This is not intended to be a deep dive into Datadog (NASDAQ:DDOG), in terms of all of its offerings and its competitive position. The other day the company announced its Q2 earnings. Initially, some observers and some investors reacted negatively to the earnings release because the company talked about slowing growth in usage in one vertical for some of its offerings. Overall, the company has 3 pillars of observability, but in looking at its suite of offerings these days, it seems as though it has as many pillars/columns to its offering as can be seen supporting the roof of the Lincoln Memorial. That is 36-the number of states in the Union at the time of the President's assassination. Just a piece of trivia in an attempt to brighten another review of an earnings report. (Actually, at this point, the company has 15 principal products on its platform; the latest offering is called Observability Pipelines based on acquired technology from Timber. This newest offering helps engineers manage large volumes of metrics and logs from telemetry data.)
The company has many competitors that range the gamut from Elastic (ESTC) and Dynatrace (DT) to Splunk (SPLK) and New Relic (NEWR). Observability is a large space with an elevated CAGR and there will be multiple winners. The linked article says that its growth is out of control. That said, at this point, DDOG is the leading company in observability, and this latest earnings report doesn't alter that contention.
I felt that the initial reaction to the earnings report, and some of the many price target reductions basically missed the point. The company has seen some modest macro headwinds. It isn't immune to those. But investors missed the part in the conference call dialogue about usage improvements in July along with the strong pipeline the company reported.
Datadog shares are not cheap and indeed have never been cheap using many valuation metrics. The EV/S ratio based on forward revenues is just less than 17X, and while far lower than in the past, is certainly elevated. And the shares have fallen by 43% since their high point reached in November 2021, although they have bounced back 38% from their low reached in June. The company had a couple of quarters of growth above 80%, with strong profitability metrics, and its growth has slackened and is likely to slacken further. I can't really imagine that any serious observer expected DDOG to continue to grow at exceptional rates of greater than 80% or even 70% indefinitely. The company, at the very least, is no longer small, with a revenue run rate of over $1.6 billion, and is likely to exceed $2 billion in run rate revenues over the next 12 months. I have projected a 3-year growth rate In the high 40% range, and that hasn't changed because of the conservative guidance. But to be fair, quite a number of analysts who have buy ratings on the shares reduced their price targets because apparently they had been convinced that the company would grow faster regardless of economic conditions.
Depending on the trajectory of free cash flow for the balance of the year, along with actual revenue growth, the valuation of Datadog shares is much less elevated. Based on some conservative estimates, DDOG has a rule of 40 metric of well greater than 60, and the combination of free cash flow and growth shows a much more attractive valuation than looking at the EV/S ratio in isolation.
I have been a Datadog shareholder for many years at this point. Datadog is one of the leaders and pioneers in a software space called observability. Just as an army needs scouts and reconnaissance in order to function, modern cloud applications need infrastructure to tell network administrators, and business line manager how their networks are performing and to track the performance of applications. I last wrote about the company for SA in an article published in January 2021. The company has grown substantially since then in terms of revenue and profitability; the share price far less so. I am very convinced that observability is a key and necessary component of digital transformation. Without observability, and all of its variants, digital transformation initiatives cannot be successful. At the most elemental level, companies that are offering digital access to data for all kinds of stakeholders will not achieve their goals unless they provide experience that is grounded in acceptable accuracy and response times, and observability is a necessary constituent of achieving those goals.
The other reason to own DDOG is that it is the most disruptive force in the observability space and has been so for several years. It is helmed by two exceptional technology leaders, Olivier Pomel, and Alexis Le-Quoc who cofounded this company, and apparently have a relationship similar to that enjoyed by the co-founders of Atlassian, Mike Cannon-Brookes and Scott Farquhar. The Datadog leaders have been working together for some time before they wound up co-founding this company in 2010.
But Datadog exists in the overall environment. Despite the breadth of the company's offerings, its continued flood of product enhancements, its excellent execution, and the overall growth of the space, the company's customers still have to pay for Datadog's products, and when their own businesses run into trouble, or are dealing with risk and uncertainty, they look for ways to minimize spending. Datadog now has some customers who spend more than $10 million/year for its solutions; a great achievement, but also an issue in that it is these largest users who are trying to save on their Datadog charges.
