Datadog Inc.

02/18/2026 | Press release | Distributed by Public on 02/18/2026 08:10

Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

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 audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. You should review the disclosure under the heading "Part I, Item 1A. Risk Factors" in this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
This section of our Annual Report on Form 10-K discusses our financial condition and results of operations for the fiscal years ended December 31, 2025 and 2024, and year-to-year comparisons between fiscal 2025 and fiscal 2024. A discussion of our financial condition and results of operations for the fiscal year ended December 31, 2023 and year-to-year comparisons between fiscal 2024 and fiscal 2023 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed on February 20, 2025.
Overview
Datadog is the AI-powered observability and security platform for cloud applications.
Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring, log management, user experience monitoring, cloud security, service management, 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 December 31, 2025, we had $401.3 million in cash and cash equivalents and $4,073.5 million in marketable securities. We have grown rapidly in recent periods, with revenues for the fiscal years ended December 31, 2025, 2024 and 2023 of $3,427.2 million, $2,684.3 million, and $2,128.4 million, respectively, representing year-over-year growth of 28% from the fiscal year ended December 31, 2024 to the fiscal year ended December 31, 2025 and 26% from the fiscal year ended December 31, 2023 to the fiscal year ended December 31, 2024. 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 generated net income of $107.7 million, $183.7 million and $48.6 million for the fiscal years ended December 31, 2025, 2024 and 2023, respectively. Our operating cash flow was $1,050.1 million, $870.6 million and $660.0 million for the years ended December 31, 2025, 2024 and 2023, respectively. Our free cash flow was $914.7 million, $775.1 million and $597.5 million for the years ended December 31, 2025, 2024 and 2023, respectively. See the section titled "-Liquidity and Capital Resources-Non-GAAP Free Cash Flow" below.
Unfavorable conditions in the economy both in the United States and abroad may negatively affect the growth of our business and our results of operations. For example, macroeconomic events including changes in trade policies, such as trade wars, tariffs or other trade restrictions or the threat of such actions, fluctuating inflation and interest rates, and the conflicts in Ukraine and the Middle East have led to economic uncertainty. Historically, during periods of economic uncertainty and downturns, businesses may slow spending on information technology, which may impact our business and our customers' businesses.
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 I, 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 December 31, 2025, we had approximately 32,700 customers spanning organizations of a broad range of sizes and industries, compared to approximately 30,000 as of December 31, 2024. 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 December 31, 2025, we had approximately 4,310 customers with annual run-rate revenue, or ARR, of $100,000 or more, representing 90% of our ARR, up from 3,610 as of December 31, 2024, representing 88% of our ARR. As of December 31, 2025, we had approximately 603 customers with annual run-rate revenue, or ARR, of $1.0 million or more, up from 462 as of December 31, 2024. 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 December 31, 2025, our trailing 12-month dollar-based net retention rate was about 120%. As of December 31, 2024, our trailing 12-month dollar-based net retention rate was high-110%'s. The increase in our trailing 12-month dollar-based net retention rate was attributable to increased usage growth from existing customers. 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.
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 20 products. Approximately 84% of our customers were using two or more products as of December 31, 2025, consistent with approximately 83% a year earlier. Additionally, as of December 31, 2025, approximately 55% of our customers were using four or more products, up from approximately 50% a year earlier; approximately 33% of our customers were using six or more products, up from approximately 26% a year earlier; approximately 18% of our customers were using eight or more products, up from approximately 13% a year earlier; and approximately 9% of our customers were using ten or more products, up from 5% 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 29% of our total revenue for each of the years ended December 31, 2025 and 2024. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly in EMEA and APAC. Although these investments may adversely affect our operating results in the near term, we believe that they will contribute to our long-term growth. Beyond North America, we now have sales presence internationally, primarily in Amsterdam, Dublin, London, Paris, Seoul, Singapore, Sydney, and Tokyo.
