Earnings season is well under way and another one of our companies, Datadog, is about to report on the 16th.
It’s difficult to predict what will be reported for the December quarter. However, I’ll make my prediction here:
Datadog guided to a midpoint of $447 MM (445 - 449) in revenue for the quarter ending in December.
I believe they’ll do at least $470 MM (a 5.1% beat - the lowest beat ever was 6% in the prior quarter), perhaps $489 MM, which would reflect 50% growth. This would still reflect the lowest YoY growth ever for the company and a beat of 9.5%.
The hyperscalers had a mixed quarter with growth generally decelerating as their customers optimized their workloads in order to reduce costs. This article from Software Stack Investing is excellent: Q4 2022 Hyperscaler Earnings Review - Software Stack Investing. According to the article, this optimization should be front-loaded. In other words, most of it should already have happened in the second half of last year, decreasing throughout 2023 with normal growth picking back up in the second half of 2023.
So there are two things to consider. Most of the optimization is occurring as a result of eliminating excess resources and capacity and most of this optimization should have occurred during the second half of 2022.
So how much of this optimization will apply to Datadog? As pointed out in the article, not all of this optimization applies to the products that Datadog offers. However, Datadog’s Q4 occurred in the second half of last year.
For example, Infrastructure, Application and Database monitoring (essential to any enterprise) are priced on a per host basis. Reductions in the size of the environments won’t have an effect on the number of hosts.
On the latest earnings call, Datadog had this to say about optimization within the context of the hyper scalers:
But we’re seeing some of what they’re seeing to optimization. We’re a little bit less sensitive to it because of what we do, we tend to skew toward more critical environment than everything that might in the hyperscaler. And overall, all of our products meaningfully outperformed the growth of the hyperscalers.
So the big question for me, at least for the December quarter, is just how sensitive is Datadog to hyperscaler optimization? The second question is despite the optimization headwinds, can they pull a rabbit out of their hat and drive more revenue anyway?
Given the fact that the September quarter reflected the lowest YoY revenue growth (61%) and beat (6%) ever for the company, the revenue guide (37%) is very low and that Sales teams are probably busting their asses to bring in big deals for Q4 to make their annual quotas, I think that Datadog will blow past their guidance for Q4 and guide a bit better than expected for 2023.
Now, having worked for a company that does what Datadog does, except for being primarily on-premise, I am acutely aware of the fact that competition could be fierce and that business can turn south really quickly. The moment I see strong competitive solutions undercutting Dastadog’s prices or when the hyperscalers offer viable competitive products for a fraction of the cost (less likely due to compatibility among all hyperscalers) is when I’ll get out. Until such time, which could be a years away, I think Datadog should outperform quite well.