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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number: 001-39051
_________________________________________________________
Datadog, Inc.
(Exact Name of Registrant as Specified in its Charter)
_________________________________________________________
Delaware27-2825503
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
620 8th Avenue, 45th Floor
New York,NY10018
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (866) 329-4466
_________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, par value $0.00001 per shareDDOGThe Nasdaq Stock Market LLC
(Nasdaq Global Select Market)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filerSmall reporting company
Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of May 1, 2024, there were 308,455,905 shares of the registrant’s Class A common stock and 26,042,907 shares of the registrant’s Class B common stock, each with a par value of $0.00001 per share, outstanding.







TABLE OF CONTENTS
Page
 
 

1





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q including statements regarding our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
our expectations regarding our revenue, expenses and other operating results;
our ability to acquire new customers and successfully retain existing customers;
our ability to increase usage of our platform and upsell and cross sell additional products;
our ability to achieve or sustain our profitability;
future investments in our business, our anticipated capital expenditures and our estimates regarding our capital requirements;
the costs and success of our sales and marketing efforts, and our ability to promote our brand;
our reliance on key personnel and our ability to identify, recruit and retain skilled personnel;
our ability to effectively manage our growth, including any international expansion;
our ability to protect our intellectual property rights and any costs associated therewith;
our ability to compete effectively with existing competitors and new market entrants;
the growth rates of the markets in which we compete; and
the potential impact of general market, political, economic, and business conditions in our industry, or reductions in information technology spending, on our business, results of operations and financial condition.

You should not rely on forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described under the header “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained herein. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made, and we undertake no obligation to update them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
Unless the context otherwise indicates, references in this report to the terms “Datadog”, “the Company,” “we,” “our” and “us” refer to Datadog, Inc. and its subsidiaries. “Datadog” and other trade names and trademarks of ours appearing in this report are our property. This report contains trade names and trademarks of other companies, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
We may announce material business and financial information to our investors using our investor relations website (www.investors.datadoghq.com). We therefore encourage investors and others interested in Datadog to review the information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, or the SEC, webcasts, press releases and conference calls.
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PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATADOG, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31,
2024
December 31,
2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$282,218 $330,339 
Marketable securities2,499,151 2,252,559 
Accounts receivable, net of allowance for credit losses of $12,362 and $12,096 as of March 31, 2024 and December 31, 2023, respectively
451,057 509,279 
Deferred contract costs, current46,391 44,938 
Prepaid expenses and other current assets54,846 41,022 
Total current assets3,333,663 3,178,137 
Property and equipment, net182,419 171,872 
Operating lease assets173,270 126,562 
Goodwill351,437 352,694 
Intangible assets, net7,312 9,617 
Deferred contract costs, non-current73,067 73,728 
Other assets20,298 23,462 
TOTAL ASSETS$4,141,466 $3,936,072 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable$64,316 $87,712 
Accrued expenses and other current liabilities117,412 127,631 
Operating lease liabilities, current23,591 21,974 
Deferred revenue, current767,474 765,735 
Total current liabilities972,793 1,003,052 
Operating lease liabilities, non-current190,891 138,128 
Convertible senior notes, net743,085 742,235 
Deferred revenue, non-current26,191 21,210 
Other liabilities6,151 6,093 
Total liabilities1,939,111 1,910,718 
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Class A common stock, $0.00001 par value per share; 2,000,000,000 shares authorized as of March 31, 2024 and December 31, 2023; 308,019,729 and 305,395,175 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
3 3 
Class B common stock, $0.00001 par value per share; 310,000,000 shares authorized as of March 31, 2024 and December 31, 2023; 25,945,861 and 25,684,571 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
  
Additional paid-in capital2,321,119 2,181,267 
Accumulated other comprehensive loss(7,700)(2,218)
Accumulated deficit(111,067)(153,698)
Total stockholders’ equity2,202,355 2,025,354 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$4,141,466 $3,936,072 
See accompanying notes to condensed consolidated financial statements.
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DATADOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
20242023
Revenue$611,253 $481,714 
Cost of revenue110,098 99,914 
Gross profit501,155 381,800 
Operating expenses:
Research and development269,988 229,478 
Sales and marketing173,881 144,971 
General and administrative45,290 42,321 
Total operating expenses489,159 416,770 
Operating income (loss)11,996 (34,970)
Other income (loss):
Interest expense(1,374)(2,181)
Interest income and other income, net35,563 16,727 
Other income, net34,189 14,546 
Income (loss) before provision for income taxes46,185 (20,424)
Provision for income taxes3,554 3,662 
Net income (loss)$42,631 $(24,086)
Net income (loss) attributable to common stockholders$42,631 $(24,086)
Basic net income (loss) per share$0.13 $(0.08)
Diluted net income (loss) per share$0.12 $(0.08)
Weighted average shares used in calculating basic net income (loss) per share:331,806 319,286 
Weighted average shares used in calculating diluted net income (loss) per share:355,979 319,286 
See accompanying notes to condensed consolidated financial statements.
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DATADOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended
March 31,
20242023
Net income (loss)$42,631 $(24,086)
Other comprehensive (loss) income:
Foreign currency translation adjustments(2,264)641 
Unrealized gain (loss) on available-for-sale marketable securities(3,218)6,008 
Other comprehensive (loss) income(5,482)6,649 
Comprehensive income (loss)$37,149 $(17,437)
See accompanying notes to condensed consolidated financial statements.
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DATADOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
(unaudited)

Class A and Class B
Common Stock
Additional
Paid-in
Capital
Accumulated Other Comprehensive LossAccumulated
Deficit
Total
Stockholders'
Equity (Deficit)
SharesAmount
BALANCE—December 31, 2023331,079,746 $3 $2,181,267 $(2,218)$(153,698)$2,025,354 
Issuance of common stock upon exercise of stock options1,340,644 — 2,173 — — 2,173 
Vesting of restricted and performance stock units1,545,200 — — — — — 
Stock-based compensation— — 137,679 — — 137,679 
Change in accumulated other comprehensive loss— — — (5,482)— (5,482)
Net income— — — — 42,631 42,631 
BALANCE—March 31, 2024333,965,590 $3 $2,321,119 $(7,700)$(111,067)$2,202,355 

