Datadog (NASDAQ:DDOG) Q3 Sales Beat Estimates, Provides Optimistic Full Year Guidance

Full Report / January 11, 2023
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Cloud monitoring software company Datadog (NASDAQ:DDOG) reported Q3 FY2022 results beating Wall St's expectations, with revenue up 61.3% year on year to $436.5 million. The company expects that next quarter's revenue would be around $447 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Datadog made a GAAP loss of $25.9 million, down on its loss of $5.48 million, in the same quarter last year.

Datadog (DDOG) Q3 FY2022 Highlights:

  • Revenue: $436.5 million vs analyst estimates of $414.2 million (5.37% beat)
  • EPS (non-GAAP): $0.23 vs analyst estimates of $0.16 (43.7% beat)
  • Revenue guidance for Q4 2022 is $447 million at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $67.1 million, up 11.5% from previous quarter
  • Customers: 2,600 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 78.5%, up from 76.6% same quarter last year

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.

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 the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the 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 incredible over the last two years, growing from quarterly revenue of $154.6 million in Q3 FY2020, to $436.5 million.

Datadog Total Revenue

This was another standout quarter with the revenue up a splendid 61.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $30.3 million in Q3, compared to $43.1 million in Q2 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Datadog is expecting revenue to grow 37% year on year to $447 million, slowing down from the 83.7% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 33.6% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Datadog reported 2,600 enterprise customers paying more than $100,000 annually, an increase of 180 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.

Datadog customers paying more than $100,000 annually


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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 78.5% in Q3.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still a good gross margin that allows companies like Datadog to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Datadog's free cash flow came in at $67.1 million in Q3, up 17.5% year on year.

Datadog Free Cash Flow

Datadog has generated $363.8 million in free cash flow over the last twelve months, an impressive 23.7% of revenues. This extremely high FCF margin is a result of Datadog asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Datadog's Q3 Results

With a market capitalization of $23.5 billion, more than $1.76 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Datadog delivered this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. On the other hand, there was a deterioration in gross margin. Overall, this quarter's results still seemed pretty positive and shareholders can feel optimistic. The company currently trades at $67.00 per share.

Is Now The Time?

When considering Datadog, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Datadog is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its impressive gross margins are indicative of excellent business economics.

There's no doubt that the market is optimistic about Datadog's growth prospects, as its price to sales ratio based on the next twelve months of 11.5x would suggest. And looking at the tech landscape today, Datadog's qualities as one of the best businesses really stand out and we think that the multiple is justified. We like the stock at this price.

The Wall St analysts covering the company had a one year price target of $128.2 per share right before these results, implying that they saw upside in buying Datadog even in the short term.

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