What Will DDOG Report on the 16th?

Hello Fools,

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.



Ok well this doesn’t look good at all. Guidance looks awful. It is certainly making me re-evaluate the attractiveness of the sub hyper growth cohort that now seems close to par, (Pure Storage, The Trade Desk, Shopify, Digital Ocean etc). Bill’s results look completely forgivable at this point.

  • Q4 Non-GAAP EPS of $0.26 beats by $0.07.
  • Revenue of $469M (+43.8% Y/Y) beats by $20.93M.
  • As of December 31, 2022, we had 317 customers with ARR of $1 million or more, an increase of 47% from 216 as of December 31, 2021. As of December 31, 2022, we had about 2,780 customers with ARR of $100,000 or more, an increase of 38% from 2,010 as of December 31, 2021.
  • First Quarter 2023 Outlook:
    • Revenue between $466 million and $470 million. vs. $482.39M consensus
    • Non-GAAP operating income between $68 million and $72 million.
    • Non-GAAP net income per share between $0.22 and $0.24, assuming approximately 348 million weighted average diluted shares outstanding vs. $0.24 consensus
  • Fiscal Year 2023 Outlook:
    • Revenue between $2.07 billion and $2.09 billion vs. $2.18B consensus
    • Non-GAAP operating income between $300 million and $320 million.
    • Non-GAAP net income per share between $1.02 and $1.09, assuming approximately 351 million weighted average diluted shares outstanding vs. $1.13 consensus

it seems they held up better this Q vs others as de-acceleration was just 0.1% but yes next Q guide is not great. it is less then this q result which they will likely beat but will show dramatic slowdown QoQ. if they beat their own forecast by same margin as this Q then it would be 4.7% QoQ growth next Q.


Here are the detailed q/q results:



My notes from the earnings call that concluded a moment ago.
DDOG Q4 FY 23 Earnings Remarks and Analyst Q/A
Announced 02/16/2023
Olivier Pomel, CEO
David Obstler, CFO

DBNRR +130%

RPO was 1.06 billion, up 30%, and declined on a y/y basis. Current RPO was in the upper 30s %.

Usage growth within existing customers was slightly lower in q4 vs. q3 and was more pronounced than in previous years.

Current operating leverage is scaling at a faster rate than previously.

Churn has remained low, with gross retention remained in the mid 90’s%.
17 generally available products in 2022 as compared to 13 at the end of 2021.

Although customers are being more cautious, we see no change in the trend of migration to cloud transformation. We believe we’re still in the early days and we plan to keep building and growing.

Drivers of Q4, saw a typical slowdown in q4 than usual. Saw larger spending customers growing slower, as we did with smaller growing customers.

Experienced a record new bookings in new logos.

Use conservative guidance and basing near term guidance we are seeing with our customers. Forecasting weaker guidance in Q1 due to the typical slow period during the December Christmas holiday season.
24-25% y/y growth.

Will continue to grow R&D and go to market teams and plan to grow their operating expenses in the low 30s % range and headcount in the mid 20s % range as compared to last year when it was in the mid 50s % range.

Analyst Questions/Answers

Q Do you see your slowdown being consistent w/ the hyperscalers?
A We are seeing some of the same trends re: slowdown in Q4, which also inform our own guidance.

Q Record new ARR in the quarter. To what do you attribute that? Do you see an increase in the number of consolidating opportunities?
A In Q4, we continue to see new greenfield being the majority of the driver. Consolidation opportunities when a client is already in their cloud journey, customers have continued to build on that. We do see customers in their cloud transformation journey trying to save cost, but not stopping.

Q Customers needing all 17 of your modules. Is it over-engineered.
A We have been investing heavily in cloud innovation, and this is actually helping us to get to these cloud transformations because it helps us solve more problems that our customers may have.

Q Larger customers, relative to their commitment, are you enforcing take or pay and how you’re working with them relative to their commitment?
A We’re working with our customers if they have run into a headwind w/ their business. Haven’t seen a very meaningful amount of unused commitments from customers because most customers tend to under-commit to spending dollars up-front.

Q Color re: billings
A Underlying wave has been cloud migration and digital transformation, so focusing on new logos and new locations/geographies in the meantime. They’re similar to the hyperscalers and are not sure when this too shall pass.

Q Cloud cost management and slowdown
A Lot of products that are early in their lifecycle. It’s going to be a mix. How do we turn them all into major products 2 to 3 years out and how do they become the platform of choice?

Q Uptick in cloud migration and how it compares to APM?
A We have a very ambitious plan and see it being adopted at a very large scale with very large customers, some of which we referenced today on the call.