Datadog has always been a cloud-centric company; that is one of the reasons for its rapid growth and market share gains, and that remains a significant factor underpinning growth.
But I felt that there were a couple of misconceptions running through some of the analysis I have seen published with regards to the earnings report, and what it means for the company, and what it means for the shares.
The headline results for the quarter were solid. Overall, revenue growth was 74% and was 7% greater than prior projections. The company had forecast non-GAAP EPS of about $.14, it reported $.24. The company's free cash flow margin this quarter was 15% - that is a significant decline basically driven by the fall in deferred revenue balances. The fall in deferred revenue balances had more to do with timing of invoices and contract duration than anything existential.
The metric I like to look at, RPO balances, or backlog, rose 51% year on year, and about 2.7% sequentially. That rather modest level has been a focus of analysts since the earnings release and is the basis for some price target reductions. While I like to look at RPO balances, there are some limitations in the use of that metric as a forward-looking tool. In this last quarter, some larger customers who had gotten bills in Q2, moved to different billing cycles which impacts the sequential growth of RPO balances. In addition, duration is a significant input into RPO balances, and it compressed last quarter. And finally, for this company, RPO balances are based on committed rather than actual usage, and some customers, apparently, reduced the size of their initial commits, although that will not impact actual usage or revenue. While the growth of the company's RPO was not as robust as in some prior periods, the same cannot be said with regards to growth in ARR which was at the highest level ever for a Q2, and for new customer growth. The company acquired about 1600 new customers on a base of about 20,000, after netting the impact of suspending operations in Russia and Belarus. The company's DBE ratio continued to surpass 130%; users adopted more products and many users increased their usage despite the slowdown seen by customers in one of the company's verticals. The company indicated that its pipeline of deals for large new logos and product cross sales remained strong, with churn at low levels.
That seems a simple question, but it requires a more nuanced answer than just yes/no. Datadog's revenue growth had accelerated over the last several quarters and had reached an apogee in the last quarter of 2021 and the first quarter of 2022. The level of growth the company had achieved was never felt to be a long-term sustainable level. So compared to the growth spike, growth has slowed, and that would likely have been the case regardless of macro-economic conditions.
Datadog is a relatively young company and so there isn't too much historical data to indicate its cyclicality. That said, during the brief recession that accompanied the initial phase of the Covid pandemic, Datadog saw usage plunge for about 1.5 quarters, before it reversed and rose consistently… until now.
In the last several quarters, Datadog has reported a plethora of outstanding operational metrics. It has come to be the largest vendor in a hotly competitive observability space. So, when it reports slowing growth of usage in a particular vertical, and with a particular size of customer, that shortfall, being a substantial change from recent performance gets magnified. The CFO described the specifics of the growth shortfall:
But we did see some customers beginning to manage costs in response to macroeconomic concerns, which impacted our usage growth with some of our existing customers. Looking at our growth with existing customers, our dollar-based net retention was above 130% for the 20th consecutive quarter, remaining strong as we continue to see customers use more existing products and adopt new products on the Datadog platform. We saw usage growth with some existing customers decelerate in Q2 and that deceleration was concentrated in our larger spending customers as opposed to our lesser spending customers, where growth remained steady year over year. Amongst our industries, we saw relative deceleration in consumer discretionary customers, which represents low teens percent of our ARR.
Datadog has many SKUs and they all have different pricing schema. One important SKU is that of log monitoring while another is the Application Performance Monitoring suite. These offerings are priced based on what is basically a combination of usage and availability. In the case of log monitoring, there are host licenses and then charges for transferring additional containers. There is also a charge based on the number of indexed log events. Basically, APM monitoring has the same kind of pricing framework with a charge for each host and a charge for the number of what are called indexed spans and ingested spans. For those interested in the specifics, I have linked to the list pricing above; of course, larger users negotiate individual deals that are invariably more attractive and more suited to their individual circumstances. Usage charges are a smaller component of cost than basic availability, but can be a significant growth driver.
