Datadog (DDOG +6%) saw its initial gains from a strong Q2 beat-and-raise become more subdued as the session progressed. Despite the positive results, several factors tempered the enthusiasm. The earnings beat was smaller than last quarter, and the FY24 guidance increase was modest. Importantly, the business environment remained unchanged, indicating ongoing consumer cost-consciousness.
Key Highlights:
- Adjusted EPS was $0.43, nearly identical to the past two quarters. Revenue grew by 26.7% year-over-year to $645.28 million, consistent with the growth rate of the past four quarters.
- Customer growth continued, with a 10% year-over-year increase to 28,700 customers. Customers generating annualized recurring revenue (ARR) of $100K+ rose by 13%. Platform adoption improved, with a 1-point increase in customers using two or more products and a 4-point rise in customers using eight or more products.
- Customer usage growth met expectations and aligned with the improved trends seen over recent quarters. Enterprise usage growth accelerated year-over-year, while small and medium-sized businesses (SMBs) showed steady growth trends. Churn remained low, and gross revenue retention stayed stable in the mid-to-high 90s.
- AI integration is a significant focus. Datadog's platform integrates with major cloud platforms, including Microsoft (MSFT, Financial) Azure and Amazon (AMZN, Financial) AWS. Datadog expanded its AI tools, including the general availability of LLM observability and its built-in AI copilot, Bits AI.
- Looking ahead, Datadog raised its FY24 guidance, projecting adjusted EPS of $1.62-1.66 (up from $1.51-1.57) and revenue of $2.62-2.63 billion (up from $2.59-2.61 billion). The company remains cautious in its outlook due to market uncertainties.
Datadog's Q2 report generated decent buying interest. While the unchanged business environment is not ideal, it is not overly concerning. Positive trends, such as stability in the SMB space and sustained enterprise usage growth, provide optimism. If these trends continue, Datadog could see a more significant recovery, potentially reaching July highs. However, a prolonged cost-conscious spending environment may keep growth rates subdued.
