filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
DATADOG, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Datadog, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Datadog, Inc. and its subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition — Identification of Performance Obligations – (Refer to Note 2 of the Financial Statements)
Critical Audit Matter Description
As described in Note 2 to the consolidated financial statements, the Company generates revenue from the sale of subscription services contracts to customers using its cloud-based platform. Subscription services contracts with certain of the Company’s customers may include non-standard terms and conditions and promises to transfer multiple services.
Contracts with customers that contain non-standard terms and conditions and promises to transfer multiple services require significant judgment by management to identify the distinct performance obligations in the arrangement. Distinct performance obligations will be accounted for as separate performance obligations, while non-distinct services are combined with others to form a single performance obligation.
Given the complexity of the Company’s subscription services contracts with certain customers, coupled with management’s judgments involved in identifying distinct performance obligations and non-standard terms and conditions, auditing the Company’s subscription services contracts with certain customers required a high degree of auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s subscription contracts with certain customers included, among others:
◦We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over revenue recognition. This includes management’s controls over the identification of performance obligations and non-standard terms and conditions in subscription contracts, as well as the allocation of revenue to each performance obligation.
◦We evaluated a sample of subscription contracts with customers to determine if all the promises referred to in the contract were properly identified by management and accounted for as distinct performance obligations by performing the following:
-
Obtained and read the subscription contract and independently assessed the terms of the contract to identify all promises and non-standard terms and conditions.
-
For each promise identified, we evaluated whether such promise represented a distinct “performance obligation”, as prescribed by Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
-
We evaluated the completeness and accuracy of the performance obligations by comparing those identified by us to those identified by management.
/s/ Deloitte & Touche LLP
New York, New York
February 23, 2024
We have served as the Company's auditor since 2016.
DATADOG, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| December 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | 330,339 | $ | 338,985 | |||||||
| Marketable securities | 2,252,559 | 1,545,341 | |||||||||
| Accounts receivable, net of allowance for credit losses of $12,096 and $5,626 as of December 31, 2023 and 2022, respectively | 509,279 | 399,551 | |||||||||
| Deferred contract costs, current | 44,938 | 33,054 | |||||||||
| Prepaid expenses and other current assets | 41,022 | 27,303 | |||||||||
| Total current assets | 3,178,137 | 2,344,234 | |||||||||
| Property and equipment, net | 171,872 | 125,346 | |||||||||
| Operating lease assets | 126,562 | 87,629 | |||||||||
| Goodwill | 352,694 | 348,277 | |||||||||
| Intangible assets, net | 9,617 | 16,365 | |||||||||
| Deferred contract costs, non-current | 73,728 | 55,338 | |||||||||
| Restricted cash | — | 3,303 | |||||||||
| Other assets | 23,462 | 24,360 | |||||||||
| TOTAL ASSETS | $ | 3,936,072 | $ | 3,004,852 | |||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | 87,712 | $ | 23,474 | |||||||
| Accrued expenses and other current liabilities | 127,631 | 171,158 | |||||||||
| Operating lease liabilities, current | 21,974 | 22,092 | |||||||||
| Deferred revenue, current | 765,735 | 543,024 | |||||||||
| Total current liabilities | 1,003,052 | 759,748 | |||||||||
| Operating lease liabilities, non-current | 138,128 | 76,582 | |||||||||
| Convertible senior notes, net | 742,235 | 738,847 | |||||||||
| Deferred revenue, non-current | 21,210 | 12,944 | |||||||||
| Other liabilities | 6,093 | 6,226 | |||||||||
| Total liabilities | 1,910,718 | 1,594,347 | |||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 9) | |||||||||||
| STOCKHOLDERS' EQUITY: | |||||||||||
| Class A common stock, $0.00001 par value per share; 2,000,000,000 shares authorized as of December 31, 2023 and 2022; 305,395,175 and 293,573,825 shares issued and outstanding as of December 31, 2023 and 2022, respectively | 3 | 3 | |||||||||
| Class B common stock, $0.00001 par value per share; 310,000,000 shares authorized as of December 31, 2023 and 2022; 25,684,571 and 25,616,018 shares issued and outstanding as of December 31, 2023 and 2022, respectively | — | — | |||||||||
| Additional paid-in capital | 2,181,267 | 1,625,190 | |||||||||
| Accumulated other comprehensive loss | (2,218) | (12,422) | |||||||||
| Accumulated deficit | (153,698) | (202,266) | |||||||||
| Total stockholders’ equity | 2,025,354 | 1,410,505 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 3,936,072 | $ | 3,004,852 |
See accompanying notes to consolidated financial statements.
DATADOG, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Revenue | $ | 2,128,359 | $ | 1,675,100 | $ | 1,028,784 | |||||||||||
| Cost of revenue | 409,908 | 346,743 | 234,245 | ||||||||||||||
| Gross profit | 1,718,451 | 1,328,357 | 794,539 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 962,447 | 752,351 | 419,769 | ||||||||||||||
| Sales and marketing | 609,276 | 495,288 | 299,497 | ||||||||||||||
| General and administrative | 180,192 | 139,413 | 94,429 | ||||||||||||||
| Total operating expenses | 1,751,915 | 1,387,052 | 813,695 | ||||||||||||||
| Operating loss | (33,464) | (58,695) | (19,156) | ||||||||||||||
| Other income: | |||||||||||||||||
| Interest expense | (6,302) | (16,535) | (21,052) | ||||||||||||||
| Interest income and other income, net | 100,001 | 37,160 | 21,786 | ||||||||||||||
| Other income, net | 93,699 | 20,625 | 734 | ||||||||||||||
| Income (loss) before provision for income taxes | 60,235 | (38,070) | (18,422) | ||||||||||||||
| Provision for income taxes | 11,667 | 12,090 | 2,323 | ||||||||||||||
| Net income (loss) | $ | 48,568 | $ | (50,160) | $ | (20,745) | |||||||||||
| Net income (loss) attributable to common stockholders | $ | 48,568 | $ | (50,160) | $ | (20,745) | |||||||||||
| Basic net income (loss) per share | $ | 0.15 | $ | (0.16) | $ | (0.07) | |||||||||||
| Diluted net income (loss) per share | $ | 0.14 | $ | (0.16) | $ | (0.07) | |||||||||||
| Weighted average shares used in calculating basic net income (loss) per share: | 324,033 | 315,410 | 309,048 | ||||||||||||||
| Weighted average shares used in calculating diluted net income (loss) per share: | 350,292 | 315,410 | 309,048 |
See accompanying notes to consolidated financial statements.
DATADOG, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Net income (loss) | $ | 48,568 | $ | (50,160) | $ | (20,745) | |||||||||||
| Other comprehensive income (loss): | |||||||||||||||||
| Foreign currency translation adjustments | 1,050 | (1,322) | (1,853) | ||||||||||||||
| Unrealized gain (loss) on available-for-sale marketable securities | 9,154 | (7,270) | (4,264) | ||||||||||||||
| Other comprehensive income (loss) | 10,204 | (8,592) | (6,117) | ||||||||||||||
| Comprehensive income (loss) | $ | 58,772 | $ | (58,752) | $ | (26,862) |
See accompanying notes to consolidated financial statements.
