Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, or the Annual Report. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.

Overview

Datadog is the observability and security platform for cloud applications.

Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, real-user monitoring, and many other capabilities to provide unified, real-time observability and security for our customers’ entire technology stack. Datadog is used by organizations of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations, security, and business teams, accelerate time to market for applications, reduce time to problem resolution, secure applications and infrastructure, understand user behavior and track key business metrics.

We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly or annual. Customers also have the option to purchase additional products, such as additional containers to monitor, custom metrics packages, anomaly detection and app analytics. Professional services are generally not required for the implementation of our products and revenue from such services has been immaterial to date.

We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our customers can expand their footprint with us on a self-service basis. Our customers often significantly increase their usage of the products they initially buy from us and expand their usage to other products we offer on our platform. We grow with our customers as they expand their workloads in the public and private cloud.

As of June 30, 2023, we had $291.3 million in cash and cash equivalents and $1.9 billion in marketable securities. We generated revenue of $509.5 million and $406.1 million in the three months ended June 30, 2023 and 2022, respectively, representing year-over-year growth of 25%. For the six months ended June 30, 2023 and 2022, our revenue was $991.2 million and $769.2 million, respectively, representing year-over-year growth of 29%. Substantially all of our revenue is from subscription software sales. We have continued to make significant expenditures and investments, including in personnel-related costs, sales and marketing, infrastructure and operations, and have incurred net (loss) income of $(4.0) million and $(4.9) million for the three months ended June 30, 2023 and 2022, respectively, and $(28.1) million and $4.9 million for the six months ended June 30, 2023 and 2022, respectively. Our operating cash flow was $286.9 million and $220.3 million for the six months ended June 30, 2023 and 2022, respectively. Our free cash flow was $258.1 million and $190.1 million for the six months ended June 30, 2023 and 2022, respectively. See the section titled “—Liquidity and Capital Resources—Non-GAAP Free Cash Flow” below.

Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events including rising inflation, the U.S. Federal Reserve raising interest rates, the failure of Silicon Valley Bank and other financial institutions, the Russian invasion of Ukraine, and the COVID-19 pandemic have led to economic uncertainty. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology, which may impact our business and our customers’ businesses. In recent quarters, we have seen slower usage growth from existing customers, which may be related to the uncertain macroeconomic environment. In addition, as restrictions imposed by the COVID-19 pandemic have lifted, we have increased office activity globally, such as travel, in-person meetings and events as well as increased hiring and capital expenditures for additional office space.

Due to our subscription model, the effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. However, if economic uncertainty increases or the global economy worsens, our business,

financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see “Risk Factors” included in Part II, Item 1A of this report.

Factors Affecting Our Performance

Acquiring New Customers

We believe there is substantial opportunity to continue to grow our customer base. We intend to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage our prospective customers, increase brand awareness and drive adoption of our platform and products. We also plan to continue to invest in building brand awareness within the development and operations communities. As of June 30, 2023, we had approximately 26,100 customers spanning organizations of a broad range of sizes and industries, compared to approximately 21,200 as of June 30, 2022. Our ability to attract new customers will depend on a number of factors, including the effectiveness and pricing of our products, offerings of our competitors and the effectiveness of our marketing efforts.

We define the number of customers as the number of accounts with a unique account identifier for which we have an active subscription in the period indicated. Users of our free trials or tier are not included in our customer count. A single organization with multiple divisions, segments or subsidiaries is generally counted as a single customer. However, in some cases where they have separate billing terms, we may count separate divisions, segments or subsidiaries as multiple customers.

Expanding Within Our Existing Customer Base

Our base of customers represents a significant opportunity for further sales expansion. As of June 30, 2023, we had approximately 2,990 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 85% of our ARR, up from 2,420 customers as of June 30, 2022, representing 85% of our ARR. We monitor our number of customers with ARR of $100,000 or more, and believe it is useful to investors, as an indicator of our ability to grow the number of customers that are exceeding this ARR threshold. We define ARR as the annual run-rate revenue of subscription agreements from all customers at a point in time. We calculate ARR by taking the monthly run-rate revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage, usage from subscriptions for a committed contractual amount of usage that is delivered as used and monthly subscriptions. ARR and MRR should be viewed independently of revenue, and do not represent our revenue under GAAP on a monthly or annualized basis, as they are operating metrics that can be impacted by contract start and end dates and renewal rates. ARR and MRR are not intended to be replacements or forecasts of revenue.

