration audits, and visibility across cloud infrastructure, promoting collaboration between security and DevOps teams.

14. Application Security Management: Reveals attacks on web applications and APIs by leveraging distributed tracing capabilities to prioritize efforts.

15. Cloud SIEM: Detects threats in real time and investigates security signals across various data sources, enhancing IT security operations.

16. Sensitive Data Scanner: Aids in meeting compliance goals by discovering and protecting sensitive data in real-time at scale.

17. CI Visibility: Provides insights into the health and performance of Continuous Integration environments, allowing developers to troubleshoot issues and improve software delivery.

The terms of subscription agreements are primarily monthly, annual or multi-year, with the majority of revenue coming from annual subscriptions. Their 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 their 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. Datadog’s infrastructure monitoring, APM and network performance monitoring products are priced per host, its 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 Datadog’s platform is made available to a customer. As a result, much of its 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 their revenue in future quarters. 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, it recognize revenue as the product is used, which may lead to fluctuations in revenue and results of operations. In addition, historically, the company experienced seasonality in new customer bookings, as we it enter into a higher percentage of subscription agreements with new customers in the fourth quarter of the year.

Revenue by location is determined based on the billing address of the customer. The revenue breakdown by geographic area for the years ended December 31, 2022, 2021, and 2020 is as follows: North America accounted for $1,200.72 million, while the International segment contributed $474.38 million. No individual country, aside from the United States, represented 10% or more of the total revenue during these years.

Beyond North America, Datadog has established its sales presence internationally, with offices in key locations such as Amsterdam, Dublin, London, Paris, Seoul, Singapore, Sydney, and Tokyo. These sales regions are organized into four primary operational areas: the Americas, Asia-Pacific (APAC), and Europe, the Middle East, and Africa (EMEA) regions.

Other Business Information

Intellectual property rights are important to the success of observability and security platform. Datadog rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements, confidentiality procedures, non-disclosure agreements with third parties, and other contractual protections, to protect its intellectual property, including proprietary technology, software, know-how and brand. It use open source software in their services. Datadog’s API libraries and agent used by customers to send data to its proprietary platform are licensed by it on an open source basis.

As of December 31, 2022, Datadog own twenty-six patents globally, six patent applications pending for examination in the United States, three pending PCT applications, and five pending foreign patent applications. The pending U.S. patent applications, if issued, would be scheduled to expire between 2039 and 2041. Despite many pending patent applications, there can be no assurance that these patent applications will result in issued patents. As of December 31, 2022, Datadog own seven registered trademarks in the United States and one hundred sixteen registered trademarks in various non-U.S. jurisdictions. However, as they have expanded internationally, they have been unable to register or obtain the exclusive right to use the Datadog trademark in certain jurisdictions. It also control access to and use of proprietary technology and other confidential information through the use of internal and external controls, including contractual protections with employees, contractors, customers and partners.

Company History

Datadog was founded in 2010 and was one of the first cloud monitoring solutions. The platform's data collection, monitoring and troubleshooting software tools promote collaborative problem-solving in complex cloud environments. It helps developers and operations teams see their entire infrastructure (i.e., servers, apps, metrics and more) all in one place. According to Olivier, it is like Facebook for DevOps. Datadog's story started more than ten years ago. CEO Olivier Pomel and President Alexis Lê-Quôc, both French natives, worked at Wireless Generation, another SaaS company. Alexis was the Director of Operations while Olivier was running the development team. After Wireless Generation was acquired by NewsCorp, the two set out to create a product that could reduce the friction they experienced between developer and systems administration teams, who were often working at cross-purposes. So the pair put their heads together to figure out a way of reducing friction between their respective teams. They thought that there must be a better way for people to talk to each other, to make software engineering much more of a team sport than it had ever been before. They built Datadog to be a cloud infrastructure monitoring service, with a dashboard, alerting, and visualizations of metrics. As cloud adoption increased, Datadog grew rapidly and expanded its product offering to cover service providers including Amazon Web Services (AWS), Microsoft Azure, Google Cloud Platform, Red Hat OpenShift, VMware, and OpenStack.

Datadog was launched to general availability in 2012, and since then, success has been nothing short of dizzying. Part of this, at least initially, was due to timing and luck, first mover advantage. At the time of the launch, DevOps and cloud migration were two huge trends that Datadog plugged into and that people wanted to know more about. In November 2012, Datadog received its first significant round of funding, a $6.2 million injection that was used to expand its development, sales and marketing operations for its rapidly growing customer base.

By 2015, it had attracted numerous high-profile customers such as Netflix, Spotify and EA. For several years, the company had one product only and was doing just infrastructure monitoring. But through acquisitions, it diversified its offerings and announced the acquisition of Mortar Data, bringing on its team and adding its data and analytics capabilities to Datadog's platform. That year, Datadog also opened a research and development office in Paris.

In 2016, Datadog relocated its New York City headquarters to occupy an entire floor of the New York Times Building in support of its rapidly growing team, which doubled in size over the course of the year. In that same year, Datadog made a significant announcement—the beta release of Application Performance Monitoring, marking the introduction of a comprehensive full-stack monitoring solution. Within its first seven years of operation, Datadog amassed more than 4,000 paying customers worldwide, with annual recurring revenues exceeding $100 million, and a workforce of over 600 employees spanning its global offices. The company also garnered substantial support from venture capitalists, having raised five funding rounds totaling $147.9 million by 2017.

In 2017, Datadog expanded its capabilities through the acquisition of Logmatic.io, a Paris-based platform-agnostic service for querying and visualizing logs, enhancing its ability to monitor and troubleshoot online services. Additionally, two years later, Datadog welcomed Madumbo, an AI-based application testing platform, into its fold. In a parallel development, the company inaugurated a Japanese subsidiary in Tokyo.

The year 2022 proved to be noteworthy for Datadog, marked by the integration of several notable features into its platform. These additions included CoScreen, a video collaboration tool, Seekret³ an API observability company, and Cloudcraft, a visualization service catering to cloud and system architects.

References

1. ^ https://thestrategystory.com/2023/02/03/what-does-datadog-do-how-does-datadog-work-business-model/
2. ^ https://www.datadoghq.com/about/latest-news/press-releases/datadog-launches-application-security-management-to-break-down-silos-between-security-and-operations-teams/
3. ^ https://www.prnewswire.com/news-releases/datadog-acquires-seekret-to-make-api-observability-accessible-301599589.html