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

Welcome to the Jefferies Software Conference. This is Brent Thill. Thanks for joining. And we're joined by David, the CFO of Datadog. Thank you, David, so much for joining us and discussing the Datadog story.

Obviously, a really incredible business momentum that you're seeing. And many have asked us just really about the product engine and what you've done around the new SKUs, around security, compliance. There's a much bigger picture at hand here, but maybe you can just talk to what's happening just from a product engine perspective.

Sure. And thank you for having us. We appreciate it. We made a number of product announcements at our user conference, Dash. And let me try to segment them and sort of go through them. I think they're evidence of our continued focus on innovation across existing products and new. So sort of, of all the product innovations, the first area was to continue to develop our APM product. And the most important function enhancements there were our Continuous Profiler, which we're already in the market with and selling with a lot of interest, and Tracing Without Limits, both of these features and functions to enhance our APM product, bring it -- bring the functionality into the platform. The second was in the area of Synthetics and RUM. As those that are following the company know, we introduced Synthetics and RUM last year and supplemental to our APM product line and have had very good adoption. And the functionality that we added there was Error Tracking, Mobile RUM and Synthetics in CI/CD. We're extending our footprint a little bit into the CI/CD market, both with this innovation as well as our recent Undefined Labs acquisition. The next group would be in security. We've been, as we've talked about, building out a next-generation SIEM for a while now. Earlier in the year, we started functionality with threat detection. And in this product release, we -- which is still in beta, we added Compliance Monitoring. This is all part of a long-term development effort to build out the security product. We think that if we're successful here, this could be a TAM multiplier. And most of what we're doing here is focused on the DevOps community and the collapsed silo between security and DevOps, with security use cases moving into the development world. The next set of investments was in our platform. We continue to enhance our platform, and some of the investments there were incident management. Here, we're trying to organize alerts and provide more functionality to the users of our platform. In addition, we launched our Marketplace. And our Marketplace is to allow our clients to buy functionality that we don't currently offer that can be then -- is integrated, can be integrated with APIs with our Datadog platform. And lastly, in infrastructure, we continue to increase the intelligence of the platform with Recommended Monitors. And what this does is it helps direct our clients to the types of monitoring that we've seen as most effective from our client base. So that's sort of the group of products that were launched. Overall, our vision is to continue to build out and innovate in core observability. It's a very large and rapidly growing market, and there are some additional markets that we're exploring getting into. Security, we talked about, and there's some other markets like ITSM and real-time BI that we have not entered, but have on our radar to evaluate and see if they're synergistic.

It's pretty incredible, that innovation pace. How have you been able to keep up with this given everything that's going on?

Yes. I think it's a good question. All credit to our R&D department and to Oli and Alexis. They have designed a platform, which has integrated data tagging and has enabled us to -- because of the product design, simple but not simplistic, to add functionality. We've been increasing our investment in R&D, substantially growing head count 60% to 70%. And we've been very successful in doing acquihires or bringing in teams. That's how we got into the log business, the Synthetics business. We just made the CI/CD. And so we've been able to attract teams. We have a pretty high bar. We cull and cull. And this has allowed to accelerate our product development. So some of this -- those are some of the reasons why we've been able to maintain this path of investment over a long period of time.

That's great. Taking all that product and then putting it in the hands of the salespeople, it's pretty exciting when you think about the sales model effectively evolving. Can you just talk through how that plays out going forward and how you see that evolving?

Yes. We are, as a reminder, a bottoms-up sales motion. Even with large enterprises, we're able to be downloaded and used in short periods of time without professional services. And the way the platform is designed, it enables our clients to get access to it in a very frictionless manner. And we've been continuing to develop in that way. We basically have an enterprise sales team, which handles lands and expands. We have an inside sales team, which handles SMB and mid-market companies with employees less than 5,000. And we have a customer success group that upsells those customers. That's supplemented by product managers and sales engineers who help make the sale. And that's very important when your product is expanding because we have SMEs attached to that. Because our clients are able to access those services on a usage basis with little friction, they can play around. They could decide they want to look at security. They want to use security. And that helps us with our multiproduct sales. We've been pretty successful with that. About 2/3 of our customers now use more than 1 platform. And our latest metric we talked about on the earnings call is that 75% of our new customers are entering with more than 1 product, more than 1 pillar. And that, I think, backs up what we've been saying all along, which is we're doing a platform sale. The more data that flows into the platform, the more use to our clients. Our clients are not viewing the boundaries at either infrastructure, logs, Synthetics, APM. They really look at problem solving. And in order to do that, you have to have a broad swath of data, and that's the use case that we're delivering to clients. So it's been pretty natural. We do not have commission plans that are focused on selling one product versus the other. All of our sales teams, we try to equip to sell the full platform.