Sanjit Singh -- Morgan Stanley -- Analyst
Really impressive Q2 results with 74% growth. I wanted to talk a little bit about some of the trends you're seeing in the business and particularly with respect to the guide. I guess the first question is, as the quarter progressed, when did you start to see some of these slower usage trends in some of these verticals? If you could give a comment on that? And then, David, in terms of the guidance in terms of how you were framing it, can you give us a sense of what you're sort of assuming in the back half with respect to Q3 into Q4? Is it some of the trends that you're seeing in July? Did that improve or stabilize or worsen? Just give us some sort of context on how you are framing the guidance for the back half, that would be super helpful.
Olivier Pomel -- Co-Founder and Chief Executive Officer
OK. So I'll start maybe with the linearity. We did see the viability in usage growth that we mentioned. We saw that start really in late April, May and June.
So as we got deeper into the quarter. I should say that this is -- if you're thinking of what happened at the COVID, this is not a sharp pullback as we have seen at that time. But we saw it's just for some customers still growth, but slower goals for certain types of customers and others than what we would have seen historically. I should say that while we did see that for some of our products, especially the ones that have more of a volume component, net logs and some APM, we did see continued healthy growth in host or I should say, cloud expenses and containers, which really are indicative of the fact that the cloud migration is proceeding as it was before.
To fully answer the question also, I think you're getting ahead of what David is going to talk about a little bit. In July, we did see an improvement on those trends, but we still remain conservative in our outlook for the short term because of the noisiness of the data we're seeing there, it's -- there's a few more valuations, a bit more noise. And all of that is underpinned by some macro uncertainty. So we want to derisk that a little bit and give it more careful.
David, do you want to comment on that?
David Obstler -- Chief Financial Officer
Yes. On guidance, as you know, we have always been conservative in our guidance by using lower organic growth and other metrics than seen historically and continue to maintain that philosophy. I would note that if you look at the raise here and the percentage of the beat that was passed through into the raise from Q2, it is lower, more conservative than we have done in previous quarters. And the reason for that is the macro uncertainty where we can't be as confident about what happens given the macro uncertainty.
So I would say there, if you want to take that, there were some incremental conservatism put into this. But I'd remind everybody that we've always been quite conservative in using assumptions that are lower than the past when we give guidance.
It is important to note that usage growth is not falling off a cliff and that the company hasn't seen signs that it is or will. This is not the same as the usage decline at the start of the pandemic. I think as well that some may have missed that usage trends started to show improvement in July. And I think management describing its guidance as more conservative, than a prior conservative approach to guidance is telling.
Trying to play quarters, or invest in companies based on some kind of expectation for a specific quarterly event is a fraught exercise. I confess that in an abundance of caution, in this environment, I really don't try to develop expectations for what a company is going to report in a particular quarter, or what its growth guidance might be. The fact is that while some customers are trying to optimize their Datadog spend, other business KPI's are still seeing excellent results, and those are the ones that provide better visibility into future growth trends.
Olivier Pomel -- Co-Founder and Chief Executive Officer
Yes. So I'll start on the rapid trends with the hyperscalers and then David can give you more color on the bookings part. But the -- so in Q2, we did a lot better than the hyperscalers. So we're going a lot faster than all of them combined.
And they've decelerated actually more than we've done in a interactive basis. So we actually feel good about the ratio there. Like we are commanding a larger portion of the cloud revenue than we were last quarter. In terms of the go forward, I don't think the hyperscalers have to guide specifically for that.
But we -- in terms of business trends, we see that all of the leading indicators of success are looking good for us. So I've mentioned it on the call that we're seeing great action with new logos. We're seeing great success with new product attaches. The pipeline's going into the second half of the year are very good.
We've also done very well with the capacity we've added and the hiring and everything that's a pretty for our success. So all of that is looking good. What we don't have necessarily in terms of the gap for the future is we have a little bit of more noise in the data in terms of growth, which leads us to be a little more conservative. David, do you want to give more color on the booking part of it?
David Obstler -- Chief Financial Officer
Definitely. So I remind everybody that with our land and expand where we start getting used by clients, they scale up the growth and when they get to a certain point through. This has been going on for the whole business model. They go to an increased commit.
