DataDog surprises investors with 541% free cash flow growth

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Jth fourth quarter report for DataDog (NASDAQ:DDOG) was quite remarkable. In this music video from “The Earnings Show” on Motley Fool Live, recorded on February 11goofy contributors Jamie Louko and Brian Withers take a look at the big numbers and are excited about where the company is heading in the next few years.

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Jamie Louko: The hat trick was truly a hat trick of incredible reporting. Because like Chipotle (NYSE: CMG)to like Twilio (NYSE: TWLO), DataDog killed it. They crushed the estimates both up and down. This is the third time I’ve said it, I’m sure. But DataDog really stood out because here we see they estimated $291 million and they showed 326. That’s crazy. That’s almost a 10% beat. In fact, I think it’s a bit more than a 10% beat by doing some quick math.

Their non-GAAP EPS was also nearly 10%. They only estimated $0.11 and they reached $0.20. Really strong and we see that DataDog just has a consistent beat-and-raise type culture. We see on every earnings report here a huge jump when they obviously reported another huge jump. They really develop this culture where they constantly beat and raise expectations. Personally, as an investor, I like to see that.

But these good results were really brought by big customers. Their million+ customers, spending over $1 million a year, grew 114% to 216, 216 customers might not sound like a lot until you realize they’re spending more than one million dollars. Their customers over $100,000 grew to 2,000 customers and that grew 63% year over year. Really strong there and they expect their growth to continue at close to 70% year-over-year revenue growth, they’re orienting for the first quarter.

Going down a bit to profitability, I had to redo this calculation three times because I thought I messed up somewhere, 541% year-over-year growth is exceptional. That gives a free cash flow margin of about 10%, because for the quarter it’s a free cash flow margin of about 30%, which is very impressive.

Their dollar based net retention rate which is basically existing customers from the period a year ago if they spent $100 then they are now spending on average and including customers who are not no longer there, spend about $130 now, that’s really strong. We can see that, if we see large customers growing and spending a lot of money, we would naturally think that the dollar-based net retention rate also increases if they expand their relationships.

This is really DataDog’s growth strategy, they want to attract customers and expand their relationships with them. Again, this year we see 33% of customers using four products versus 22% using four products last year and 10% using six products versus 3% last year. All of this shows that DataDog is truly successful in attracting customers and then expanding their relationship.

I don’t think I said it outright, DataDog is an observability platform that focuses on infrastructure monitoring, security, application development, etc. They want to be like an eye in the sky for developers and infrastructure to make sure everything is running smoothly, performance is good, and customers are having a good experience on whatever app they’re on. are found.

Brian Wither: Hey, Jamie, let me jump in here. You pitch these big customers and they just keep adding products. There is another stat that I want to share with members that blows my mind. 2010 customers who spend more than $100,000 per year, these customers generate 83% of their annual recurring revenue.

This landing and expanding strategy of landing with one module and then as customers see the power of DataDog expanding over time and the fact that they can support 200 customers of a million dollars that probably have critical cloud infrastructure needs and very high customer expectations is just amazing and they are just getting started. I think you mentioned the innovation there and the Fed ramp, which gives them even more room for growth in the years to come.

Louco: Yeah, 100%. When we’re talking about customers hitting $1 million in ARR, there has to be a cap somewhere. This is where continuous innovation and the creation of new products come in. They just raise the roof every time so more customers can keep increasing their spending.

I put continuous innovation because if I tried to say every single thing they did in the quarter that was classified as innovation, I would have three slides. They acquired CoScreen, which allows developers to monitor security, basically, to do whatever DataDog wants to do simultaneously, and they can all do it collaboratively. They also created a new product, which eludes me right now. I’ll come back to that in a second.

But they’ve also got ramp clearance from the Fed, which basically means they can sell to US government agencies and public sector customers, which really opens up their customer base to a whole place that they don’t have yet could access and from which they could not get customers. Government agencies are usually big customers willing to spend millions of dollars if they really need it. This really has the opportunity to add some of those million dollar customers and grow DataDog.

Brian Wither: A great and really exciting quarter for the company. If you want to learn more about these innovations, you can check out DataDog’s revenue transcript at idiot.com, put the ticker in the search bar, and one of the articles will pop up.

Brian Wither owns Datadog and Twilio. Jamie Louko owns Chipotle Mexican Grill, Datadog and Twilio. The Motley Fool owns and recommends Chipotle Mexican Grill, Datadog, and Twilio. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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