Datadog, Inc. Q1 FY2024 earnings

Datadog's first quarter of fiscal 2024 delivered strong top-line growth and a swing to GAAP profitability. Revenue was $611.25 million, up 26.9% year over year. Gross profit was $501.16 million, up 31.3%, and gross margin rose 2.7 percentage points to 82.0%. GAAP operating income was $12.00 million, up $46.97 million and swung to a profit, while operating margin rose 9.2 percentage points to 2.0%. Net income was $42.63 million, up 277.0% and swung to a profit. Diluted EPS was $0.12, up $0.20 and swung to a profit. On a non-GAAP basis, operating income was $164 million and operating margin was 27%. Non-GAAP net income per diluted share was $0.44. The gap between GAAP and non-GAAP results reflects large non-cash and payroll tax items, but the quarter still showed meaningful margin expansion.

Cash generation also improved. Operating cash flow was $212.27 million, up 58.7% year over year. Capital expenditures were $14.16 million, up 62.0%. Free cash flow was $187 million, and free cash flow margin was 31%. Deferred revenue was $767.47 million, up 36.5%, though that figure is only the current portion. Remaining performance obligations, or RPO, reached $1.73 billion, up 52.1%. The RPO growth suggests customers continue to commit to longer or larger contracts. Management said the company generated positive cash flows from operations in the quarter, and the balance sheet remains liquid. However, the MD&A notes that slower usage growth from existing customers may be tied to the uncertain macroeconomic environment.

Operational metrics were mixed. Customers with ARR of $100,000 or more grew to about 3,340, up 15% from about 2,910 a year earlier. Total customers were approximately 28,000, compared with approximately 25,500 a year earlier. Product adoption continued to deepen: about 82% of customers used more than one product, up from 81%; about 47% used more than four products, up from 43%; and about 23% used more than six products, up from 19%. The trailing 12-month dollar-based net retention rate was in the mid-110%'s, down from the mid-130%'s a year earlier. Datadog attributed the decline to slower usage growth from existing customers. The company also announced general availability for several products, including Bits AI for Incident Management, Event Management, Error Tracking for Logs, and Mobile App Testing. It launched IT Event Management. Amit Agarwal will step down as President at the end of 2024, and he is expected to join the board.

Guidance points to continued growth. For the second quarter of 2024, Datadog expects revenue between $620 million and $624 million. It expects non-GAAP operating income between $134 million and $138 million and non-GAAP net income per share between $0.34 and $0.36, assuming approximately 360 million weighted average diluted shares. For the full year 2024, the company guided revenue to between $2.59 billion and $2.61 billion. It guided non-GAAP operating income to between $585 million and $605 million and non-GAAP net income per share to between $1.51 and $1.57, assuming approximately 361 million weighted average diluted shares. Datadog said it cannot reconcile the non-GAAP guidance to the most directly comparable GAAP measures without unreasonable effort because of uncertainty around stock-based compensation and employer payroll taxes on equity incentive plans. The main risks include macroeconomic uncertainty, rising inflation, higher interest rates, geopolitical conflicts, competition, security breaches, and the company's history of operating losses. The deceleration in dollar-based net retention and the slower usage growth from existing customers are the clearest watch items. Even so, the quarter showed revenue growth of 26.9%, a GAAP profit, and expanding margins, while RPO and deferred revenue grew at a strong pace.