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

Good afternoon for those in Chicago, good evening for those in Europe, and good morning for those on the West Coast. It's a pleasure to have you all here. My name is Bhavan Suri. I'm the analyst at William Blair that covers Datadog. You can find the appropriate disclosures on our website at www.williamblair.com. It's funny sometimes I do these enough I tend to say www.datadog.com. But you won't find our disclosures there. It's a great pleasure to have David Obstler, who is the CFO there with us. David, to you and Oli and the rest of the team, thank you for your support over the years and for being at the conference with us.

Thanks for having us.

Absolutely. We're going to run this as a fireside chat. I have a list of questions, but we're happy to take your questions. Feel free to just pop up them on the chat and I'll curate them as we go along.

Just kicking off, David, for investors new to the story, just I guess, a quick overview of what Datadog does. I think more -- let's start there, and then I've got a couple questions about like, what differentiates you? And given all the noise, like, where would you say you fit in the space? But let's kick off with what Datadog does and then we can walk through the others.

Datadog provides observability platform for cloud workloads, targeted at DevOps professionals. It combines infrastructure, application, logging, Synthetics, RUM, network monitoring and some new security functions, all in a single pane of glass that allows DevOps professionals to see how their customer-facing applications are functioning and to quickly remediate -- analyze and remediate any problems. In terms of differentiation, Datadog was built as a data platform from the very beginning. So it's architected in order to get lots of data in and we've relentlessly innovated on that to get more data in. It's very extensible and easy to use. It's not a specialized used product. It is distributed throughout the DevOps and other types of departments and can be used by many. Easy to use, frictionless to add additional functionality and has a lot of reporting in it and ability to correlate and see various different signals. It's multi-cloud, handles a lot, was born with -- to address increasing complexity in technologies, including containers, Kubernetes, serverless, et cetera. And differentiation includes a single pane of glass, the data architecture, the integration with over 450 pieces of software as well as the ability to do all those functions in a single platform.

Yes. No, I think that's helpful. I think for the pure generalist, I would say, think of it as a what is going on with my system across every layer of those complex stacks anytime in sort of real-time is the way to sort of think about it. And I think as we talk about that, one of the most interesting conversations comes up, especially with folks that are less technical is where does Datadog fit when I hear things like New Relic and Splunk and Dynatrace and Sumo Logic and observability and logging. And it'd be great if you just talked about sort of the markets you target, which is a huge extensive from small to large, and sort of how you go to market that differentiates you, the lack of professional services, maybe a couple of those things that kind of show how you differentiate yourselves, not just from a technical perspective, but a variety of other perspectives from the other players?

Yes. First of all, we're focusing on workloads that are in modern cloud environments, usually public and hybrid clouds. We are focusing on a greenfield opportunity as workloads move to the cloud. The product was designed and optimized for those environments. So 1 differentiation is we're not focused on legacy, on-premise and more static environment. So our typical customers are putting workloads -- client-facing workloads in modern cloud environments. Our product was built and has been invested in as a unified product, meaning we haven't accumulated this through acquisitions that we are integrating. It's all in a single product. That provides a rich layer of data analysis and the ability to correlate and see metrics and signals all in one. It was designed so it is very easy to download without any professional services. You can be up and running and using it within hours. That allows clients to test it out, put their data in and it also allows because of the simplicity, but elegance of it, it allows many parts of an enterprise to use it, as you said in real time. There are no professional services required. It is able -- we are able to land and expand and follow cloud workloads in a very frictionless way. So we have sales teams that target everything from SMB to enterprise. We get clients signed up generally with infrastructure first. One of the reasons that's important is infrastructure is ubiquitous and puts us everywhere and allows clients to see what's going on. And increasingly, as you can tell from the metrics that we've been reporting, clients have been buying more of the complete platform. We have a very efficient and frictionless go to market. In that, our clients can grow and use automatically. They can download without any human intervention or any sales efforts. So that contributes to our very strong net retention as well as our adoption of new products, where clients can do that very, very easily. So those are some of the ways that we differentiate ourselves from the competition and also have been able to access the market in an economical and frictionless way.

And all of that, coupled with David's first point, which is the transition to move to cloud has led them to deliver 60% growth in a challenging economic environment. There's a couple of questions from investors, but I want to touch on 1 quick one. Coming out of the environment, David, kind of go back to, I think, it was middle of last year, you saw some large customers slowdown expansion rates a little bit, and I think, it was 1 quarter that happened. And again, totally understandable, given the environment and the size of the deals. What are you seeing coming out of the environment from a demand perspective? Does the potential for acceleration exist or sustainability exist? How should we think about the demand -- as you're a bigger company, obviously, by 60% sustainable would be great. But I'd love to understand how you think about the growth rate coming out of this yes.

In Q2 of last year, we still had our clients -- existing clients grow, but they grew at a lower weighted average rates -- at rate -- as there was a focus on some cost optimization and more -- it happens all the time but more all at once. And since that time, we've been reporting that the demand environment, both for new logos, new customers as well as usage by existing customers has recovered a lot. And in the last couple quarters, we reported that we see the usage of our -- of clients -- of our products by clients be at or above pre-COVID levels. That indicates that workloads are shifting. We've also seen new logos, new customers be very strong. And what that indicates to us is we have a resumption of the long-term trend of new cloud projects, which were, let's say, a little bit interrupted at the beginning of COVID as clients -- as companies sort of panic to control costs and also get their workers remote. So we've seen a resumption of the long-term trends. In fact, we said in Q1, we had a record for -- overall -- over $100 million. We said that it was very distributed that we had records for infrastructure logs and APM that our APM and logs in terms of new product -- new sales were higher than all of the company a year ago, and we said that the usage trends were very strong at the top end of our long-term trend and certainly at or higher than it was pre COVID. So we've seen very much a resumption of the longer-term movement of workloads to the cloud, and it's a result in demand for our product.