DATADOG, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share data)
| Class A and Class B Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Income (Loss) | Accumulated Deficit | Total Stockholders' Equity (Deficit) | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| BALANCE—December 31, 2020 | 305,880,063 | $ | 3 | $ | 1,103,305 | $ | 2,287 | $ | (148,163) | $ | 957,432 | ||||||||||||||||||||||||
| Effect of adoption of ASU 2020-06 | — | — | (173,070) | — | 16,802 | (156,268) | |||||||||||||||||||||||||||||
| BALANCE—January 1, 2021 | 305,880,063 | 3 | 930,235 | 2,287 | (131,361) | 801,164 | |||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 5,109,688 | — | 14,941 | — | — | 14,941 | |||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | 566 | — | — | 566 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 1,483,639 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of restricted shares of common stock from acquisitions | 600,176 | — | 57,720 | — | — | 57,720 | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 291,871 | — | 20,278 | — | — | 20,278 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 173,397 | — | — | 173,397 | |||||||||||||||||||||||||||||
| Change in accumulated other comprehensive loss | — | — | — | (6,117) | — | (6,117) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (20,745) | (20,745) | |||||||||||||||||||||||||||||
| BALANCE—December 31, 2021 | 313,365,437 | $ | 3 | $ | 1,197,136 | $ | (3,830) | $ | (152,106) | $ | 1,041,203 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 2,687,334 | — | 9,970 | — | — | 9,970 | |||||||||||||||||||||||||||||
| Vesting of early exercised stock options | — | — | 33 | — | — | 33 | |||||||||||||||||||||||||||||
| Vesting of restricted stock units | 2,492,535 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance of restricted shares of common stock from acquisitions | 327,662 | — | 14,019 | — | — | 14,019 | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 316,875 | — | 26,025 | — | — | 26,025 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 378,007 | — | — | 378,007 | |||||||||||||||||||||||||||||
| Change in accumulated other comprehensive loss | — | — | — | (8,592) | — | (8,592) | |||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (50,160) | (50,160) | |||||||||||||||||||||||||||||
| BALANCE—December 31, 2022 | 319,189,843 | $ | 3 | $ | 1,625,190 | $ | (12,422) | $ | (202,266) | $ | 1,410,505 | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options | 6,455,931 | — | 20,924 | — | — | 20,924 | |||||||||||||||||||||||||||||
| Vesting of restricted and performance stock units | 4,794,318 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Issuance (retirement) of restricted shares of common stock from acquisitions | 122,224 | — | 1,886 | — | — | 1,886 | |||||||||||||||||||||||||||||
| Issuance of common stock under the Employee Stock Purchase Plan | 517,430 | — | 37,370 | — | — | 37,370 | |||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 495,897 | — | — | 495,897 | |||||||||||||||||||||||||||||
| Change in accumulated other comprehensive income | — | — | — | 10,204 | — | 10,204 | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | 48,568 | 48,568 | |||||||||||||||||||||||||||||
| BALANCE—December 31, 2023 | 331,079,746 | $ | 3 | $ | 2,181,267 | $ | (2,218) | $ | (153,698) | $ | 2,025,354 |
See accompanying notes to consolidated financial statements.
DATADOG, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||||||||
| Net income (loss) | $ | 48,568 | $ | (50,160) | $ | (20,745) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 44,465 | 34,629 | 22,938 | ||||||||||||||
| (Accretion) amortization of (discounts) premiums on marketable securities | (41,621) | 4,726 | 16,236 | ||||||||||||||
| Amortization of debt discount and issuance costs | 3,388 | 3,369 | 3,349 | ||||||||||||||
| Amortization of deferred contract costs | 39,207 | 28,003 | 17,866 | ||||||||||||||
| Stock-based compensation, net of amounts capitalized | 482,300 | 363,154 | 163,737 | ||||||||||||||
| Non-cash lease expense | 26,382 | 21,416 | 17,201 | ||||||||||||||
| Allowance for credit losses on accounts receivable | 11,933 | 5,215 | 2,311 | ||||||||||||||
| Loss on disposal of property and equipment | 706 | 1,662 | 274 | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable, net | (121,661) | (135,701) | (107,112) | ||||||||||||||
| Deferred contract costs | (69,481) | (51,098) | (42,775) | ||||||||||||||
| Prepaid expenses and other current assets | (13,508) | (6,565) | (737) | ||||||||||||||
| Other assets | 1,018 | (5,179) | (2,627) | ||||||||||||||
| Accounts payable | 57,773 | (1,286) | 3,078 | ||||||||||||||
| Accrued expenses and other liabilities | (40,489) | 37,578 | 37,270 | ||||||||||||||
| Deferred revenue | 230,974 | 168,644 | 176,281 | ||||||||||||||
| Net cash provided by operating activities | 659,954 | 418,407 | 286,545 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||||||||
| Purchases of marketable securities | (2,558,013) | (1,413,717) | (1,125,519) | ||||||||||||||
| Maturities of marketable securities | 1,864,557 | 1,137,724 | 1,046,560 | ||||||||||||||
| Proceeds from sale of marketable securities | 36,995 | 2,090 | 67,749 | ||||||||||||||
| Purchases of property and equipment | (27,586) | (35,261) | (9,956) | ||||||||||||||
| Capitalized software development costs | (34,820) | (29,628) | (26,069) | ||||||||||||||
| Cash paid for acquisition of businesses; net of cash acquired | (12,498) | (45,878) | (226,505) | ||||||||||||||
| Net cash used in investing activities | (731,365) | (384,670) | (273,740) | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||||||||
| Proceeds from exercise of stock options | 20,909 | 10,001 | 14,907 | ||||||||||||||
| Proceeds from issuance of common stock under the employee stock purchase plan | 37,370 | 26,025 | 20,278 | ||||||||||||||
| Employee payroll taxes paid related to net share settlement under the employee stock purchase plan | — | — | (245) | ||||||||||||||
| Repayments of convertible senior notes | — | (3) | — | ||||||||||||||
| Net cash provided by financing activities | 58,279 | 36,023 | 34,940 | ||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 1,183 | (1,935) | (1,993) | ||||||||||||||
| NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | (11,949) | 67,825 | 45,752 | ||||||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH—Beginning of period | 342,288 | 274,463 | 228,711 | ||||||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH—End of period | $ | 330,339 | $ | 342,288 | $ | 274,463 | |||||||||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | |||||||||||||||||
| Cash paid for income taxes | $ | 16,505 | $ | 1,595 | $ | 1,486 | |||||||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | |||||||||||||||||
| Accrued property and equipment purchases | $ | 7,046 | $ | 972 | $ | 1,746 | |||||||||||
| Stock-based compensation included in capitalized software development costs | $ | 13,597 | $ | 14,853 | $ | 9,660 | |||||||||||
| Vesting of early exercised options | $ | — | $ | 33 | $ | 566 | |||||||||||
| Issuance of restricted shares of common stock for the acquisition of businesses | $ | 1,886 | $ | 14,019 | $ | 57,720 | |||||||||||
| Acquisition holdback | $ | 750 | $ | 8,123 | $ | 5,555 | |||||||||||
| RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH WITHIN THE CONSOLIDATED BALANCE SHEETS TO THE AMOUNTS SHOW IN THE STATEMENTS OF CASH FLOWS ABOVE: | |||||||||||||||||
| Cash and cash equivalents | $ | 330,339 | $ | 338,985 | $ | 270,973 | |||||||||||
| Restricted cash | — | 3,303 | 3,490 | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 330,339 | $ | 342,288 | $ | 274,463 |
See accompanying notes to consolidated financial statements.
DATADOG, INC.