A further indication of the propensity of our customer relationships to expand over time is our dollar-based net retention rate, which compares our ARR from the same set of customers in one period, relative to the year-ago period. As of each of June 30, 2023 and 2022, our trailing 12-month dollar-based net retention rate was above 120%. We calculate dollar-based net retention rate as of a period end by starting with the ARR from the cohort of all customers as of 12 months prior to such period-end, or the Prior Period ARR. We then calculate the ARR from these same customers as of the current period-end, or the Current Period ARR. Current Period ARR includes any expansion and is net of contraction or attrition over the last 12 months but excludes ARR from new customers in the current period. We then divide the total Current Period ARR by the total Prior Period ARR to arrive at the point-in-time dollar-based net retention rate. We then calculate the weighted average of the trailing 12-month point-in-time dollar-based net retention rates, to arrive at the trailing 12-month dollar-based net retention rate. As the growth of our business has decelerated in recent quarters, our trailing 12-month dollar-based net retention rate has declined.

We believe that our land-and-expand business model allows us to efficiently increase revenue from our existing customer base. Our customers often expand the deployment of our platform across large teams and more broadly within the enterprise as they migrate more workloads to the cloud, find new use cases for our platform, and generally realize the benefits of our platform. We intend to continue to invest in enhancing awareness of our brand and developing more products, features and functionality, which we believe are important factors to achieve widespread adoption of our platform. Our ability to increase sales to existing customers will depend on a number of factors, including our customers’ satisfaction with our solution, competition, pricing and overall changes in our customers’ spending levels.

Sustaining Innovation and Technology Leadership

Our success is dependent on our ability to sustain innovation and technology leadership in order to maintain our competitive advantage. We believe that we have built a highly differentiated platform that will position us to further extend the adoption of our platform and products. Datadog is frequently deployed across a customer’s entire infrastructure, making it ubiquitous. Datadog is a daily part of the lives of developers, operations engineers and business leaders. We employ a land-and-expand business model centered around offering products that are easy to adopt and have a very short time to value. Our efficient go-to-market model enables us to prioritize significant investment in innovation. We have demonstrated the success of our platform approach, through expansion beyond our initial infrastructure monitoring solution to include over 17 products. Approximately 82% of our customers were using more than one product as June 30, 2023, up from approximately 79% a year earlier. Additionally, as of June 30, 2023, approximately 45% of our customers were using more than four products, up from approximately 37% a year earlier, and approximately 21% of our customers were using more than six products, up from approximately 14% a year earlier. We believe these metrics indicate strong expansion of product adoption across our platform.

We intend to continue to invest in building additional products, features and functionality that expand our capabilities and facilitate the extension of our platform to new use cases. We also intend to continue to evaluate strategic acquisitions and investments in businesses and technologies to drive product and market expansion. Our future success is dependent on our ability to successfully develop, market and sell existing and new products to both new and existing customers.

Expanding Internationally

We believe there is a significant opportunity to expand usage of our platform outside of North America. Revenue, as determined based on the billing address of our customers, from regions outside of North America was approximately 30% and 28% of total revenue for the six months ended June 30, 2023 and 2022, respectively. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly in EMEA and APAC. Although these investments may adversely affect our operating results in the near term, we believe that they will contribute to our long-term growth. Beyond North America, we now have sales presence internationally, including in Amsterdam, Dublin, London, Paris, Seoul, Singapore, Sydney, and Tokyo.