Components of Results of Operations
Revenue
We generate revenue from the sale of subscriptions to customers using our cloud-based platform. The terms of our subscription agreements are primarily monthly, annual or multi-year, with the majority of our revenue coming from annual subscriptions. Our customers can enter into a subscription for a committed contractual amount of usage that is apportioned ratably on a monthly basis over the term of the subscription period, a subscription for a committed contractual amount of usage that is delivered as used, or a monthly subscription based on usage. To the extent that our customers' usage exceeds the committed contracted amounts under their subscriptions, either on a monthly basis in the case of a ratable subscription or once the entire commitment is used in the case of a delivered-as-used subscription, they are charged for their incremental usage. Usage is measured on a per-unit basis, with the unit of measure differing for each product, based on the unit that, in working with customers and design partners, best indicates the value we deliver,
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, with the exception of certain software development costs which are eligible for capitalization. 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 for finance, legal, human resources, 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 expect that our general and administrative expense will increase in absolute dollars as our business grows.
Other Income (Loss), Net
Other income (loss), 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 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:
Year Ended December 31,
2025 2024 2023
(in thousands)
Revenue $ 3,427,158 $ 2,684,275 $ 2,128,359
Cost of revenue (1)(2)(3)
686,957 515,531 409,908
Gross profit 2,740,201 2,168,744 1,718,451
Operating expenses:
Research and development (1)(3)
1,548,451 1,152,703 962,447
Sales and marketing (1)(2)(3)
956,423 756,605 609,276
General and administrative (1)(3)(4)
279,700 205,152 180,192
Total operating expenses 2,784,574 2,114,460 1,751,915
Operating (loss) income (44,373) 54,284 (33,464)
Other income:
Interest expense (5)
(11,059) (7,068) (6,302)
Interest income and other income, net 182,453 156,724 100,001
Other income, net 171,394 149,656 93,699
Income before provision for income taxes 127,021 203,940 60,235
Provision for income taxes 19,280 20,194 11,667
Net income $ 107,741 $ 183,746 $ 48,568
____________________
(1)Includes stock-based compensation expense as follows:
Year Ended December 31,
2025 2024 2023
(in thousands)
Cost of revenue $ 29,729 $ 26,221 $ 17,578
Research and development 469,526 363,301 313,096
Sales and marketing 156,472 122,079 101,937
General and administrative 94,944 58,735 49,689
Total $ 750,671 $ 570,336 $ 482,300
____________________
(2)Includes amortization of acquired intangibles expense as follows:
Year Ended December 31,
2025 2024 2023
(in thousands)
Cost of revenue $ 5,428 $ 5,642 $ 8,041
Sales and marketing 945 825 825
Total $ 6,373 $ 6,467 $ 8,866
_____________________
(3)Includes employer payroll taxes on employee stock transactions as follows:
Year Ended December 31,
2025 2024 2023
(in thousands)
Cost of revenue $ 695 $ 446 $ 364
Research and development 40,183 31,134 21,449
Sales and marketing 5,923 4,694 5,917
General and administrative 6,998 6,852 4,811
Total $ 53,799 $ 43,126 $ 32,541
___________________
(4)Includes M&A transaction costs as follows:
Year Ended December 31,
2025 2024 2023
(in thousands)
General and administrative $ 1,574 $ - $ -
____________________
(5)Includes amortization of issuance costs as follows:
Year Ended December 31,
2025 2024 2023
(in thousands)
Interest expense $ 5,602 $ 3,761 $ 3,388
The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Year Ended December 31,
2025 2024 2023
(as a percentage of total revenue(1))
Revenue 100 % 100 % 100 %
Cost of revenue 20 19 19
Gross profit 80 81 81
Operating expenses:
Research and development 45 43 45
Sales and marketing 28 28 29
General and administrative 8 8 8
Total operating expenses 81 79 82
Operating (loss) income (1) 2 (2)
Other income:
Interest expense - - -
Interest income and other income, net 5 6 5
Other income, net 5 6 4
Income before provision for income taxes 4 8 3
Provision for income taxes 1 1 1
Net income 3 % 7 % 2 %
_____________________
(1)Certain items may not total due to rounding.