NOTES TO 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
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of Datadog, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segment Information
The Company has a single operating and reportable segment as well as one business activity, monitoring and providing analytics on companies’ information technology (“IT”) infrastructure. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information presented on a consolidated basis for purposes of making operating decisions, assessing financial performance, and allocating resources. There are no segment managers who are held accountable for operations or results below the consolidated level.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the 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.
Foreign Currency Translation
The reporting currency of the Company is the United States dollar (“USD”). The functional currency of the Company is USD, and the functional currency of the Company’s subsidiaries is generally the local currency of the jurisdiction in which the foreign subsidiary is located. The assets and liabilities of the Company’s subsidiaries are translated to USD at exchange rates in effect at the balance sheet date. All income statement accounts are translated at monthly average exchange rates. Resulting foreign currency translation adjustments are recorded directly in accumulated other comprehensive loss as a separate component of stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in other income, net in the accompanying consolidated statements of operations when realized and have not been material for any of the periods presented.
Revenue Recognition
The Company generates revenue from the sale of subscriptions to customers using its cloud-based platform. The terms of the Company’s subscription agreements are primarily monthly, annual or multi-year. The Company’s customers can enter into (1) a subscription agreement for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, (2) a subscription agreement for a committed contractual amount of usage that is delivered as used, or (3) a monthly subscription based on usage. The Company typically bills customers on an annual or multi-year subscription in advance, with any usage in excess of the committed contracted amount billed monthly in arrears. The Company typically bills customers on a monthly plan in arrears. Customers also have the option to purchase additional services priced at rates at or above the stand-alone selling price.
The Company accounts for revenue contracts with customers through the following steps:
(1)identify the contract with a customer;
(2)identify the performance obligations in the contract;
(3)determine the transaction price;
(4)allocate the transaction price to the performance obligations in the contract; and
(5)recognize revenue when or as the Company satisfies a performance obligation.
The Company’s revenue arrangements may include infrastructure monitoring, application performance monitoring, log management, synthetics monitoring, security monitoring, continuous profiling, serverless monitoring, network monitoring, real user monitoring and incident management as well as secondary services including custom metrics in dashboard monitoring, docker container monitoring, and indexed spans. The Company has identified each service as a separate performance obligation.
The transaction price is based on the fixed price for the contracted level of service plus variable consideration for additional optional purchases. Billing periods correspond to the periods over which services are performed and there are no discounts given on the purchase of future services.
The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on a range of actual prices charged to customers.
Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those services. The Company determined an output method, recognition over time, to be the most appropriate measure of progress because it most faithfully represents when the value of the services is simultaneously received and consumed by the customer, and control is transferred.
For committed contractual amounts of usage, revenue is recognized ratably over the term of the subscription agreement generally beginning on the date that the platform is made available to a customer. For committed contractual amount of usage that is delivered as used, a monthly subscription based on usage, or usage in excess of a ratable subscription, the Company recognizes revenue as the product is used. Subscription revenue excludes sales and other indirect taxes.
The Company applied the practical expedient in Topic 606 and did not evaluate contracts of one year or less for the existence of a significant financing component.
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.
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 deferred revenue, multi-year contracts with future installment payments and certain unfulfilled orders against accepted customer contracts at the end of any given period.
Convertible Senior Notes
In accounting for the issuance of the Company’s convertible senior notes (the “2025 Notes”), the 2025 Notes were separated into liability and equity components through December 31, 2020. The carrying amounts 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 equity component was recorded in additional paid-in capital.
In accounting for the debt issuance costs 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 are being amortized to interest expense over the contractual terms of the 2025 Notes. The issuance costs attributable to the equity component were 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 consolidated balance sheet.
Cost of Revenue
Cost of revenue consists primarily of costs related to providing subscription services to paying customers, including data center and networking expenses, employee compensation (including stock-based compensation) and other employee-related expenses for customer experience and technical operations staff, payments to outside service providers, payment processing fees, amortization of capitalized internally developed software costs and acquired developed technology, and allocated overhead costs.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs consist of employee compensation (including stock-based compensation) and other employee-related expenses, materials and supplies, and allocated overhead costs such as rent and facilities costs.
Sales and Marketing Costs
Sales and marketing costs consist primarily of personnel costs for the Company’s sales and marketing organization, including stock-based compensation and commissions, costs of general marketing and promotional activities, including the free tier and introductory trials of the Company’s products, travel-related expenses, amortization of acquired customer relationships, and allocated overhead costs.
Advertising Costs
Advertising costs are expensed as incurred and were approximately $21.8 million, $25.5 million and $20.8 million for the years ended December 31, 2023, 2022 and 2021, respectively, and are included in sales and marketing expense in the accompanying consolidated statement of operations.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts for financial reporting and the tax bases of assets and liabilities. The deferred assets and liabilities are recorded at the statutorily enacted tax rates anticipated to be in effect when such temporary differences reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is established; when based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company engages in transactions in which the tax consequences may be subject to uncertainty. The Company accounts for uncertain tax positions based on an evaluation as to whether it is more likely than not that a tax position will be sustained on audit, including resolution of any related appeals or litigation processes. This evaluation is based on all available evidence and assumes that the appropriate tax authorities have full knowledge of all relevant information concerning the tax position. The Company accounts for uncertain tax positions as non-current tax liabilities or through a reduction of a corresponding deferred tax asset. The tax benefit recognized is based on the largest amount that is greater than 50% likely of being realized upon ultimate settlement. The Company includes potential interest expense and penalties related to its uncertain tax positions in income tax expense.
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 fair value of each stock option granted is estimated using the Black-Scholes option pricing model. The determination of the grant date fair value using an option-pricing model is affected by the estimated fair value of the Company’s Class A 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist of money market funds, corporate debt securities, and U.S. government treasury securities.
Marketable Securities
The Company’s marketable securities consist of corporate debt securities, commercial paper, certificates of deposit, U.S. government treasury securities, and U.S. government agency securities. The Company determines the appropriate classification of its marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. The Company has classified and accounted for its marketable securities as available-for-sale securities as the Company may sell these securities at any time for use in its current operations or for other purposes, even prior to maturity. As a result, the Company classifies its marketable securities within current assets on the consolidated balance sheet.
Available-for-sale securities are recorded at fair value each reporting period. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective interest method. Interest income is recognized when earned. Unrealized gains and losses on these marketable securities are presented net of tax and reported as a separate component of accumulated other comprehensive loss until realized. Realized gains and losses are determined based on the specific identification method and are reported in Interest income and other income, net in the consolidated statements of operations.
The Company periodically evaluates its marketable securities to assess whether an investment’s fair value is less than its amortized cost basis and if the decline in the fair value is attributable to a credit loss. Declines in fair value judged to be related to credit loss are reported in Interest income and other income, net in the consolidated statements of operations.
Restricted Cash
Restricted cash primarily consists of collateralized letters of credit established in connection with lease agreements for the Company’s facilities. Restricted cash is included in current assets for leases that expire within one year and is included in non-current assets for leases that expire in more than one year from the balance sheet date.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. Cash deposits may, at times, exceed amounts insured by the Federal Deposit Insurance Corporation (“FDIC”) and the Securities Investor Protection Corporation (“SIPC”). The Company has not experienced any losses on its deposits of cash and cash equivalents to date. For accounts receivable, the Company is exposed to credit risk in the event of nonpayment by customers to the extent of the amounts recorded on the accompanying consolidated balance sheets.
Geographical Information - Long-Lived Assets
As of December 31, 2023, and 2022, 67% and 66% of the Company’s long-lived assets were located in the United States and 33% and 34% were located outside of the United States, primarily in EMEA, respectively.