Components of Results of Operations

Revenue

We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly, annual or multi-year, with the majority of our revenue coming from annual subscriptions. Our customers can enter into a subscription for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, a subscription for a committed contractual amount of usage that is delivered as used, or a monthly subscription based on usage. To the extent that our customers’ usage exceeds the committed contracted amounts under their subscriptions, either on a monthly basis in the case of a ratable subscription or once the entire commitment is used in the case of a delivered-as-used subscription, they are charged for their incremental usage.

Usage is measured primarily by the number of hosts or by the volume of data indexed. A host is generally defined as a server, either in the cloud or on-premise. Our infrastructure monitoring, APM and network performance monitoring products are priced per host, our logs product is priced primarily per log events indexed and secondarily by events ingested. Customers also have the option to purchase additional products, such as additional container or serverless monitoring, custom metrics packages, anomaly detection, synthetic monitoring and app analytics.

In the case of subscriptions for committed contractual amounts of usage, revenue is recognized ratably over the term of the subscription agreement, generally beginning on the date that our platform is made available to a customer. As a result, much of our revenue is generated from subscriptions entered into during previous periods. Consequently, any decreases in new subscriptions or renewals in any one period may not be immediately reflected as a decrease in revenue for that period but could negatively affect our revenue in future quarters. This also makes it difficult for us to rapidly increase our revenue through the sale of additional subscriptions in any period, as revenue is recognized over the term of the subscription agreement. In the case of a subscription for a committed contractual amount of usage that is delivered as used, a monthly subscription based on usage, or usage in excess of a ratable subscription, we recognize revenue as the product is used, which may lead to fluctuations in our revenue and results of operations. In addition, historically, we have experienced seasonality in new customer bookings, as we typically enter into a higher percentage of subscription agreements with new customers in the fourth quarter of the year.

Due to ease of implementation of our products, professional services generally are not required and revenue from such services has been immaterial to date.

Cost of Revenue

Cost of revenue primarily consists of expenses related to providing our products to customers, including payments to our third-party cloud infrastructure providers for hosting our software, personnel-related expenses for operations and global support, including salaries, benefits, bonuses and stock-based compensation, payment processing fees, information technology, depreciation and amortization related to the amortization of acquired intangibles and internal-use software and other overhead costs such as allocated facilities.

We intend to continue to invest additional resources in our platform infrastructure and our customer support and success organizations to expand the capability of our platform and ensure that our customers are realizing the full benefit of our platform and products. The level, timing and relative investment in our infrastructure could affect our cost of revenue in the future.

Gross Profit and Gross Margin

Gross profit represents revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin may fluctuate from period to period as our revenue fluctuates, and as a result of the timing and amount of investments to expand our products and geographical coverage.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation expense and sales commissions. Operating expenses also include overhead costs for facilities and shared IT-related expenses, including depreciation expense.

Research and Development

Research and development expense consists primarily of personnel costs for our engineering, service and design teams. Additionally, research and development expense includes contractor fees, depreciation and amortization and allocated overhead costs. Research and development costs are expensed as incurred. We expect that our research and development expense will increase in absolute dollars as our business grows, particularly as we incur additional costs related to continued investments in our platform.

Sales and Marketing

Sales and marketing expense consists primarily of personnel costs for our sales and marketing organization, costs of general marketing and promotional activities, including the free tier and free introductory trials of our products, travel-related expenses, amortization of acquired customer relationships and allocated overhead costs. Sales commissions earned by our sales force are deferred and amortized on a straight-line basis over the expected period of benefit, which we have determined to be four years. We expect that our sales and marketing expense will increase in absolute dollars as we expand our sales and marketing efforts.

General and Administrative

General and administrative expense consists primarily of personnel costs and contractor fees for finance, legal, human resources, information technology and other administrative functions. In addition, general and administrative expense includes non-personnel costs, such as legal, accounting and other professional fees, hardware and software costs, certain tax, license and insurance-related expenses and allocated overhead costs.

We have incurred, and expect to continue to incur, additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations and increased expenses for insurance, investor relations and professional services. We expect that our general and administrative expense will increase in absolute dollars as our business grows.

