DDOG — Three profit measures and one growing customer base

Datadog's quarter looks different depending on which profit measure you read. A useful investment case should explain the differences.

In its November 4 results, $DDOG reported third-quarter revenue of $1.20 billion, up 35% from a year earlier. Operating income under standard accounting rules was $75 million, a 6% operating margin.

Adjusted operating income was $334 million, a 28% margin. The company also reported $251 million in free cash flow.

These are three views of the business, not three interchangeable descriptions of profit. Adjusted income excludes specified costs. Free cash flow measures cash after the capital spending included in the company's calculation, and can differ from accounting earnings for several reasons.

The gap is a reason to inspect the reconciliation, not automatically reject the growth story or accept the most flattering figure.

Customer data provide another useful check. Datadog had about 4,860 customers generating at least $100,000 in annual recurring revenue at quarter end, versus about 4,060 a year earlier. That describes a larger base of substantial customer relationships; it does not guarantee every customer's future spending.

The quarter supports an expanding business, while the margin differences make cost quality an important part of the investment argument.

For the next report, follow large-customer growth alongside standard operating margin and cash generation. If customer expansion continues while those measures improve, the argument becomes stronger than revenue growth alone. If they diverge, the cost reconciliation is where the next round of research should begin.