Datadog Q4 Earnings: Margins Shrink, Outlook Lags Expectations

Datadog, the leading provider of observability and security platforms, recently announced its financial results for the fourth quarter of 2024. While the company outperformed expectations in terms of revenue and earnings per share (EPS), its margins took a hit, and the outlook for the coming year fell short of analysts' expectations. Let's dive into the details and explore what this means for investors.

Strong Revenue Growth, but Margins Shrink

Datadog's revenue for the quarter climbed to $738 million, marking a 25.1% year-over-year increase. This impressive growth was driven by strong customer expansion, with 462 customers achieving an annual recurring revenue (ARR) of $1 million or more, up from 396 a year ago. However, the company's margins took a dip. The adjusted gross margin declined by 100 bps to 82%, and the adjusted operating margin decreased by 400 bps to 24%. This decline in margins can be attributed to increased research and development expenses (up 29% year-over-year) and selling, general, and administrative expenses (up 13% year-over-year).



Outlook Lags Expectations

For the full fiscal year of 2025, Datadog anticipates revenue between $3.175 billion and $3.195 billion, with an adjusted EPS of $1.65 to $1.70. While these projections represent a continuation of the company's growth trajectory, they fell short of analysts' expectations. Stifel analyst Brad Reback downgraded Datadog to Hold from Buy, citing challenges to both revenue growth and margins throughout fiscal 2025. He mentioned that typical pricing pressure during contract renewals and the potential for year-end customer churn could lead to a deceleration in Datadog's Amazon Web Services (AWS) growth.

Addressing the Challenges

To address the decline in margins and meet or exceed the projected outlook, Datadog can focus on the following strategic initiatives:

1. Optimize compensation structure: High stock-based compensation continues to be a concern, impacting GAAP profitability measures. Datadog can optimize its compensation structure to reduce the dilutive effect of stock-based compensation.
2. Improve operational efficiency: Datadog can focus on improving operational efficiency and negotiating better terms with suppliers and partners to maintain or improve gross margins.
3. Prioritize spending: The company can prioritize spending on high-impact initiatives while optimizing costs in other areas to maintain or improve operating margins.
4. Innovate and expand product offerings: Datadog can continue to innovate and expand its product suite to attract new customers and retain existing ones, driving revenue growth.
5. Diversify customer base: By expanding its customer base and reducing reliance on a few large customers, Datadog can minimize the impact of customer churn.
6. Strengthen customer relationships: Building strong relationships with customers can help reduce churn. Datadog can focus on providing exceptional customer service, addressing customer needs proactively, and ensuring customer success.
7. Monitor and manage pricing pressure: Datadog can work on managing pricing pressure during contract renewals by offering competitive pricing, bundling services, or providing added value to customers.



In conclusion, Datadog's Q4 earnings showed strong revenue growth but a decline in margins. The outlook for 2025 fell short of analysts' expectations, raising concerns about potential slowdowns in revenue growth and margins. To address these challenges, Datadog can focus on optimizing its compensation structure, improving operational efficiency, prioritizing spending, innovating and expanding product offerings, diversifying its customer base, strengthening customer relationships, and monitoring and managing pricing pressure. By taking these steps, Datadog can work towards maintaining and growing its profitability margins moving forward.