Comparison of the Years Ended December 31, 2025 and 2024
Revenue
Year Ended December 31,
2025 2024 Change % Change
Revenue $ 3,427,158 $ 2,684,275 $ 742,883 28 %
Revenue increased by $742.9 million or 28%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. Approximately 75% of the increase in revenue was attributable to growth from existing customers, and the remaining 25% was attributable to growth from new customers.
Cost of Revenue and Gross Margin
Year Ended December 31,
2025 2024 Change % Change
(dollars in thousands)
Cost of revenue $ 686,957 $ 515,531 $ 171,426 33 %
Gross margin 80 % 81 %
Cost of revenue increased by $171.4 million, or 33%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. This increase was primarily due to an increase of $149.8 million in third-party cloud infrastructure hosting and software costs and an increase of $18.2 million in personnel costs including allocated overhead costs as a result of increased headcount.
Our gross margin decreased by 1% for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily as the result of increased in third-party cloud infrastructure provider costs.
Research and Development
Year Ended December 31,
2025 2024 Change % Change
(dollars in thousands)
Research and development $ 1,548,451 $ 1,152,703 $ 395,748 34 %
Percentage of revenue 45 % 43 %
Research and development expense increased by $395.7 million, or 34%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. This increase was primarily due to an increase of $324.4 million in personnel costs including allocated overhead costs for our engineering, product and design teams as a result of increased headcount and an increase of $60.0 million in cloud infrastructure-related investments.
Sales and Marketing
Year Ended December 31,
2025 2024 Change % Change
(dollars in thousands)
Sales and marketing $ 956,423 $ 756,605 $ 199,818 26 %
Percentage of revenue 28 % 28 %
Sales and marketing expense increased by $199.8 million, or 26%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. This increase was primarily due to an increase of $165.4 million in personnel costs including allocated overhead 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 $26.3 million in advertising, sales, marketing and promotional activities.
General and Administrative
Year Ended December 31,
2025 2024 Change % Change
(dollars in thousands)
General and administrative $ 279,700 $ 205,152 $ 74,548 36 %
Percentage of revenue 8 % 8 %
General and administrative expense increased by $74.5 million, or 36%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. This increase was primarily due to an increase of $58.2 million in personnel costs and other related costs as a result of increased headcount, and an increase of $10.4 million in legal and other professional services expenses.
Other Income, Net
Year Ended December 31,
2025 2024 Change % Change
(dollars in thousands)
Other income, net $ 171,394 $ 149,656 $ 21,738 15 %
Percentage of revenue 5 % 6 %
Other income, net increased by $21.7 million, or 15% for the year ended December 31, 2025 compared to the year ended December 31, 2024. This increase was primarily driven by an increase of $39.1 million in interest income, mainly due to income earned from investments in marketable securities, offset by $14.0 million due to fluctuations related to foreign currency exchange rates.
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 years ended December 31, 2025, 2024, and 2023. When assessing sources of liquidity, we also include cash and cash equivalents of $0.4 billion and marketable securities of $4.1 billion as of December 31, 2025. 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 principally consist 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. Non-cancelable purchase commitments for business operations and operating lease obligations total $1.4 billion and $375.2 million, respectively, as of December 31, 2025, due primarily over the next five years. Purchase commitments for business operations are primarily related to cloud hosting and other software-based services.
We have also issued long-term debt to finance our business. In December 2024, we issued $1.0 billion aggregate principal amount of the 2029 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The total net proceeds from the sale of the 2029 Notes, after deducting the initial purchasers' discounts and debt issuance costs, were approximately $979.1 million. The principal and future interest payments related to our 2029 Notes are $1.0 billion. We may from time to time seek to retire or purchase the 2029 Notes, through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise.
