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

Hey, good morning. Welcome to our next session. I'm really happy to be here with David Obstler, the CFO for Datadog. David, great to have you here. What a journey this year.

Yes. Thanks for having us. Glad to be here. It's good this year is coming to a close.

Yes. I know. I can't wait for it. Like actually staying on that subject, like talk a little bit about your journey this year. Like I mean, a lot happened, the pandemic happened, but your growth has been very, very strong as you continued. So talk us through that journey a little bit.

Yes. And we talked about this on our earnings call. In Q2, we saw a trend towards rationalization of cloud spend. It has been echoed by a number of the cloud providers, which resulted in what proved to be a temporary slowdown, rationalization. And in sort of the rearview mirror, it's not surprising that the company has tried to optimize some costs. As we've talked about, that happens over time as companies are accelerating to the cloud. But we saw it happen more all at once in Q2. Since that time, towards the end of Q2 and in Q3, we saw a resumption of normal growth, organic growth of our clients' use of our product and movement towards the cloud. That's probably the most important impact. In terms of other things that surprised us positive and negative, we thought we might see some increased churn and some pushback on payment terms. And that really didn't happen. Our gross retention rates stayed very stable.

Yes.

That was very encouraging, indicating how important our solution is to our clients and how sticky it is. We really didn't see that much in the way of pushback of clients in billing from here to there. And so that was pretty encouraging. We also saw a pretty stable new logo accumulation growth rate, which was a positive for us. So that's sort of what happened in sales. We think that long term, COVID is going to be an accelerator of digital migration with some fits and starts due to the environment we're in. In terms of the company, we've been very happy with our ability to work from home. Our employees have really rallied and done a great job. And also, we've continued hiring at a very high rate. We've had our highest net hire quarters during COVID. And so we, given our long-term opportunities, continue to be able to attract the right people and bring them onboard in COVID.

That's good to hear. I mean that's the one thing that you should be proud of and you're probably proud of is like you keep growing at a very healthy clip despite all the changes that are going on there. Can you talk a little bit about some of the fundamental drivers? And I know you mentioned transformation. I think it's probably even simpler. Like people realize they need to go to the cloud. And as you go to the cloud, you need to monitor. So here, we go for you.

Yes. I mean, we've had a very strong sort of trend that we've been associated with, which we think longer term might be accelerated. But except for the Q2 disruption, it really didn't go off the trend. Our net retention, as we talked about, has stayed very strong and above 130%. That's been driven by what we said all along, which is clients' increased usage of our products and the platform strategy. Some of the metrics we talked about, 71% of our customers using 2-plus and 20% using 4-plus, both strong increases. So that motion continues. And new customers continue to be robust. So we've seen sort of a maintenance, except for the disruption in Q2, of the very significant trends of both cloud migration as well as the adoption of our platform.

Yes. And then a lot of people -- like if you think about the changes over the last year, a lot of people started talking more about like observability in cloud and pretend to kind of compete with you. But like if I look at the growth rates, you're still, despite the larger scale compared to some of them, are growing at a faster clip. Talk a little bit about the differentiation that you see there.

Yes. That goes back to some of our differentiators that we've talked about all along. First of all, we follow cloud migrations. We're focused mainly on greenfield. So we're focused more where the puck is going or the ball is going. That enables us to be in very early as a client is working in cloud migration, essentially the legacy tools don't work, so in order to get observability and not be blind. As we said, the second call or the second purchase after the cloud generally is us. And so that's an infrastructure has proven to be a very good landing spot for us. That's one thing. Another thing we've talked about is we started out as a platform. As Oli said, we were a data integration platform. And that means we were architected to bring all the data and the signals together. This isn't patched together. And that has proven to be, in the single pane of glass, a very important differentiator versus our competitors and a real value-add for our clients. We're mainly cloud-native. We've essentially invested significantly in the monitoring around containers, Kubernetes, microservices, et cetera. And that's proven to be a big differentiator. And then we've been able, through our architecture of the platform, to have low friction and ubiquity, meaning our products can be used by everyone, not a specialist product that's in a central location. And that's proven to stimulate adoption and differentiated us from some of the legacy and other products out there. In addition to that, our relentless product innovation, which has allowed us to expand the capabilities of the platform, these are the differentiators that we feel have allowed us to continue to grow at high-growth rates and create a significant competitive advantage in the market.