Fair Value of Financial Instruments
The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
The Company’s financial instruments consist of cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses. Cash equivalents are stated at amortized cost, which approximates fair value at the balance sheet dates, due to the short period of time to maturity. Marketable securities are recorded at fair value. Accounts receivable, accounts payable, and accrued expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable includes billed and unbilled receivables. Trade accounts receivable are recorded at invoiced amounts and do not bear interest. The expectation of collectability is based on a review of credit profiles of customers, contractual terms and conditions, current economic trends, and historical payment experience. The Company regularly reviews the adequacy of the allowance for credit losses by considering the age of each outstanding invoice and the collection history to determine the appropriate amount of allowance for credit losses. Accounts receivable deemed uncollectible are charged against the allowance for credit losses when identified.
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, substantially all of which is expected to be billed and collected within one year.
Internal-Use Software Development Costs
The Company capitalizes qualifying internal-use software development costs related to its cloud platform. The costs consist of personnel costs (including related benefits and stock-based compensation) that are incurred during the application development stage. Capitalization of costs begins when two criteria are met: (1) the preliminary project stage is completed, and (2) it is probable that the software will be completed and used for its intended function. Capitalization ceases when the software is substantially complete and ready for its intended use, including the completion of all significant testing. Costs related to preliminary project activities and post implementation operating activities are expensed as incurred.
Capitalized costs are included in property and equipment. These costs are amortized over the estimated useful life of the software, which is two years, on a straight-line basis, which represents the manner in which the expected benefit will be derived. The amortization of costs related to the platform applications is included in cost of revenue and sales and marketing expense based on an allocation between paid customer accounts and free customer accounts not generating revenue.
Property and Equipment, Net
Property and equipment, net is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the related asset. Expenses that improve an asset or extend its remaining useful life are capitalized. Costs of maintenance or repairs that do not extend the lives of the respective assets are charged to expenses as incurred.
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. There are no sales commissions earned on renewals. These costs are deferred and then amortized over a period of benefit which is determined to be 4 years. The Company determined the period of benefit by taking into consideration the length of terms in its customer contracts, life of the technology and other factors. 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 consolidated balance sheets. Deferred contract costs are periodically analyzed for impairment. Amortization expense is included in sales and marketing expenses in the accompanying consolidated statements of operations.
Business Combinations
When the Company acquires a business, the purchase consideration is allocated to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated respective fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require the Company to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and trade names from a market participant perspective, useful lives and discount rates. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to other income, net in the consolidated statement of operations.
Accounting for Impairment of Long-Lived Assets (Including Goodwill and Intangibles)
Long-lived assets with finite lives include property and equipment, capitalized development software costs and acquired intangible assets. Long-lived assets are amortized over their estimated useful lives which are as follows:
| Computers and equipment | 3 years | ||||
| Furniture and fixtures | 5 years | ||||
| Leasehold improvements | Shorter of lease term or useful life of asset | ||||
| Capitalized software development costs | 2 years | ||||
| Developed technology | 3 years | ||||
| Customer relationships | 4 years |
The Company evaluates long lived assets, including acquired intangible assets and capitalized software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or the estimated useful life becomes shorter than originally estimated. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset or an asset group to estimated undiscounted future net cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset exceeds these estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group, based on discounted cash flows.
Goodwill is not amortized but rather tested for impairment at least annually on October 1, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Goodwill impairment is recognized when the quantitative assessment results in the carrying value exceeding the fair value, in which case an impairment charge is recorded to the extent the carrying value exceeds the fair value. The Company did not recognize any impairment of goodwill during the years ended December 31, 2023, 2022 or 2021.
Operating Leases
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are reflected within operating lease assets, operating lease liabilities, current, and operating lease liabilities, non-current, on the consolidated balance sheets. For short-term leases (an initial term of 12 months or less), an operating lease asset and corresponding lease liability are not recorded and the Company records rent expense in its consolidated statements of operations on a straight-line basis over the lease term. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company generally uses its incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease assets also include any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately.
Net Income (Loss) Per Share Attributable to Common Stockholders
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of Class A common stock and Class B common stock (together “common stock”) outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period giving effect to all potentially dilutive securities to the extent they are dilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income (loss) per share by application of the two-class method. During the periods when the Company is in a net loss position, the net loss attributable to common stockholders was not allocated to the unvested common stock under the two-class method as these securities do not have a contractual obligation to share in the Company’s losses.
Accounting Pronouncements Recently Adopted
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU No. 2021-08”), which intends to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. It is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company early adopted ASU No. 2021-08 on January 1, 2022 on a prospective basis with no material impact on the Company's consolidated financial statements.
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
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 December 31, 2023 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 consolidated balance sheet as of December 31, 2023 and December 31, 2022 (in thousands):
| December 31, 2023 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Corporate debt securities | $ | 776,323 | $ | 770 | $ | (1,140) | $ | 775,953 | |||||||||||||||
| Commercial paper | 605,291 | 570 | (75) | 605,786 | |||||||||||||||||||
| U.S. government treasury securities | 460,854 | 390 | (1,399) | 459,845 | |||||||||||||||||||
| Certificates of deposit | 264,405 | 335 | (15) | 264,725 | |||||||||||||||||||
| U.S. government agency securities | 146,611 | — | (361) | 146,250 | |||||||||||||||||||
| Marketable securities | $ | 2,253,484 | $ | 2,065 | $ | (2,990) | $ | 2,252,559 |
| December 31, 2022 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gain | Unrealized Losses | Fair Value | ||||||||||||||||||||
| Corporate debt securities | $ | 813,598 | $ | 64 | $ | (7,554) | $ | 806,108 | |||||||||||||||
| Commercial paper | 357,030 | 64 | (821) | 356,273 | |||||||||||||||||||
| Certificates of deposit | 174,080 | 37 | (587) | 173,530 | |||||||||||||||||||
| U.S. government treasury securities | 120,977 | — | (1,099) | 119,878 | |||||||||||||||||||
| U.S. government agency securities | 89,718 | 12 | (178) | 89,552 | |||||||||||||||||||
| Marketable securities | $ | 1,555,403 | $ | 177 | $ | (10,239) | $ | 1,545,341 |
Interest receivable of $15.1 million and $8.1 million is included in Prepaid expenses and other current assets on the consolidated balance sheets as of December 31, 2023 and 2022, respectively. The Company did not recognize an allowance for credit losses against interest receivable as of December 31, 2023 and 2022 because such potential losses were not material.
As of December 31, 2023, the fair values of available-for-sale marketable securities, by remaining contractual maturity, were as follows (in thousands):
| Due within one year | $ | 1,799,542 | |||
| Due in one year through five years | 453,017 | ||||
| Total | $ | 2,252,559 |
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.