Other Income, Net

Other income, net consists of interest income, primarily due to income earned on money market funds included in cash and cash equivalents and on marketable securities, partially offset by interest expense due on the 2025 Notes and amortization of premiums on our marketable securities.

Provision for Income Taxes

Provision for income taxes consists of U.S. federal and state income taxes and income taxes in certain foreign jurisdictions in which we conduct business. We recorded a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.

Results of Operations

The following table sets forth our consolidated statements of operations data for the periods indicated:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Revenue			$	509,460					$	406,138					$	991,174					$	769,168
Cost of revenue (1)(2)(3)			101,846						81,925						201,760						156,387
Gross profit			407,614						324,213						789,414						612,781
Operating expenses
Research and development (1)(3)			239,494						177,699						468,972						328,307
Sales and marketing (1)(2)(3)			147,455						115,270						292,426						216,436
General and administrative (1)(3)			42,671						34,383						84,992						60,763
Total operating expenses			429,620						327,352						846,390						605,506
Operating (loss) income			(22,006)						(3,139)						(56,976)						7,275
Other income (loss):
Interest expense (4)			(1,526)						(4,541)						(3,707)						(9,788)
Interest income and other income, net			22,624						7,669						39,351						13,356
Other income, net			21,098						3,128						35,644						3,568
(Loss) income before provision for income taxes			(908)						(11)						(21,332)						10,843
Provision for income taxes			(3,061)						(4,868)						(6,723)						(5,984)
Net (loss) income			$	(3,969)					$	(4,879)					$	(28,055)					$	4,859

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Cost of revenue			$	4,157					$	2,355					$	7,882					$	4,008
Research and development			75,730						53,309						150,433						98,005
Sales and marketing			25,884						17,590						48,898						32,185
General and administrative			12,566						9,145						23,852						15,085
Total			$	118,337					$	82,399					$	231,065					$	149,283

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Cost of revenue			$	2,064					$	1,482					$	4,080					$	2,895
Sales and marketing			206						206						409						409
Total			$	2,270					$	1,688					$	4,489					$	3,304

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

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Cost of revenue			$	109					$	70					$	169					$	172
Research and development			5,360						2,829						9,953						6,126
Sales and marketing			1,253						605						2,028						1,714
General and administrative			1,143						217						2,108						474
Total			$	7,865					$	3,721					$	14,258					$	8,486

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(4) Includes amortization of issuance costs as follows:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(in thousands)
Interest expense			$	846					$	842					$	1,691					$	1,682

The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:

			Three Months Ended June 30,												Six Months Ended June 30,
			2023						2022						2023						2022
			(as a percentage of total revenue**(1)****)**
Revenue			100		%				100		%				100		%				100		%
Cost of revenue			20						20						20						20
Gross profit			80						80						80						80
Operating expenses
Research and development			47						44						47						43
Sales and marketing			29						28						30						28
General and administrative			8						8						9						8
Total operating expenses			84						81						85						79
Operating (loss) income			(4)						(1)						(6)						1
Other income (loss):
Interest expense			0						(1)						0						(1)
Interest income and other income, net			4						2						4						2
Other income, net			4						1						4						0
(Loss) income before provision for income taxes			0						0						(2)						1
Provision for income taxes			(1)						(1)						(1)						(1)
Net (loss) income			(1)		%				(1)		%				(3)		%				1		%

(1)Certain items may not total due to rounding.

Comparison of the Three Months Ended June 30, 2023 and 2022

Revenue

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Revenue			$	509,460					$	406,138					$	103,322					25		%

Revenue increased by $103.3 million, or 25%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. Approximately 60% of the increase in revenue was attributable to growth from existing customers, and the remaining 40% was attributable to growth from new customers.

Cost of Revenue and Gross Margin

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Cost of revenue			$	101,846					$	81,925					$	19,921					24		%
Gross margin			80		%				80		%

Cost of revenue increased by $19.9 million, or 24%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily due to an increase of $12.0 million in third-party cloud infrastructure hosting and software costs and an increase of $5.2 million in personnel and other related costs as a result of increased headcount.

