Datadog Inc. once again topped growth expectations in the fourth quarter after logging a 44% year-over-year revenue increase. 

The New York-based observability provider reported today that its sales reached $469 million in the last three months of 2022, surpassing the Zacks consensus estimate by about 5%. Datadog also topped analyst projections in the previous quarter.

Nevertheless, Datadog’s shares over 7% of their value in today’s trading session. One likely contributor to the decline was that the company’s first-quarter guidance fell short of expectations. The company is projecting revenue of $466 million to $470 million, whereas analysts expected $484 million.

“We are pleased with our fourth-quarter performance, as we delivered more value to more customers across our broadening platform, while driving strong profitability and cash generation,” said co-founder and Chief Executive Officer Olivier Pomel. “We are proud of our strong execution in fiscal year 2022, with 63% year-over-year revenue growth, $418 million in operating cash flow, and $354 million in free cash flow.”

Datadog provides a software platform of the same name that helps companies detect unusual developments in their technology environments. It can detect slow network connections, application outages and hacking attempts. It also provides a set of testing tools that developers can use to scan their software for reliability issues.

Prior to its initial public offering in 2019, Datadog focused primarily on helping companies detect technical malfunctions in their applications and cloud infrastructure. The software maker has since expanded its focus to multiple adjacent markets.

As part of its namesake platform, Datadog offers tools that help companies detect hacking attempts targeting their cloud environments. It also spots vulnerabilities that could be used by hackers in future cyberattacks. The company’s platform can scan a cloud environment for insecure configuration settings, prioritize them based on severity and provide technical data about each issue.

For software teams, Datadog offers application testing tools alongside its core outage and cyberattack detection features. The tools enable developers to send simulated user requests to an application and measure how well it processes them. Errors are logged to facilitate troubleshooting. 

Datadog’s efforts to expand the breadth of its platform have emerged as a core pillar of its revenue growth strategy. New customers often buy one or two components of its platform at first, then purchase more modules over time. That leads to increased spending. 

In an investor presentation last November, Datadog detailed that 80% of customers use at least two of its products. Moreover, 40% have purchased four or more products. In late 2020, only about a fifth of customers used four or more of its tools. 

The company reported today that the number of customers spending more than $1 million annually on its software reached 317 in the fourth quarter, up from 216 a year earlier. The number of customers spending at least $100,000 annually grew 38% year-over-year, to 2,780.

Datadog’s steadily expanding feature set reflects its growing investment in product development. During the November investor presentation, It detailed that its research and engineering budget grew from less than $200 million in 2020 to just over $400 million during the 12 months ended October 2022.

The company makes occasional startup acquisitions to complement its in-house product development efforts. In the fourth quarter, it bought Cloudcraft, the developer of a software tool for monitoring cloud environments. The startup’s tool helps administrators track how the various infrastructure resources and applications in a cloud environment interact with one another.

Despite its increased research and engineering spending, fourth-quarter earnings topped expectations. The company delivered an adjusted operating income of $83.1 million in the three months ended Dec. 31. That translated into earnings of 26 cents per share, significantly more than the 19 cents per share the Zacks consensus estimate projected.

For the full 2023 fiscal year, Datadog is projecting sales of $2.07 billion to $2.09 billion. It expects to earn between $300 million and $320 million in adjusted operating income.

Image: Datadog