Starting a thread here for DDOG: (down 23% premarket, but rising somewhat since then )
All things considered there’s plenty to like about this quarter:
-Record non-GAAP net income of $125.3m, up from $83.7m last year in Q2
-GAAP net loss of -$3.9m, which is the best it’s been since Q1 2022, when they reported a $9m net income
-Beat their own revenue estimate for the Q by 1.5%
-Free cash flows of $141.7m, representing a 28% FCF margin, the highest it’s been since Q1 2022
-Lowered its annual guide by 2%
-Revenue growth for this quarter of 6% QoQ and 25% YoY is very bad relative to what it was in previous years. For perspective, the average of the past 4 quarters of QoQ growth is 5%. But at this time last year, that average was 13%. Said differently, just look at their YoY rev growth numbers the past six quarters:
83% → 74% → 62% → 44% → 33% → 25%
-Revenue growth problems most likely stem from enterprise customer growth declines, which have declined almost in lock step with revenue growth. This quarter saw a 3% QoQ increase in enterprise customers, or 24% YoY.
-There is an argument that’s been floating around that DDOG would benefit from AI because, “more stuff to monitor”. This argument IMO got much weaker and will take longer to play out in DDOG’s favor.
In summary, I don’t think DDOG became a much worse stock with the release of this report. -23% seems silly, but the context here is that DDOG was up 47% before earnings came out. Some selling probably makes sense given the big run up YTD, growth continuing to slow down, and the AI thesis not working out as quickly as some may have hoped.
This did seem like a mixed bag, so I cannot tell if the business is slowing or if the macro (OT) is slowing. One more note on the positive side is - “As of June 30, 2023, we had about 2,990 customers with ARR of $100,000 or more, an increase of 24% from about 2,420 as of June 30, 2022.”
Is 24% growth good here? I am guessing yes with the lowered guidance they are still growing customers?
I did not see this coming. What’s more concerning is the implied Q4 guidance.
Datadog guided to $523M at the midpoint for Q3, and with a similar size beat, revenue should end up around $530-535M. This means the reduced full year guide assumes Q4 revenue will be flat sequentially, at about $535M resulting in YoY revenue dropping to the mid-teens. I expect this is why the stock is taking a beating, at rightfully so IMO. I did not get a chance to listen to the call this morning but imagine there were several questions asked about this.
This was the other really disappointing aspect. Datadog added only 80 customers with > $100K ARR, which is the fewest since 12 quarters ago - Q2 2020 Covid quarter… This does not give me a lot of confidence.
Profitability looks great but growth does not. Now the question really becomes whether one believes revenue growth will accelerate meaningfully from here. Decisions, decisions…
And if you take out the COVID black swan, it was the worst in 16. Total customers is the same dynamic even adjusting for the 200 low-paying customers who dropped back to the free tier. I get usage optimization, but they now have notably less user growth as well. Not a good trend.