Got it. That's great. Your growth rate is fairly unprecedented. When you're thinking about this continuation, how do you -- I know it's a combination of what we just talked about, those 2 together. But when you think about kind of the gained capacities that you're working through, how do you think about the continuation of just the growth?

Yes. I mean it starts with product, it starts with continually innovating on function to be able to add more products so that the size of the buy, the number of potential users goes up. But alongside of that, what we are doing is rapidly expanding our go-to-market muscle. We are growing our sales team 60% to 70%. That's across all the different pieces that I mentioned earlier. We're very far from saturation. There are many teams and many regions of the world that we're barely in, and we've been pretty methodical in looking at when we get a sort of critical mass in a region or a territory to then split teams and grow teams and grow from there. So a bit of it is capacity planning. And then we have also been expanding our end markets. A good example of that is the government. We weren't in the federal sector. We've been investing in the infrastructure there to be able to enter. We've now passed mid impact, and we're going in the course of the year to go high impact, and that's a new market for us. So a lot of other companies have significant federal business. We don't have that, and that's a growth opportunity. In addition, we're concentrating on developing our partner network. Again, we really hadn't exercised that muscle. But we're essentially expanding both the number of partners, training those partners and trying to get their effectiveness and sales up in order, again, to expand our distribution muscle and go-to-market. So those are all the pieces that we're working on and investing in, in terms of growth.

We had a couple of questions from the audience come in already, so maybe I can ask you quickly. Just there was a quick question as it relates to Splunk. And do you see Splunk in the field? And there was another question about the role of open source and how you're embracing open source. Those were 2, if you could address.

Yes. Let's start with Splunk. So Splunk has had a very strong presence in on-premise and in security and centralized logging. It's -- that's not the part of the security market that we're in. In terms of are we seeing them in cloud, I would say there's been sort of no change. They've acquired a number of things, including SignalFX. There's some -- probably some integration. I don't think they have the unified cloud-native, multi-tenant platform. So we see them a little, but not in our core market of greenfield cloud as much. As far as open source, yes, we embraced open telemetry, and we have integrated and have embraced and integrated with a number of those technologies. In terms of open source itself, I would say, that is probably the biggest area of competition in greenfield, which is really Datadog or do-it-yourself. And there are a number of open source technologies that are employed, some of them alongside of Datadog. In terms of what happens in our normal motion, we see -- since we offer a managed service, we often see that they start with some open source and then sort of move to the platform. So we'll see that in our motion, whether it be Grafana, Nagios, ELK, et cetera, there are a number of them. So I would say we either sit along, sometimes replace that. That might be in earlier. And some clients decide they want to for -- use open source in the construction of their components. We're kind of delivering sort of the full solution, and some of those are components that have to be knitted together.

There have been a lot of questions around the pricing strategy. And maybe if you could just walk through your thoughts on how you set pricing, how you think about relative maintenance. Seems like there's others in the market that have had to drop price because they've realized that you've driven higher levels of innovation at a potentially the cheaper cost. I think it's been the secret sauce. Maybe I'm wrong, but yes.

Well I would say that we're not, I would say, a price-cutter. What we are is we are attempting to deliver more utilization, more ubiquity at a similar cost structure, and it's worked very well. Our pricing is based on either device or host or on data volume. It's heavily correlated with the client's use. So for instance, in logging, the majority of our revenues come from indexing rather than ingestion. Our pricing has been transparent. It's on our website. It's been unbundled, meaning you can see what you're paying for each of the pieces of functionality. This has been important for us in that it's given us a lot of clues from customers as to how they use the product and what they think about the product. And it hasn't been by seat. And all of those things were designed and have been successful in, as we talked about, getting lots of eyeballs on it, getting a lot of usage. Because once we're in there, we've been able to expand our functionality. So I would say that we feel our pricing has been aligned with our go to market, been very successful. There's nothing that we've seen in the market to date that has caused us to want to change that. Of course, we'll watch what happens in the market. We're always open to learning, but we feel that our pricing has served us well in creating high adoption across enterprises.

I think the -- one of the stats that's really sat with a lot of us is the comment you guys have made that most of the wins that you're seeing are in greenfield. A lot of them are -- you're not replacing it. It's a new app that's being stood up. So can you just talk to that? Is that what you continue to see going forward?