Datadog, Inc. (DDOG) Earnings Call Transcript & Summary

Good afternoon, and thank you all for being here. This is William Blair's 40th Growth Stock Conference, so a huge milestone for us. Appreciate all of your support. My name is Bhavan Suri. I'm the analyst at William Blair that covers Datadog. You can find all the appropriate disclosures on our website at www.williamblair.com. Sometimes I'm going to say www.datadog.com as my mind's focused, but it's williamblair.com. It's a great pleasure to have David Obstler, who is the CFO there. And as we've seen, one of my favorite names, has done incredibly well pre-COVID and then sort of through COVID. But I'll kick it off. We're going to keep this as a fireside chat. But David, thank you for being here. I really appreciate the support you've shown us.

Maybe as a quick start, can you just provide an overview to the investors who may not know you about what Datadog does and sort of what differentiates you from others in the marketplace?

Yes. And thank you for inviting us to the conference. Datadog, at a higher level, provides observability for hybrid cloud environments. So in another way, we ensure that digital operations and apps are performing properly, enabling innovation for developers and IT environments to promote more agile development. That's high level, yes.

Great. And then as you think about the differentiation, so if you think about this marketplace sort of as the next-gen version, what's called 3.0, whatever vendors, you have sort of legacy guys. You've got some ankle biters. Just a little bit about sort of what differentiates you and sort of when you think about, I mean, you went through the IPO process, the tiers, infrastructure and apps and things like that, how do you fit in the, sort of, integrated view? Just a little bit of color for investors on understanding where you play and what differentiates you.

Yes. The first way to look at it is we were designed for distributed cloud environments. So we were designed for -- to be able to monitor microservices, containers, et cetera. That dynamic infrastructure cannot be monitored by the legacy solutions. So therefore, there was a replatforming going on. When a customer is migrating to the cloud, they have to choose a new platform in order to monitor it. From the very beginning, one of the ways we differentiated ourselves is we started as a unified data platform. We didn't start as an infrastructure monitor, et cetera. That enabled us to be able to design something, and we took data in from a number of different sources. And today, we have 400 integrations. And on top of that, we've been able to build out the functionality, starting first with infrastructure, which was a good place to start because it was ubiquitous. Once workloads go to the cloud, they need to be monitored, and they need to be monitored by either an open source or a Datadog. And so we got ubiquity. We designed the products, so that it was easy to download. No professional services. The way we priced it was on a per host basis, so it could be used by everybody and that promoted early adoption. And since that time, we've expanded the product by adding on other functionalities, such as an APM and logs.

I think it's an interesting story, right, in the sense that you did start with a single product in 2012. You've been able to anticipate the needs of the market and time these introductions incredibly well. It's led to impressive growth and really strong early attach rates. I guess a little bit of the journey in the end-to-end platform. What enabled you guys to sort of execute that strategy and vision so well?

Yes. Everything comes from the customers. So we were -- since we were used ubiquitously and we had many touch points, we were able to watch how the customers were using our product. Very early on, we saw, on top of infrastructure, our clients start to use it to monitor applications and build functionality on top of it. Very early on, we saw them to -- building dashboards and metrics, et cetera, on top. So once we saw that, since we have such a grassroots way of exiting customers, we were able to follow the client needs and develop the platform. And that's one of the efficiencies and, I think, brilliance of the way the product was developed.

Yes, yes. The other efficiency you have is around the business model, David. I mean if you think about it, it's a case study and how to execute sort of bottoms-up land and expand. So maybe walk us through the go-to-market playbook and the sales motion. And then we'll talk about sort of the expansion. Does that make sense?

Yes, that makes sense. And it all goes back to the product itself. So essentially, since our product is able to be downloaded very frictionlessly by our customers and their data able to get into the product very quickly, they're able to use it within hours. So that means that we're able to evolve from ground up. The client can start using it, see the utility. And then because of the way it's architected, as more volume runs through the platform, as more hosts are deployed automatically and frictionlessly, the client can use more. We've designed the whole product that way. So they can do the same thing with adding on APM, logs, et cetera. As a result, generally, we're following migration to the cloud. And when a client shifts workloads, one of their first calls usually is to Datadog. Otherwise, they're blind in that environment. They start to use it. And as volumes increase, the way we're able to contract and price allows them to use more, we have a usage model and pay us more, over time. We're able to go to market through both a very efficient internal small business and mid-market, complemented by sales engineers and account managements. And over the years, we've added on enterprise salespeople who are landing and expanding. All of that has resulted in a lot of efficiency in going to market.

