Datadog (DDOG) – Earnings Review – May 7, 2024
Datadog is a dominant player in the data observability space. Observability simply refers to the practice of monitoring an entire software ecosystem to track issues, vulnerabilities and performance. Other players within this area include the hyper-scalers, Splunk, Elastic, CrowdStrike (through its Humio acquisition) and many more. Datadog splits its observability niche into 3 smaller buckets: infrastructure monitoring, log management and Application Performance Monitoring (APM).
Infrastructure monitoring: provides a holistic view of assets like servers and networks. It automates the collection of traffic and overall usage insights. That means it can more expediently fix and uncover infrastructure issues.
Log (or record of event) management: manages “timestamped records of events” occurring across the entire infrastructure. This also facilitates faster issue remediation and optimization of performance. These logs are organized and utilized within infrastructure monitoring and other use cases to identify things like customer service issues. Log management encompasses the collecting, maintaining, and leveraging of log data. This product routinely supports infrastructure monitoring, BUT there’s a key difference between the two. Log management handles event-based data, while infrastructure monitoring (as the name indicates) handles infrastructure-based metrics.
Application Performance Monitoring (APM): tracks app performance and uncovers/prioritizes performance issues to be remediated.
These three product categories closely tie together.
Because Datadog already handles network viability, security is a wonderfully relevant growth adjacency. Products like Cloud Infrastructure Entitlement Management (CIEM) for example, ensure identity controls are strict and minimum access permissibility is in place. There’s a lot of competition here, but Datadog is no slouch. CIEM diminishes risk of identity attacks in a cloud environment. Its Security Information and Event Management (SIEM) product allows for “long term data log visualization for security investigations.”
“At Datadog, we’re focused on helping our customers observe, secure, and take action on their complex systems.” – Co-founder/CEO Oliver Pomel
Demand
- Beat revenue estimates by 3.3% & beat guidance by 3.7%.
- Missed billings estimates by 0.8%. It does not guide to billings as that metric is tied to timing of deal closures. It tells investors to focus on revenue and annual recurring revenue (ARR) – like many other software names do.
- This was its highest quarter of net new ARR since Q4 2021.
- Customer growth slowed to 10% Y/Y this quarter vs. 18% Y/Y last quarter as Datadog stopped enjoying inorganic growth contributions from previous M&A.
- Gross revenue retention (GRR) remained in the mid-to-high 90% range. 98%-99% would be great; 95% would be fine. It’s somewhere in that range.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profitability & Margins
- Beat EBIT estimates by 25.7% & beat guidance by 26.2%.
- Operating expenses (OpEx) rose by 14% Y/Y as it accelerates its pace of hiring to support growth.
- Beat $0.34 EPS estimates & beat identical guidance by $0.10.
- Beat $0.04 GAAP EPS estimates by $.08.
- Beat FCF estimates by 18%.
Gross profit margin was 83.3% vs. 83.4% Q/Q & 80.5% Y/Y. This expansion is being driven by cloud cost efficiencies. Economies of scale and better hyper-scaler bargaining power are likely the two sources of cost efficiency here.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $2.8 billion in cash & equivalents.
- No traditional debt.
- $743 million in convertible senior notes.
- Diluted share count rose by 11.4% Y/Y; basic share count rose by 3.9% Y/Y.
Guidance & Valuation
“Our guidance philosophy remains unchanged. As a reminder, we based our guidance on trends observed in recent months and then we apply conservatism to these growth trends.” – CFO David Obstler
- Raised annual revenue guidance by 1.4%, which beat estimates by 0.6%.
- Raised EBIT guidance by 9.2%, which beat estimates by 8.3%.
- This is despite adding $11 million in incremental OpEx this year via the return of its DASH User Conference.
- Raised $1.41 EPS guidance by $0.13, which beat estimates by $0.05.
- Q2 guidance was ahead across the board.
Datadog trades for 70x 2024 earnings with 13% Y/Y earnings growth expected. Its margins are set to contract Y/Y as it accelerates growth spending (and over-earned last year due to prudence here). Profit growth should improve in 2025 and beyond.
