Datadog Inc. this morning disclosed that it had an expectation-topping fourth quarter, but weak full-year guidance sent the company’s stock tumbling over 4%.

New York-based Datadog sells more than a dozen cloud services focused mainly on helping enterprises find technical issues in their infrastructure. The software can spot slow application performance, bugs, vulnerabilities and cost overruns. Datadog’s revenue growth strategy places an emphasis on convincing enterprises that buy one or a few of its services to purchase additional products over time.

Alongside the observability market, the company is active in a number of adjacent segments. One Datadog service, Cloudcraft, helps administrators draw a diagram visualizing how the different components of a cloud environment interact with each other. Another service can simulate user requests to an application in order to find technical issues before they have a chance of interrupting live traffic.

Datadog’s fourth quarter revenue leapfrogged the $568.7 million consensus estimate to reach $589.6 million, which represents a year-over-year increase of 27%. The company credited large customers with helping to drive its sales growth. The number of organizations that spend at least $1 million annually on Datadog services reached 396 in the fourth quarter, up from 317 a year earlier.

The company disclosed that it counts 42% of the Fortune 500 as customers. Datadog Chief Executive Officer Olivier Pomel told investors that the average Fortune 500 customer spends about $500,000 per year, which he believes “leaves a very large opportunity for us to grow with these customers.” He also disclosed that generative artificial intelligence providers currently account for about 3% of Datadog’s revenue.

The company is prioritizing generative AI as part of its product roadmap as well. In the fourth quarter, it launched an integration that will make it easier to monitor machine learning workloads powered by Google Cloud’s Vertex AI product suite. Additionally, Datadog offers a chatbot that can find technical issues in an organization’s infrastructure and generate remediation suggestions.

The software maker sold its cloud services with a 28% adjusted operating margin in the fourth quarter, which translated to adjusted operating income of $166.7 million. Datadog’s adjusted earnings amounted to 44 cents per share, a 70% improvement from 12 months earlier. Analysts had expected 43 cents per share.

Datadog expects its sales and earnings momentum to continue into the current year, but not to the same extent as in 2023. 

The company’s full-year revenue guidance of $2.55 billion to $2.57 billion is well ahead of the $2.13 billion in sales that it posted in 2023. However, it’s slightly less than 23% year-over-year growth analysts had expected Datadog to predict. The software maker’s adjusted earnings forecast of $1.38 to $1.44 per share is likewise lower than the $1.77 the market had anticipated.

Pomel said he expects the widening enterprise adoption of AI to emerge as a sales driver for the software maker in 2024. He pointed to cloud migration initiatives as another source of revenue growth. Additionally, Datadog detailed that the “higher intensity” of customer cost-optimization efforts it observed in the past two years started subsiding during the fourth quarter, which could likewise help boost the usage of its services over the coming months.

Image: Datadog