Yes. And let's focus on the enterprise for a second. I mean you've really seen strong traction in the enterprise segment over the last few years. But when I look at some of these things, like, for example, the recent launch of Security Monitoring, have you had to change that dynamic? Have you had to layer in the security subject matter expert, the IoT subject matter expert, as -- especially in the enterprise? Because obviously, SMB mid-market, a lot of it is just making sure the system is up and running. But as you run the enterprises, it becomes much, much more complex and sophisticated.

Good question. Yes, our point of landing tends to be in production and development. And our -- and what we're doing in security is focused on that. It's using the data we already have to look at security threats in the DevOps environment. We are not, at this point, trying to go on-premise internal IT. That's meant that our initial run at the security has been towards the same customer base. But as we build out more functionality, we may have to consider a different or added go-to-market, depending upon what we see. We won't know that for a while because we're still early stages in building out the security product, but that's a possibility as we evolve that business.

Yes, yes. It's early stages in many ways. If you think about the sort of these macro trends, right, the digital transformation, it's the technology shift to the cloud, this paradigm shift, it's micro services and sort of that serverless corporate data use, et cetera, where do you think we are in terms of those trends and then, obviously, then in terms of your growth rate and sustaining your growth rate?

We think we're very early. We think there's 5% to 20% of workloads that are migrated to cloud. Some companies are just beginning digital -- their digital transformation. And we also find a relatively low percentage of applications are being monitored in the cloud. We're also pretty early in the full rollout of a hybrid, a public and private-cloud type. And so we think there's a lot of runway. One thing we're going to watch here is many companies have had to face this more quickly through COVID than they had planned. Digital migrations are happening very quickly. Is this going to accelerate a very compelling trend that was already out there? We believe there's a lot of reasons why it should, but we'll have to see as things develop.

Yes, yes. We firmly believe it will, too, but let's see how it plays out. Let's touch on the competitive environment. We talked about a little bit, if we frame a little more broadly, specifically, when you think about deals, love to get some sense of what sort of your deals are greenfield versus competitor, big customers or vendors. And then who do you see most on some of these deals? And I'd love to get sort of color on win rates, too.

Yes, definitely. So for the most part, it's greenfield. So since we are trying to instrument new migrations to the cloud, that is most of our muscle. It's also a very efficient way to go because, as I mentioned, when a client is doing that migration, they need that visibility. Probably, our biggest competitor is in-house and open source. So most clients are deciding, when it comes to the platform, whether they start to do it themselves, often through open source, maybe through some AWS data, et cetera, or a Datadog. So that's the core of the -- most of the time, there's not bakeoffs. Most of the time, our motion is, since we're so easy to implement, a client starts to go through a free trial, download the data, see how it works, sees the utility. So we don't have to face bakeoffs very much. In terms of the competitors, we face some companies that came more from a point solution, under well it came from APM, so we faced a Dynatrace APM, a Splunk more logs. We face that. We -- today, there really isn't another company that has a cloud-native, fully integrated, accessible platform like we have, but we do see competitor from some of those other point solutions out there.

If I just change that a little bit. If we look at the cloud enabled -- the cloud infrastructure guys, like AWS, Azure, GCP, et cetera, if a company is deploying on AWS, I guess, the question comes up from investors quite a bit, and it's come up now, too, why wouldn't they use AWS' monitoring service as a Datadog? I'd love for you to sort of explain why someone who builds on AWS wants to use Datadog as well.

Yes. AWS, the ideal way of product, what -- like I said, tends to be more of a data source for us. So you do get some data points, but a couple of things. We have 400 integrations, so we're seeing much more broadly. We build out a set of intelligence tools and dashboards. We have invested in the integration with APM and logs, which is beyond what they've done. And because most of our clients either have today or want to be hybrid, they want to be able to see data points from a number of different cloud vendors, including their -- often their private client instances. And all of that plays into a data platform that integrates and builds all that intelligence on top of Datadog. We compete -- we cooperate very well with the cloud providers, both in terms of delivering our product on their clouds, monitoring their clouds and then using their information as data sources as part of our product and integrate.

