Cloud monitoring software company Datadog (NASDAQ:DDOG) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 26.9% year on year to $611.3 million. The company expects next quarter's revenue to be around $622 million, in line with analysts' estimates. It made a non-GAAP profit of $0.44 per share, improving from its profit of $0.23 per share in the same quarter last year.
Datadog (DDOG) Q1 CY2024 Highlights:
- Revenue: $611.3 million vs analyst estimates of $591.7 million (3.3% beat)
- Billings: $618.0 million vs analyst estimates of $619.3 million (slight miss)
- EPS (non-GAAP): $0.44 vs analyst estimates of $0.34 (27.8% beat)
- Revenue Guidance for Q2 CY2024 is $622 million at the midpoint, roughly in line with what analysts were expecting
- The company lifted its revenue guidance for the full year from $2.57 billion to $2.6 billion at the midpoint, a 1.4% increase
- Gross Margin (GAAP): 82%, up from 79.3% in the same quarter last year
- Free Cash Flow of $186.7 million, similar to the previous quarter
- Customers: 3,340 customers paying more than $100,000 annually
- Market Capitalization: $42.44 billion
Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ:DDOG) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.
Founded in 2010, Datadog was designed to help companies that were then just starting to move from legacy on-premise servers to hosting their systems in the cloud. Because the rate of deployment of software increased from weeks to days and hours, the engineering teams needed a way to observe their cloud infrastructure in real-time.
Datadog seamlessly integrates into a company’s tech stack and pulls all the metrics that matter for different cloud services and databases and makes them available in a single real-time dashboard. The shared dashboard then makes it easy for different teams in the company to collaborate when investigating why a service broke down or became really slow.
Cloud Monitoring
Software is eating the world, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical and ever more complex. To solve this challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with the visibility to troubleshoot issues in real-time.
Cloud infrastructure monitoring is becoming a competitive space and Datadog is competing with offerings from New Relic (NYSE:NEWR), Elastic (NYSE:ESTC), Splunk (NASDAQ:SPLK), monitoring tools made by the cloud providers themselves and up and coming startups.
Sales Growth
As you can see below, Datadog's revenue growth has been impressive over the last three years, growing from $198.5 million in Q1 2021 to $611.3 million this quarter.
This quarter, Datadog's quarterly revenue was once again up a very solid 26.9% year on year. However, its growth did slow down compared to last quarter as the company's revenue increased by just $21.6 million in Q1 compared to $42.11 million in Q4 CY2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.
Next quarter's guidance suggests that Datadog is expecting revenue to grow 22.1% year on year to $622 million, slowing down from the 25.4% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 20.4% over the next 12 months before the earnings results announcement.
Large Customers Growth
This quarter, Datadog reported 3,340 enterprise customers paying more than $100,000 annually, an increase of 150 from the previous quarter. That's quite a bit more contract wins than last quarter and about the same as what we've seen in past quarters, demonstrating that the business has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.
Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Datadog's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 82% in Q1.
That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Trending up over the last year, Datadog's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Datadog's free cash flow came in at $186.7 million in Q1, up 60.5% year on year.
Datadog has generated $668 million in free cash flow over the last 12 months, an eye-popping 29.6% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.
Key Takeaways from Datadog's Q1 Results
We were impressed by Datadog's significant improvement in new large contract wins this quarter. We were also glad its revenue outperformed Wall Street's estimates. However, billings missed. Overall, this quarter's results seemed fairly positive, although the billings blemish means it wasn't perfect. Valuation is high, and the market was likely expecting more following bullish results from the public cloud vendors like Amazon AWS, Microsoft Azure, and Alphabet GCP. The stock is down 10.7% after reporting, trading at $113.4 per share.
Is Now The Time?
When considering an investment in Datadog, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are several reasons why we think Datadog is a great business. While we'd expect growth rates to moderate from here, its revenue growth has been exceptional over the last three years. And while its existing customers have been reducing their spending, which is a bit concerning, the good news is its bountiful generation of free cash flow empowers it to invest in growth initiatives. On top of that, its efficient customer acquisition hints at the potential for strong profitability.
There's no doubt the market is optimistic about Datadog's growth prospects, as its 16.6x price-to-sales ratio based on the next 12 months would suggest. Looking at the tech landscape today, Datadog's qualities as one of the best businesses really stand out and there's no doubt it's a bit of a market darling. We don't mind paying a premium for a premium business and would argue that it's often wise to hold on to quality businesses long term, even when expectations are high, but we do want to mention that there seems to be a lot optimism priced in at the moment.
Wall Street analysts covering the company had a one-year price target of $148.19 right before these results (compared to the current share price of $113.40).
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