Q Usage patterns of large customers vs. slow customers. Not seeing as much of a slowdown in the smaller customers. When can we expect to see a slowdown w/ the smaller customers?
A Customers tend to make cuts to large budget items, such as the cloud hyperscalers where the spend is larger. On the very low end of their customer base, they are seeing more of an impact on churn.

Q Gross margin was surprisingly high. How are you doing this?
A On the Engineering side, changing prices by 1% doesn’t impact customers much and they see a better way to help customers is by innovating and adding more product benefits.

Q Levels of conservativism now vs. when you gave guidance at the end of 2022
A Organic growth and expansion of new logos. In periods of time when they saw more growth of customers, the ratio between discounts and where they ended up has not changed. The optimization continues. Not currently building “when macros will stop” into their guidance.

Q Mid-20s% growth of go to market.
A Still have ground/geographies to cover and have had great success landing new customers. These are the seeds of future success we’re planting. The growth rate that we had in 2022, the growth rate will be higher because of the work that was done by the go to market team that was brought on board in late 2022.

Q Growth rates.
A DDOG’s products that are more mature are growing at similar %s as last year, where newer products are growing at a slower rate.(???)

Q Will NRR go below 130% with 25% growth rate of revenue?
A Given that net retention is comparison to y/y customers, yes, they will report if this goes below 130%.

Q Are you seeing that layoffs at your customers and DDOG charging on a per seat basis is impacting the projected revenue slowdown?
A Optimizing their cloud infrastructure and cloud build is what’s slowing revenue. They’re not directly impacted by layoffs of their customers.

Q ROI of customers?
A Have a lot of experience w/ large cloud providers. They see more of that coming their way as customers need to optimize and be more efficient.

Q Month of December…Have trends changed now vs. December of 2022?
A We continue to have a strong pipeline of opportunities. Seasonality was higher than they’ve seen in previous years. So far in early 2023, it’s similar to what they saw in Q3.

Q Large wins on the federal size. How big could this be and how does Fedramp impact TAM?
A Still have some building on the go to market teams for this. We are getting the proof points that we’re a fit and that there’s a real market there for DDOG.

Q How long does it take customer to get to the point where their optimization projects start to make a difference?
A Generally, the fastest thing they can do to have an impact is to adjust logs. Too early and they’re all going through different projects at different times.

Q Trends and what you’re seeing ytd, optimizations and workloads and NRR, timeline it takes given the anniversary of this, how does it look from a linearity perspective?
A Given the level of macro uncertainty, we (and the cloud providers) cannot tell you when this will ease.

Q Flexibility of payments, etc.
A Free Cash flow has been historically higher than their EBIT. Have not seen material changes in payment terms or the flows of conversion, so there’s nothing they see in terms of their cash flow.



This particular bit from the earnings call sounds a lot like ZSCALER two years ago, just before it brought in a new head of sales. The company re-energized sales teams and two quarters later reported great results


I think it’s fine in this macro. Churn remains low, generational tailwinds with regard to AI, migration to cloud transformation still strong. I think their guide is by necessity conservative, but no matter, they continue to execute. This isn’t a company losing their focus, or losing market share to competitors. I want to own this space, and DDOG is my best play. For me personally, I consider this to be on the shortlist, top… 5? of companies I own. There really isn’t a better place for 12-20% of my money. For me at least, this isn’t like the debate before on the board where many sold CRWD and piled into S. In my opinion, if I sold today it would be just to get out of the market and try and save some tics while the market thrashes, then be constantly waiting to get back in when the macro turns. That just isn’t the level of trading I want to engage in as I don’t have any particular skill to time the market, I don’t think, to say nothing of the potential for Wash sale if it happens quicker than expected.


To clarify, CFO David Obstler made comments re: headcounts and hiring during the call, just prior to the start of the analyst Q/A session. DDOG is projecting growth of the headcount of their go to market team in 2023 to be in the mid 20% range:


Guidance in Q1 is weak but this is similar to the hyperscalers also guiding for further weakness in Q1. DDOG seems to be closely correlated with the hyperscalers and this suggests to me that the weakness is caused by macro factors.
Management not assuming any macro improvement in 2023 for their guidance, this could give some upside in case macro would get better this year, to be seen.

I have seen some comparisons with New Relic and Dynatrace that aren’t slowing down as significantly, but first of all their growth rates are still much lower and secondly, they are more focussed on the larger enterprises. DDOG has much more mid market and cloud-native customer base, it are mostly these companies optimizing cloud spend today.