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 December 31, 2023 and 2022, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
| Fair Value Measurement as of December 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| 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 |
| Fair Value Measurement as of December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Financial Assets: | |||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||
| Money market funds | $ | 302,902 | $ | — | $ | — | $ | 302,902 | |||||||||||||||
| Corporate debt securities | — | 2,493 | — | 2,493 | |||||||||||||||||||
| Marketable Securities: | |||||||||||||||||||||||
| Corporate debt securities | — | 806,108 | — | 806,108 | |||||||||||||||||||
| Commercial paper | — | 356,273 | — | 356,273 | |||||||||||||||||||
| Certificates of deposit | — | 173,530 | — | 173,530 | |||||||||||||||||||
| U.S. government treasury securities | — | 119,878 | — | 119,878 | |||||||||||||||||||
| U.S. government agency securities | — | 89,552 | — | 89,552 | |||||||||||||||||||
| Total financial assets | $ | 302,902 | $ | 1,547,834 | $ | — | $ | 1,850,736 |
The Company considers all highly liquid investments, including money market funds with an original maturity of three months or less at the date of purchase, to be cash equivalents. The Company uses quoted prices in active markets for assets to determine the fair value of its Level 1 investments in money market funds. The Company classifies its commercial paper, corporate debt securities, certificates of deposit, U.S. government treasury securities, and Non-U.S. government 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 8, Convertible Senior Notes, to the consolidated financial statements for further details.
5. Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Computers and equipment | $ | 35,736 | $ | 33,376 | |||||||
| Furniture and fixtures | 17,202 | 13,315 | |||||||||
| Leasehold improvements | 55,111 | 27,683 | |||||||||
| Capitalized software development costs | 192,691 | 134,890 | |||||||||
| Total property and equipment | $ | 300,740 | $ | 209,264 | |||||||
| Less: accumulated depreciation and amortization | (128,868) | (83,918) | |||||||||
| Total property and equipment, net | $ | 171,872 | $ | 125,346 |
As discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies—Internal-Use Software Development Costs, 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 $35.6 million, $27.0 million, and $18.5 million for the years ended December 31, 2023, 2022 and 2021, 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.
2022 Acquisitions
During the year ended December 31, 2022, the Company entered into four purchase agreements for acquisitions of businesses, each of which were accounted for as business combinations in accordance with ASC 805, Business Combinations. The 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 $8.2 million and goodwill in the amount of $56.6 million based on the respective estimated fair values. The resulting goodwill from each of the agreements is not deductible for income tax purposes. Pro forma results of operations from these acquisitions have not been presented because they were not material to the consolidated results of operations.
2021 Acquisitions
In October and December 2021, the Company entered into two 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 $4.3 million and goodwill in the amount of $36.6 million based on the respective estimated fair values. The resulting goodwill from both 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.
In April 2021, the Company entered into a stock purchase agreement whereby the Company acquired all of the issued and outstanding shares of a SaaS based security platform company. The consideration was approximately $219.4 million, comprising cash and Class A common stock. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase price was allocated to intangible assets in the amount of $12.0 million and goodwill in the amount of $204.3 million based on the respective estimated fair values. The resulting
goodwill is not deductible for income tax purposes. Intangible assets consisted of developed technology in the amount of $8.7 million and customer relationships in the amount of $3.3 million. The useful life for developed technology and customer relationships are three and four years, respectively. Additionally, there was a one-time severance charge of $1.3 million recorded on the acquisition date.
In February 2021, the Company entered into a stock purchase agreement whereby the Company acquired all of the issued and outstanding shares of an observability data pipeline tool company with the purchase price paid in cash and Class A common stock. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The purchase price was allocated to intangible assets in the amount of $1.7 million and goodwill in the amount of $34.3 million based on the respective estimated fair values. The resulting goodwill is not deductible for income tax purposes. Pro forma results of operations for this acquisition 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):
| December 31, 2023 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Amortization Period | ||||||||||||||||||||
| Developed technology | $ | 24,995 | $ | (16,428) | $ | 8,567 | 3 years | ||||||||||||||||
| Customer relationships | 3,300 | (2,250) | 1,050 | 4 years | |||||||||||||||||||
| Total | $ | 28,295 | $ | (18,678) | $ | 9,617 |
| December 31, 2022 | |||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Amortization Period | ||||||||||||||||||||
| Developed technology | $ | 24,460 | $ | (9,970) | $ | 14,490 | 3 years | ||||||||||||||||
| Customer relationships | 3,300 | (1,425) | 1,875 | 4 years | |||||||||||||||||||
| Total | $ | 27,760 | $ | (11,395) | $ | 16,365 |
Intangible amortization expense was approximately $8.9 million, $7.6 million and $4.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Amortization of developed technology and customer relationships are included in cost of revenue and sales and marketing expense, respectively, on the Company’s consolidated statement of operations and comprehensive loss.
As of December 31, 2023, future amortization expense by year is expected to be as follows (in thousands):
| Amount | |||||
| 2024 | $ | 6,489 | |||
| 2025 | 2,597 | ||||
| 2026 | 531 | ||||
| Total | $ | 9,617 |
Goodwill
The changes in the carrying amount of goodwill were as follows (in thousands):
| Amount | |||||
| Balance as of December 31, 2022 | $ | 348,277 | |||
| 2023 Acquisitions | 3,540 | ||||
| Foreign currency translation adjustments | 877 | ||||
| Balance as of December 31, 2023 | $ | 352,694 |
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Accrued cloud hosting and infrastructure expenses (1) | $ | 13,783 | $ | 73,566 | |||||||
| Accrued compensation and commissions | 61,541 | 46,736 | |||||||||
| Other tax liability and sales tax | 30,775 | 25,818 | |||||||||
| Other accrued expenses | 21,532 | 25,038 | |||||||||
| Total accrued expenses and other current liabilities | $ | 127,631 | $ | 171,158 |
1)Due to the timing of when invoices are received, accounts payable on the consolidated balance sheets includes cloud hosting and infrastructure expenses of $70.2 million and $12.6 million for the years ended December 31, 2023 and 2022, respectively.
8. 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.
During the three months ended December 31, 2023, the conditional conversion feature of the 2025 Notes was not triggered as the last reported sale price of the Company’s Class A common stock was not greater than or equal to 130% of the conversion price 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 December 31, 2023. Therefore the 2025 Notes are not convertible, in whole or in part, at the option of the holders between January 1, 2024 through March 31, 2024. Whether the 2025 Notes will be convertible in future periods will depend on the continued satisfaction of this condition or another conversion condition.
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 December 31, 2023, the 2025 Notes were classified as long-term debt on the Company's 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. 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 consolidated balance sheet.
The net carrying amount of the liability component of the 2025 Notes was as follows (in thousands):
| December 31, 2023 | December 31, 2022 | ||||||||||
| Convertible senior notes, net: | |||||||||||
| Principal | $ | 747,496 | $ | 747,496 | |||||||
| Unamortized debt issuance costs | (5,261) | (8,649) | |||||||||
| Net carrying amount | $ | 742,235 | $ | 738,847 |
As of December 31, 2023, the total estimated fair value of the 2025 Notes was approximately $1,050.2 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.
The following table sets forth the interest expense related to the 2025 Notes for the years ended December 31, 2023, 2022, and 2021 (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Contractual interest expense | $ | 934 | $ | 934 | $ | 934 | |||||||||||
| Amortization of issuance costs | 3,388 | 3,369 | 3,349 | ||||||||||||||
| Total | $ | 4,322 | $ | 4,303 | $ | 4,283 |
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.
9. Commitments and Contingencies
The Company enters into non-cancelable purchase commitments and operating leases in the normal course of business. Non-cancelable purchase commitments for business operations and operating lease obligations total $485.0 million and $347.1 million, respectively, as of December 31, 2023, due primarily over the next 5 years. Purchase commitments for business operations are primarily related to cloud hosting and other software-based services.
The Company also issued long-term debt to finance the business. The principal and future interest payments related to the 2025 Notes are $749.0 million.
