Datadog, Inc. Q1 FY2023 earnings

Datadog closed the first quarter of fiscal 2023 with $481.7 million in revenue, up 32.7% from the prior-year quarter. Gross profit rose 32.3% to $381.8 million, but gross margin slipped to 79.3%, down 0.2 percentage points. The top line held up, while the bottom line swung sharply negative. The company reported a GAAP operating loss of $34.97 million and a GAAP net loss of $24.09 million. Diluted GAAP EPS was -$0.08. A year earlier, Datadog generated positive operating income, net income and diluted EPS. Operating margin fell to -7.3%, down 10.1 percentage points. On a non-GAAP basis, operating income was $86.4 million, operating margin was 18%, and diluted net income per share was $0.28. The gap between GAAP and non-GAAP results reflects large stock-based compensation and related costs.

Customer metrics continued to expand. Datadog ended the quarter with about 25,500 customers, up from about 19,800 a year earlier. Its large-customer cohort, the accounts above the annual run-rate revenue threshold the company tracks, reached about 2,910, an increase of 29% from about 2,250. Those larger customers represented 85% of ARR. The trailing 12-month dollar-based net retention rate remained above 130% as of March 31, 2023 and 2022, though management said the rate has declined as growth decelerated. Product adoption also deepened. About 81% of customers used more than one product as of each period. About 43% used more than four products, up from about 35% a year earlier, and about 19% used more than six products, up from about 12%. International revenue outside North America was about 29% of total revenue for the quarter, compared with about 28% a year earlier.

Datadog launched Data Streams Monitoring and Application Vulnerability Management during the quarter. It also opened a data center in Tokyo, Japan, its first in Asia. The company published its 2023 State of Application Security Report, which found that only three percent of critical vulnerabilities are truly high risk and worth prioritizing. Those product and geographic moves support the land-and-expand model, but they come with spending. Operating expenses increased sharply, which contributed to the GAAP loss.

Cash generation remained positive but lower. Operating cash flow was $133.79 million, down 9.2% from the prior-year quarter. Capital expenditures were $8.74 million, down 8.1%. Free cash flow was $116.3 million. Deferred revenue, current portion, rose 23.7% to $562.43 million. Remaining performance obligations increased 32.7% to $1.14 billion. Those backlog and deferred revenue figures point to continued demand, even as usage growth from some existing customers has slowed.

Guidance points to continued growth. For the second quarter of 2023, Datadog expects revenue between $498 million and $502 million, non-GAAP operating income between $82 million and $86 million, and non-GAAP net income per share between $0.27 and $0.29. For the full year 2023, revenue is guided to $2.08 billion to $2.10 billion, non-GAAP operating income to $340 million to $360 million, and non-GAAP net income per share to $1.13 to $1.20. The company assumes about 349 million weighted average diluted shares for the second quarter and about 351 million for the full year. Management did not reconcile the non-GAAP guidance to GAAP because of uncertainty around items such as stock-based compensation and employer payroll taxes on equity incentive plans.

Risks remain material. Datadog cited macroeconomic uncertainty, including rising inflation, Federal Reserve interest rate increases, the failure of Silicon Valley Bank and other financial institutions, the Russian invasion of Ukraine, and the COVID-19 pandemic. In recent quarters, the company has seen slower usage growth from some existing customers, which may be tied to the uncertain economy. The subscription model can delay the impact of those conditions on reported results. Other risks include the company's history of operating losses, reliance on existing customers to buy more products and renew subscriptions, the need to attract new customers, competition, security breaches, platform interruptions, and the challenge of managing rapid growth. Management also warned that increased office activity, travel, in-person events, hiring and capital expenditures could raise costs and reduce margins in future quarters.