Yes, yes. Absolutely. Let's touch quickly on COVID briefly. You were one of the few companies that actually saw an improvement in performance. I know we're saying we're not sure if there's going to be acceleration coming out of this. But I'd love to just get a quick update because I know it's coming up from -- for everybody. And it feels like the environment is so dynamic, it changes week to week, right? So just an update on how activity levels trend in May and to date in June and then what you're hearing from customers as it pertains to potential deal activity in the back half of the year.

Yes. We're not able to really update what we said on the earnings call with May and June. But what we said at that time was we had a very strong first quarter and we had a very strong end of the first quarter. A lot of -- we did well in new logos. What we started to see at the end of the quarter is we started to see some volatility in usage, where some of the more impacted industries in travel, hospitality, et cetera, had some pressure on usage. We had about -- we said we have about 10% of our customers in there, so not a huge amount of exposure, and probably another 10% as having some impact. But we have a pretty much symmetrical 10% of, let's say, video streaming services or online delivery of food that also had a countering impact. And then another group that was somewhat impacted to the positive. And we saw more volatility in usage, but didn't really see any pattern change from what we saw already. When we got to April, we said on the call, we started to see some of those that had sprinted to try to get their systems up, started to equilibrate a little more and some volatility, but it was too early to tell what was going to be the endgame. We also hadn't seen a significant effect on new sales or on retention rates. But as I said, we thought that given what was happening, we would not be surprised if there was a negative impact on retention rates and a more difficulty in accumulating new logos. And we'll have to see a lot of what happens in the quarter, happens towards the end of the quarter. And we'll see in this quarter what the impact of COVID was, but the first quarter did not impact us very much.

Yes, yes. And I mean you're absolutely right. This churn in the SMB segment, et cetera, shouldn't come as no surprise to anybody.

We said that when we gave our guidance, we incorporated that. We wanted to make sure we were prudent. We would expect logically that there would be some increased churn, and there might be some effect on uses, but had not, at that point, really seen it materially yet.

Yes, yes. Let's touch on the partner ecosystem. So you guys easy to implement. You can see that from the professional services and your business is tiny, but you did announce the launch of a formal partner network in January, so go to market, things like that. I just want to talk about sort of early interest across the partner categories. And then what is sort of the near or longer term, let's call it, again, your medium-term sort of strategy around those relationships?

Yes. Good question. Yes, we have been more direct, and we have had on our radar to get a program together. At the end of the year, we did launch a program. Again, it's too early, but we're starting to see some success. And there are 2 areas where we would see that success. One would be some geographical diversification in places where we're newer. We have -- we don't have as much of a footprint. We have been able to partner with some MSPs, resellers and go to market. So that's one area. And then sort of the global system integrators, where corporations are outsourcing, but cloud migration and that entity, and that was the case of the insurance company that we showed, had to make a recommendation on which cloud provider and which tools. And we've been trying to work with them and go to market to be able to educate them on the architecture and product of Datadog, and so that they can help recommend. And in that case, that was an early success of one of the large global system integrators recommending and then being the MSP for that one as it was being outsourced by that enterprise. We think there's upside here. Or early on, we're putting our muscle behind it, and we think it's upside to what we've been doing.

No, that was cool. And then when you look at the platform and you look at the growth, I mean, you highlighted the percentage of customers using 2 more products have increased pretty significantly, right, from 32 to 63, if I recall. Just how have attach rates trended, specifically on sort of new logo transactions? Like are the new customers coming in and buying more? Or is that something that happens over time? And then I'd love to understand how much of the product adoption, once you're in the expansion phase, already with a customer, does that happen organically? Like how are you pushing for the second product, third product? Or are they realizing that these things are really simple, how they do fit together? There's a reason why they're built together. I'd love to get some color on both of those. So sort of attach rates on new logos and then obviously, how they...

Yes, definitely. Yes, as the platform has developed and the utility of that, we've seen both the overall base of customers grow into, we mentioned, the 60s there, and new logos in 70-some-percent of our new logos are landing with more than 1 product. So we're seeing the motion attached right away. Often as we -- in our land and expand, that's a smaller attachment. And one of the big growth drivers in our net retention has been not only the volume of hosts and infrastructure, but also the volume once we attach to the other products. So a big driver of our growth has been the expansion of volume, both from the original infrastructure land as well as the new products. So both muscles are happening. We're seeing that the average revenue per customer, once you have more than one product, tends to be around double, and we're seeing that happen both in initial lands as well as expands.