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 beginning on January 1, 2022, the Company began making matching contributions to the 401(k) plan. For the years ended December 31, 2023 and 2022, the Company incurred expense of $6.3 million and $5.7 million for matching contributions, respectively. The Company did not make any matching contributions to the 401(k) plan for the year ended December 31, 2021.
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 consolidated statements of operations in connection with the indemnification provisions have not been material.
10. 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.
Rent expense for the years ended December 31, 2023, 2022 and 2021 was $43.5 million, $34.0 million, and $23.8 million, respectively.
The Company recorded $0.9 million, $1.0 million, and $1.0 million in sub-lease income for the years ended December 31, 2023, 2022 and 2021, respectively. Sub-lease income is recorded as a credit to rent expense.
The components of lease cost recognized within the Company’s consolidated statements of operations were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Operating lease cost (1) | $ | 34,670 | $ | 25,212 | $ | 20,198 | |||||||||||
| Short-term lease cost | 8,797 | 8,739 | 3,609 |
1)Includes non-cash lease expense of $26.4 million, $21.4 million, and $17.2 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Supplemental cash flow information and non-cash activity related to the Company’s operating leases are as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cash paid for amounts included in measurement of lease liabilities | $ | 13,273 | $ | 24,752 | $ | 20,741 | |||||||||||
| Operating lease assets obtained in exchange for new lease liabilities | 61,594 | 48,404 | 17,476 |
Maturities of lease liabilities by fiscal year for the Company’s operating leases are as follows (in thousands):
| Amount | |||||
| 2024 | $ | 17,995 | |||
| 2025 | 34,234 | ||||
| 2026 | 31,050 | ||||
| 2027 | 27,747 | ||||
| 2028 | 24,479 | ||||
| Thereafter | 73,102 | ||||
| Total lease payments | $ | 208,607 | |||
| Less: imputed interest | (48,505) | ||||
| Present value of lease liabilities | $ | 160,102 |
As of December 31, 2023, the Company had various operating leases that had not yet commenced, which are excluded from the table above. The operating leases will commence between fiscal year 2024 and 2025 with total undiscounted future payments of $138.5 million and a weighted-average lease term of 9 years.
Weighted average remaining lease term and discount rate for the Company’s operating leases are as follows:
| December 31, 2023 | December 31, 2022 | ||||||||||
| Weighted average remaining lease term (years) | 6.7 | 6.2 | |||||||||
| Weighted average discount rate | 6.00% | 5.12% |
11. 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):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| North America (1) | $ | 1,487,319 | $ | 1,200,719 | $ | 736,218 | |||||||||||
| International | 641,040 | 474,381 | 292,566 | ||||||||||||||
| Total | $ | 2,128,359 | $ | 1,675,100 | $ | 1,028,784 |
1)Includes revenue from the United States of $1,411.0 million, $1,134.1 million, and $691.8 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Other than the United States, no other individual country accounted for 10% or more of total revenue for the years ended December 31, 2023, 2022, or 2021.
Accounts Receivable
As of December 31, 2023 and 2022, unbilled accounts receivable of approximately $61.2 million and $60.0 million, respectively, was included in accounts receivable on the Company’s consolidated balance sheets.
During the years ended December 31, 2023 and 2022, the Company charged $5.5 million and $2.7 million, respectively, of accounts receivable deemed uncollectible against the allowance for credit losses.
Deferred Revenue and Remaining Performance Obligations
Revenue recognized during the years ended December 31, 2023, 2022 and 2021 which was included in the deferred revenue balances at the beginning of each respective period, was $525.5 million, $374.6 million, and $206.6 million.
As of December 31, 2023, and 2022, the aggregate transaction price allocated to remaining performance obligations was $1,839.4 million and $1,057.2 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.
Deferred Contract Costs
Deferred contract costs on the Company’s consolidated balance sheets were $118.7 million and $88.4 million as of December 31, 2023 and 2022, respectively. Amortization expense was $39.2 million, $28.0 million and $17.9 million for the years ended December 31, 2023, 2022 and 2021, respectively.
12. 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 year ended December 31, 2023, 2,016,413 shares of Class B common stock were converted into Class A common stock.
As of December 31, 2023, 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 305,395,175 shares of Class A common stock and 25,684,571 shares of Class B common stock were issued and outstanding.
As of December 31, 2023 and 2022, the Company had reserved shares of common stock for future issuance as follows:
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Options, RSUs and PSUs outstanding | 25,741,136 | 30,930,540 | |||||||||
| Shares available for future grants | 73,189,660 | 63,291,013 | |||||||||
| Shares subject to the employee stock purchase plan | 17,481,059 | 14,806,591 | |||||||||
| Total shares of common stock reserved for future issuance | 116,411,855 | 109,028,144 |
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 (“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 December 31, 2023, there were 12,054,709 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 awards, 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 December 31, 2023, there were 73,189,660 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—December 31, 2022 | 18,551,857 | $ | 3.24 | 4.4 | $ | 1,303,464 | |||||||||||||||||
| Options granted | — | — | |||||||||||||||||||||
| Options exercised | (6,455,931) | 3.24 | |||||||||||||||||||||
| Options forfeited or expired | (18,291) | 5.50 | |||||||||||||||||||||
| Balance—December 31, 2023 | 12,077,635 | $ | 3.24 | 3.4 | $ | 1,426,912 | |||||||||||||||||
| Exercisable—December 31, 2023 | 12,074,409 | $ | 3.23 | 3.4 | $ | 1,426,607 |
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. As of December 31, 2022, there were 28,557 shares of Class A common stock and 18,523,300 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 December 31, 2023. Compensation cost related to unvested awards not yet recognized was approximately $10.1 million as of December 31, 2022. The weighted-average period over which this compensation cost related to unvested employee awards will be recognized is 1.0 year and 0.6 years as of December 31, 2023 and December 31, 2022, respectively.
There were no options granted during the years ended December 31, 2023, 2022 and 2021. The Company received approximately $20.9 million, $10.0 million and $14.9 million in cash proceeds from options exercised during the years ended December 31, 2023, 2022 and 2021, respectively. The intrinsic value of options exercised during the years ended December 31, 2023, 2022 and 2021 was approximately $565.9 million, $301.6 million and $579.6 million, respectively. The aggregate fair value of options vested during the years ended December 31, 2023, 2022 and 2021 was $12.5 million, $23.9 million and $28.1 million, respectively.
Restricted Stock Units, Restricted Stock and Performance Stock Units
The following table summarizes the activity for the Company’s unvested RSUs and PSUs:
| Shares | Weighted-Average Fair Value | Aggregate Intrinsic Value (in thousands) | |||||||||||||||
| Unvested and outstanding balance as of December 31, 2022 | 12,378,683 | $ | 106.19 | $ | 909,833 | ||||||||||||
| Awarded | 7,382,006 | 89.09 | |||||||||||||||
| Vested | (4,794,318) | 101.02 | |||||||||||||||
| Forfeited/canceled | (1,302,870) | 102.42 | |||||||||||||||
| Unvested and outstanding balance as of December 31, 2023 | 13,663,501 | $ | 99.13 | $ | 1,658,476 |
The Company issued a total of 122,224 shares of restricted Class A common stock in connection with acquisitions, net of shares retired, during the year ended December 31, 2023, which are subject to service-based vesting conditions over approximately four years from the respective grant dates.
Total compensation cost related to unvested RSUs and restricted shares of common stock not yet recognized was approximately $1,187.3 million and $1,151.1 million as of December 31, 2023 and December 31, 2022, respectively. The weighted-average period over which this compensation cost related to unvested RSUs and restricted shares of common stock will be recognized is 2.8 years and 2.9 years as of December 31, 2023 and December 31, 2022, respectively.
