In the future, I plan take a more nuanced approach to management comments. I am repurchasing the 50% of DDOG that I sold. Thanks for shedding light on DDOGs situation, and how they appear to remain viable. Posts like yours help me to learn and refine my investing.
That’s a really great insight you gave into interpreting management guidance, and offers some more reassurance that we can take Datadog’s management at face value.
However, on reflection I feel I may have been a bit too one-sided. I didn’t mean my suggestion that Datadog is likely going to beat its Q3 guidance to be a recommendation to buy, because 1. I could be wrong and 2. who knows if management comments are already priced in.
There are many reasons why I could be wrong:
The first few weeks of April were very good growth in new logos. New logos remain for the rest of the quarter, but what we saw is toward the end of April and then the full month of May, we had much lower growth.
Perhaps our presupposed usage recovery is either overstated, or substantially offset by deceleration of new logo. Our equally it could be understated by achievement of non-underpinned pipeline.
Analyst: David, I know you don’t guide to billings, but I believe, looking through my notes, next quarter, you have some difficult comps with pretty significant contracts that paid up last 3Q. Any color on that would be super helpful. Thank you.
Sorry. Any issues for 3Q with difficult comps than the year before?
David Obstler – Chief Financial Officer: Yeah. Nothing that we’re pointing out on this call. So nothing that we wanted to point out.
There is something vague about this answer, and perhaps there could be an impact from the loss of some key customers that we haven’t counted in. While I do think Datadog will beat its guidance, I don’t believe it’ll be a big beat. I hope I’m wrong.
“I’ve learned to see a sustained high valuation as a perceived certainty, by the market, of a company’s dominance” (gmcnatt)
We have to consider that Datadog might grow +15% sequentially, which would be a return to its pre-covid growth rate and a big beat (to my mind), but that would ‘only’ be +68% YoY. How would the market perceive that? Equally a flat sequential growth rate of 7% would be in fact maintaining its growth rate but might be construed as deceleration by the market. A few more quarters of simply maintaining its new growth rate and up against a tough Q1 comparative, Datadog would go from a 87% grower to a 31% grower in a year. Or at the ‘best case’ 15% sequential increase each quarter, in Q221 this would ‘only’ be a 62% grower.
You’ll note that Datadog’s revenue is usually very predictable, but in the Q2 earnings call management admitted that there was a lot of ‘noise’ and uncertainty.
Datadog has been awarded a high multiple because of its perceived dominance of its market. But how quickly will the market’s perception change if Datadog growth ‘perceptibly’ changes YoY, and what will happen to its multiple then. Equally, I’m not encouraging anyone to sell, I just want to provide a balanced view.
Thinking past Q3
"Given macro uncertainty, we saw these larger customers look to conserve cash where they still could and therefore, optimize the consumption of cloud infrastructure. We see large enterprises go through these optimization exercises on a regular basis. What was unusual this quarter was to see a large number of companies going through it at the same time."
The biggest reliance we are placing on management’s comments is that their usage recovery is genuine. I have faith in that, compared to the April-June period, as this was the height of the outbreak. I can’t see a deceleration in usage from that point, which their guidance implies, which is why I think they’ll beat it. But what happens after?
I have no doubt in my mind that Datadog is an excellent company and an excellent proposition. But what we need to scrutinise is whether this ‘optimisation’ that caused the Q2 slowdown (in other words ‘cost cutting’) is really a one-off. It is ‘unusual’ in comparison to prior quarters, because there was no pandemic in prior quarters.
My concern is that if Datadog was an expendable proposition to its customers at the beginning of Covid, then why would it not be expendable as pressure on cost cutting continues - and it will. I think very, very few companies will be protected completely from this pressure (we had even seen something similar with Fastly in Q2, and many others). How can we place faith that this really was a one-time ‘optimisation’? I am giving Datadog the benefit of the doubt for now, but it is something I will keep an eye on closely for Q3.
Why do I think that? For context I work in finance selling IoT solutions within the ‘Enterprise’ division, spending much of my day trending run rates, churn, new logo/pipeline and usage. We achieve revenue through data usage via a platform, and during the first months of Covid (and lockdown) usage dropped off a cliff and has since recovered to almost the prior year exit rate. Albeit, we are NOT a Datadog. But we are well behind budget and struggling to accelerate usage & new logo due to the macro enviroment. And being behind budget means pressure to cut costs. I am fully ready to admit that my own experience may have skewed my perception here, and to judge Datadog on its own merits. I would welcome that reassurance.
To be quite honest, I would rather not to have to interpret management’s good faith. It seemed obvious Zoom would blow-out Q2 earnings due to having 3 months of positive Covid impact as opposed to 1 month in their blow-out Q1. We would all prefer not to have to second guess a Covid headwind instead. But that’s the reality we are in.
I think Datadog will be just fine long term. I just wanted to provide a more rounded and realistic view here, as in my opinion I don’t think many companies will be unaffected one way or another from Covid. I don’t want my post on Datadog’s Q3 guidance to be interpreted that the growth will reaccelerate to new highs in Q3 and then fly off into the sunset. I don’t think that’s realistic, and that we might need to reassess what Datadog’s ‘high growth’ looks like going forward.