Datadog Earnings Report Summary

Cloud monitoring and observability company Datadog (NASDAQ:DDOG) reported its Q2 earnings on August 8th. The company, which is valued at nearly $29 billion, had seen its shares gain by more than 23 percent for the year.

Due to mixed business results, however, the Q2 earnings report marked a halt to this run of strong returns. Still, there are reasons to be optimistic.

One of the most positive elements in the Q2 report was Datadog’s announcement of a 24 percent growth in customers contributing $100,000 or more in annual revenue. At the end of the quarter, the company had 2,990 such customers. 

Datadog also rolled out a number of enhancements to its line of analytics and observability products over the last three months. One of the most crucial of these was a monitoring product built specifically for large language model (LLM) applications. This should be valuable for Datadog because LLMs are rapidly gaining traction in the business world through implementations like ChatGPT. 

The company is leaning even further into artificial intelligence with its new Bits AI, an assisting generative AI meant to help engineers process data and troubleshoot issues. While it’s not yet clear how Bits AI will impact Datadog’s sales, the introduction of an AI assistant could enhance Datadog’s ease of use, especially to small businesses. 

Beyond innovative AI products, DDOG added several capability upgrades to its existing platform. These included a new test-running system, improved logging and new cost-management tools.

While perhaps not as consequential to Datadog’s future growth as its forays into the AI world, more basic capability upgrades may help to support the company’s competitive position and ensure its customer retention rates remain high.

Revenue and Operating Income

In Q2, Datadog generated $509.5 million in total revenue, up 25 percent on a year-over-year basis. To date, the company has generated $991.2 million in revenue this fiscal year, up from $769.2 million at the same point in the 2022 fiscal year. This represents a growth rate of nearly 29 percent for the fiscal year so far. 

Turning to profitability, Datadog reported an operating loss of $22 million. This represented a substantial widening from the $3.1 million loss reported in Q2 of 2022. More troubling for shareholders, the YTD operating loss for Datadog is now $57.0 million.

Through the second quarter of 2022, the company had managed a slim operating profit of $7.3 million. This widening loss was tightly linked to Datadog’s rapidly rising expenses, which increased from $327.4 million a year ago to $429.6 million in the most recent quarter. 

Net losses, however actually shrank relative to the previous year. On a GAAP basis, the company posted a net loss of $4.0 million, or 0.01 per share. This was down from $4.9 in 2022. For the fiscal year, however, this is still a troubling metric. The company has racked up $28.1 million in net losses so far this year, compared to a net profit of $4.9 million by the same time in 2022.

It should be noted that Datadog’s non-GAAP reporting was far more favorable. By non-GAAP metrics, Datadog reported $106.5 million in net income or $0.36 per diluted share. Non-GAAP margin was 21 percent, compared to -4 percent on a GAAP basis. 

While minor in comparison to other revenues, the company has benefited from higher interest income from its cash stockpile over the last year. In Q2, Datadog brought in $22.6 million in net interest and other income. This was up from $7.6 million a year earlier. The company’s interest expenses, meanwhile fell from $4.5 million to $1.5 million.

DDOG Balance Sheet

Datadog’s balance sheet is relatively strong, though its composition has changed over the past year. At the end of Q2, Datadog had $291.3 million in cash, down from $339.0 million at the end of the last fiscal year.

The value of the company’s marketable securities, however, rose from $1.55 billion to $1.89 billion over the same period. Though the company’s debt-to-equity ratio now stands at 0.49, this is actually the lowest point in its reported history. 

In total, Datadog’s assets have risen from $3.00 billion at the end of 2022 to $3.31 billion at the end of Q2. Total liabilities saw a more modest increase during the same time frame, rising from $1.59 billion to $1.66 billion.

Where Is DataDog Headed Next?

For the full year, Datadog expects to post revenues of $2.05 to $2.06 billion.

Non-GAAP operating income is expected to total $390 to $400 million. This would result in earnings per share of $1.30 to $1.34 on an adjusted basis.

Next quarter, management anticipates $521-$525 million in revenue and adjusted EPS of $0.33 to $0.35.  

How Did the Market React to Datadog’s Q2 Earnings Report?

Although the company actually beat earnings estimates, Datadog’s shares were down 20 percent in pre-market trading on August 8th. This was largely the result of management’s forward guidance, which fell short of what analysts had previously expected. Specifically, management’s expected revenues for the full year fell far short of the $2.24 billion projected. 

The earnings report was followed by analysts’ downgrades, implying weaker-than-expected share price growth for the rest of the year.

Investment banking firm Stifel downgraded its rating on Datadog from buy to hold, noting that the company may not see higher multiples return until 2024. Wells Fargo, which remained more bullish on the stock, cut its price forecast from $130 to $120 to reflect the effects of the new forward guidance. 

On the whole, analysts maintain a consensus buy rating on Datadog. The stock’s median price forecast is now $104, about 14.6 percent above the most recent price of $90.74. While still positive, this outlook suggests that Datadog may not post outstanding returns again until it can boost its revenues or regain GAAP profitability.

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