Class A and Class B
Common Stock
Additional
Paid-in
Capital
Accumulated Other Comprehensive (Loss) Income
Accumulated
Deficit
Total
Stockholders'
Equity (Deficit)
SharesAmount
BALANCE—December 31, 2022319,189,843 $3 $1,625,190 $(12,422)$(202,266)$1,410,505 
Issuance of common stock upon exercise of stock options1,208,185 — 2,076 — — 2,076 
Vesting of restricted and performance stock units1,048,215 — — — — — 
Stock-based compensation— — 116,955 — — 116,955 
Change in accumulated other comprehensive (loss) income
— — — 6,649 — 6,649 
Net loss— — — — (24,086)(24,086)
BALANCE—March 31, 2023321,446,243 $3 $1,744,221 $(5,773)$(226,352)$1,512,099 

See accompanying notes to condensed consolidated financial statements
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DATADOG, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20242023
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income (loss)$42,631 $(24,086)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization12,895 10,275 
Accretion of discounts on marketable securities(14,126)(5,195)
Amortization of issuance costs850 845 
Amortization of deferred contract costs11,844 8,648 
Stock-based compensation, net of amounts capitalized135,033 112,728 
Non-cash lease expense6,810 5,944 
Allowance for credit losses on accounts receivable2,732 3,732 
Loss on disposal of property and equipment43 88 
Changes in operating assets and liabilities:
Accounts receivable, net55,490 28,773 
Deferred contract costs(12,636)(11,750)
Prepaid expenses and other current assets(14,075)(15,810)
Other assets2,614 164 
Accounts payable(17,122)18,545 
Accrued expenses and other liabilities(7,433)(28,080)
Deferred revenue6,720 28,966 
Net cash provided by operating activities212,270 133,787 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities(637,351)(757,787)
Maturities of marketable securities401,666 497,648 
Proceeds from sale of marketable securities 21,341 
Purchases of property and equipment(14,158)(8,739)
Capitalized software development costs(11,365)(8,711)
Net cash used in investing activities(261,208)(256,248)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options2,191 2,098 
Net cash provided by financing activities2,191 2,098 
Effect of exchange rate changes on cash, cash equivalents and restricted cash(1,374)623 
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH(48,121)(119,740)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period330,339 342,288 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period$282,218 $222,548 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes$4,647 $3,022 
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued property and equipment purchases$813 $304 
Stock-based compensation included in capitalized software development costs$2,646 $4,227 
RECONCILIATION OF CASH AND CASH EQUIVALENTS WITHIN THE CONDENSED CONSOLIDATED BALANCE SHEETS TO THE AMOUNTS SHOWN IN THE STATEMENTS OF CASH FLOWS ABOVE:
Cash and cash equivalents$282,218 $222,548 
Total cash and cash equivalents
$282,218 $222,548 
See accompanying notes to condensed consolidated financial statements.
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DATADOG, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
Description of Business
Datadog, Inc. (“Datadog” or the “Company”) was incorporated in the State of Delaware on June 4, 2010. The Company is the observability and security platform for cloud applications. The Company’s SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, user experience monitoring, cloud security, and many other capabilities to provide unified, real-time observability and security of its customers’ entire technology stack. The Company is headquartered in New York City and has various other global office locations.
2. Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Condensed Consolidated Financial Information
The unaudited condensed consolidated financial statements include the accounts of Datadog, Inc. and its wholly-owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and following the requirements of the SEC for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2024 or for any other interim period or for any other future year. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, as filed with the SEC on February 23, 2024 (the “Annual Report”).
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Datadog, Inc. and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates include the fair value of marketable securities, the allowance for credit losses, the fair value of acquired assets and assumed liabilities from business combinations, useful lives of property, equipment, software and finite lived intangibles, stock-based compensation, valuation of long-lived assets and their recoverability, including goodwill, the incremental borrowing rate for operating leases, estimated expected period of benefit for deferred contract costs, fair value of the liability component of the convertible debt, realization of deferred tax assets and uncertain tax positions, revenue recognition and the allocation of overhead costs between cost of revenue and operating expenses. The Company bases its estimates on historical experience and also on assumptions that management considers reasonable. The Company assesses these estimates on a regular basis; however, actual results could materially differ from these estimates.
Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU No. 2023-07), which intends to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The amendments in this ASU should be applied retrospectively to all prior
8





periods presented in the financial statements. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU No. 2023-09), which intends to increase the transparency of income tax disclosures, particularly the rate reconciliation table and disclosures about income taxes paid. For public business entities, it is effective for annual periods beginning after December 15, 2024, and interim periods beginning after December 15, 2025, with early adoption permitted. The Company has not early adopted ASU No. 2023-09 as of March 31, 2024 and is evaluating its impact.

3. Marketable Securities
The following is a summary of available-for-sale marketable securities, excluding those securities classified within cash and cash equivalents on the condensed consolidated balance sheets as of March 31, 2024 and December 31, 2023 (in thousands):
March 31, 2024
Amortized
Cost
Unrealized
Gain
Unrealized
Losses
Fair
Value
Corporate debt securities$1,320,167 $424 $(2,176)$1,318,415 
U.S. government treasury securities459,310  (2,291)457,019 
Commercial paper439,956 119 (119)439,956 
Certificates of deposit187,728 194 (9)187,913 
U.S. government agency securities96,134  (286)95,848 
Marketable securities$2,503,295 $737 $(4,881)$2,499,151 