Our gross margin remained flat for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily as the result of revenue growing in proportion to the growth of third-party cloud infrastructure provider costs.

Research and Development

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Research and development			$	239,494					$	177,699					$	61,795					35		%
Percentage of revenue			47		%				44		%

Research and development expense increased by $61.8 million, or 35%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily due to an increase of $54.7 million in personnel and other related costs for our engineering, product and design teams as a result of increased headcount and an increase of $6.4 million in cloud infrastructure-related investments.

Sales and Marketing

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Sales and marketing			$	147,455					$	115,270					$	32,185					28		%
Percentage of revenue			29		%				28		%

Sales and marketing expense increased by $32.2 million, or 28%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily due to an increase of $31.1 million in personnel and other related costs for our sales and marketing organization as a result of increased headcount and increased variable compensation for our sales personnel.

General and Administrative

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
General and administrative			$	42,671					$	34,383					$	8,288					24		%
Percentage of revenue			8		%				8		%

General and administrative expense increased by $8.3 million, or 24%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily due to an increase of $7.3 million in personnel and other related costs as a result of increased headcount and an increase of $1.4 million related to bad debt expense.

Other Income, Net

			Three Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Other income, net			$	21,098					$	3,128					$	17,970					574		%
Percentage of revenue			4		%				1		%

Other income, net increased by $18.0 million, or 574%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. This increase was primarily driven by an increase of $16.6 million in interest income, mainly due to income earned from investments in marketable securities.

Comparison of the Six Months Ended June 30, 2023 and 2022

Revenue

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Revenue			$	991,174					$	769,168					$	222,006					29		%

Revenue increased by $222.0 million, or 29%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. Approximately 65% of the increase in revenue was attributable to growth from existing customers, and the remaining 35% was attributable to growth from new customers.

Cost of Revenue and Gross Margin

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Cost of revenue			$	201,760					$	156,387					$	45,373					29		%
Gross margin			80		%				80		%

Cost of revenue increased by $45.4 million, or 29%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to an increase of $28.6 million in third-party cloud infrastructure hosting and software costs, an increase of $11.7 million in personnel and other related costs as a result of increased headcount, and an increase of $3.5 million of depreciation and amortization.

Our gross margin remained flat for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, primarily as the result of revenue growing in proportion to the growth of third-party cloud infrastructure provider costs.

Research and Development

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Research and development			$	468,972					$	328,307					$	140,665					43		%
Percentage of revenue			47		%				43		%

Research and development expense increased by $140.7 million, or 43%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to an increase of $122.4 million in personnel and other related costs for our engineering, product and design teams as a result of increased headcount and an increase of $17.0 million in cloud infrastructure-related investments.

Sales and Marketing

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Sales and marketing			$	292,426					$	216,436					$	75,990					35		%
Percentage of revenue			30		%				28		%

Sales and marketing expense increased by $76.0 million, or 35%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to an increase of $68.8 million in personnel and other related costs for our sales and marketing organization as a result of increased headcount and increased variable compensation for our sales personnel and an increase of $6.7 million in advertising, sales, marketing and promotional activities.

General and Administrative

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
General and administrative			$	84,992					$	60,763					$	24,229					40		%
Percentage of revenue			9		%				8		%

General and administrative expense increased by $24.2 million, or 40%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily due to an increase of $19.5 million in personnel and other related costs as a result of increased headcount and an increase of $4.4 million related to bad debt expense.

Other Income, Net

			Six Months Ended June 30,
			2023						2022						Change						% Change
			(dollars in thousands)
Other income, net			$	35,644					$	3,568					$	32,076					899		%
Percentage of revenue			4		%				0		%

Other income, net increased by $32.1 million, or 899%, in the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This increase was primarily driven by an increase of $29.6 million in interest income, mainly due to income earned from investments in marketable securities.