Call & Release Highlights
The Platform Play:
Datadog has done well to round out its observability suite beyond its initial cloud monitoring niche. Across log management, APM, cloud security and software delivery, it is becoming an increasingly powerful vendor consolidator and efficiency force multiplier for its clients. It allows customers to enjoy an overarching view of data, app performance and infrastructure, with insights on how to optimize every part of an enterprise. And the evidence of this playing out is clear:
10% of its customers now have 8 or more products vs. 7% Y/Y… and it’s not just the three-headed observability product core driving this progress. The 12 products it launched from 2020 to 2022 now represent 11% of total sales, while its new database monitoring tool rapidly reached 1% of total sales. Its non-observability tools crossed $200 million in annual recurring revenue (ARR) during the quarter. The pace of vendor consolidation continues to accelerate, and that favors platforms like Datadog.
Q1 Success & Macro:
Usage growth accelerated in Q1 vs. Q4 while, quarter to date, Q2 usage growth is faster than it was a year ago. It’s now back to usage patterns that it considers to be more normal. Budget scrutiny has not vanished, but it is modestly dissipating as cloud optimization intensity fades away.
Product Innovation & AI:
Bits AI was broadly released during the quarter. This gives incident response managers automated and curated summaries. It also offers a recommended course of action based on this powerful context.
AI integrations within the Datadog platform allow customers to place their first party data right into its ecosystem to uplift model and app creation. It now has 2,000 customers using one or more of these integrations.
The big release within cloud service management was its event management product. This product prioritizes and ranks cloud incidents and alerts to deprioritize false positives (big cost saver) and remediate pressing issues more quickly. This complements Bits AI quite well as Bits AI curates reports and event management tells you which reports to focus on. This happens in a fully automated fashion, with remediation actions as well. Between event management, Watchdog (its AI-powered infrastructure monitoring platform) and its workflow automation tools, Datadog is confident in its AI operations suite being end-to-end.
In log management, it added error tracking tools to combine “millions or errors” into a consolidated list of issues. It also added full-text search for more powerful querying. Finally, Flex Logs is doing very well early on. As a reminder, this is its cost effective means to store and retain large batches of logs. They’re priced at $0.60 per 1 million annually and allow for separation of storage and query costs. This makes it ideal for long term data storage and regulatory compliance. With Flex Logs, storage and computation can scale in a parallel, independent manner. This separation for Datadog unleashes far more data scalability, customization and cost optimization for clients. Conversely, querying from a flex log is slower than for Datadog’s standard log tier. That makes Flex Logs better suited for lower priority data. So far, interest in this product is excellent, as it crossed $10 million in ARR before even fully launching.
More Product news:
- Launched mobile app testing for no code examinations on remote devices.
- Added Google Cloud to its cloud cost management tool. It now has every hyperscale on that product, which allows it to better optimize cloud consumption for its users.
Wins:
- Signed a 3-year, 7-figure expansion deal with an online grocer to bring the client’s product usage from 7 to 14. This win included its newer cloud security tools.
- Signed a 7-figure expansion deal with a medical device firm. Its log management solution was becoming a bottleneck with poor inter-department communication and soaring costs. It added 9 Datadog products and displaced 4 point solutions in doing so.
- Displaced 4 point solutions as part of a win with a leading athletic apparel company. This company expects to save millions in annual OpEx.
GenAI Monetization:
Datadog was asked how it can enjoy more GenAI monetization than it does today. Leadership reminded us that next-gen AI companies are now 3.5% of its business, vs. 3% Q/Q, but analysts wanted to know why it hasn’t gotten an Azure-type growth uplift. The explanation mimics what we’ve been talking about in other reports. The first wave of GenAI monetization is within the current chip and server boom. Training clusters help hyperscaler growth, but don’t support Datadog usage. Instead, app creation will be what powers Datadog’s GenAI revenue. App creation is in a far more nascent stage than GenAI hardware. The foundation is being laid.
Final Note:
Datadog President Amit Agarwal is stepping down at the end of the year. He will join DDOG’s board.
Take
This is another entirely fine report being punished by Mr. Market. Why? Likely because of the billings miss and analysts maybe wanting a larger guidance raise. It’s an expensive name, which has kept me out of what I view as an elite company to date. Expensive inherently means the bar for what is considered a successful quarter is higher. There’s nothing alarming in this report, and the team all but told you the guidance is overly conservative (as it always is). Ugly reaction… not an ugly quarter or anything to panic about.