December 31, 2023
Amortized
Cost
Unrealized
Gain
Unrealized
Losses
Fair
Value
Corporate debt securities$776,323 $770 $(1,140)$775,953 
Commercial paper605,291 570 (75)605,786 
U.S. government treasury securities460,854 390 (1,399)459,845 
Certificates of deposit264,405 335 (15)264,725 
U.S. government agency securities146,611  (361)146,250 
Marketable securities$2,253,484 $2,065 $(2,990)$2,252,559 
As of March 31, 2024, the fair values of available-for-sale marketable securities, by remaining contractual maturity, were as follows (in thousands):
Due within one year$1,652,826 
Due in one year through five years846,325 
Total$2,499,151 
The Company does not believe that any unrealized losses are attributable to credit-related factors based on its evaluation of available evidence. To determine whether a decline in value is related to credit loss, the Company evaluates, among other factors: the extent to which the fair value is less than the amortized cost basis, changes to the rating of the security by a rating agency and any adverse conditions specifically related to an issuer of a security or its industry. Unrealized gains and losses on marketable securities are presented net of tax.
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4. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities that have been measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
Fair Value Measurement as of March 31, 2024
Level 1Level 2Level 3Total
Financial Assets:
Cash equivalents:
Money market funds$268,229 $ $ $268,229 
Marketable Securities:
Corporate debt securities 1,318,415  1,318,415 
Commercial paper 439,956  439,956 
Certificates of deposit 187,913  187,913 
U.S. government treasury securities 457,019  457,019 
U.S. government agency securities 95,848  95,848 
Total financial assets$268,229 $2,499,151 $ $2,767,380 
Fair Value Measurement as of December 31, 2023
Level 1Level 2Level 3Total
Financial Assets:
Cash equivalents:
Money market funds$240,909 $ $ $240,909 
Corporate debt securities 484  484 
     U.S. government treasury securities
 53,972  53,972 
Marketable Securities:
Corporate debt securities 775,953  775,953 
Commercial paper 605,786  605,786 
Certificates of deposit 264,725  264,725 
U.S. government treasury securities 459,845  459,845 
U.S. government agency securities 146,250  146,250 
Total financial assets$240,909 $2,307,015 $ $2,547,924 
The Company classifies its highly liquid money market funds and securities purchased within three months of maturity within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The Company classifies its commercial paper, corporate debt securities, certificates of deposit, U.S. government agency securities, and U.S. government treasury securities within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market, including readily available pricing sources for the identical underlying security which may not be actively traded.
In addition to its cash equivalents and marketable securities, the Company measures the fair value of its outstanding convertible senior notes on a quarterly basis for disclosure purposes. The Company considers the fair value of the convertible senior notes to be a Level 2 measurement due to limited trading activity of the convertible senior notes. Refer to Note 7, Convertible Senior Notes, to the condensed consolidated financial statements for further details.
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5. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
March 31,
2024
December 31,
2023
Computers and equipment$36,844 $35,736 
Furniture and fixtures19,049 17,202 
Leasehold improvements59,035 55,111 
Capitalized software development costs210,363 192,691 
Total property and equipment$325,291 $300,740 
Less: accumulated depreciation and amortization(142,872)(128,868)
Total property and equipment, net$182,419 $171,872 
The Company capitalizes costs related to the development of computer software for internal use and is included in capitalized software development costs within property and equipment, net.
Depreciation and amortization expense was approximately $10.7 million and $8.1 million for the three months ended March 31, 2024 and 2023, respectively.
6. Acquisitions, Intangible Assets and Goodwill
2023 Acquisitions
During the year ended December 31, 2023, the Company entered into three purchase agreements for acquisitions of businesses, each of which were accounted for as business combinations in accordance with ASC 805, Business Combinations. The Company does not consider these acquisitions to be material, individually or in aggregate. The total purchase price was allocated to intangible assets in the amount of $2.1 million and goodwill in the amount of $3.5 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.
Intangible Assets
Intangible assets, net consisted of the following (in thousands):
March 31, 2024
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortization
Period
Developed technology$24,995 $(18,528)$6,467 3 Years
Customer relationships3,300 (2,455)845 4 Years
Total$28,295 $(20,983)$7,312 
December 31, 2023
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortization
Period
Developed technology$24,995 $(16,428)$8,567 3 years
Customer relationships3,300 (2,250)1,050 4 years
Total$28,295 $(18,678)$9,617 
Intangible amortization expense was approximately $2.2 million for each of the three months ended March 31, 2024 and 2023.
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As of March 31, 2024, future amortization expense by year is expected to be as follows (in thousands):
 Amount
Remainder of 2024$4,214 
20252,572 
2026526 
Total$7,312 
Goodwill
The changes in the carrying amount of goodwill were as follows (in thousands):
Amount
Balance as of December 31, 2023$352,694 
Foreign currency translation adjustments(1,257)
Balance as of March 31, 2024$351,437 
7. Convertible Senior Notes
On June 2, 2020, the Company issued $747.5 million aggregate principal amount of 0.125% convertible senior notes due 2025 (the “2025 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (“Securities Act”). The total net proceeds from the sale of the 2025 Notes, after deducting the initial purchasers’ discounts and debt issuance costs, were approximately $730.2 million. The 2025 Notes bear interest at a rate of 0.125% per year, payable semiannually in arrears on June 15 and December 15 of each year, beginning on December 15, 2020. The 2025 Notes will mature on June 15, 2025, unless earlier converted, redeemed or repurchased.
Holders may convert their notes at their option at any time prior to the close of business on the business day immediately preceding March 15, 2025 only under the following circumstances:
(1)during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
(2)during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2025 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s Class A common stock and the conversion rate on each such trading day;
(3)if the Company calls such 2025 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or
(4)upon the occurrence of specified corporate events, as set forth in the indenture governing the 2025 Notes (“the Indenture”).
On or after March 15, 2025 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances. The conversion rate for the 2025 Notes is initially 10.8338 shares of Class A common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of approximately $92.30 per share of Class A common stock), subject to adjustment as set forth in the Indenture. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company’s election. If the Company satisfies its conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of Class A common stock, the amount of cash and shares of Class A common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 30 trading day observation period as described in the Indenture. In addition, if specific corporate events occur prior to the applicable maturity date, or if the Company elects to redeem the 2025 Notes, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event or redemption in certain circumstances.
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During the three months ended March 31, 2024, the conditional conversion feature of the 2025 Notes was triggered as the last reported sale price of the Company's Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the quarter ended March 31, 2024 was greater than or equal to 130% of the conversion price on each applicable trading day. Therefore the 2025 Notes are convertible, in whole or in part, at the option of the holders between April 1, 2024 through June 30, 2024. Whether the 2025 Notes will be convertible following such period will depend on the continued satisfaction of this condition or another conversion condition in the future.
When a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof. Since the issuance of the 2025 Notes, the Company received and settled an immaterial amount of conversion notices from the holders in cash. As of March 31, 2024, the 2025 Notes were classified as long-term debt on the Company's condensed consolidated balance sheet.
The Company may redeem for cash all or any portion of the 2025 Notes prior to the 31st scheduled trading day immediately preceding the maturity date, at its option, if the last reported sale price of its Class A common stock was at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides a notice of redemption at a redemption price equal to 100% of the principal amount of the 2025 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
In accounting for the issuance of the 2025 Notes, the 2025 Notes were separated into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the respective 2025 Notes. This difference represents the debt discount that is amortized to interest expense over the contractual terms of the 2025 Notes using the effective interest rate method. The carrying amount of the equity component representing the conversion option was $177.2 million. The equity component was recorded in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the debt issuance costs of $17.3 million related to the 2025 Notes, the Company allocated the total amount incurred to the liability and equity components of the 2025 Notes in the same proportion as the allocation of the proceeds. Issuance costs attributable to the liability component were $13.2 million and will be amortized, along with the debt discount to interest expense over the contractual term of the 2025 Notes at an effective interest rate of 5.97%. Issuance costs attributable to the equity component were $4.1 million and are netted against the equity component in additional paid-in capital.
On January 1, 2021 the Company adopted ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU No. 2020-06”). As a result of the adoption, the debt conversion option of $177.2 million and debt issuance costs of $4.1 million previously attributable to the equity component are no longer presented in equity. Similarly, the debt discount, that is equal to the carrying value of the embedded conversion feature upon issuance, is no longer amortized into income as interest expense over the life of the instrument. This resulted in a $16.8 million decrease to the opening balance of accumulated deficit, a $173.1 million decrease to the opening balance of additional paid-in capital and a $156.3 million increase to the opening balance of convertible senior notes, net on the condensed consolidated balance sheet.
The net carrying amount of the liability component of the 2025 Notes was as follows (in thousands):
March 31,
2024
December 31,
2023
Convertible senior notes, net:
Principal$747,496 $747,496 
Unamortized debt issuance costs(4,411)(5,261)
Net carrying amount$743,085 $742,235 
As of March 31, 2024, the total estimated fair value of the 2025 Notes was approximately $1,055.1 million. The fair value was determined based on the closing trading price or quoted market price per $100 of the 2025 Notes as of the last day of trading for the period. The fair value of the 2025 Notes is primarily affected by the trading price of the Company’s Class A common stock and market interest rates.
