Earnings Roundup - DDOG, NET, UPST - February 2022
Recap of results from the latest earnings release, guidance, and notable quotes
High growth companies have been out of favor since November 2021, as persistently high inflation led to beliefs around increasing interest rates. Rising interest rates have a negative effect on the valuation of companies that depend on future cash flows.
Some of these companies, however, are firing on all cylinders.
Over the last few weeks, many companies have shared their 2021 annual results as well as their outlook for 2022. Earnings season came to an unofficial end after Walmart reported on February 17, 2022.
This article dives in to review results from Datadog (DDOG), Cloudflare (NET), and Upstart (UPST).
Datadog (DDOG)
Datadog is a leader in the observability space for cloud applications, providing monitoring and security solutions to ensure smooth operations.
They reported strong fourth quarter earnings on February 10th, 2022.
In 2021, Datadog grew annual revenue over 70% year-over-year to $1.03 billion. Over the same period, they produced over $250 million in free cash flow, roughly a margin of 24.3%.
The fourth quarter results were even more impressive. Fourth quarter revenue was up 84% year-over-year to $326.2 million, demonstrating accelerating revenue growth quarter-over-quarter. Free cash flow for the quarter was $107 million, representing a FCF margin of 33%.
For 2022, Datadog is guiding for revenue growth between $1.51 and $1.53 billion in revenue, representing just under 50% growth.
For context, last year, Datadog guided for between $825 and $835 million in revenue. Their $1.03 billion in actual revenue significantly exceeded their guidance.
Datadog is well positioned as a leader in a rising market – the large cloud platforms themselves are growing at roughly 45% annually.
Notable quotes from the earnings call
“Our dollar-based net retention rates continued to be over 130% as customers increase our usage and adopted our newer products.”
“We had record new logo ARR in Q4, including some large new enterprise wins. And churn remains low and in line with historical rates. All these factors together led to another record quarter of ARR added.”
“Our platform strategy continues to resonate in the market. As of the end of Q4, 78% of customers were using two or more products, up from 72% a year ago, 33% of customers were using four or more products, up from 22% a year ago and as a sign of further adoption of our platform, we saw that 10% of our customers were using six or more products, which is up from 3% last year.”
This demonstrates the effectiveness of their platform and their land-and-expand model.
“We saw strong growth across our platform in Q4. Year-over-year growth of infrastructure monitoring ARR has accelerated in Q4 compared to Q3. In addition to that, APM suite and logo management products continue to be in hyper-growth mode. And we're very pleased to report that our newer products added about $100 million in ARR in 2021. These are the newer products we launched in 2019, which excludes core infrastructure, core APM and log management.”
Not only do their core offerings continue to perform well, but their new product offerings seem to be resonating with the market.
Datadog continues to innovate, delivering many features and products throughout the quarter including Sensitive Data Scanner and their acquisition of CoScreen.
“In addition to this, we are pleased to have received a FedRAMP moderate authorization. As a result, we can now sell to U.S. Federal Government agencies as well as the other public sector customers who use FedRAMP as an indicator of compliance and security.“
“We also announced a global strategic partnership with AWS. This is a recognition of our success and growth with AWS and our commitment to further invest to accelerate our joint opportunities.”
With the FedRAMP approval and AWS partnership, not only does Datadog unlock a new market with the government and broaden customer access, but they also reinforce their legitimacy in the commercial market.
Cloudflare (NET)
Cloudflare is a global network provider for the cloud, offering solutions to make the internet more performance, secure, and reliable. Their mission is to build a better internet.
They reported fourth quarter earnings on February 10th, 2022.
For 2021, Cloudflare generated $656.4 million in revenue, an increase of 52% year-over-year. Free cash flow was negative $43.1 million, or 7% of revenue.
For the fourth quarter, Cloudflare reported $193.6 million in revenue, a 54% increase year-over-year. Free cash flow was $8.6 million, or 4.4% of revenue.
While the fourth quarter marked a slight deceleration quarter-over-quarter of 12% down from 13%, it is on the high-end of their historical record.
For 2022, Cloudflare is guiding for between $927 and $931 million in revenue, growth of roughly 42%.
Guidance tends to be conservative. For context, a year ago they guided for roughly $590 million in 2021, which they surpassed by over 11%, delivering $656.4 million.
One of the more remarkable things about Cloudflare is their ability to grow revenue consistently. Matthew Prince, CEO, comments that they are in full control of their business. Their consistent results demonstrate it – this is Cloudflare’s fifth consecutive year delivering revenue growth above 50%.
Cloudflare’s business is more capital intensive than software pure plays. Building out a global network of data centers requires a significant investment. It also serves as another challenge potential competitors would have to confront.
Cloudflare is on a 3-act journey, ultimately looking to become a next-generation cloud provider, competing directly with AWS, Google Cloud Platform, and Microsoft Azure.
Notable quotes from the earnings call
“Our dollar-based net retention ticked up to a record 125%, improving 6 percentage points from a year ago.”
“2021 becomes our fifth straight year with 50% or greater compounded growth. I am proud of two things. First, over those 5 years, our growth has actually accelerated; but second, and probably more important, our growth has been relentlessly consistent.”
“We have dialed in our business. We understand and we are in control of its levers. You can see that in metrics like our gross margin.”
He follows this with a statement on their competitive advantage:
“While talk across the industry is about increasing cost and pricing pressure, we achieved a gross margin of 79%. That remains above our long-term target gross margin range of 75% to 77% and creates some opportunities. We expect to use this exceptional gross margin as a weapon to take business from competitors more vulnerable than we are to pricing and cost pressures. It also allows us to bundle together products into an overall platform no competitor can match.”