Because of that, there's variability in the billings and RPO that net-net, over time, on average, go toward the ARR growth. Again, remember, we mentioned that the ARR growth is the best metric. And the way to look at that is that you look at the revenues. You take -- you use the linearity, which is 34%, 35% of that and multiply that times 12, and that is pure because it doesn't get altered by when a bill goes out either in timing or whether the bill is a previous commitment plus an on-demand or a new commitment.
So it's always going to be noisy with us. We understand that investors and analysts look at it. So we try to give some color on that, but remind everybody that is very variable and only over time gets -- it comes back to the revenue growth. So just to remind everybody.
And I think we said we basically put in there that in the first half of the year, the growth of this was in the 70s, pretty close to revenues. Why? Because there was some timing of billing in the first quarter relative to the second quarter that moved the first quarter up in the second quarter down, but it really doesn't have much effect on the drivers of our business.
I have said on several occasions, in writing about different companies that I find the billings metric to be of least use in trying to provide an analysis of a company. About all it is good for, for the most part, is its input into a free cash flow analysis. But in terms of making a growth forecast, the change in RPO balances is more helpful, and the growth in ARR is the most helpful, although it is not completely appreciated by some.
Quick answer - no one knows. Almost all businesses are attempting to manage costs in this environment. Any customer who is spending $10 million/year on software with an individual vendor is inevitably going to be scrutinizing their bills and seeing what can be eliminated without changing the performance of their networks. That is true for every vendor and every software user. It is not something that is unique to Datadog or to anyone else. I was encouraged to hear that the negative usage trends abated in July; there is probably just so much optimization that can be done because of the momentum of workloads shifting to the cloud, and the need to monitor those new workloads. But I was even more positive about the comments on pipeline.
Olivier Pomel -- Co-Founder and Chief Executive Officer
I think the improvement in July were not about closing contracts. The one I mentioned we're about the usage trends, which is fairly force from the closings and the contracts and everything else. We also -- again, I got a great pipeline, and we're very happy with what we've seen the sale side in July, but this is where -- which we commented about the usage.
I think that Datadog's opportunities are to continue to gain market share in this space. Market share gains can come about through vendor consolidation, and they also come about through the adoption of additional Datadog modules. As mentioned, this is a very development focused company with its founders having technical backgrounds.
Datadog shares are not the cheapest of all those that I follow. OK, on an EV/S basis they are amongst the most expensive. They never have been cheap due to the hyper-growth, and the company's leadership and disruption of its space. After making the adjustments for the Q2 earnings release, my projected EV/S is now just a bit less than 17X based on projecting 12-month forward revenues. That level of EV/S is quite a premium for the company's growth rate, but a far more modest premium when considering the company's free cash flow margins. But equally important, perhaps more important in my view is that Datadog is, and has been a consistent share gainer. It is a share gainer because of vendor consolidation, and because of the rapid expansion of its portfolio. And it is achieving excellent sales execution with record levels of new ARR in a very difficult macro environment.
Observability, in general, is proving to be a very resilient application in terms of its stickiness. This is particularly true for Datadog because of its exclusive cloud focus. Workloads are shifting to the cloud, and that isn't going to stop during a recession. Shifting workloads to the cloud is basically a tactic to reduce costs, and that was the reason why the results of Amazon/AWS (AMZN), Microsoft/Azure (MSFT) and Google Cloud (GOOG) (GOOGL) surprised to the upside. As workloads shift to the cloud, the need for observability increases. Successful migrations of workloads to the cloud as part of digital transformation need observability to achieve reasonable performance. I doubt that there are any readers who haven't experienced what can happen when observability is ignored in migrating a workload. And speaking for myself, I have left websites on occasion because of their lack of performance or because of some other glitch - the kind of problem observability is meant to solve.
So, I expect that Datadog's operational performance will continue to stand out, regardless of the usage headwinds it experienced in one vertical at the end of last quarter. I am the last person to suggest I know if the exceptional compression in high growth multiples has absolutely ended. I can, but hope that is the case, but I really don't have that kind of a crystal ball. But I do believe, nonetheless, that making a commitment at this time in Datadog shares makes sense. I expect that as the company proves that it can grow at elevated rates despite macro headwinds its relative multiple can improve, even though the company's growth spike is likely ending. There is plenty of alpha available to investors in the shares of this company, I believe.
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Disclosure: I/we have a beneficial long position in the shares of DDOG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.