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The following table sets forth the interest expense related to the 2025 Notes for the three months ended March 31, 2024 and 2023 (in thousands):
Three Months Ended
March 31,
20242023
Contractual interest expense$234 $234 
Amortization of issuance costs850 845 
Total$1,084 $1,079 
Capped Calls
In connection with the pricing of the 2025 Notes, the Company entered into privately negotiated capped call transactions with certain counterparties (“Capped Calls”). The Capped Calls each have an initial strike price of approximately $92.30 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2025 Notes. The Capped Calls have initial cap prices of $151.04 per share, subject to certain adjustments. The Capped Calls are expected to partially offset the potential dilution to the Company’s Class A common stock upon any conversion of the 2025 Notes, with such offset subject to a cap based on the cap price. The Capped Calls cover, subject to anti-dilution adjustments, approximately 8.1 million shares of the Company’s Class A common stock. For accounting purposes, the Capped Calls are separate transactions, and not part of the 2025 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $89.6 million incurred to purchase the Capped Calls was recorded as a reduction to additional paid-in capital and will not be remeasured.
8. Commitments and Contingencies
Non-cancelable Material Commitments—During the three months ended March 31, 2024, other than certain non-cancelable operating leases described in Note 9, Leases, there have been no other material changes outside the ordinary course of business to the Company’s contractual obligations and commitments from those disclosed in the Annual Report.
401(k) Plan—The Company sponsors a 401(k) defined contribution plan covering all eligible U.S. employees. The Company is responsible for administrative costs of the 401(k) plan and makes matching contributions to the 401(k) plan. For the three months ended March 31, 2024 and 2023, the Company incurred expense of $1.8 million and $1.4 million, respectively, for matching contributions.
Legal Matters—The Company is involved from time to time in various claims and legal actions arising in the ordinary course of business. While it is not feasible to predict or determine the ultimate outcome of these matters, the Company believes that none of its current legal proceedings will have a material adverse effect on its financial position or results of operations.
Indemnification—The Company enters into indemnification provisions under some agreements with other parties in the ordinary course of business, including business partners, investors, contractors, customers and the Company’s officers, directors and certain employees. The Company has agreed to indemnify and defend the indemnified party claims and related losses suffered or incurred by the indemnified party from actual or threatened third-party claim because of the Company’s activities or non-compliance with certain representations and warranties made by the Company. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in the Company’s condensed consolidated statements of operations in connection with the indemnification provisions have not been material.
9. Leases
The Company has entered into various non-cancelable operating leases for its facilities expiring between 2024 and 2033. Certain lease agreements contain an option for the Company to renew a lease for a term of up to three years or an option to terminate a lease early within one year. The Company considers these options, which may be elected at the Company’s sole discretion, in determining the lease term on a lease-by-lease basis.
Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.
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The components of lease cost recognized within the Company’s condensed consolidated statements of operations were as follows (in thousands):
Three Months Ended
March 31,
20242023
Operating lease cost (1)
$10,530 $7,380 
Short-term lease cost1,315 2,519 
1)Includes non-cash lease expense of $6.8 million and $5.9 million for the three months ended March 31, 2024 and 2023, respectively.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands):
Three Months Ended
March 31,
20242023
Cash paid for amounts included in measurement of lease liabilities$2,284 $6,552 
Operating lease assets obtained in exchange for new lease liabilities55,042 12,539 
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):
 Amount
Remainder of 2024$15,129 
202540,865 
202640,106 
202736,849 
202833,775 
2029 and beyond117,938 
Total lease payments$284,662 
Less: imputed interest(70,180)
Present value of lease liabilities$214,482 
As of March 31, 2024, the Company had various operating leases that had not yet commenced, which are excluded from the table above. The operating leases will commence in fiscal year 2025 with total undiscounted future payments of $58.0 million and a weighted-average lease term of 8.5 years.
Weighted average remaining lease term and discount rate for the Company’s operating leases are as follows:
March 31,
2024
Weighted-average remaining lease term (years)7.3
Weighted-average discount rate6.44 %
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10. Revenue
Geographical Information
Revenue by location is determined by the billing address of the customer. The following table sets forth revenue by geographic area (in thousands):
Three Months Ended
March 31,
20242023
North America (1)
$425,600 $341,216 
International185,653 140,498 
Total$611,253 $481,714 
1)Includes revenue from the United States of $404.5 million and $323.5 million for the three months ended March 31, 2024 and 2023, respectively.
Deferred Revenue and Remaining Performance Obligations
Certain of the Company’s customers pay in advance of satisfaction of performance obligations and other customers with monthly contract terms are billed in arrears on a monthly basis. The Company records contract liabilities to deferred revenue when customers are billed or when the Company receives customer payments in advance of the performance obligations being satisfied on the Company’s contracts.
Revenue recognized during the three months ended March 31, 2024 and 2023, which was included in the deferred revenue balances at the beginning of each such period, was $346.8 million and $245.3 million, respectively.
Remaining performance obligations represent the aggregate amount of the transaction price in contracts allocated to performance obligations not delivered, or partially undelivered, as of the end of the reporting period. Remaining performance obligations include unearned revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period. As of March 31, 2024 and December 31, 2023, the aggregate transaction price allocated to remaining performance obligations was $1,731.5 million and $1,839.4 million, respectively. There is uncertainty in the timing of revenues associated with the Company’s drawdown contracts, as future revenue can often vary significantly from past revenue. However, the Company expects to recognize substantially all of the remaining performance obligations over the next 24 months.
Accounts Receivable
Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified. During the three months ended March 31, 2024 and 2023, the Company charged $2.6 million and $1.3 million, respectively, of accounts receivable deemed uncollectible against the allowance for credit losses.
Unbilled accounts receivable represents revenue recognized on contracts for which billings have not yet been presented to customers because the amounts were earned but not contractually billable as of the balance sheet date. The unbilled accounts receivable balance is due within one year. As of March 31, 2024 and December 31, 2023, unbilled accounts receivable of approximately $75.5 million and $61.2 million, respectively, was included in accounts receivable on the Company’s condensed consolidated balance sheets.
Deferred Contract Costs
Sales commissions earned by the Company’s sales force are considered incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit, which is determined to be four years. Amounts expected to be recognized within one year of the balance sheet date are recorded as deferred contract costs, current; the remaining portion is recorded as deferred contract costs, non-current, in the condensed consolidated balance sheets.
Deferred contract costs on the Company’s condensed consolidated balance sheets were $119.5 million and $118.7 million as of March 31, 2024 and December 31, 2023, respectively. Amortization expense was $11.8 million and $8.6 million for the three months ended March 31, 2024 and 2023, respectively.
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11.Stockholders’ Equity
Class A and Class B Common Stock
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 three months ended March 31, 2024, 220,174 shares of Class B common stock were converted into Class A common stock.
As of March 31, 2024, 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, of which 308,019,729 shares of Class A common stock and 25,945,861 shares of Class B common stock were issued and outstanding.
Equity Incentive Plans
The Company has two equity incentive plans, the 2012 Equity Incentive Plan (the “2012 Plan”) and the 2019 Equity Incentive Plan (the “2019 Plan”). In connection with the Company’s initial public offering of Class A common stock (the “IPO”), the Company ceased granting awards under the 2012 Plan, and all shares that remained available for issuance under the 2012 Plan at that time were transferred to the 2019 Plan. Additionally, as of March 31, 2024, there were 10,716,958 shares of Class A common stock issuable upon conversion of Class B common stock underlying options outstanding under the 2012 Plan. Under the 2019 Plan, the Board and any other committee or subcommittee of the Board may grant stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and performance stock units (“PSUs”) and other awards, each equity award valued or based on the Company’s Class A common stock, to employees, directors, consultants and advisors of the Company. As of March 31, 2024, there were 88,787,760 shares available for grant under the 2019 Plan.  
Stock Options
The following table summarizes the Company’s stock option activity and weighted-average exercise prices:
Number Of
Options
Outstanding
Weighted-
Average
Exercise Price
Weighted-
Average
Remaining
Contractual
Life (in Years)
Aggregate
Intrinsic Value
(in thousands)
Balance outstanding—December 31, 202312,077,635 $3.24 3.4$1,426,912 
Options granted  
Options exercised(1,340,644)1.62 
Options forfeited or expired(63)1.27 
Balance outstanding—March 31, 202410,736,928 $3.44 3.3$1,290,186 
Ending Exercisable—March 31, 2024
10,734,508 $3.43 3.3$1,289,952 
As of March 31, 2024, there were 19,970 shares of Class A common stock and 10,716,958 shares of Class B common stock issuable upon the exercise of options outstanding. As of December 31, 2023, there were 22,926 shares of Class A common stock and 12,054,709 shares of Class B common stock issuable upon the exercise of options outstanding.
Approximately all compensation cost related to unvested awards was recognized as of March 31, 2024 and December 31, 2023. The weighted-average period over which this compensation cost related to unvested employee awards will be recognized is 0.7 years and 1.0 year as of March 31, 2024 and December 31, 2023, respectively.
There were no options granted during the three months ended March 31, 2024 and 2023. The Company received approximately $2.2 million and $2.1 million in cash proceeds from options exercised during the three months ended March 31, 2024 and 2023, respectively. The intrinsic value of options exercised during the three months ended March 31, 2024 and 2023 was approximately $164.7 million and $86.3 million, respectively. The aggregate fair value of options vested during the three
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months ended March 31, 2024 was insignificant. The aggregate fair value of option vested during the three months ended March 31, 2023 was $5.0 million.
Restricted Stock Units, Restricted Stock and Performance Stock Units
