Datadog - a reprise of my previous comments

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Here is what I wrote in my discussion of the previous quarter (Q3):

”Remember that the yoy comparisons may not show their revenue growth for the next two quarters. As they said several times (here are two)

However, while Q3 usage growth was back to pre-COVID levels, the slowdown experienced in Q2 will still be seen in our year-over-year comparisons for a number of quarters.

And

So the growth we did forego in Q2 is going to be with us in the year-to-year comparison a little bit.

To clarify, they say they are growing almost as fast as before, but that, because of the slowdown in Q2, the year over year numbers are coming off a lower base than they would have been for yoy comparisons, until they get four quarters under their belt.

They are saying that because of Q2 dropping the baseline, you can’t look at yoy revenue growth for this just reported quarter, Q4 or next Q1, but should look at sequential dollars of revenue growth. Then in Q2, year over year revenue growth should return to normal. But that’s just the way I interpret it.

Look at it this way, they grew revenue, in sequential quarters in 2019 by:

$08 million
$13 million
$13 million
$18 million

Then in 2020 they grew revenue by:

$17 million — Q1, hit for maybe $2 million because of Covid in last two weeks of March, assuming they would have hit $19 million
$09 million — Q2, hit for maybe $9 million more (full pandemic panic)
$15 million — Q3, they are almost back in line

What they are saying is that because of the (say) $9 million that they lost in Q2, and perhaps $2 million in the last two weeks of March, this quarter looks light if you look yoy. However if you put that $11 million back into the base they’d be growing off, and imagine they were growing off a base $11 million higher, the yoy, instead of 155/96 = 61%, you get 166/96 = 73% revenue growth.

And that’s even though they were not quite all the way back as far as sequential dollars of growth, at $15 million, although it’s a lot better than Q2’s $9 million. And if they accelerate their sequential growth of revenue to $20 million in Q4, I won’t worry at all about the yoy percentages.”

Well, that’s what I wrote a quarter ago, and they grew this quarter by $23 million, which topped my target, and means that they reaccelerated to be back at a growth rate where they would have been, more or less, without the 2nd Q covid panic. It’s just what I wanted to see, and that they will have quite strong yoy comparisons yoy this year, especially in Q2 and Q3.

Best,

Saul

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Thanks, Saul; this dovetails with my thinking, fwiw.

Assuming DDOG stays in the 11-13% QoQ growth range, which would be slightly under pre-pandemic levels, Q321 YoY compare will be ~65%.

Today’s call (along with prior commentary) seems to suggest at least some basis for such a sequential growth assumption–e.g., continued 130%+ DBNR, continued large customer growth/commitments, the repeated refrain that the competitive landscape remains “boring in a good way,” and management’s apparent suggestion that the bulk of the impact of recent cloud partnerships will be seen in coming quarters’ topline. (On this last point, I need to read the transcript, as I was half-listening.)

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From the just announced quarter conference call last evening:

As a reminder, even though we have now experienced two quarters of usage growth that was approximately in line with pre-pandemic levels, Q2 was meaningfully pressured and that pressure will impact our yoy metrics, including revenue growth and net retention until we lap that quarter.

Saul

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Thanks Saul. That is reassuring and a good perspective.

I’m still learning from your posts and digging through board histories. I hope this question is not out of place.

Revenue per share was 0.02 vs consensus estimate of 0.06. Why would the consensus estimate have been that much higher? Were analysts expecting more than $23M quarter on quarter growth? Or is revenue per share a yoy metric?

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Thanks Saul for reminding us of this really important point. In order to really see how this works mathematically, I built a simple model to illustrate how 14.7% sequential growth equals 73% YoY.

So if revenue is growing at 14.7% sequentially (e.g. QoQ), as DDOG announced yesterday ($177.5M in Q4 compared to $154.7M in Q3’20), that implies they are growing their revenue at 73% YoY.


rev.gro.factor @endofQ1   rev.gro.factor @endofQ2   rev.gro.factor @endofQ3   rev.gro.factor @endofQ4
         1.147	                   1.316	             1.509	               1.731

So at the end of Q4, revenue is 1.731 higher than at the start of Q1, or 73% growth, assuming they can maintain 14.7% sequential revenue growth. This suggests DDOG revenue is growing at their pre pandemic levels!

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One thing to add to Saul’s excellent commentary: DDOG’s deferred revenues went up 25% from 166 to 208 pointing to further acceleration. Last quarter they barely budged which made few folks concerned that the company’s growth is decelerating. The growth this quarter points to a further acceleration ahead.

q2 q3 q4
165 166 208

DDOG management is notoriously conservative in their guidance as evidenced by past quarters. This was reinforced on the call in answers to several questions on this very topic. I would ignore the guidance altogether. The commentary about their business is in direct contradiction to it.

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Revenue per share was 0.02 vs consensus estimate of 0.06. Why would the consensus estimate have been that much higher?

Revenue per share for the quarter was 6 cents. You must be looking at GAAP results, which neither analysts, nor the company, nor us, pay any attention to. Just for accountants.

Read the Knowledgebase.

Saul

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GaryMF2020,

Be careful with annualized QoQ revenue growth because of seasonality. DDOG mentioned in their 10-K that they historically have higher percentage of subscription agreements in 4th quarter and this seems to have been the case Q4 2019 as far as I can tell. Seasonality is an problem with QoQ growth comparisons, hence why most people use YoY but this is a special case where YoY isn’t completely representative because of Q2. Just a friendly caution.

-Junomean2
Long DDOG

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good point Junomean2, thanks for the reminder. I do recall DDOG suggested there is some seasonality in their revenue and me forecasting based on Q4’20 might be a little optimistic.
Thanks again!
Gary

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good point Junomean2, thanks for the reminder. I do recall DDOG suggested there is some seasonality in their revenue and me forecasting based on Q4’20 might be a little optimistic.
Thanks again!

This observation should be taken into account. However IMHO far more significant is the often repeated remark that growth in new customers had returned to pre pandemic levels and that the CEO’ s comments were extremely upbeat and optimistic. I see the 14.8% Q/Q growth rate as an informed basis for projecting Q1 and perhaps full year results. My inclination is to discount seasonality ,such as it is, this time at least.

arnie

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