Yes. And talk a little bit about -- you mentioned already like you started on infrastructure. But I think the portfolio is getting broader now. And talk a little bit about that portfolio expansion and what you see in terms of adoption as well. Like you mentioned some stats already, so...

No, definitely. We have 7 product categories today. We have infrastructure, the original, then APM and logs. Those are the next 2 largest. Those are in hyper growth. The infrastructure already is, given the cloud migration, is a very, very high-growing SaaS software company. And we've added to those, Synthetics, RUM, network monitoring and security. So this has been very rapid. And the go-to-market is very well architected for frictionless adoption. Clients can adopt the products without professional services. That has -- the evidence there is the 70%-plus adopting more than 2 products. And in fact, we're landing right now -- 75% of the lands are with more than 1 product. So clients are really adopting this. And at the same time, we still get in the door first through infrastructure, we think, which is a very good, immediate need. And 100% of the infrastructure is monitoring. So it gets us the real estate. And then our clients have increasingly adopted these other products. Right now, we said that we have very strong and sizable positions, multiple tens of millions of dollars in APM and logs. Synthetics, in 8 figures right now, been out in the market for a year. And we're getting good traction with the newer products of the NAT, RUM, network and security.

Yes, okay. And security, I mean, I have to give you credit. Because like I think Dynatrace, only yesterday, at security. And I remember last year when we talked about it, it was like, "Oh, wow, okay." So yes, fair play to you. I mean like how much of the growth opportunity do you see for some of these new areas?

Yes. I think we've already demonstrated that in some of the ones, the core APM and logs. But we think there's a big opportunity in security. It's a lift. We're providing inside security from the data we collect to developers. We think there's a collapse of the silos in DevSecOps going on. We're early on, on that. And so we think it can be a large market opportunity over time. We said that we have a heavy product lift and a go-to-market lift. So we have early success, but we need to see this develop over time. Other areas that we think we can expand into and already are ITSM. We've done some of that already working on the workflows of the alerts and are continuing to -- that's a product we call Incident Management. We're going to continue to invest there. Again, this is all about providing more value to our DevOps group in order to make their lives easier. We have some investments in BI and analytics with our dashboards and our custom metrics. But we think we can invest more of that over time. But at the core, we think there's tremendous opportunity for growth, green -- whitespace in our observability market. So these are add-ons to that, as you mentioned. But we think there's a lot of runway in our core -- our observability market, and we're in early days for that.

And talk a little bit about that. If you think about long run rate, there's so many different factors of growth. Because you have like more geographies, more deeper hyperscalers and more of their data centers, et cetera. Just like even just going there should be like something that drives you for quite a long time.

Before you go to product, we have the fact that we still have a relatively small go-to-market organization. There are still many areas where we've just landed there or we have a small team. We think there's a lot of opportunity to build that out in direct selling. We think there's a lot of opportunity in partnering. Some of the -- we're very excited about some of the cloud partnerships and what that might mean for go-to market and distribution. And so that -- there's a lot of runway there. And then in terms of the product suite, we're relentlessly innovating and proving successful in developing more functionality. So we think there's a lot of runway in cloud migration. But then we can add to that with expanding the solution set and the value we can give to clients.

Yes. And remind me, where are you on your geographic build-out?