The following table summarizes the activity for the Company’s unvested RSUs and PSUs:
SharesWeighted-
Average Grant Date
Fair Value
Balance—December 31, 202313,663,501 $99.13 
Awarded1,362,439 123.77 
Vested(1,545,200)87.65 
Forfeited/canceled(406,489)100.22 
Balance—March 31, 202413,074,251 $103.02 
The Company granted no restricted shares of Class A common stock in connection with acquisitions, as the Company did not complete any acquisitions during the three months ended March 31, 2024.
Total compensation cost related to unvested RSUs and restricted shares of common stock not yet recognized was approximately $1,193.8 million and $1,187.3 million as of March 31, 2024 and December 31, 2023, respectively. The weighted-average period over which this compensation cost related to unvested RSUs and restricted shares of common stock will be recognized is 2.7 years and 2.8 years as of March 31, 2024 and December 31, 2023, respectively.
Total compensation cost related to unvested PSUs not yet recognized was approximately $18.3 million and $25.1 million as of March 31, 2024 and December 31, 2023, respectively. The weighted-average period over which this compensation cost related to unvested PSUs will be recognized is 1.4 years and 1.3 years as of March 31, 2024 and December 31, 2023, respectively.
Employee Stock Purchase Plan
In September 2019, the Board adopted and approved the 2019 Employee Stock Purchase Plan (the “ESPP”).
The ESPP is implemented through a series of offerings under which eligible employees are granted purchase rights to purchase shares of the Company’s Class A common stock on specified dates during such offerings. Under the ESPP, the Company may specify offerings with durations of not more than 27 months and may specify shorter purchase periods within each offering. Historically offering periods have been approximately 6 months. On each purchase date, eligible employees will purchase the shares at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s Class A common stock on the first trading day of the offering period, or (2) the fair market value of the Company’s Class A common stock on the purchase date, as defined in the ESPP.
The Company recognized $4.3 million of stock-based compensation expense related to the ESPP during the three months ended March 31, 2024. As of March 31, 2024, $17.9 million has been withheld on behalf of employees for a future purchase under the ESPP due to the timing of payroll deductions. There were no purchases related to the ESPP in the three months ended March 31, 2024. As of March 31, 2024, 20,791,856 shares of Class A common stock remain available for grant under the ESPP.
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Stock-Based Compensation
The Company recognizes and measures compensation expense for all stock-based payment awards granted to employees, directors and nonemployees, including stock options, restricted stock units (“RSUs”), performance-based awards (“PSUs”), and the employee stock purchase plan (the “ESPP”) based on the fair value of the awards on the date of grant. The determination of the grant date fair value using an option-pricing model is affected by the estimated fair value of the Company’s common stock as well as assumptions regarding a number of other complex and subjective variables. These variables include expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends. The fair value of RSUs and PSUs is determined by the closing price on the date of grant of the Company’s Class A common stock, as reported on the Nasdaq Global Select Market. The Company estimates the fair value of the rights to acquire stock under the ESPP using the Black-Scholes option-pricing model. Stock-based compensation for stock options and RSUs is recognized on a straight-line basis over the requisite service period and account for forfeitures as they occur. Stock-based compensation for PSUs is amortized under the accelerated attribution method and may be adjusted over the vesting period based on interim estimates of performance against pre-set objectives. PSUs will vest upon achievement of specified performance targets and subject to continuous service through the applicable vesting dates. The compensation cost is recognized over the requisite service period when it is probable that the performance condition will be satisfied and the Company accounts for forfeitures as they occur.
The Company also has certain options that have performance-based vesting conditions; stock-based compensation expense for such awards is recognized on a straight-line basis from the time the vesting condition is likely to be met through the time the vesting condition has been achieved.
Stock-based compensation expense was included in the condensed consolidated statement of operations as follows (in thousands):
Three Months Ended
March 31,
20242023
Cost of revenue$5,527 $3,725 
Research and development88,413 74,703 
Sales and marketing28,531 23,014 
General and administrative12,562 11,286 
Stock-based compensation, net of amounts capitalized135,033 112,728 
Capitalized stock-based compensation expense2,646 4,227 
Total stock-based compensation expense$137,679 $116,955 
12.Interest Income and Other Income, Net
Interest income and other income, net consist of the following (in thousands):
 Three Months Ended
March 31,
 20242023
Interest income$35,435 $18,520 
Other income (loss), net128 (1,793)
Interest income and other income, net$35,563 $16,727 
13.Income Taxes
The Company recorded a provision for income taxes of $3.6 million and $3.7 million for the three months ended March 31, 2024 and 2023, respectively. The Company has generated U.S. operating income and has minimal profits in its foreign jurisdictions during the quarter.
The Company has applied ASC 740, Income Taxes, and has determined that it has uncertain positions that would result in a tax reserve deemed immaterial for each of the three months ended March 31, 2024 and 2023. The Company’s policy is to recognize interest and penalties related to uncertain tax positions in income tax expense. The Company is subject to U.S. federal tax authority, U.S. state tax authority and foreign tax authority examinations.
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The Company has evaluated the available evidence supporting the realization of its deferred tax assets, including the amount and timing of future taxable income, and has determined that it is more likely than not that its net deferred tax assets will not be realized in the United States. Due to uncertainties surrounding the realization of the deferred tax assets, the Company recorded a full valuation allowance against substantially all of its net deferred tax assets. When the Company determines that it will be able to realize some portion or all of its deferred tax assets, an adjustment to its valuation allowance on its deferred tax assets would have the effect of increasing net income in the period such determination is made.
On August 16, 2022, the Inflation Reduction Act (“the Act”) was signed into law. The Act includes a 15.0% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations and a 1.0% excise tax on all corporate stock buybacks of public companies for tax years beginning after December 31, 2022. For the three months ended March 31, 2024, the Act did not materially impact the Company’s provision for income tax. The Company will continue to monitor any changes in tax law.
14.Net Income (Loss) Per Share
Basic and diluted net income (loss) per common share is presented in conformity with the two-class method required for participating securities. Basic and diluted net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding during the period. The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common stock as if the earnings for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as the conversion of Class B common stock is assumed in the computation of the diluted net income (loss) per share of Class A common stock, the undistributed earnings are equal to net income (loss) for that computation.
The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended
March 31,
20242023
Basic net income (loss) per share:Class AClass BClass AClass B
Numerator:
Net income (loss)$39,306 $3,325 $(22,157)$(1,929)
Denominator:
Weighted-average shares used in calculating net income (loss) per share, basic
305,927 25,879 293,712 25,574 
Basic net income (loss) per share$0.13 $0.13 $(0.08)$(0.08)
Diluted net income (loss) per share:
Numerator:
Allocation of distributed net income (loss) for basic computation
$39,306 $3,325 $(22,157)$(1,929)
Reallocation of undistributed net income (loss) as a result of conversion of Class B to Class A shares
3,325  (1,929) 
Allocation of undistributed income (loss)
$42,631 $3,325 $(24,086)$(1,929)
Denominator:
Number of shares used in basic calculation305,927 25,879 293,712 25,574 
Weighted-average effect of diluted securities:
Conversion of Class B to Class A common shares outstanding25,879  25,574  
Employee stock options11,047    
Employee stock purchase plan
34    
Restricted stock units and performance stock units
4,475    
Unvested restricted stock in connection with acquisition519    
Shares issuable upon conversion of the convertible senior notes 8,098    
Number of shares used in diluted calculation355,979 25,879 319,286 25,574 
Diluted net income (loss) per share$0.12 $0.13 $(0.08)$(0.08)
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Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
As of March 31,
20242023
Shares subject to outstanding stock options, RSUs and PSUs966 30,512 
Unvested restricted shares of common stock 1,088 
Shares subject to the employee stock purchase plan 311 
Shares issuable upon conversion of the convertible senior notes 8,098 
Total966 40,009 
ASU No. 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share when the instruments may be settled in cash or shares. The Company uses the if-converted method for calculating any potential dilutive effect of the conversion options embedded in the 2025 Notes on diluted net income per share as required under ASU No. 2020-06 to determine the dilutive effect of the Notes. See Note 7, Convertible Senior Notes for more information.
The Company entered into Capped Calls in connection with the issuance of the 2025 Notes. The effect of the Capped Calls was also excluded from the calculation of diluted net income per share as the effect of the Capped Calls would have been anti-dilutive. The Capped Calls are expected to partially offset the potential dilution to the Company’s Class A common stock upon any conversion of the 2025 Notes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2023, or the Annual Report. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, 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 observability and security platform for cloud applications.
Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, user experience monitoring, cloud security, and many other capabilities to provide unified, real-time observability and security for 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, security and business teams, accelerate time to market for applications, reduce time to problem resolution, secure applications and infrastructure, 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, 2024, we had $282.2 million in cash and cash equivalents and $2.5 billion in marketable securities. We generated revenue of $611.3 million and $481.7 million in the three months ended March 31, 2024 and 2023, respectively, representing year-over-year growth of 27%. Substantially all of our revenue is from subscription software sales. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net income (loss) of $42.6 million and $(24.1) million for the three months ended March 31, 2024 and 2023, respectively. Our operating cash flow was $212.3 million and $133.8 million for the three months ended March 31, 2024 and 2023, respectively. Our free cash flow was $186.7 million and $116.3 million for the three months ended March 31, 2024 and 2023, respectively. See the section titled “—Liquidity and Capital Resources—Non-GAAP Free Cash Flow” below.