DDOG is arguably the best solution, but also the most expensive one. This puts them at an increased risk in this environment for customer churn, but no evidence is pointing to that imo:

  • Gross retention rates mid to high 90s, in line with previous years.
  • Only saw increased churn in their smallest customers, which are so insignificant that it didn’t even impact the gross retention rates.
  • 1.000 net new customers added. It has been around the 1.000 for a long time, while I would like to see that number trending higher again, it indicates consistent churn rates.
  • Customers continue to use more modules, with % of customers using >2, >4 and >6 modules trending higher in Q4 at same rates as in previous quarters.

Another positive data point: Record new logo ARR this quarter, impressive in this environment. They had several 7 digit customer lands using 12-15 modules, that’s almost the entire product portfolio.

To me this all suggests that weakness is caused (mostly) by spend optimizations, not by customers moving to other alternatives or by any fundamental problem with DDOG. Therefore, my bull thesis for DDOG hasn’t changed and they are still well positioned to profit from the cloud growth over the coming years. I sold 15% of my position yesterday but will keep 10-15% DDOG position for the time being. Valuation is also reasonable and I could see upside when the growth rates start to stabilize and perhaps even accelerate again after these cloud optimizations are done.


Just finished the DDOG call and posted my thoughts on Twitter. Wanted to put them here too.

Finishing $DDOG call. My take, they still have a brighter future than competitors that have reported better Q’s ( $DT ) because they have more exposure to cloud. Optimizing spend is much much easier and one of the HUUUUUUUGE benefits for the cloud as opposed to on-prem where you gotta spend HUGE upfront for what you’ll need over the next 5 years.

As a result, I think DDOG is more sensitive to hyperscaler optimization. When a customer reduces containers, VMs, other cloud pieces, it indirectly impacts DDOG.
Lots of confirmation on the call as to how the optimizing is happening. A good chunk is this indirect optimization but an additional part is log optimizing (not logging noise).

Still, I really don’t like seeing them tout customer growth when it is also slowing a ton like their revenue is. Every metric seems to be deteroriating. The question becomes, WHEN re-acceleration happens, where will it go? Will the “easy” comps being created now make them look OUTSTANDING next year? I’m not so sure I want to wait it out over the next couple quarters as it seems risky especially when they are openly saying, like the hyperscalers, that they expect optimization to continue and can’t see an end in sight.


…and this is starting to make me worried about Snowflake’s upcoming earnings and forward guidance. The amount of potential workload optimisation could be huge and Snowflake is fully valued at an aggressive growth rate expectation.



Thanks for adding to the discussion on this thread. I went through a few things as well and added them.

Well, my thinking was way off! I thought that they would pull a deal or two in that would push them over $470 MM and possibly a lot higher.

Take a look at the historical growth rates:

Grth Mar Jun Sep Dec
2018 116% 109% 91% 83%
2019 76% 82% 88% 84%
2020 87% 68% 61% 56%
2021 51% 67% 75% 84%
2022 83% 74% 61% 44%

The 44% ToY growth came on top of a number last year that reflected 84% growth. Had growth in Q4 2021 been only 75% and not 84%, the growth percentage for Q4 2022 would have been 51%, not so good - but not so bad. The comp next quarter will be just as difficult as the Q1 2022 growth rate was 83%.

Here is the midpoint guide growth over the prior quarter attainment:

GuideGrth Mar Jun Sep Dec
2019 6.4%
2020 3.8% 2.5% 2.8% 5.4%
2021 4.8% 6.8% 5.8% 7.6%
2022 3.2% 4.1% 1.4% 2.4%
2023 -0.3%

Datadog’s 2023 Q1 guide at the midpoint is lower than this quarter’s attainment. This is the first time this has happened.

Here is a table of the YoY Revenue differences (and Revenues for comparative purposes):

REV Mar Jun Sep Dec YoYDelta Mar Jun Sep Dec
2017 18.4 21.9 26.7 33.7 2017 - - - -
2018 39.7 45.7 51.1 61.6 2018 21.3 23.8 24.3 27.9
2019 70.1 83.2 95.9 113.6 2019 30.3 37.5 44.8 52.0
2020 131.2 140.0 154.7 177.5 2020 61.2 56.8 58.8 63.9
2021 198.5 233.5 270.5 326.2 2021 67.3 93.5 115.8 148.7
2022 363.0 406.1 436.5 469.4 2022 164.5 172.6 166.0 143.2

In real numbers, the increases have now decreased two quarters in a row. I cannot see a huge negative here. They guided $468 MM, which reflects a YoY increase of $105MM, accelerating this deceleration (even if they come in $20 MM - $30 MM higher). Despite the fact that there are hyperscaler headwinds, this does not look a business that is suffering. We should not forget that they are almost at a $2 billion annual run rate. However, what bothers me is the YoY guide increase of 29% for 2023 Q1. How are they going to maintain their >130% dollar based net retention rate (provided in their supplemental financial information document each quarter), especially when bigger customers are growing well?