Total compensation cost related to unvested PSUs not yet recognized was approximately $25.1 million and $19.0 million as of December 31, 2023, and December 31, 2022, respectively. The weighted-average period over which this compensation cost related to unvested PSUs will be recognized is 1.3 years and 1.4 years as of December 31, 2023, and December 31, 2022, respectively. There were no PSUs outstanding during the year ended December 31, 2021.
Stock-Based Compensation
Stock-based compensation was included in the consolidated statement of operations as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Cost of revenue | $ | 17,578 | $ | 10,827 | $ | 4,565 | |||||||||||
| Research and development | 313,096 | 237,120 | 101,942 | ||||||||||||||
| Sales and marketing | 101,937 | 76,735 | 35,035 | ||||||||||||||
| General and administrative | 49,689 | 38,472 | 22,195 | ||||||||||||||
| Stock-based compensation, net of amounts capitalized | 482,300 | 363,154 | 163,737 | ||||||||||||||
| Capitalized stock-based compensation | 13,597 | 14,853 | 9,660 | ||||||||||||||
| Total stock-based compensation | $ | 495,897 | $ | 378,007 | $ | 173,397 |
Employee Stock Purchase Plan
In September 2019, the Board adopted and approved the 2019 ESPP, which became effective on the date of the final prospectus for the Company’s IPO.
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 $16.0 million, $11.2 million, and $7.6 million of stock-based compensation expense related to the ESPP during the years ended December 31, 2023, 2022, and 2021, respectively.
As of December 31, 2023, and 2022, $6.6 million and $6.0 million, respectively has been withheld on behalf of employees for a future purchase under the ESPP due to the timing of payroll deductions.
During the years ended December 31, 2023, 2022, and 2021, the Company issued 517,430, 316,875, and 291,871 shares of Class A common stock under the ESPP. As of December 31, 2023, 17,481,059 shares of Class A common stock remain available for grant under the ESPP.
Total compensation cost related to the ESPP not yet recognized was approximately $6.8 million and $7.1 million as of December 31, 2023 and 2022, respectively. The weighted average period over which this compensation cost will be recognized is 0.4 years as of December 31, 2023 and 2022, respectively.
13. Interest Income and Other Income, Net
Interest income and other income, net consist of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Interest income | $ | 103,459 | $ | 34,931 | $ | 21,412 | |||||||||||
| Other (loss) income, net | (3,458) | 2,229 | 374 | ||||||||||||||
| Interest income and other income, net | $ | 100,001 | $ | 37,160 | $ | 21,786 |
14. Income Taxes
Income Taxes**—**For financial reporting purposes, income (loss) before income taxes, includes the following components (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Domestic | $ | 42,811 | $ | (76,694) | $ | (29,617) | |||||||||||
| Foreign | 17,424 | 38,624 | 11,195 | ||||||||||||||
| Income (loss) before income taxes | $ | 60,235 | $ | (38,070) | $ | (18,422) |
Total income taxes allocated to operations for the years ended December 31, 2023, 2022 and 2021 were as follows (in thousands):
| 2023 | Current | Deferred | Total | ||||||||||||||
| Federal | $ | (261) | $ | — | $ | (261) | |||||||||||
| State | 2,551 | — | 2,551 | ||||||||||||||
| Foreign | 10,262 | (885) | 9,377 | ||||||||||||||
| Total | $ | 12,552 | $ | (885) | $ | 11,667 |
| 2022 | Current | Deferred | Total | ||||||||||||||
| Federal | $ | 3,122 | $ | — | $ | 3,122 | |||||||||||
| State | 183 | — | 183 | ||||||||||||||
| Foreign | 9,179 | (394) | 8,785 | ||||||||||||||
| Total | $ | 12,484 | $ | (394) | $ | 12,090 |
| 2021 | Current | Deferred | Total | ||||||||||||||
| Federal | $ | 232 | $ | — | $ | 232 | |||||||||||
| State | 44 | — | 44 | ||||||||||||||
| Foreign | 2,091 | (44) | 2,047 | ||||||||||||||
| Total | $ | 2,367 | $ | (44) | $ | 2,323 |
Tax Rate Reconciliation—Income tax expense was $11.7 million, $12.1 million and $2.3 million for the years ended December 31, 2023, 2022 and 2021, respectively, and differed from the amounts computed by applying the U.S. federal statutory income tax rate of 21% for the years ended December 31, 2023, 2022 and 2021, to pretax income (loss) from operations as a result of the following (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Income tax expense at federal statutory rate | $ | 12,650 | $ | (7,995) | $ | (3,868) | |||||||||||
| Meals and entertainment | 1,957 | 1,717 | 416 | ||||||||||||||
| State taxes (net of federal benefit) | 1,090 | 140 | 18 | ||||||||||||||
| Net change in valuation allowance | 68,770 | 25,573 | 62,173 | ||||||||||||||
| Uncertain tax positions | (94) | 3 | (728) | ||||||||||||||
| U.S. tax costs on international operations | 2,037 | 5,722 | 1,478 | ||||||||||||||
| Foreign taxes | 1,149 | (835) | 424 | ||||||||||||||
| Share based compensation deductions | (69,784) | (1,580) | (57,350) | ||||||||||||||
| Return to provision | (3,335) | (1,149) | (193) | ||||||||||||||
| U.S. R&D tax credits | (2,973) | (9,467) | — | ||||||||||||||
| Other | 200 | (39) | (47) | ||||||||||||||
| Total | $ | 11,667 | $ | 12,090 | $ | 2,323 |
Certain reclassifications have been made to the components of Tax Rate Reconciliation for the year ending December 31, 2022 and 2021 to conform to the 2023 presentation.
For the year ended December 31, 2023, 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.
The Company is subject to tax laws in the United States and numerous foreign jurisdictions. The United States and many international legislative and regulatory bodies continually propose and enact legislation that could significantly impact how U.S. multinational corporations are taxed. The Company is closely monitoring proposed legislation and its potential impact. For tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminates the option to deduct research and development expenditures, as defined under IRC Section 174, in the year incurred. Instead, taxpayers are required to amortize such expenditures over five years if incurred in the U.S. and over fifteen years if incurred in a foreign jurisdiction.
Components of Deferred Taxes—The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 are presented below (in thousands):
| December 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Deferred tax assets: | |||||||||||
| Net operating losses | $ | 49,057 | $ | 54,974 | |||||||
| U.S. R&D tax credits | 46,639 | 13,841 | |||||||||
| Stock-based compensation | 47,652 | 48,872 | |||||||||
| Section 174 capitalization | 181,721 | 76,625 | |||||||||
| Lease liability | 27,004 | 18,793 | |||||||||
| Other | 21,593 | 15,494 | |||||||||
| Total deferred tax assets | $ | 373,666 | $ | 228,599 | |||||||
| Less: valuation allowance | (321,612) | (188,817) | |||||||||
| Deferred tax assets, net of valuation allowance | $ | 52,054 | $ | 39,782 | |||||||
| Deferred tax liabilities: | |||||||||||
| Commissions | (29,782) | (22,182) | |||||||||
| Right of use asset | (20,916) | (17,151) | |||||||||
| Total deferred tax liabilities | $ | (50,698) | $ | (39,333) | |||||||
| Deferred tax assets, net | $ | 1,356 | $ | 449 |
The Company accounts for income taxes using an asset and liability method and deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The Company’s deferred tax assets and liabilities consist primarily of federal and state net operating loss carryforwards and basis differences for financial reporting and tax purposes of certain assets and liabilities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the weight of all available evidence, which includes the historical operating performance and the recorded cumulative losses in prior fiscal periods, management does not believe as of December 31, 2023 and 2022 that it is more likely than not that the Company will realize its U.S. deferred tax assets. As a result, a valuation allowance of $321.6 million and $188.8 million has been provided at December 31, 2023 and 2022, respectively. The valuation allowance changed by $132.8 million and $40.2 million at December 31, 2023 and 2022, respectively. Certain reclassifications have been made to the components of deferred tax for the year ending December 31, 2022 to conform to the 2023 presentation.