Liquidity and Capital Resources

Our largest source of operating cash is cash collection from sales of subscriptions to our customers. Our primary uses of cash from operating activities are for personnel expenses, hosting expenses, facility expenses, and marketing expenses. We have generated positive cash flows from operations during the six months ended June 30, 2023 and 2022. When assessing

sources of liquidity, we also include cash and cash equivalents of $291.3 million and marketable securities of $1.9 billion as of June 30, 2023. We believe that our existing cash and cash equivalents, marketable securities and cash flow from operations will be sufficient to support our cash requirements for the next 12 months and beyond.

Our working capital requirements are principally comprised of workforce salaries, bonuses, commissions, and benefits and, to a lesser extent, cancellable and non-cancelable licenses and services arrangements that are integral to our business operations, and operating lease obligations. Our principal commitments consist of purchase commitments for business operations, operating lease obligations, and obligations to pay the 2025 Notes’ coupons and principal. Purchase commitments for business operations are primarily related to cloud hosting and other software-based services. In June 2020, we issued $747.5 million aggregate principal amount of the 2025 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act.

During the six months ended June 30, 2023, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments, as disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report.

Cash Flows

The following table shows a summary of our cash flows for the periods presented:

			Six Months Ended June 30,
			2023						2022
			(in thousands)
Cash provided by operating activities			$	286,945					$	220,348
Cash used in investing activities			(366,285)						(269,872)
Cash provided by financing activities			27,520						20,005

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2023 increased $66.6 million compared to the six months ended June 30, 2022, primarily driven by an increase in non-cash charges of $78.7 million and a decrease in accounts receivable of $98.2 million. The increase in non-cash charges related primarily to an increase of $81.8 million in stock-based compensation as we continued to increase headcount to support the growth of the business. The decrease in accounts receivable was primarily due to timing of cash collections. The increase in cash provided by operating activities was offset by a decrease in accrued expenses and other liabilities of $39.8 million and a decrease in deferred revenue of $33.0 million.

Investing Activities

Net cash used in investing activities for the six months ended June 30, 2023 increased $96.4 million compared to the six months ended June 30, 2023, primarily driven by an increase of $671.5 million in the investment in marketable securities. The increase in cash used in investing activities was offset by an increase of $501.6 million in proceeds from maturities of marketable securities, an increase of $34.6 million in proceeds from the sale of marketable securities, and a decrease of $37.5 million in cash paid for the acquisition of businesses net of cash acquired.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2023 increased $7.5 million compared to the six months ended June 30, 2022, primarily due to an increase in proceeds from the issuance of Class A common stock under the ESPP of $6.4 million.

Non-GAAP Free Cash Flow

We report our financial results in accordance with GAAP. To supplement our condensed consolidated financial statements, we provide investors with the amount of free cash flow, which is a non-GAAP financial measure. Free cash flow represents net cash provided by operating activities, reduced by capital expenditures and capitalized software development costs, if any. Free cash flow is a measure used by management to understand and evaluate our liquidity and to generate future

operating plans. The reduction of capital expenditures and amounts capitalized for software development facilitates comparisons of our liquidity on a period-to-period basis and excludes items that we do not consider to be indicative of our liquidity. We believe that free cash flow is a measure of liquidity that provides useful information to our management, board of directors, investors and others in understanding and evaluating the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. Nevertheless, our use of free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Further, our definition of free cash flow may differ from the definitions used by other companies and therefore comparability may be limited. You should consider free cash flow alongside our other GAAP-based financial performance measures, such as net cash used in operating activities, and our other GAAP financial results.

The following table presents a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable financial measure calculated in accordance with GAAP, for each of the periods indicated:

			Six Months Ended June 30,
			2023						2022
			(in thousands)
Net cash provided by operating activities			$	286,945					$	220,348
Less: Purchases of property and equipment			(11,078)						(15,501)
Less: Capitalized software development costs			(17,798)						(14,780)
Free cash flow			$	258,069					$	190,067

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

There have been no material changes to our critical accounting policies from those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report.

Recently Adopted Accounting Pronouncements

See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, in our Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.