A month has gone by since the last earnings report for Datadog (DDOG Quick QuoteDDOG - Free Report) . Shares have added about 14.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Datadog due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Datadog Q3 Earnings Beat Estimates, Revenues Rise Y/Y

Datadog reported third-quarter 2023 non-GAAP earnings per share of 45 cents, which beat the Zacks Consensus Estimate of 34 cents and increased 95.7% from the year-ago quarter.

The company’s net revenues of $547.5 million increased 25.4% year over year. The Zacks Consensus Estimate for revenues was pegged at $523 million.

Quarter Details

In the third quarter of 2023, Datadog had about 3,130 customers with an annual run rate (ARR) of $100K or more, up from 2,600 in the year-ago quarter.

As of the end of the third quarter, 82% of customers used two or more products, up from 80% in the year-ago quarter. Additionally, 46% of customers utilized four or more products, up from 40% in the year-ago quarter.

Datadog’s dollar-based retention rate was slightly below 120% as customers increased their usage and adopted more products.

Operating Details

In the third quarter, Datadog’s adjusted gross margin increased 260 basis points (bps) on a year-over-year basis to 82.3%.

Research & development expenses gained 12.7% on a year-over-year basis to $155.8 million, driven by increased investments in Datadog’s platform. Research & development, as a percentage of revenues, decreased 320 bps to 28.5%.

Sales and marketing expenses increased 18.6% year over year to $127.5 million. Sales and marketing expenses, as a percentage of revenues, decreased 130 bps to 23.3%.

General & administrative expenses increased 34.2% year over year, reaching $36.8 million in the reported quarter. General & administrative expenses, as a percentage of revenues, expanded 40 bps to 6.7%.

Datadog reported a non-GAAP operating income of $130.8 million compared with $74.8 million in the year-ago quarter.

Balance Sheet & Cash Flow

As of Sep 30, 2023, Datadog had cash, cash equivalents, restricted cash and marketable securities of $2.3 billion compared with $2.2 billion as of Jun 30, 2023.

Operating cash flow was $152.8 million in the reported quarter, down from $153.2 million reported in the previous quarter.

Free cash flow during the quarter was $138.2 million compared with $141.7 million in the prior quarter.

Guidance

For the fourth quarter of 2023, Datadog anticipates revenues between $564 million and $568 million. The Zacks Consensus Estimate for the same is pegged at $541.39 million.

Non-GAAP earnings are expected in the range of 42-44 cents per share. The consensus mark for earnings is pegged at 34 cents per share.

Non-GAAP operating income is expected in the range of $129-$133 million.

For 2023, Datadog anticipates revenues between $2.103 billion and $2.107 billion. The Zacks Consensus Estimate for the same is pegged at $2.06 billion.

Non-GAAP earnings per share are expected between $1.52 and $1.54. The Zacks Consensus Estimate for earnings is pegged at $1.32 per share.

Non-GAAP operating income is expected in the range of $453-$457 million.

Q3 Highlights

Datadog had a strong quarter for infrastructure monitoring ARR, which exceeded $1 billion due to continuous innovation and demand for serverless functions.

Datadog launched new logos, workloads and products in the third quarter. This attracted a number of exciting new customers in the third quarter.

For the second quarter in a row, the company closed a record number of new deals with more than $100,000 in annual commitments.

Some of the notable deals done in third-quarter 2023 are a seven-figure deal with a South American FinTech company, the U.S. federal agency and a Fortune 500 industrial company. Datadog’s other important agreement includes an eight-figure deal with a major American chain of convenience stores.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

The consensus estimate has shifted 690.91% due to these changes.

VGM Scores

Currently, Datadog has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Datadog has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

Datadog is part of the Zacks Internet - Software industry. Over the past month, BILL Holdings (BILL Quick QuoteBILL - Free Report) , a stock from the same industry, has gained 10.2%. The company reported its results for the quarter ended September 2023 more than a month ago.

BILL Holdings reported revenues of $304.99 million in the last reported quarter, representing a year-over-year change of +32.7%. EPS of $0.54 for the same period compares with $0.14 a year ago.

For the current quarter, BILL Holdings is expected to post earnings of $0.40 per share, indicating a change of -4.8% from the year-ago quarter. The Zacks Consensus Estimate has changed -9.2% over the last 30 days.

BILL Holdings has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of D.