We are essentially pretty well-built-out in the Americas. What we're doing there is optimizing, taking territories that are proven to be successful and adding more teams. We are fairly developed in EMEA. But in places, we just have small teams in some places. We started, I think the most intense development has been in the U.K. and Northern Europe and in our Dublin commercial office. In terms of other places, pretty early in Asia, in the emerging markets. The result of all of that is we think that we can continue to grow the sales team like we've been talking about. We've been growing it at about the 60% range. In addition, there's some areas where muscle we haven't really flexed: partnership, cloud alliances, GovCloud and the government, where we're brand-new. We really have very early efforts going on. For instance, we have one government sales team, so we're going to make some investments there. We really are just scratching the surface in that area.

Yes. It's funny, when you talk about Europe, like I'm German, obviously. And I would have thought France, given the background of the founders, would be kind of a natural strong point. But like it doesn't look -- sound like it yet.

We do have sales teams. We're really following cloud migration. Essentially, we can't cause it. We're essentially landing teams, developing proof points and then -- so we have teams. We have enterprise sales teams and commercial sales teams covering all the major markets in Europe. But some of them are smaller teams or one team. So we still have more build-out to do in some of the other markets. For instance, we have a very successful doc team. But we're building a second team and a third team now. So this is all about following cloud migration.

Yes. It's really -- if the country is not ready or the customers, they are not ready, you can't -- yes, you can't do anything.

Yes.

Yes. And then remind me, what's the setup for sales? And you must have been involved as a CFO in terms of like commercial accounts, enterprise accounts, et cetera. Where are you on that one?

Definitely. We have a commercial sales team that covers SMB and mid-market, organizations up to 5,000 employees. They tend -- they're a centralized group that is in the United States, in Boston and Denver, in Dublin, Amsterdam and then in various locations in Asia. That team's -- the upselling, they land new accounts. We have a customer success group that is responsible for taking care of those accounts once landed and upselling them in terms of volume and product. So those teams work together. We also have an enterprise sales team that works with clients, 5,000 employees and over. They are responsible both for landing and expanding, given the more complicated nature of navigating larger enterprises. And so that's how we're organized. The major organization is by geography. So we have, as I mentioned before, we also have a newer government sales team. And all those teams are supported by either sales engineers, presales or technical service management post sales.

Yes, yes, yes. Okay. That's really interesting. But it must be -- it's so funny because for you, it's like must be such an interesting challenge because you always have to think like, "When do I split territories, when do I do an industry overlay," all that sort of type of stuff. And it seems like it's all still evolving.

Well, definitely, we do things bottoms-up. Right now, we give -- we have not found the need to have industry overlay other than government. And that may happen 1 day. So most of the motion has been around looking at geographical territories, doing the hard work and understanding what the base of customers are, where they are in digital migration and basically splitting territories or expanding territories based on that. So that's the work we do every day. We do that as part of our planning that we're doing, finishing right now as well as in the course of the year.

Yes. And then what are some of the lessons that you've seen now? Like it sounds like commercial is inside sales, enterprise is more probably a combination, as it sounds like, of both more direct. What were the lessons from this year? Like do you think you can do more in terms of lead generation for inside sales for the enterprise? Or are you thinking that we're just going back to where we were before?

We're earlier on -- we're sticking with this, meaning that the enterprise sales team is a direct selling team that will be helped by marketing efforts, whether this year, I think the biggest change, like everybody is we've moved more from -- totally from field events to online, whether that be Dash, I know many of you -- many of us are experiencing reinvent right now online and other types of seminars. So we're doing that, and then also sales engineering. So that is how we have found success in enterprise. And we haven't seen any reason to change that. There are places in the middle where you have companies that have larger revenues but smaller employees. And that's our -- we're growing our mid-market. That's a combination of -- where you have a combination of inside selling and outside selling to service them. And then for the SMB accounts, we've been very effective in using lead generation from marketing and account analysis to produce leads for inside salespeople.

Yes. Okay. Perfect. That's really interesting. And then let me switch gears. We mentioned earlier the different cloud providers. There was one big contract now with Azure. And we were kind of debating, is this like a special relationship now? Or is it just like a contract and some investors get overly hyped? Like what are your relationships with the different clouds looking like? And how can that evolve?

