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Datadog (NASDAQ:DDOG) Q2: Beats On Revenue But Stock Drops


Full Report / September 16, 2022
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Cloud monitoring software company Datadog (NASDAQ:DDOG) announced better-than-expected results in the Q2 FY2022 quarter, with revenue up 73.8% year on year to $406.1 million. On the other hand, guidance for the full year slightly missed analyst expectations with revenues guided to $1.62 billion at the midpoint, or 0.28% below analyst estimates. Datadog made a GAAP loss of $4.87 million, improving on its loss of $9.36 million, in the same quarter last year.

Datadog (DDOG) Q2 FY2022 Highlights:

  • Revenue: $406.1 million vs analyst estimates of $381.2 million (6.51% beat)
  • EPS (non-GAAP): $0.24 vs analyst estimates of $0.15 ($0.09 beat)
  • Revenue guidance for Q3 2022 is $412 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $1.62 billion at the midpoint
  • Free cash flow of $60.1 million, down 53.6% from previous quarter
  • Customers: 2,420 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 79.8%, up from 75.5% 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 like Better Stack.

Sales Growth

As you can see below, Datadog's revenue growth has been incredible over the last year, growing from quarterly revenue of $233.5 million, to $406.1 million.

Datadog Total Revenue

This was another standout quarter with the revenue up a splendid 73.8% year on year. On top of that, revenue increased $43.1 million quarter on quarter, a solid improvement on the $36.8 million increase in Q1 2022, and happily, a slight acceleration of growth.

Guidance for the next quarter indicates Datadog is expecting revenue to grow 52.3% year on year to $412 million, slowing down from the 74.8% 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 41.2% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Datadog reported 2,420 enterprise customers paying more than $100,000 annually, an increase of 170 on last quarter. That is a bit less contract wins than we saw in the last quarter but quite a bit still above what we have typically seen over the last year, suggesting sales momentum is coming off slightly after a stronger quarter.

Datadog customers paying more than $100,000 annually

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 79.8% in Q2.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, marketing & sales and the general administrative overhead. Trending up over the last year, this is 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 $60.1 million in Q2, up 42.2% year on year.

Datadog Free Cash Flow

Datadog has generated $353.8 million in free cash flow over the last twelve months, an impressive 25.9% 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 Q2 Results

With a market capitalization of $35.4 billion, more than $1.7 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.  On the other hand, it was unfortunate to see the slowdown in new contract wins and the revenue guidance for the full year slightly missed expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $94 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 numerous reasons why we think Datadog is one of the best software as service companies out there. 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 bountiful generation of free cash flow empowers it to invest in growth initiatives.

The market is certainly expecting long term growth from Datadog given its price to sales ratio based on the next twelve months is 18.5x. Looking at the tech landscape today, Datadog's qualities really stand out, and it is not hard for us to argue that the multiple is well deserved. We really like the stock at this price.

The Wall St analysts covering the company had a one year price target of $152.3 per share right before these results, implying that they saw upside in buying Datadog even in the short term.

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