Datadog reported Q3 results on November 3. I summarized some of the most important point from the report.
Datadog continued its rapid revenue growth, at 61.4% year-over-year, although a a slower pace. They grew revenue by single digits vs. previous quarter, the only other time this happened was during the COVID pandemic. DBNER continued to be best in class above 130% (21 quarters in a row).
Datadog bills all of their revenue in U.S. dollars, they don’t price in local currencies. Customers in Europe and Japan still have their budgets in euros or yen and so the strong dollar is a headwind.
Some additional numbers and statistics:
- Non-GAAP operating margin was 17%.
- Operating cash flow was $83.6 million
- Free cash flow of $67.1 million (15% margin).
- Q4 guide:
- Revenue of $445m to $449m, this would mean a 37% growth yoy at the mid point. I expect them to beat this target as always. If they beat it by the same 5.9% they did this quarter then revenue would be $473.5m with 45.2% yoy revenue growth.
- Churn remains low with gross revenue retention steady in the mid to high 90s.
Datadog updates how many employees they have only once a year on their 10-K, will be interesting to see how many new hires they have this year.
One of the things I like about Datadog is that their R&D expense as a percentage of revenue is growing while S&M expense as a percentage of revenue is going down. All this while maintaining operating income at around breakeven.
The reason I like this trend is that it tells me that customers are probably pulling the product more than the company needs to push it to them. This is very important.
Stock Based Compensation (SBC)
Like most SaaS companies Datadog pays it’s employees partly with stock. As we can see from the cash flow statement SBC is a huge part of the payment and although they claim to have $83.6m in operating cash flow the truth is that had they paid their employees with only cash then operating cash would have been a negative $17.7m.
Total customers growth slowed down vs. last quarter and last year. Datadog added ~1,000 new customers which is sort off a base number they add each quarter but as a percentage it came at the lowest number for the last two years.
Large customers, which are defined as ARR of $100,000 or more, growth also slowed down a bit but their percentage of the total customers continued to grow.
Some new customer highlights for this quarter:
- 7-year land with a Fortune 100 grocery chain.
- 7-figure land with a major multinational restaurant chain.
- 7-figure land with a social networking app.
- 7-figure upsell with a large Asia-based electronic conglomerate.
- 8-figure multiyear upsell with a large e-commerce company.
Their customers are adopting more and more products.
- 80% of customers were using 2 or more products.
- 40% of customers were using 4 or more products.
- 16% of customers were using 6 or more products.
Notes from the conference call
Asked about the current environment vs. what they saw in the pandemic as regards to cost optimization and customers calling back a little bit.
The situation is fairly different now from what we saw in COVID. In COVID, everyone was cramming to save money as quickly as possible, which is not what we’re seeing today. When you look at the usage and where you might see cost optimization, I think there are 2 different stories there.
There’s the customers that are largely cloud-native and normally pretty scale on the cloud environment, so then have cloud end-to-end on public cloud. They are definitely trying to save money. And these are companies that, in general, also tend to have their own growth rates affected or probably affected in the future by the macro trends. So that’s why they’re doing that.
But when you look at the other customers, the ones that are earlier in their cloud migration, they are actually not slowing down, and we see the same urgency and eagerness for them to keep scaling and keep moving into the cloud.Olivier Pomel, CEO
Asked about their investment philosophy
We’ve always lived within our means and been limited more by our ability to integrate in a responsible way of quota carrying reps, or R&D for that matter, into our company. And we really have not made changes. We had a sort of a prudent plan and continued. We think there’s a very long-term opportunity, and we’re investing behind that. We are cognizant that there’s more volatility in microeconomic conditions, and we’re looking at everything, but we didn’t get out over our skis to begin with in our plan. So it allows us, given our model and the way we run the company, to continue that investment in a systematic way.David Obstler, CFO
I keep repeating, but we burned only $30 million from inception to taking the company public. We generated a lot more cash since then. We have efficiency that’s one of the core parts of our culture. That’s how we run the business, where we built it.Olivier Pomel, CEO
Valuation / Multiples
Datadog is usually valued on it’s EV/Revenue multiple, it was quite high last couple of years but it seems that it came back to earth lately.
Disclaimer: This article does not represent investment advice and is solely the author’s opinion. The author is not a financial advisor. Readers are expected to perform their own due diligence before making investment decisions.
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