Datadog Q1 2024 Earnings Review

$DDOG Q1'24 Results:

Financial Results:

↗️$611.3M rev (+26.9% YoY, +25.6% LQ) beat est by 3.4%

↗️GM* (83.3%, +2.8%pp YoY)

↗️Operating Margin* (26.9%, +9.0%pp YoY)

↗️FCF Margin (30.6%, +6.4%pp YoY)

↗️EPS* $0.55 beat est by 57.1%🟢

*non-GAAP

Key Metrics

➡️DBNR 115% (115% LQ)
↗️RPO $1.73 B (+52.0% YoY)

➡️Billings $618M (+21.0% YoY)🟡

Customers

➡️28,000 customers (+10.0% YoY, +700)

↗️3,340 $100k+ customers (+15.0% YoY, +150)

↘️% of customers using 2+ products (82%, 83% LQ)

➡️% of customers using 4+ products (47%, 47% LQ)

↗️% of customers using 6+ products (23%, 22% LQ)

↗️% of customers using 8+ products (10%, 9% LQ)

Operating expenses

↗️S&M*/Revenue 23.4% (22.4% LQ)

↗️R&D*/Revenue 27.9% (27.7% LQ)

↘️G&A*/Revenue 5.0% (5.1% LQ)

↘️Net New ARR $87M ($168 LQ)

↗️CAC* Payback Period 22.0 Months (10.9 LQ)

Dilution

↗️SBC/rev 22%, +0.0%pp QoQ

↗️Basic shares up 3.9% YoY, +0.3%pp QoQ

↗️Diluted shares up 11.5% YoY, +0.3%pp QoQ🔴

Guidance

➡️Q2'24 $620.0 - $624.0M guide (+22.1% YoY) in line with est

↗️$2,590.0 - $2,610.0M FY guide (+22.2% YoY) raised by 1.4% beat est by 0.8%

Key points from Datadog’s First Quarter 2024 Earnings Call:

Strong Financial Performance

Datadog reported revenue of $611 million, marking a 27% increase year-over-year, which was above their guidance range. They also generated a significant free cash flow of $187 million with a margin of 31%.

AI-driven ARR is about 3.5% of Datadog's total, highlighting the growing impact of AI on the ecosystem.

Growing Customer Base

There was an uptick in customer usage, and existing customers showed higher usage growth in Q1 compared to Q4 of the previous year, which was similar to the usage growth experienced in Q2 and Q3 of 2022.

Many customers are consolidating their monitoring and security tools into Datadog’s platform as part of their digital transformation and cloud migration strategies. This consolidation is driven by a desire to reduce costs and streamline operations.

Specific examples of customer expansion include a three-year, seven-figure expansion with an online grocery business, and a significant expansion with a medical device company, where Datadog was selected over legacy solutions due to cost-effectiveness and improved integration.

New Products

AI for Incident Management: Datadog announced the general availability of Bit AI for incident management, which helps incident responders with auto-generated incident summaries to quickly understand the context and scope of complex incidents. Users can also utilize Bit AI to inquire about related incidents and perform tasks on the fly from incident creation to resolution.

Event Management: Datadog released Event Management in general availability. This product addresses the challenge of managing an increasing volume of alerts and events by automatically reducing them into actionable insights. These insights are used to generate tickets, call an incident, or trigger automated remediation, combining with Watchdog and Beats AI to provide a full AIOps solution.

Error Tracking for Logs: Datadog made error tracking for logs generally available. This feature intelligently combines millions of errors from logs into a manageable number of issues, allowing customers to more effectively manage and respond to errors within their systems.

FlexLogs: FlexLogs, which remains in limited availability, allows customers to easily scale storage and compute separately. This feature supports very high volume use cases in a cost-effective manner, particularly for long-term purposes like audit, security, and compliance. Despite limited availability, FlexLogs has already exceeded $10,000,000 in ARR.

