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Datadog Guides Q4 Sales Flat After 35% Growth: Rapid Earnings Reaction
Key Points
Revenue climbed 35%, and the company swung to a GAAP operating profit from a loss a year ago.
Management expects fourth-quarter revenue to land near the third quarter's level.
Free cash flow grew at about half the pace of revenue.
Datadog (NASDAQ:DDOG) grew third-quarter revenue 35% to about $1.2 billion, then guided fourth-quarter revenue to roughly the same level. Shares fell about 12% in pre-market trading. The outlook implies revenue stops growing from the third quarter to the fourth, and that matters more than the strong quarter behind it.
Key numbers
- Revenue: about $1.2 billion, up 35% year over year.
- GAAP operating income: $75 million, versus a $6 million loss a year ago.
- Customers with $100,000 or more in annual recurring revenue: about 4,860, up 20%.
- Fourth-quarter revenue guidance: $1.19 billion to $1.20 billion.
What it means
The profit gains are real. Revenue grew much faster than operating costs, which is how a software company with large fixed engineering and sales teams turns a loss into a profit. The catch is stock-based pay. It ran about 20% of revenue and explains most of the gap between GAAP and adjusted profit.
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The outlook is the bigger issue. Datadog's recurring revenue includes customer usage, so a flat forecast from one quarter to the next suggests either slower usage growth or a very cautious bar from management. The release also guides adjusted operating income to $280 million to $290 million, below the third quarter's level, so margins dip too.
Cash flow lagged. Free cash flow rose 17%, about half the pace of revenue, partly because deferred revenue (customer prepayments) shrank during the quarter.
What to watch next
Watch whether fourth-quarter revenue lands flat or clears the top of guidance, and whether deferred revenue starts growing again.
David Kretzmann has positions in Datadog. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.