Got it. That's absolutely awesome. Let me take a couple of questions from investors. I guess, one is, can you talk about the traction you're getting with enterprise customers? And specifically, and you started to touch on this a little bit, are you seeing an acceleration? So if I peel back the onion a little bit from what you just said about the large deals, more products being adopted. I guess the question is, are you seeing acceleration in new enterprise wins coming out of COVID?

So 1 thing is important to know is that we have sort of pro rata strength across SMB, mid-market and enterprise. The key thing is, are you a DevOps group that uses modern development tools, which increase complexity and are you in public or hybrid clouds. And we have that across the different channels. We have strong growth in all 3 of them. And I think in the new logo performance that we had in Q4 and Q1, we saw a number of key enterprise wins from traditional enterprises. We outlined a number of them in the earnings call. And in places like manufacturing, insurance companies, et cetera, banks indicating to us that the longer term trend of migration to the cloud had been restored. So the answer is yes. We've had a lot of good wins, but we've also had strength across the SMB and mid-market during that time as well.

Got you. Got you. There's a couple of questions around pricing. So let's start with, you've seen pricing changes at New Relic -- it's a specific question from the investor, but you've seen pricing changes at a bunch of places Splunk and others. And I guess the question here is, has that affected your business? Has it been a net contributor or detractor?

Not a lot has changed. We essentially were a pioneer and very transparent. Usage-based pricing, many of the innovations we put in the market were in order to align value of product with price. And that has been a key part of our value proposition. We haven't seen any change in that environment and feel very good about that pricing environment and that it adds -- it creates value for clients as part of our value proposition. So no, in all the scrambling around in the market, we certainly look at it, but we haven't seen any really change in the demand from that.

I like the terminology. A more specific question from another investor. Infrastructure and APM are priced on a per host or per month basis. So this is pretty stable host, monthly basis, log management price and activity level. What percent of total your revenues, if you could help provide some color, is usage-based, based on activity? And how is the mix between usage-based and subscription going to change in the future as maybe other parts of the business grow faster or become a bigger part of the mix?

Yes. We have a combination of different models, subscriptions with overage. We have drawdowns, et cetera. I would say that about -- what we said so far is about 75% of our business is based on either subscriptions or usage around subscriptions and then about 25% -- 20%, 25% is usage over contract over sort of the contracted amount or month-to-month. That's -- it's been roughly stable. And so there hasn't been really much change in that metric. It has to do with our go-to-market land and expand, where our clients try to size out their consumption, try to put that in the contract but then because these are rapidly growing environments, find that they need more product or they need more usage and then see the usage. It's kind of the way AWS and the cloud providers, price and contract as well. What you do is you have that -- it's a better way to say maybe that 75 or 80 is reserved and the rest of it would be usage on top of it. Yes.

Right. Right. Do you see that mix shifting at all, David, over time?

Well, we haven't seen that mix shifting very much. Even when you -- whether it be on a data or a host, it generally follows that pattern we talked about which is that you try to buy a certain amount and then you have overages. So no matter whether it's a host based or a data based, it still follows the same sort. So it hasn't changed very much. We don't see anything that would expect, and it has more to do with the growth of the environments and the client side and how they buy than our side.

Yes. Yes. If we were to look at just cloud, so forget the on-premise legacy, slow-moving stuff, and we're to say, you win because of ease of use, frictionless sales model, frictionless usage model, no services, no complexity there. I'm sure that occasionally, you might lose a deal. If you were to consider why you lost a deal and thought about a product feature functionality whole, does that come up? Is there ever a piece of the business that Oli is figuring out to add, maybe build today, maybe buy someday in the future. But is there a gap there that seems to be a common reason why you lose? Or is it just sort of more one-off-ish, I'd love to sort of think through?

It is more one-off-ish. As you said, we're essentially devoting most of our resources into cloud environments. So some -- more traditional companies have some on-premise type of...

On-premise. Yes.

And so that would be an area where we've made selective investments, but we've tried to keep our eye on the ball. So if -- it's not a typical thing, usually you have sort of side by side. But that would be an area where we would not be focusing our products, et cetera. So that could be an area. I think 3 or 4 years ago, there was probably, as we sort of ramped the AMP and the log product, there was some functionality in the products that we may have been behind on, but we've caught up and we have product parity or product excellence in a lot of areas as indicated by the Gartner, so that probably doesn't. Sometimes there is the majority of the spend might be from a Splunk security-based log or a legacy Dynatrace, where this might be a bolt-on, and in which case, they may go in the direction of that direction, having that as most of the spend. But I would say it's not common -- these are not commonplace.

Yes. And that's why I kind of paraphase as the cloud because ultimately, you and I think and say have the same belief that most of the stuff moves to sort of a cloud-based deployment environment and...

In the cloud, I think we're -- as we said, we have a very differentiated product. I think all of the pieces of it have -- we've done a lot of investment, massive credit to the R&D team here. And so they're really -- whether you look at the individual products or you look at how it all fits together, we have an industry-leading product that's being widely adopted.

Yes. Yes. So a question from an investor that says, with the combination now of DevSecOps, who do you see as the most emerging, most potent competitor? But also who is the most potent potential partner?