Datadog, Inc. Q3 FY2022 earnings

Datadog reported third quarter revenue of $436.5 million, up 61.4% from the prior-year quarter. Gross profit rose 65.5% to $342.9 million and gross margin improved to 78.6%, up 2.0 percentage points. Both the top line and gross margin expanded. Profitability went the other way. The GAAP operating loss was $31.3 million, and operating margin fell to -7.2%, down 5.4 percentage points from a year earlier. Net loss was $26.0 million and diluted EPS was -$0.08, both wider than the prior-year quarter. Non-GAAP operating income was $74.8 million at a 17% margin, and non-GAAP net income per diluted share was $0.23. The gap between GAAP and non-GAAP results reflects stock-based compensation and related employer payroll taxes, which management excludes from its adjusted figures.

Customer metrics show the platform still pulling in larger accounts. Datadog ended the quarter with about 2,600 customers generating ARR of $100,000 or more, up 44% from about 1,800 a year earlier. Total customers stood at approximately 22,200, compared with approximately 17,500 at the same point last year. The dollar-based net retention rate remained above 130%. About 80% of customers used more than one product, up from about 77% a year earlier, which supports the land-and-expand story. At its Dash conference the company announced 18 new products and features. It also reached general availability for Continuous Testing, Cloud Cost Management and Cloud Security Management, achieved PCI compliance for Log Management and APM, and added AWS Security, Networking and Retail competencies.

Cash generation held up. Operating cash flow was $83.6 million for the quarter, up 24.1%, and free cash flow, a non-GAAP measure, was $67.1 million. For the first nine months, operating cash flow reached $304.0 million, up 78.0%, while free cash flow was $257.2 million. Capital expenditures were $9.7 million in the quarter, up 192.0%. Deferred revenue was $478.7 million, up 59.1% from a year earlier, and remaining performance obligations stood at $941.0 million. Those balances suggest customers are still committing spend, even as the company invests heavily.

Guidance points to continued expansion. For the fourth quarter, Datadog guided non-GAAP operating income to between $56 million and $60 million and non-GAAP net income per share to between $0.18 and $0.20. For the full year 2022, the outlook calls for non-GAAP operating income between $300 million and $304 million and non-GAAP net income per share between $0.90 and $0.92. The company has not reconciled those non-GAAP expectations to the closest GAAP measures, citing uncertainty around stock-based compensation and payroll taxes on equity plans. Weighted average diluted shares are expected to be approximately 347 million for the fourth quarter and approximately 346 million for the full year.

Risks are piling up. Management flagged macroeconomic uncertainty, rising inflation, the U.S. Federal Reserve raising interest rates and the Russian invasion of Ukraine. It has seen slower usage growth from some existing customers, which may be tied to the uncertain economy. A broad slowdown in information technology spending would hurt results. Company-specific risks include a history of operating losses, reliance on existing customers buying more subscriptions and products, competition in a fast-changing market, and the possibility of security breaches or service interruptions. Datadog also said that more office activity, travel, in-person events, hiring and capital expenditures may raise costs and lower margins in future quarters. The quarter shows a business growing quickly with a large base of committed revenue and positive cash flow, but GAAP losses widened and spending remains aggressive. The main test is whether Datadog can hold its growth rate while absorbing those costs.