Datadog’s Earnings: A Mixed Bag with a Silver Lining

Datadog (DDOG) has consistently impressed the market with its financial performance and this trend persisted with the company’s fourth-quarter results for fiscal year 2023, which once again demonstrated Datadog’s robust observability, monitoring, and security platform’s market appeal. Despite challenges, including optimization activities within its customer base, Datadog reported healthy usage growth and platform adoption, aligning with the company’s projections.

The Disappointing Outlook

However, the shine of Datadog’s recent earnings report was somewhat dimmed by its future earnings outlook. For the first quarter (Q1) and the full fiscal year 2024 (FY24), the guidance provided by Datadog fell short of market expectations. While Q1 revenue forecasts slightly exceeded analyst predictions, EPS estimates did not meet the anticipated mark. The shortfall was more pronounced in the FY24 EPS guidance, which significantly missed analyst expectations, alongside a revenue outlook that also disappointed, leading to an immediate sell-off in Datadog’s stock.

CEO’s Reassuring Comments

The initial negative reaction to Datadog’s earnings release saw the company’s stock plummet by approximately 9% in after-hours trading. This downturn was later mitigated following remarks from CEO Olivier Pomel during the earnings call. Pomel provided a reassuring outlook on the company’s recent optimization trends, noting a reduction in the intensity of optimization activities observed over the past six quarters. He also highlighted fewer headwinds compared to previous quarters, suggesting a more stable environment moving forward.

Bullish Developments Amidst Conservative Guidance

Despite the conservative guidance, several bullish indicators emerged from Datadog’s report. For the first time in six quarters, the sequential annual recurring revenue (ARR) additions in Q4 surpassed the figures from a year ago. Additionally, Datadog has been securing an increasing number of multi-year contracts with customers, and its enterprise team reported a record amount of annualized bookings in Q4. These positive developments raise questions about the conservative nature of Datadog’s guidance, with Pomel explaining that the company prefers to remain cautious due to the uncertain quarter’s outcome and is adopting a conservative stance in analyzing recent growth trends.

Investment in Future Growth

Datadog’s downside EPS guidance can be attributed to planned increases in hiring and research and development (R&D) investments throughout the year. The company anticipates operating expenses to grow in the mid-20% range, a move that reflects confidence in the demand outlook for 2024. This strategic investment is underscored by solid demand in Q4, particularly from large enterprise customers, with a notable 15% year-over-year increase in customers generating an ARR of $100,000 or more and a significant adoption rate of Datadog’s products among existing clients.

A Conservative Outlook Amid Strengthening Business

While Datadog’s FY24 guidance initially led to stock volatility, CEO Olivier Pomel’s comments have shed light on the company’s strategic caution. With promising signs of business strengthening and a return to growth among large optimizers, Datadog’s conservative outlook may well be a prudent approach to navigating the uncertain times ahead. As Datadog continues to invest in its future, the underlying strength of its business model and the increasing adoption of its platform among enterprises suggest that the company remains well-positioned for sustained growth.