Cash Flows
The following table shows a summary of our cash flows for the periods presented:
Year Ended December 31,
2025 2024
(in thousands)
Cash provided by operating activities $ 1,050,135 $ 870,603
Cash used in investing activities (1,334,480) (736,840)
Cash (used in) provided by financing activities (572,483) 787,083
Operating Activities
Net cash provided by operating activities for the year ended December 31, 2025 increased $179.5 million compared to the year ended December 31, 2024, primarily driven by an increase in non-cash charges of $215.4 million, an increase in deferred revenue of $75.7 million, and a increase in accrued expenses and other liabilities of $54.5 million. The increase in non-cash charges related primarily to an increase of $180.3 million in stock-based compensation as we continued to increase headcount to support the growth of the business. The increase in cash provided by operating activities was partially offset by an increase in accounts receivable of $52.9 million and an increase in deferred contract costs of $50.8 million.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2025 increased by $597.6 million compared to the year ended December 31, 2024, primarily driven by an increase in the purchases of marketable securities of $946.6 million, an increase in cash paid for acquisition of businesses, net of cash acquired of $110.9 million, an increase in capitalized software development costs of $25.1 million, and an increase in purchases of property and equipment of $14.9 million. These increases were partially offset by an increase in proceeds from maturities of marketable securities of $468.8 million and an increase in proceeds from the sale of marketable securities of $30.9 million.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2025 decreased by $1,359.6 million compared to the year ended December 31, 2024, primarily due to the absence of proceeds from the issuance of the 2029 Notes of $979.1 million, higher repayments of the 2025 Notes of $438.8 million, and the absence of proceeds from the termination of Capped Calls related to the 0.125% Convertible Senior Notes 2025 (the "2025 Notes"), together with the 2029 Notes, (the "Notes") of $54.7 million. The decrease in cash provided by financing activities was partially offset by the absence of purchases of Capped Calls related to the 2029 Notes of $100.9 million and proceeds from the issuance of common stock under the employee stock purchase plan of $13.1 million.
Non-GAAP Free Cash Flow
We report our financial results in accordance with U.S. GAAP. To supplement our 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 the strength of our liquidity and future ability to generate cash that can be used for strategic opportunities or investing in our business. 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. 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:
Year Ended December 31,
2025 2024 2023
(in thousands)
Net cash provided by operating activities $ 1,050,135 $ 870,603 $ 659,954
Less: Purchases of property and equipment (49,578) (34,719) (27,586)
Less: Capitalized software development costs (85,840) (60,781) (34,820)
Free cash flow $ 914,717 $ 775,103 $ 597,548
Critical Accounting Estimates
Our 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.
The significant accounting policies and methods used in the preparation of our consolidated financial statements are discussed in Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. We believe that the accounting policies described below involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
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, 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.
We account for revenue contracts with customersthrough 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 we satisfy a performance obligation.
Our subscriptions are generally non-cancellable. Once we have determined the transaction price, the total transaction price is allocated to each performance obligation in the contract on a relative stand-alone selling price basis, or SSP. The determination of a relative stand-alone SSP for each distinct performance obligation requires judgment. We determine SSP for performance obligations based on overall pricing objectives, which take into consideration market conditions and customer-specific factors. This includes a review of internal discounting tables, the service(s) being sold, and customer demographics.
Revenue is recognized when controlof these services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those services. We determine an output method 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 amountsof 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, we recognize revenue as the services are rendered.
Internal-Use Software Development Costs
We capitalize certain costs related to the development of our platform and other software applications for internal-use. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management with the relevant authority has authorized and committed to funding the project, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. In January 2025, the Company completed an assessment of the useful life of its capitalized software development costs, resulting in an increase in the estimated useful life of capitalized software development costs from two to three years. This change in accounting estimate was effective beginning fiscal year 2025. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within research and development expenses in our consolidated statements of operations.
We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods.
Business Combinations
When we acquire 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 us 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. Our 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, we 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.
Recently Adopted Accounting Pronouncements
See Note 2, in our Notes to Consolidated Financial Statements included in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.
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