“We are not in a rush to be significantly profitable. … We will continue to shovel money back in to drive innovation and reach new customers as long as we can achieve exceptional growth. … We want our operating margin to hold just above breakeven and right where it’s been for the last two quarters.”
“We are proud that this is Cloudflare’s first quarter since we have been public to be free cash flow positive. It also won’t be our last. We know this is a business that can generate significant cash flows when we want.”
“We admire and seek to emulate other companies that came before us and had significant cash flows while holding operating margins at breakeven. And we feel very dialed in and confident in our business as we come out of the uncertainty over the last 2 years.”
Likely a reference to the Amazon model, and Amazon’s ability to continually invest in the business, managing earnings while generating significant cash flows.
“It starts with innovation. When we talk to customers, what they appreciate about Cloudflare is our relentless innovation.”
“Network effects are spawned by networks and we have run one of the largest networks in the world. As customers join our network, our network gets better and more efficient.”
“Act 1 was the CDN, WAF, DDoS, DNS, those types of products. Act 2 is our zero trust product, which I think we are square in the middle of and where a lot of our growth is coming from. I think Act 3 is Workers, and that’s still, I don’t think has hit really the hockey stick sort of point in the growth curve.”
Upstart (UPST)
Upstart is a modern lending platform, leveraging artificial intelligence and machine learning to make credit better.
They reported fourth quarter earnings on February 15th, 2022.
For 2021, Upstart delivered revenue of $849 million, an increase of 264% year-over-year. For profitability Upstart reports on adjusted EBITDA, which came in at $232 million, or 27% of revenue. Free cash flow for the year was roughly $168 million or 20% of revenue.
Fourth quarter revenue of $305 million accelerated quarter-over-quarter to 33% from 17%. Adjusted EBITDA came in at $91 million, or 30% of revenue.
Growth and profitability are trending in a desirable direction.
As for 2022 guidance, Upstart expects revenue of $1.4 billion, growth of 65% year-over-year. As for profitability, they guide for adjusted EBITDA margins of 17%. The lower profitability is a result of ramping up their auto loans offering.
Additionally, Upstart announced a share repurchase program to buy back $400 million of common stock, or roughly 4-5% of the company, with the intention of taking advantage of the volatility in their share price. This is uncommon in a high growth company. However, given their profitability, it should be welcomed as a positive, shareholder-friendly signal.
While Datadog, Cloudflare, and many other technology companies have a software-as-a-service business model, Upstart’s model is based on usage. Upstart’s revenue depends on the number of loans they originate.
While there are efforts to bring more consistency to the mix, for example by partnering with banks and dealerships that provide steady flow of loan applications, Upstart’s business will have more variability depending on the macro environment, such as the overall demand for loans.
That being said, Upstart represents a very unique, early-stage opportunity combining high growth, high profitability, and long runway.
Notable quotes from the earnings call
“2021 will be remembered as the year AI lending came to the forefront, kicking off the most impactful transformation of credit in decades.”
“We generated more cash in 2021 than we burned in our entire eight-plus-years as a private company.”
“This unusual combination of growth and profits in a heavily competed industry is evidence of distinct competitive advantage and clear operating leverage.”
“We also now have 42 banks and credit unions as well as more than 150 institutional investors funding loans on the Upstart platform.”
They are adding partners at a faster rate. In September 2020, they had only 10. There are over 4,500 FDIC-insured commercial banks in the USA.
“I’m also pleased to report that we now have seven lenders on the Upstart platform with no minimum FICO score requirement”
Upstart is displacing the incumbent.
“Our Auto Refi funnel performance is now comparable to where our personal loan funnel was in 2019, on a channel-adjusted basis.”
This is a very positive sign. The developments in personal lending in 2019 and 2020 led to a blowout in 2021 as Upstart’s personal lending exploded, increasing revenue over 250%.
“We also continue to make rapid progress in the new product categories that I mentioned in our last earnings call—small dollar lending, small business lending, and mortgage. In each case we’ve established a core team and are making real progress toward entering the market. In the case of small-dollar and small-business lending, we expect to have these products in market during 2022. In the case of mortgage lending, we hope to be in market in 2023. In each case, we anticipate a year or so of development, a year of seeding and testing, and then a year to begin scaling. A home run success for Upstart would amount to a new product in market and ready to scale in each of the next two or three years.”
Upstart continues to invest heavily in new solutions. These are all very attractive additions and expansions to the Upstart ecosystem, providing more data for increasingly robust models.
“We think of ourselves as a consumer internet brand focused on personal finance. Unlike a bank, an internet brand can seek to serve all Americans and eventually everyone in the world. We hope to do this over time with an incredible diversity of offerings from hundreds if not thousands of partners, each of which will benefit from leveraging Upstart AI. So in short, our goal is to become a technology partner to all the world’s great financial institutions, and through those partnerships, to enable the broadest array of financial products at the best price and with the best experience, to everybody.”
Upstart has no plans in becoming an online bank. They understand their core competencies depend on being a horizontal platform, one that can capture the most data.
“With the volatility in the trading of our stock, we have seen what we believe to be attractive buying conditions at various times over the past year, and our profitability puts us in a position to be able to initiate this program and take advantage of those situations on behalf of our shareholders.”
Closing
While these emerging compounders - Datadog, Cloudflare, and Upstart - are young and have limited historical records, they are consistently demonstrating their ability to execute. The reinvestments they make in their business help fuel future growth.
By continually demonstrating innovation coupled with product market fit, they are poised to continue growing.
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Torre Financial is an independent investment advisory firm focused on emerging and established compounders.
Federico Torre
Torre Financial
federico@torrefinancial.com
https://torrefinancial.com
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