Datadog (DDOG) has become the de factor APM for all three major clouds AWS, Azure, GCP for starting a new cloud stack or migrating from on-prem. Their APM product is simply a lot better than the others. Case in point: our company used to be on New Relic monitoring AWS containers. Switched to Datadog three years ago and never looked back.
In the meantime they are still expanding into the log aggregation space and eating market share from Splunk, Sumo Logic etc.
(P.S. APM = capture the events
Log aggregation = summarize what’s happening with those events)
I believe the current revenue growth in Datadog is mostly from the on-prem to cloud migration in the last few years. Every new container created today is likely equipped with Datadog. In other words, their growth is driven by the total number of cloud containers (number of virtual computers) in the world. So whenever you see AWS or Azure posting 40%+ growth, you can be pretty sure Datadog won’t have less than that, since every new container created is new revenue for Datadog. And they are still eating market share from log aggregation players.
The CEO, Olivier Pomel, stated that they don't really see the competition much in sales and bidding situations. Now that's lovely – there is no competition to speak of. If there was ever a company that was a pure-play cloud company, with a strong tailwind behind their backs, and nothing to stop them from taking virgin market share….that company is called DataDog. Floki, the Norseman, has landed on the shores of Iceland and the entire island is his for the taking.
Here is what stood out to me in DDOG's Q4 earnings report:
refer to the detailed DDOG financials map here: https://beachman.substack.com/p/ddog-has-no-real-competition…
Revenue growth – Q4 YOY revenue (84%) handily beat guidance by a whopping 20% and annual revenue rose 70% YOY (a beat of 5%). Sequential QOQ revenue beat guidance by a full 13% and grew double digits by 21%. They guided for $339M revenue in Q1 2022 and for $1,530M in full year 2022. Deferred revenue (a sign of contracted revenue that will be booked in future quarters) grew 82% YOY and 24% QOQ to $372M. Their recent FedRamp Moderate approval will start feeding additional growth into the pipeline with larger $1M+ contracts.
Profitability – Gross margin is 79% and steadily creeping up to the 80% level that they promised when they IPOed. Net income was $7M and it will be interesting to watch whether they stay in the green going forward. Non-GAAP P/L per share beat Q4 guidance by 67%!
Cashflow – They generated operating cash flow of $287M and free cash flow of $251M in FY2021. Healthy and steady QOQ cash flow generation for 4 quarters straight.
Market share – DBNRR has been at / above 130% for 18 consecutive quarters…think about the market dominance demonstrated by this metric. Once a DDOG customer, you tend to keep buying more. Most customers start a new contract with at least 2+ products and this cohort is growing 78% YOY. Customer with 4+ products grew 33% YOY and large customer with > $1M contracts grew 114% YOY.
Debt – remains steady at $735M along with about $1.6B cash on the balance sheet which is being continually replenished by increasing operating and free cash flow.
Product – Product innovation continues with the launch of Sensitive Data Scanner, Online Archives, the acquisition of CoScreen and OZcode, 80 new integrations and a lot more. New and expanded partnerships were announced with AWS and Confluent. Their new foray into cloud security is intriguing and could lead to significant TAM additions.
I have been asking myself when will I sell Datadog? Probably whenever the big three cloud growth slows down. Datadog does not have exciting product outside of APM or log aggregation. If they want to go into network security, they will face competition from Cloudflare, which I believe is a lot stronger than Datadog here and is as almost as universal as Datadog in a company’s cloud stack. I don’t know where else they can expand. But I feel the end of runway for APM and logging won’t be coming anytime soon. There’s still a crazy shortage of cloud engineers that indicates high demand in migrating to cloud right now.
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