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events including rising inflation, the U.S. Federal Reserve raising interest rates, the Russian invasion of Ukraine, and the conflict in the Middle East have led to economic uncertainty. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology, which may impact our business and our customers’ businesses. In recent quarters, we have seen slower usage growth from existing customers, which may be related to the uncertain macroeconomic environment.

Due to our subscription model, the effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. However, if economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.
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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, 2024, we had approximately 28,000 customers spanning organizations of a broad range of sizes and industries, compared to approximately 25,500 as of March 31, 2023. 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, 2024, we had approximately 3,340 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 87% of our ARR, up from 2,910 customers as of March 31, 2023, representing 85% 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, usage from subscriptions for a committed contractual amount of usage that is delivered as used 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 March 31, 2024, our trailing 12-month dollar-based net retention rate was in the mid-110%'s. As of March 31, 2023, our trailing 12-month dollar-based net retention rate was in the mid-130%'s. The decline in our trailing 12-month dollar-based net retention rate was primarily attributable to slower usage growth from existing customers, which may be related to the uncertain macroeconomic environment. 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 trailing 12-month dollar-based net retention rate. As the growth of our business has decelerated in recent quarters, our trailing 12-month dollar-based net retention rate has declined.
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.
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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 demonstrated the success of our platform approach, through expansion beyond our initial infrastructure monitoring solution to include over 20 products. Approximately 82% of our customers were using more than one product as of March 31, 2024, up from approximately 81% a year earlier. Additionally, as of March 31, 2024, approximately 47% of our customers were using more than four products, up from approximately 43% a year earlier, and approximately 23% of our customers were using more than six products, up from approximately 19% a year earlier. We believe these metrics indicate strong expansion of product adoption across our platform.
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 30% and 29% of our total revenue for the three months ended March 31, 2024 and 2023, respectively. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly in EMEA and APAC. 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, primarily in Amsterdam, Dublin, London, Paris, Seoul, Singapore, Sydney, 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, annual or multi-year, 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.
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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.
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, amortization of acquired customer relationships, 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.
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Other Income, Net
Other income, net consists of interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities, partially offset by interest expense due on the 2025 Notes and amortization of premiums on our 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.
Results of Operations
The following table sets forth our consolidated statements of operations data for the periods indicated:
Three Months Ended
March 31,
20242023
(in thousands)
Revenue$611,253 $481,714 
Cost of revenue (1)(2)(3)
110,098 99,914 
Gross profit501,155 381,800 
Operating expenses
Research and development (1)(3)
269,988 229,478 
Sales and marketing (1)(2)(3)
173,881 144,971 
General and administrative (1)(3)
45,290 42,321 
Total operating expenses489,159 416,770 
Operating income (loss)11,996 (34,970)
Other income (loss):
Interest expense (4)
(1,374)(2,181)
Interest income and other income, net35,563 16,727 
Other income, net34,189 14,546 
Income (loss) before provision for income taxes46,185 (20,424)
Provision for income taxes3,554 3,662 
Net income (loss)$42,631 $(24,086)
_________________
(1)Includes stock-based compensation expense as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Cost of revenue$5,527 $3,725 
Research and development88,413 74,703 
Sales and marketing28,531 23,014 
General and administrative12,562 11,286 
Total$135,033 $112,728 
_________________
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(2)Includes amortization of acquired intangibles expense as follows:
 Three Months Ended
March 31,
 20242023
 (in thousands)
Cost of revenue$2,027 $2,016 
Sales and marketing205 203 
Total$2,232 $2,219 
_________________
(3) Includes employer payroll taxes on employee stock transactions as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Cost of revenue$192 $60 
Research and development10,819 4,593 
Sales and marketing2,153 775 
General and administrative2,057 965 
Total$15,221 $6,393 
_________________
(4) Includes amortization of issuance costs as follows:
Three Months Ended
March 31,
20242023
(in thousands)
Interest expense$850 $845 
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,
 20242023
 