At December 31, 2023 and 2022, the Company has net operating loss carryforwards for federal tax purposes of approximately $148.9 million and $243.4 million, respectively, which is available to offset federal taxable income. The federal net operating loss carryforwards generated at December 31, 2017 and prior will begin to expire in 2031, if not utilized. Net operating losses generated after December 31, 2017 have an indefinite carryforward period but are subject to an 80% of taxable income limitation after December 31, 2020. The Company has approximately $206.4 million and $92.0 million of post-apportioned net operating loss carryforwards as of December 31, 2023 and 2022, respectively for various state tax purposes. The state net operating loss carryforwards will begin to expire in 2026, if not utilized.
Generally, the utilization of net operating losses may be subject to an annual limitation provided for in the Internal Revenue Code of 1986, as amended, under Section 382 and similar state codes. The Company has prepared an analysis to determine whether its net operating losses may be limited under such provisions. It has been determined that any annual limitation would not result in the expiration of net operating loss carryforwards before utilization.
In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Historically, the Company has not made a provision for U.S. income tax with respect to accumulated earnings of foreign subsidiaries where the foreign investment of such earnings is essentially permanent in duration. Generally, such amounts would become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. The Company has not provided U.S. taxes on unremitted earnings of its foreign subsidiaries as it asserts permanent reinvestment on any accumulated earnings and profits.
Consistent with the provisions of ASC 740, Income Taxes, the Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
The following table shows the changes in the gross amount of unrecognized tax benefits as of December 31, 2023, 2022 and 2021 (in thousands):
| December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Beginning balance | $ | 106 | $ | 106 | $ | 532 | |||||||||||
| Increases based on tax positions during the current period | — | — | — | ||||||||||||||
| (Decreases) based on tax positions during the current period | (47) | — | (426) | ||||||||||||||
| Ending balance | $ | 59 | $ | 106 | $ | 106 |
The total amount of unrecognized tax benefits that, if recognized would impact the effective tax rate would be $0.1 million for the year ended December 31, 2023.
The Company’s policy for classifying interest and penalties associated with unrecognized income tax benefits is to include such items in income tax expense. The total amount of interest and penalties associated with unrecognized income tax benefits is $0.1 million and $0.1 million for the years ended December 31, 2023 and 2022.
It is reasonably possible that certain unrecognized tax benefits may increase or decrease within the next 12 months due to tax examination changes, settlement activities, expirations of statute of limitations, or the impact on recognition and measurement considerations related to the results of published tax cases or other similar activities. As such the Company anticipates insignificant changes to unrecognized tax benefits over the next 12 months.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions and in various international jurisdictions. Tax years 2017 and forward generally remain open for examination for federal and state tax purposes. To the extent utilized in future years’ tax returns, net operating loss carryforwards at December 31, 2023 and 2022 will remain subject to examination until the respective tax year is closed.
15. 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. Immediately prior to the consummation of the Company’s IPO in September 2019, all outstanding shares of convertible preferred stock and common stock were converted into shares of Class B common stock. As a result, Class A and Class B common stock are the only outstanding equity in the Company.
Basic and diluted net income (loss) per share is computed using the weighted-average number of common 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 loss per share of Class A common stock, the undistributed earnings are equal to net 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):
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Basic net income (loss) per share: | Class A | Class B | Class A | Class B | Class A | Class B | |||||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 44,684 | $ | 3,884 | $ | (45,163) | $ | (4,997) | $ | (16,177) | $ | (4,568) | |||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||||||||
| Weighted average shares used in calculating net income (loss) per share, basic | 298,116 | 25,918 | 283,989 | 31,421 | 240,999 | 68,049 | |||||||||||||||||||||||||||||
| Basic net income (loss) per share | $ | 0.15 | $ | 0.15 | $ | (0.16) | $ | (0.16) | $ | (0.07) | $ | (0.07) | |||||||||||||||||||||||
| Diluted net income (loss) per share: | |||||||||||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||||||||
| Allocation of distributed income (loss) for basic computation | $ | 44,684 | $ | 3,884 | $ | (45,163) | $ | (4,997) | $ | (16,177) | $ | (4,568) | |||||||||||||||||||||||
| Reallocation of undistributed income (loss) as a result of conversion of Class B to Class A shares | 3,884 | — | (4,997) | — | (4,568) | — | |||||||||||||||||||||||||||||
| Allocation of undistributed income (loss) | $ | 48,568 | $ | 3,884 | $ | (50,160) | $ | (4,997) | $ | (20,745) | $ | (4,568) | |||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||||||||
| Number of shares used in basic calculation | 298,116 | 25,918 | 283,989 | 31,421 | 240,999 | 68,049 | |||||||||||||||||||||||||||||
| Weighted average effect of diluted securities: | |||||||||||||||||||||||||||||||||||
| Conversion of Class B to Class A common shares outstanding | 25,918 | — | 31,421 | — | 68,049 | — | |||||||||||||||||||||||||||||
| Employee stock options | 14,828 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Employee stock purchase plan | 15 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock units and performance stock units | 2,731 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Unvested restricted stock in connection with acquisitions | 586 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Shares issuable upon conversion of the convertible senior notes | 8,098 | — | — | — | — | — | |||||||||||||||||||||||||||||
| Number of shares used in diluted calculation | 350,292 | 25,918 | 315,410 | 31,421 | 309,048 | 68,049 | |||||||||||||||||||||||||||||
| Diluted net income (loss) per share | $ | 0.14 | $ | 0.15 | $ | (0.16) | $ | (0.16) | $ | (0.07) | $ | (0.07) |
For the periods presented where the Company was in a loss position, basic net loss per share is the same as diluted net loss per share as the inclusion of all potential common shares outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows (in thousands):
| Year Ended December 31, | |||||||||||||||||
| 2023 | 2022 | 2021 | |||||||||||||||
| Shares subject to outstanding stock options and RSUs | 2,248 | 30,931 | 29,454 | ||||||||||||||
| Unvested early exercised stock options and restricted shares of common stock | 31 | 1,120 | 946 | ||||||||||||||
| Shares subject to the employee stock purchase plan | — | 316 | 94 | ||||||||||||||
| Shares issuable upon conversion of the convertible senior notes | — | 8,098 | 8,098 | ||||||||||||||
| Total | 2,279 | 40,465 | 38,592 |
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. See Note 2, Basis of
Presentation and Summary of Significant Accounting Policies—Accounting Policies Recently Adopted for more information. During the three months ended December 31, 2023, the conditional conversion feature of the 2025 Notes was not triggered and the 2025 Notes are not convertible, in whole or in part, at the option of the holders between January 1, 2024 through March 31, 2024. 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; however, since the Company is in a net loss position, there was no dilutive effect during any period presented.
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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