Got it , got it. Let's touch on a couple of topics really quickly. One, the government vertical, early stages of building out the government-focused sales team. Just any progress there and level of traction you're seeing within the government vertical? Because obviously, they have got the same issue now. No one wants to go to the DMV or whatever, local, state, federal. They have to go through their own digital transformation. So what are you seeing there?

Yes. Big opportunity. We're still in the middle, I think. So we ought to get the certifications. We're still doing it, and we'll be doing that through the course of the year. We have hired a small government sales team. And we're focusing on some of the areas where the certification is last. The state, local government and the university is first. We're getting some traction. But again, we're spending -- and we said this right up at the beginning of the year that we're spending most of this year going through the certification, the fed ramp and being able to sell more broadly. So I think most of the traction that we might see is really next year's business given this year is mainly going through fed ramp.

Yes, building it out. Turning to pricing. So you're viewed as having sort of one of the most attractive entry price points among the modern vendors, but you've got some customers that are spending a lot of money. I'd love to understand sort of what are you seeing in the pricing environment. Any pressure in the pricing environment? And sort of what you think -- as I think about these large customers, what that ARPU growth, the pricing growth might look like over time?

Yes. We -- we've tend -- this is -- our strategy has been to promote ubiquity. We see this like Salesforce. We want to have the unit -- the barriers, the unit prices and the implementation be frictionless and be used. So often, as you mentioned, we may have a unit price, but were used by more people and monitoring more, so we get up to those types of deal sizes. I would say that as we showed in the IPO, we have grown the average deal size quite rapidly, more than double, for enterprise into the mid-200s for mid-market into the mid-100s to above that. And we're seeing that continue to grow. And we're seeing that continue to grow as customers are landing bigger, as they're moving into that and as they're using more. For most of our customers, we're still very early on. Some customers, we gave some case studies in the IPO and elsewhere, we do have pretty full deployment. But in many others, we're just scratching the surface in terms of our deployment. Even though we're at $10 million, $8 million. We haven't really seen any change in the pricing environment. We tend to go with this frictionless land, expand and then we have price breaks as you commit to more. That motion really hasn't changed at all, and it probably has a lot to do with the fact that we're able to cover so much of the infrastructure and application for that price point that our clients feel utility there.

Yes, yes. It's interesting as I think about the price point, I think about the product and the modules, we've touched on security already in this conversation. But when you think about logging and you think about sort of the network performance monitoring product. And if you think about as point solutions, that dynamic is acquired by Cisco and became sort of more kind of the instrument stuff and it becomes a networking product, how are you seeing traction for, specifically, I'll go through 3 of them, the logging products, the network performance monitoring product and then, obviously, you're at Synthetics, which you just started charging for in Q3?

Yes. I think probably the better way to look at it is, starting with infrastructure, we had for quite a bit of time, 2 to 3 years, great traction in both APM and logs. Both of them are growing in hyper growth rates. Most of our clients are thinking this is a single platform. The ability to investigate a problem doesn't stop at infrastructure. APM and the logs is a very good tool to be able to analyze it. Infrastructure itself is a very scalable, high growth company, and we said we've been in hyper growth in both of those. Both of them have evolved to a multiple tens of million dollars of product at a very high growth rate. And I would say it's very typical that we would have, as I mentioned, 2 of those, if not 3 of those, in a solution. Then we added utility to each of those. In APM, the Synthetics and then the RUM allow for analytics out to the website and expand the range of the APM. And the attach rate in Synthetics has been quite favorable and continuing. It's not got a lot of friction. Our clients are seeing a lot of value in it. RUM, we just started to charge for, so it's a little bit too early. But we're seeing some good signs. In terms of network, that's a data source that's appended to infrastructure. It is -- enables a client to look at the flows of data between an infrastructure, between network. And again, we just started -- that's -- I would say that's more of an additional data source and more signals to our infrastructure customers. Early good signs, but we just started charging for it. I think security is a little bit of a different case. Security, we said, has a long product development. We're building out additional functionality. We started out with penetration. We had some good beta customers, and they're buying, and we're seeing some good traction. But it's going to be a little bit of a longer haul in that adoption, yet we think that could be the biggest opportunity of Synthetics from network and then security in growing our TAM and in growing our top line.