(as a percentage of total revenue(1))
Revenue100 %100 %
Cost of revenue18 21 
Gross profit82 79 
Operating expenses
Research and development44 48 
Sales and marketing28 30 
General and administrative
Total operating expenses80 87 
Operating income (loss)(7)
Other income (loss):
Interest expense
Interest income and other income, net
Other income, net
Income (loss) before provision for income taxes(4)
Provision for income taxes
Net income (loss)%(5)%
(1)Certain items may not total due to rounding.
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Comparison of the Three Months Ended March 31, 2024 and 2023
Revenue
Three Months Ended
March 31,
 20242023Change% Change
 (dollars in thousands)  
Revenue$611,253 $481,714 $129,539 27 %
Revenue increased by $129.5 million, or 27%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Approximately 70% of the increase in revenue was attributable to growth from existing customers, and the remaining 30% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Three Months Ended
March 31,
20242023Change% Change
(dollars in thousands)
Cost of revenue$110,098 $99,914 $10,184 10 %
Gross margin82 %79 %
Cost of revenue increased by $10.2 million, or 10%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily due to an increase of $4.2 million in third-party cloud infrastructure hosting and software costs, an increase of $2.8 million in personnel costs as a result of increased headcount, and an increase of $1.7 million in depreciation and amortization expense.
Our gross margin increased by 3% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily as the result of revenue growth exceeding the growth of third-party cloud infrastructure provider costs due to cost savings.
Research and Development
Three Months Ended
March 31,
20242023Change% Change
(dollars in thousands)
Research and development$269,988$229,478$40,510 18 %
Percentage of revenue44 %48 %
Research and development expense increased by $40.5 million, or 18%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily due to an increase of $40.5 million in personnel costs including allocated overhead costs for our engineering, product and design teams as a result of increased headcount.
Sales and Marketing
Three Months Ended
March 31,
 20242023Change% Change
 (dollars in thousands)  
Sales and marketing$173,881$144,971$28,910 20 %
Percentage of revenue28 %30 %  
Sales and marketing expense increased by $28.9 million, or 20%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily due to an increase of $23.0 million in personnel costs including allocated overhead costs for our sales and marketing organization as a result of increased headcount and increased
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variable compensation for our sales personnel and an increase of $5.3 million in advertising, sales, marketing and promotional activities.
General and Administrative
Three Months Ended
March 31,
 20242023Change% Change
 (dollars in thousands)
General and administrative$45,290$42,321$2,969 %
Percentage of revenue%%
General and administrative expense increased by $3.0 million, or 7%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily due to an increase of $4.8 million in personnel costs including allocated overhead costs as a result of increased headcount, partially offset by a decrease of $1.1 million in legal and other professional services expenses, and a decrease of $1.0 million related to bad debt expense.
Other Income, Net
Three Months Ended
March 31,
20242023Change% Change
(dollars in thousands)
Other income, net$34,189 $14,546 $19,643 135 %
Percentage of revenue%%
Other income, net increased by $19.6 million, or 135%, for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. This increase was primarily driven by an increase of $16.9 million in interest income, mainly due to income earned from investments in marketable securities.
Liquidity and Capital Resources
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, hosting expenses, facility expenses, and marketing expenses. We have generated positive cash flows from operations during the three months ended March 31, 2024 and 2023. When assessing sources of liquidity, we also include cash and cash equivalents of $282.2 million and marketable securities of $2.5 billion as of March 31, 2024. We believe that our existing cash and cash equivalents, marketable securities and cash flow from operations will be sufficient to support our cash requirements for the next 12 months and beyond.
Our working capital requirements are principally comprised of workforce salaries, bonuses, commissions, and benefits and, to a lesser extent, cancellable and non-cancelable licenses and services arrangements that are integral to our business operations, and operating lease obligations. Our principal commitments consist of purchase commitments for business operations, operating lease obligations, and obligations to pay the 2025 Notes’ coupons and principal. Purchase commitments for business operations are primarily related to cloud hosting and other software-based services. 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.
During the three months ended March 31, 2024, there have been no material changes outside the ordinary course of business to 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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Cash Flows