Very good question. We're in many ways. We want -- we and the cloud provider view this. They view the ability to sell-through observability to help them to sell cloud, which is their main. So we have, for many years, been working with AWS. And that is a lead gen, we're a major customer of theirs. We sell through their marketplace as well. And GCP, we also have been working with them. We made an announcement of an increased relationship, which will result in a new instance in the Americas and more marketing dollars committed by them in helping us in lead generation and sales teams. And then Azure, we have been more [ immature ] with Azure. And what this is, is it is similar to the others, except it has a technology partnership, where we're building out the instance and we're integrating into their console. So that will make it easier and even less friction in Azure customers buying Datadog when they buy Azure cloud. They also have -- this is all in beta right now and will be launched next year. They're also committing salespeople on commission to selling the product. So it will be a good go-to market. We're the only ones in their console right now. It's not an exclusive relationship. But it could be a big opportunity for us in terms of both this go-to market and the fact that this will position us for those types of companies, which tend to be more traditional enterprises, as they invest more in their cloud migration through Azure.

Yes. And do you think that the Azure model is like an example of things to come? Or do you think it's more Azure-specific because they want to catch up with AWS?

We think it was -- it's very positive that they chose us. They wanted it mutual. It could have applicability to others. This was a mutual thing, where Azure wanted to go to market this way, but we can also explore that, and we are constantly exploring ways that we can extend our distribution with all the cloud providers. They're very important in lead gen, as we said. We're generally bought when cloud is bought, so it's a very good lead gen for us as well.

Yes. Okay. Let me, in the last couple of minutes, switch gears a little bit. So I remember when we first met, I think it was in Las Vegas a few months ago, like we had this kind of whole debate around like this is like fast-growing software, but you still have to think about leverage, cash generation as well. And I mean it's almost like it's not immediate, it's absolutely amazing to see how you grow at this scale to kind of generate cash, et cetera. Like you've been in other industries before. Like how does it feel to you?

I agree that I feel very fortunate to be a CFO of an operation that is a company that's this efficient. It has to do with the way the product was architected, the frictionless go-to market, the way that we're adopted virally. And also, probably good and prudent management has resulted in us -- despite very high investment and we're prioritizing investment, we think there's a big opportunity. But we've been able to be significantly cash flow-generative. Our margins have expanded at a greater rate than we had expected. So there's a lot of economies of scale in the business. And one of the things, I think, that is a real asset for us is that we can make choices. We can -- we believe there are a lot of investments and that's where we're headed. But this is -- the marginal profitability is in our hands based on the investments we make. And right now, we see a lot of opportunities. So we're trying to invest in product, go-to market, as we talked about, in order to capture that opportunity. But there's a lot of flexibility in our model, given the efficiencies of it.

And for you, coming also from other industries, if you think about that growth versus margin balance you need to strike, and you said you're planning at the moment, and I don't want to numbers, but like how do you think about that like in terms of that dynamic?

Right now, we're trying to maximize the top line growth. The margins and profitability are more of an output, all caveated by we have a track record of prudent management and a lot of economies and -- in the business. So we are solving for the top line, given the opportunity, and the margins sort of roll out. But the efficiency and the return on investments have proven to be very strong. And therefore, our profitability has grown faster than we expected. I think that we will be in significant investment mode in the future. And we'll continue to be limited more by our ability to execute projects and bring people in, attract talent, just the sheer mass of all that, then the opportunities. And so therefore, we have to prioritize and make sure we're hitting the most impactful ones. But our long-term model and the evidence of profitability in the business stands.

Yes. Okay. David, that's a really good summary. I'm getting the signal our time is up. Great to connect again. Congratulations, it's an amazing track record you guys built up here. And good to see how you're executing on the growth opportunity. Thank you.

Okay. Thank you very much for having us, and happy end of the year to everybody.

Yes. Same to you. Thank you.

Thank you. Bye.