Got you, got you, got you. Let's quickly touch on international, and then we'll talk about M&A. I think it's probably all we have time left for. But international, what are you seeing there in terms of adoption? I know you've mentioned you're using some of the partners to go out there from a managed service perspective, but it usually typically feels like international is typically behind the U.S. in some ways. What are you seeing out there in terms of adoption? And let's go with that.

Yes, yes. Definitely, we've seen international behind. We're farther along in EMEA, the adoption is more -- is quicker. And it is more adoption in certain environments, like the U.K. and Northern Europe. So we're essentially following that, and we're building out sales teams, sales engineers. We -- in the second part of last year and it followed on to this year, we got some very good wins. I think we mentioned the French National Railroad, a very large U.K. insurance company, one of the big stock exchanges. So we're starting to see a lot of traction, but still behind the U.S. And we are younger, and the adoption is younger in Asia. We -- it's only in the last year that we really had some critical mass there. We're growing very rapidly. We've had some nice wins. But you're absolutely right. It is behind the U.S., and we're going to follow that. We can't create adoption of cloud migration. We follow cloud migration, see that there's a market and are there to instrument it.

Yes. No, that makes perfect sense. And I got to believe the frictionless model is going to help, too. I don't need to have salespeople in Germany, France, Norway, whatever, doing this, at least, for the mid-market and lower. Like enterprise, I'm sure there's absolutely some handholding that goes on, but the ability to try it for an IT DevOps person to just try it and build, even in a large enterprise should be helpful.

That's exactly right. We basically modeled this after U.S. In the U.S., we have the small and mid. In central locations, we have in Boston and Denver. We have ours for Europe in Dublin. And now we also have another site in Amsterdam. We find that we can make that sale with an inside sales team. And then we do have enterprise salespeople in most of the major markets. So you're absolutely right. That's been our formula. We've followed that, both in the Americas, now in EMEA, and we're doing that in Asia.

Got you, got you. Probably the last thing on M&A quickly. You have made a couple of -- I think, a couple of small acquisitions, but how does that fit into the growth strategy? And then the philosophy, like how do you decide build versus buy?

Well, we -- essentially, again, our product strategy is client-focused. So we see what -- how clients are using the platform and what kind of use. So far, what we've done is emphasize bringing in IT and R&D teams. That can accelerate the development by being farther along, and that's what we did in logs and in APM. We then have re-architected and build it on our platform, and that's worked very well for us, and we continue to do that. Most of those tend to be R&D focused. We have looked at some bigger acquisitions and in areas where we think that the domain, security could be won or the head start could provide accelerated go-to-market. And we think there's more opportunities now given the valuation adjustments we've seen -- we're starting to see in some of the private markets. But we have a pretty high bar. They have to fit in culturally, the right type of development and the ability to fit the platforms together. So we continue to be discriminating, but think there are going to be more opportunities for us. And therefore, we may be able to expand a little more rapidly and inorganically than we have previously.

Yes. The valuation expectations from sellers still, I feel like, haven't come down. And then the public market is certainly supporting it. I mean probably markets in tech have held up incredibly well.

It's going to be a transition. It's going to be time. And like I'm saying, we are sort of building different capabilities in product and extension. That's one of the reasons we did the convert. We wanted to have financial flexibility not stand in the way if we saw the right opportunity, but aren't going to try to do something just because we have to.

No, you've been a fairly disciplined team, even...

Very disciplined.

Pre- IPO, incredibly disciplined.

My team is very disciplined in how they consider, and the bar is not going to be lowered for acquisitions.

Yes. I wonder if that's more of a European heritage than the Silicon Valley or maybe even in your heritage versus Silicon Valley.

They think -- yes, I think because they essentially were born in New York, I always told the story a number of times, and had to scrap their way, they found a way brilliantly to be efficient and to be quite disciplined in the way they build the company. And that's some of the reasons why from day 1, they've looked at that ease of implementation, acceptance by even the individual developer to be able to use the platform. And that's paid off in spades and creating adoption and ubiquity.

Yes. That's paid off in spades.

Yes.

David, it's been great. We are out of time, but thank you so much. I appreciate the support. Thanks for being here. And stay well, my friend. And hopefully, I'll see you in person physically, not virtually.

We'll do an in-person meeting. Be well, and thank you, again, for inviting us to the conference. Thanks a lot.

Thank you. Bye. Thanks, David. Bye.