Datadog's (NASDAQ:DDOG) Q2 Sales Top Estimates But Stock Drops 18.4%

Full Report / August 08, 2023

Cloud monitoring software company Datadog (NASDAQ:DDOG) reported Q2 FY2023 results topping analysts' expectations, with revenue up 25.4% year on year to $509.5 million. However, next quarter's revenue guidance of $523 million was less impressive, coming in 2.33% below analysts' estimates. Datadog made a GAAP loss of $3.97 million, improving from its loss of $4.88 million in the same quarter last year.

Datadog (DDOG) Q2 FY2023 Highlights:

  • Revenue: $509.5 million vs analyst estimates of $501 million (1.68% beat)
  • EPS (non-GAAP): $0.36 vs analyst estimates of $0.28 (27.6% beat)
  • Revenue Guidance for Q3 2023 is $523 million at the midpoint, below analyst estimates of $535.5 million
  • The company dropped revenue guidance for the full year from $2.09 billion to $2.06 billion at the midpoint, a 1.67% decrease
  • Free Cash Flow of $141.7 million, up 21.8% from the previous quarter
  • Customers: 2,990 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 80%, in line with the 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 exceptional over the last two years, growing from $233.5 million in Q2 FY2021 to $509.5 million this quarter.

Datadog Total Revenue

This quarter, Datadog's quarterly revenue was once again up a very solid 25.4% year on year. On top of that, its revenue increased $27.7 million quarter on quarter, a very strong improvement from the $12.3 million increase in Q1 2023. This is a sign of acceleration of growth and great to see.

Next quarter's guidance suggests that Datadog is expecting revenue to grow 19.8% year on year to $523 million, slowing down from the 61.4% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 23.6% over the next 12 months.

Large Customers Growth

This quarter, Datadog reported 2,990 enterprise customers paying more than $100,000 annually, an increase of 80 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 80% in Q2.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. 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. It's also comforting to see its gross margin remain stable, indicating that Datadog is controlling its costs and not under pressure from its competitors to lower prices.

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 $141.7 million in Q2, up 136% year on year.

Datadog Free Cash Flow

Datadog has generated $421.5 million in free cash flow over the last 12 months, an impressive 22% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Datadog's Q2 Results

Sporting a market capitalization of $34.2 billion, more than $2.19 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Datadog is attractively positioned to invest in growth.

It was comforting to see that Datadog topped analysts' revenue expectations this quarter, even if just narrowly. Non-GAAP operating profit beat more handily. Those really stood out as a positives in these results. On the other hand, its full-year revenue guidance was lowered and missed analysts' expectations, which is never a good sign. Although full year non-GAAP operating profit was raised (slower but more profitable growth), the market is focused on the lowered revenue guide. Next quarter's revenue guidance missed Wall Street's expectations. Overall, the results could have been better. The company is down 18.4% on the results and currently trades at $86.85 per share.

Is Now The Time?

Datadog may have had a bad quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity. 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 two years. On top of that, its impressive gross margins are indicative of excellent business economics, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Datadog's price to sales ratio based on the next 12 months of 14.6x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Datadog's qualities stand out and we still like it at this price.

Wall Street analysts covering the company had a one year price target of $111.2 per share right before these results, implying that they saw upside in buying Datadog even in the short term.

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