Mobile App Testing: Datadog launched mobile app testing in general availability, offering fast, no-code, reliable testing on mobile devices. This addresses challenges related to the wide range of devices and operating systems used by consumers.

Cloud Cost Management: Datadog has added full support for Google Cloud to its Cloud Cost Management tool, enabling FinOps and DevOps teams to optimize their cloud spend across AWS, Azure, and GCP footprints. This product has surpassed the $10,000,000 ARR milestone and is seen as having significant growth potential.

Security Products

The launch of new security packages has been well received, with good uptake indicating alignment with customer needs. These packages make it easier to integrate security into the sales process.

The introduction of agent-led scanning for InfoSec and Security products is expected to help customers deploy Datadog's products more broadly and quickly.

Datadog's security solutions, including their cloud SIEM product, are being positioned to capitalize on the increasing complexity of security demands, especially in cloud environments.

Challenges

The company noted some customer optimization activities, indicating a focus on cost-efficiency by clients but observed a reduction in intensity compared to previous quarters.

Market and Geographic Expansion

The company highlighted stronger year-over-year revenue growth in international markets compared to North America, indicating a broadening of their market footprint.

Billings Growth

The billings for Q1 were reported at $618,000,000, reflecting a year-over-year increase of 21%. However, there was a sequential decline in billings from Q4 to Q1, which is typically expected due to seasonal factors in their business cycle. The sequential decline was noted to be larger than in the previous cycle, suggesting some variability but not necessarily indicative of a broader trend.

Future Outlook

Positive outlook for ongoing cloud migration and digital transformation trends. The company remains focused on leveraging digital transformation trends and AI adoption to fuel future growth.

Management comments on the earnings call.

Customer Growth:

"We saw usage growth from existing customers that was higher than in Q4. And this usage growth in Q1 was similar to what we experienced in Q2 and Q3 of 2022." - David Ochsler

New Products:

"Our newer products grew at a faster rate from a smaller base... For example, our products outside of Infrastructure Monitoring, APM Suite and Log Management exceeded €200,000,000 in ARR in Q1." - Olivier Pomel

"We launched mobile app testing in general availability, giving access to fast, no-code, reliable testing on their mobile devices." - Olivier Pomel

Security Products:

"In the Next Gen AI space, we announced general availability of bit AI for incident management... And users can also acquire Beats AI to ask about related incidents and perform tasks on the fly from incident creation to resolution." - Olivier Pomel

"The uptake [of new security packages] is good. They seem to align well with customers, correspond to the right need and are fairly easy to insert into the sales process." - Olivier Pomel

Challenges:

"While some of our customers are continuing to be cost conscious, we are seeing optimization activity reduce in intensity." - Olivier Pomel, CEO

"We have continued to add new customers and to see existing customers increase our usage growth and product adoption." - Olivier Pomel

Future Outlook:

"Overall, we continue to see no change in a multiyear trend towards digital transformation and cloud migration. We are seeing improved usage growth with less impact from optimization than we had seen in the last few quarters." - Olivier Pomel

Thoughts on Datadog ER $DDOG :

🟢Pros:

+ Revenue increased by +27% YoY, accelerating from 25.6% in last quarter.

+ DBNR remains strong at ~115%.

+ RPO grew by +52% YoY, much faster than revenue.

+ The company is increasing margins and profitability.

+ Beat revenue guidance by 3.4%.

+ The percentage of customers using 6+, and 8+ products increased from the last quarter.

+ Net New ARR is growing 76% YoY.

+ Investment in R&D is bigger than in S&M; the company pays great attention to the development of new products.

+ Strong customer growth (+150 >$100K customers); the share of >$100K clients now is 87%.

🔴Cons:

- Billings are growing 21% YoY, slower than revenue

- Diluted shares up 11.5% YoY

🟡Neutral:

+- Stock-Based Compensation (SBC)/revenue is 22%.