DataDog Stuns Investors With 541% Free Cash Flow Growth

The fourth-quarter report for DataDog (DDOG 3.58%) was quite remarkable. In this video clip from "The Earnings Show" on Motley Fool Live, recorded on Feb. 11, Fool contributors Jamie Louko and Brian Withers pore over the big numbers and are excited about where the company is headed in the next few years.

Jamie Louko: The hat trick was really a hat trick of amazing reports. Because like Chipotle (CMG 1.07%), like Twilio (TWLO 2.94%), DataDog killed it. They crushed estimates on both the top and bottom line. That's the third time I've said it, I'm pretty sure. But DataDog really stood out because we see here they were estimating for $291 million and they posted 326. That is crazy. That's almost a 10% beat. Actually, I think that's a little more than a 10% beat doing some quick math.

Their non-GAAP EPS was also almost a 10% beat. They were only estimating for $0.11 cents and they hit $0.20 cents. Really strong and we see that DataDog has just a consistent beat and raise type culture. We see on every single earnings report right here a huge jump when they reported obviously another huge jump. They're really developing this culture where they consistently beat and raise expectations. I personally as an investor, I love to see that.

But these strong results were really brought by big customers. Their customers over one million, spending over $1 million dollars a year, grew 114% to 216, 216 customers may not sound like a lot until you realize they're spending over a million dollars. Their customers over $100,000 reached 2,000 customers and that grew 63% year-over-year. Really strong there and they are expecting their growth to keep going almost 70% year-over-year revenue growth, they're guiding for the first quarter.

Moving a little bit down toward profitability, I had to redo this calculation three times because I thought I messed up somewhere, 541% year-over-year growth is outstanding. That puts it at about a 10% free cash flow margin because this is for the quarter, that's about a 30% free cash flow margin, which is very impressive.

Their dollar-based net retention rate, which is basically existing customers from the year-ago period, if they spent a $100 then, they're now spending on average and including churning customers who are no longer there are spending about $130 now, that's really strong. We can see that, if we see big-name customers growing and spending a lot of money, we would naturally think that the dollar-based net retention rate is also going up if they're expanding their relationships.

That's really the growth strategy for DataDog, they want to land customers and expand their relationships with them. Again, we see this year 33% of customers using four products compared to 22% using four products last year and 10% are using six products compared to 3% last year. All of this shows that DataDog is really succeeding at getting customers in the door and then expanding their relationship.

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

Brian Withers: Hey, Jamie, let me jump in here. You make a point about those large customers and they're just continuing to add products. There's one more stat that I want to share with members that it just blows me away. The 2010 customers that spend more than $100,000 a year, those customers generate 83% of their annual recurring revenue.

This land and expand strategy of land with one module and then as customers see the power of DataDog just expand over time and the fact that they can support 200 $1 million customers who probably have critical cloud infrastructure needs and really high customer expectations is just amazing and they're really just getting started. I think you mentioned the innovation there and the Fed ramp thing, which gives them even more runway for growth in the coming years.

Louko: Yeah, 100%. When we talk about customers hitting a million dollars in ARR, there's got to be a cap somewhere. That's where there continuous innovation and creation of new products comes in. They're just raising the roof every single time so more customers can keep increasing their spending.

I put continued innovation because if I try to say every single thing that they did in the quarter that was classified as innovation, I would have three slides. They made an acquisition of CoScreen, which allows developers to monitor security, basically, do what DataDog wants to do simultaneously, and they can all do it collaboratively. They also created a new product, which is slipping my mind right now. I will come back to that in just a second.

But they also got Fed ramp authorization, which basically means they can sell to U.S. government agencies and public sector customers, which really opens up their customer base to a whole place that they haven't been able to access yet and get customers from. Government agencies are typically pretty big customers willing to spend a lot of millions of dollars if they really need it. That really has the opportunity to add some of those $1 million dollar customers and grow DataDog a whole bunch.

Brian Withers: Awesome, really exciting quarter for the company. If you're interested in reading more about those innovations, you can check out the DataDog earnings transcript on fool.com, put in the ticker up in the search bar, and will come up is one of the articles.