The following table shows a summary of our cash flows for the periods presented:
Three Months Ended
March 31,
20242023
(in thousands)
Cash provided by operating activities$212,270 $133,787 
Cash used in investing activities(261,208)(256,248)
Cash provided by financing activities2,191 2,098 
Operating Activities
Net cash provided by operating activities for the three months ended March 31, 2024 increased $78.5 million compared to the three months ended March 31, 2023, primarily driven by a decrease in accounts receivable of $26.7 million, an increase in accrued expenses and other current liabilities of $20.6 million and an increase in non-cash charges of $19.0 million. The increase in non-cash charges related primarily to an increase of $22.3 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 offset by a decrease in accounts payable of $35.7 million and a decrease in deferred revenue of $22.2 million.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2024 increased $5.0 million compared to the three months ended March 31, 2024, primarily driven by a decrease of $96.0 million in proceeds from maturities of marketable securities and a decrease of $21.3 million in proceeds from the sale of marketable securities. The increase in cash used in investing activities was partially offset by a decrease of $120.4 million in the purchases of marketable securities.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2024 increased $0.1 million compared to the three months ended March 31, 2023, primarily due to an increase in proceeds from the exercise of stock options of $0.1 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 provided by 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.
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The following table presents a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, for each of the periods indicated:
Three Months Ended
March 31,
20242023
(in thousands)
Net cash provided by operating activities$212,270 $133,787 
Less: Purchases of property and equipment(14,158)(8,739)
Less: Capitalized software development costs(11,365)(8,711)
Free cash flow$186,747 $116,337 
Critical Accounting Estimates
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.
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 March 31, 2024, we had $268.2 million in cash equivalents and $2.5 billion in marketable securities, which consisted of commercial debt, commercial paper, U.S. government treasury securities, certificates of deposit, and U.S. government agency securities. Our cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. As of March 31, 2024, a hypothetical 10% relative change in interest rates would not have a material impact on our condensed consolidated financial statements.
On June 2, 2020, we issued $747.5 million aggregate principal amount of the 2025 Notes. The fair value of the 2025 Notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the 2025 Notes will generally increase as our Class A common stock price increases and will generally decrease as our Class A common stock price declines. The interest and market value changes affect the fair value of the 2025 Notes but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligation.
Foreign Currency Exchange Risk
Our reporting currency and the functional currency of our wholly-owned foreign subsidiaries is the U.S. dollar. All of our sales are denominated in U.S. dollars, and therefore our revenue is not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, which are primarily in the United States, France, Ireland, and the United Kingdom. Our consolidated results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. To date, we have not entered into any hedging arrangements with respect to
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foreign currency risk or other derivative financial instruments, although we may choose to do so in the future. A hypothetical 10% increase or decrease in the relative value of the U.S. dollar to other currencies would not have a material effect on our operating results.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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 March 31, 2024. Based on the evaluation of our disclosure controls and procedures as of March 31, 2024, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, cash flows or financial condition. Defending such proceedings is costly and can impose a significant burden on management and employees. The results of any current or future litigation cannot be predicted with certainty, and regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
ITEM 1A. RISK FACTORS
Our operations and financial results are subject to various risks and uncertainties including those described below. You should consider carefully the risks and uncertainties described below, in addition to other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the following risks or others not specified below materialize, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our Class A common stock could decline.
Risk Factors Summary
The following is a summary of the principal risks associated with an investment in our Class A common stock:
Unfavorable conditions in our industry or the global economy, or reductions in information technology spending, could limit our ability to grow our business and negatively affect our results of oper