Reported Customers & Customers by ARR:

Month Cust >100k >1Mil
Sep-18 7,008 377
Dec-18 7,676 453 29
Mar-19 8,391 508
Jun-19 9,106 594
Sep-19 9,821 727
Dec-19 10,536 858 50
Mar-20 11,391 960
Jun-20 12,246 1,015
Sep-20 13,100 1,082
Dec-20 14,200 1,228 101
Mar-21 15,200 1,406
Jun-21 16,400 1,570
Sep-21 17,500 1,800
Dec-21 18,800 2,010 216
Mar-22 19,800 2,250
Jun-22 21,200 2,420
Sep-22 22,200 2,600
Dec-22 23,200 2,780 317

The number of large customers as a percentage of total customers is increasing. It doesn’t look like this is only a result of slowing total customer growth.

Here is a chart of the Market Cap to TTM Revenues over time:

I used the prices and weighted average shares for the calculations in the chart above, which means that the real numbers may be a little different.

At $80/share, they’re sitting at 16.5, which is historically low (they hit a low of 13.7 last quarter and a high of 67.1 in in 2021 Q4).

Combining the comps (which will be tough the next 2 quarters) with hyperscaler optimization (which should ease in the 2nd half of the year) and the relatively low valuation (albeit at lower growth rates), I see an opportunity for decent share appreciation by the end of the year. However, I need to dig a bit into their TAM, competitors and realistic long term growth rates a bit more.



Perhaps. To be fair though, Hyperscaler optimization doesn’t flow to snowflake like it does DDOG so it is quite possible, and I think probable, that SNOW won’t be AS impacted. That is mostly a guess… Maybe a hope.


Very possible FinallyFoolin although their exposure to direct optimisation is probably a lot greater and more elective at Snowflake than DDOG.


Wouldn’t you think though that usage of SNOW gives the customer much more of an ROI, and gives it much more clearly, than usage of DDOG? (to oversimplify, you are saving having employees having to do the same or similar calculations “by hand”.)


100% agree Saul it would - Snowflake’s usage can drive revenues and profits rather than costs, however if layoffs are happening, market opportunities aren’t as abundant and business just isn’t available to be performed then I can see customer teams optimising their usage of Snowflake. I wasn’t prepared for the optimisation levels and growth collapse in Datadog or other plays this last quarter. I’m just preparing myself for Snowflake to be similarly affected even if my conviction is higher.



All good thoughts. Perhaps instead of asking:

Is the product mission-critical?

we should ask
What part of the workload is mission-critical?

This quarter is clarifying this second question. It’ll be interesting to hear what MDB reports as their platform is mission-critical but it may be the mission-critical workloads on there are a smaller subset of those overall workloads.


Great discussion so far!

I also try to be conservative about SNOW, even if I still hope Slootman is always up for a positive surprise (also seeing the point Saul made about them having stronger ROI)

It will also be interesting to see how SNOW and MDB are impacted by the ongoing optimizations.

Regarding mission criticality, I think it can depend on a second layer on top of the workload per see: how customers are using the product.

Example DDOG: They say their smaller spending (not necessarily small customers, rather large ones) that are early in the cloud transformation, are not optimizing but rather investing in DDOG. This is, a) due to the smaller costs of DDOG for them, so there is not that much optimization potential, and b), because cloud transformation is more mission-critical for their business goals and performance, compared to companies who are already much farther on their cloud journey. So in this case, the way the customer uses DDOG, also plays a role in how mission-critical it is for them.

Example MDB: While some larger customers are just using Atlas for some smaller applications/projects (low mission-criticality), many digital native start-up/scale-up-type of companies are built completely on MDB, so for them, it is very mission-critical, even if they temporarily consume less due to contraction in the own business.

I completely see the point of how mission-critical a workload is, and how logging in the case of DDOG can be optimized, for instance.

This is just another layer to think of mission-criticality I want to put on the table.


Here’s a note including partner checks on Snowflake’s workloads…


… and getting back to Datadog, here’s Bert’s latest take on the revenue growth quagmire it faces.

Effectively the way I see this after bringing all of the respective threads together is:

  1. Datadog always guide conservatively
  2. Optimisation is hitting them hard but is a one time saving and front loaded (H1’23)
  3. Once performed then sequential and YoY compares will right themselves
  4. New customers (a metric that continues to be very strong) will produce revenue growth as they activate their new service consumption
  5. Once the general industry malaise is through customers will ramp their consumption of services back up
  6. In the meantime their profitability and cash flow will be more than able to handle the hit on revenue growth.

Overall this translates into another V shape recovery IN REV GROWTH as per 2020/21 or U shape at worst.