Summary
Datadog's second quarter of fiscal 2023 delivered revenue of $509.5 million, up 25% from the prior-year quarter. First-half revenue reached $991.2 million, up 29% year over year. Gross profit was $407.6 million, up 25.7%, and gross margin was 80.0%, up 0.2 percentage points. First-half gross profit was $789.4 million, up 28.8%. The GAAP operating loss was $22.0 million, wider than a year earlier, and operating margin was -4.3%, down 3.5 percentage points. On a year-to-date basis, the GAAP operating loss was $57.0 million, a swing from prior-year income. Net loss was $4.0 million, narrower than a year earlier, while diluted EPS was -$0.01, also a narrower loss per share. Year-to-date net loss was $28.1 million, and year-to-date diluted EPS was -$0.09, both swings from prior-year income.
Cash generation was strong. Operating cash flow was $153.2 million, up 109.9% from the prior-year quarter. First-half operating cash flow was $286.9 million, up 30.2%. Capital expenditures were $2.3 million, down 60.9%. Free cash flow was $141.7 million for the quarter and $258.1 million for the first half. Cash, cash equivalents, and marketable securities totaled $2.2 billion as of June 30, 2023. Deferred revenue was $567.5 million, up 27.7%, and remaining performance obligations were $1.25 billion, up 42.1%. Non-GAAP operating income was $106.5 million, with a 21% non-GAAP operating margin, and non-GAAP diluted EPS was $0.36.
Customer metrics continued to expand. Datadog had about 26,100 customers as of June 30, 2023, compared with about 21,200 a year earlier. Customers with ARR of $100,000 or more reached about 2,990, up 24% from about 2,420, and they represented 85% of ARR. The trailing 12-month dollar-based net retention rate was above 120%, though management said it has declined as growth decelerated. Product adoption deepened: about 82% of customers used more than one product, about 45% used more than four, and about 21% used more than six. Revenue from regions outside North America was about 30% of total revenue for the first half. At DASH 2023, Datadog announced LLM Observability, Bits AI, Security Inbox, Intelligent Test Runner, Flex Logs, Workflow Automation, and new Azure and OpenAI integrations. It was also named a Leader in the 2023 Gartner Magic Quadrant for Application Performance Monitoring and Observability.
Management guided third-quarter revenue and provided non-GAAP operating income and non-GAAP net income per share ranges for the third quarter and the full year 2023. The company did not reconcile these non-GAAP outlook figures to GAAP, citing uncertainty around stock-based compensation and employer payroll taxes on equity incentive plans. Risks include macroeconomic uncertainty, rising inflation, higher interest rates, the failure of Silicon Valley Bank and other financial institutions, the Russian invasion of Ukraine, and the COVID-19 pandemic. Datadog also flagged slower usage growth from existing customers, a declining net retention rate, competition, security breach risk, and its history of operating losses. The company expects to keep investing in sales and marketing, research and development, and international expansion, which may pressure near-term margins.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $509.5M | $481.7M | +5.8% | $406.1M | +25.4% |
| Gross profit | $407.6M | $381.8M | +6.8% | $324.2M | +25.7% |
| Gross margin | 80.0% | 79.3% | +0.8 pp | 79.8% | +0.2 pp |
| Research & development | $239.5M | $229.5M | +4.4% | $177.7M | +34.8% |
| Sales & marketing | $147.5M | $145.0M | +1.7% | $115.3M | +27.9% |
| General & administrative | $42.7M | $42.3M | +0.8% | $34.4M | +24.1% |
| Total operating expenses | $429.6M | $416.8M | +3.1% | $327.4M | +31.2% |
| Operating income (loss) | -$22.0M | -$35.0M | +37.1% | -$3.1M | -601.1% |
| Operating margin | -4.3% | -7.3% | +2.9 pp | -0.8% | -3.6 pp |
| Net income (loss) | -$4.0M | -$24.1M | +83.5% | -$4.9M | +18.7% |
| Net margin | -0.8% | -5.0% | +4.2 pp | -1.2% | +0.4 pp |
| Diluted EPS | -$0.01 | -$0.08 | +$0.07 | -$0.02 | +$0.01 |
| Net retention rate | 120.0% | 130.0% | -10.0 pp | 130.0% | -10.0 pp |
Risks
MD&A states that in recent quarters Datadog has seen slower usage growth from existing customers, which may be related to the uncertain macroeconomic environment, and risk factors cite rising inflation, Federal Reserve rate increases, the failure of Silicon Valley Bank, and the war in Ukraine as pressures that could reduce customer IT spending and disrupt key industry events.
MD&A discloses that Datadog's trailing 12-month dollar-based net retention rate has declined as revenue growth decelerated, although it remained above 120% as of both June 30, 2023 and 2022. The land-and-expand model depends on existing customers increasing usage and renewing subscriptions, so further declines could pressure future revenue.
Operating loss widened to $22.0 million in the quarter ended June 30, 2023 from $3.1 million in the prior-year quarter, and year-to-date operating income swung to a $57.0 million loss from $7.3 million income. Net loss for the six months ended June 30, 2023 was $28.1 million compared with net income of $4.9 million a year earlier, and risk factors cite an accumulated deficit of $230.3 million as of June 30, 2023.
Risk factors disclose a July 2016 unauthorized access and exfiltration incident involving customer credentials and note that security breaches or incidents could reduce demand, cause customer losses, and increase liabilities.
Risk factors state that in March 2023 the platform experienced widespread outages across multiple products and regions, substantially resolved in approximately a day, and that interruptions or performance problems could harm customer trust and cause lost or delayed market acceptance.
Risk factors state Datadog competes with larger vendors across infrastructure monitoring, APM, log management, and cloud monitoring, and that an increasing number of sales through cloud provider marketplaces could reduce direct customer relationships and profit margins. They also note pricing pressure from lower-priced competitor solutions.
Risk factors note that some Datadog products use AI and machine learning and that expanding AI capabilities requires significant infrastructure and personnel investment, while AI technologies are complex, rapidly evolving, and subject to uncertain market acceptance. Failure to keep pace could make Datadog's products less competitive.
Risk factors describe a complex and evolving global privacy framework, including uncertainty around the EU-U.S. Data Privacy Framework, reliance on EU Standard Contractual Clauses for cross-border personal data transfers, and new U.S. state laws such as the CPRA effective January 1, 2023. Non-compliance could require costly changes to data processing or business practices.
Risk factors state that Datadog targets enterprise customers, which involves longer sales cycles, more complex customer requirements, substantial upfront sales costs, and less predictability, with large enterprises often deploying on a limited basis before broader rollout. MD&A plans continued expansion of sales and marketing.
SaaS KPIs
All quarters →Total Customers
Free Cash Flow
Non-GAAP Operating Margin
Free Cash Flow Margin
Customers Using More Than One Product
Customers with ARR of $100,000 or more
Customers Using More Than Four Products
Customers Using More Than Six Products
Customers with ARR of $100,000 or more (as % of ARR)
Summary, forecast, risks and KPIs are extracted from Datadog, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.