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

Welcome back, everyone, to the software conference. My name is Brent Thill. Pleasure to have with us, David, CFO of Datadog. He's been at the company since 2018. David, really appreciate your perspective on the story. And for those listening, you can ask questions in the screen, you can just ask any question, and I'll read that off and ask David, so feel free to jump in. This is an interactive discussion.

But David, maybe to kick off, welcome. And when you think about your growth profile, it's unlike a lot of other companies we work with. Your revenue growth accelerated in the second quarter. It's the second consecutive quarter of over $100 million in new ARR adds. Just talk us through what you're seeing.

Right. Brent, first of all, thank you for having us. We appreciate the opportunity. As we said on the earnings call, we first see a very robust demand environment. We've had a number of quarters in a row of, I would say, back to the work of cloud migration, modern DevOps, deployment of applications. And so the customer base has been very receptive. And at the core, cloud migration is triggering demand. So we've had a good buying environment. We've had been very successful in -- throughout COVID of increasing our investment, our investment in products. So we've been able to expand the product set very rapidly and add new functionality, which I think we reported on has been adopted quite nicely. What we said on our last call was our products, our second and third product sets in the 3 pillars, APM and logs, are now over $400 million in hyper growth, which is code for over 100% growth. And we've also been able to scale our investment in our head count and our sales capacity throughout COVID. We never wavered from our rapid investment. That combined with a number of quarters in a row of strong organic growth and new sales in the land and expand, if you're landing more a couple of quarters ago, they are a big driver of growth, has produced this acceleration and the performance in new adds. So those are some of the reasons why we've been able to be successful in accelerating the top line.

The product engines moving at an incredible pace with 12 products GA today versus 1 4 years ago. How is this conversation evolving from best-of-breed to now a platform you clearly have enough to become considered a platform vendor versus a point solution vendor?

I think 2 things have happened along the way. One is we've expanded the value of the platform. Our clients have spoken, and they've said they want to see the single pane of glass, various data points, various correlations, reports in a single platform. At the same time, we've relentlessly improved the quality and functionality of the individual products, which you see in the results in APM, built over time. You see confirmed by some of the industry research. So the platform has grown, the utility and as well as the quality of the individual products. Don't forget, we are a sort of a decentralized purchase used ubiquitously. So we're on the screens of a large number of our users in all of our customers, and that promotes the frictionless sale and the adoption of additional products as they come online.

We know you love your children equally.

Yes.

But when you think about the kind of 1 or 2 emerging products that you're most excited about, how would you characterize that?

I think the core product set and observability, which includes the growth of infrastructure but also APM and logs has a lot of legs. We gave an amount on size. And when you think about what we've done in innovative NAND, for instance, adding profiling to APM, tracing without limits and logs. We've added -- we innovated pricing to -- linked pricing to indices. We bought a data company in Vector, which is going to help organize the data that flows into our platform. There's a lot of growth there. And we've said is -- we think that security can be a TAM multiplier, a huge opportunity servicing the DevSecOps where we're early on we're developing the product. We see a lot of good evidence of traction. And whereas all of our children we love, we also see this as a special child that has tremendous potential long term. We're still building the product. It's early, but we see a potential very large market in adding security to the DevOps functions.

Probably a year back, a couple of clients said this feels like ServiceNow. This feels like other platform stories like a Salesforce.com early days. And I think many people kind of scratched their head and said, no, I don't know, I don't know. When we did the math and you went back and looked at the numbers, you're actually growing faster than ServiceNow at the same absolute run rate. So when you think of these analogies of kind of who you want to be or what you think you could look like, is there someone that you aspire to? Or you kind of look at and say, wow, this is a model we're mirroring? Or are you just saying, look, we're on or on track. We are Datadog, and we're really running our own course?

Well, I think the answer is -- it's a very good question. It's a multi-pointed answer. Number one, we're in our own market. We're winning in our market in DevOps, but we do see and admire and have learned from the companies you mentioned, Salesforce and ServiceNow. I would say they're a little bit different. Salesforce has made some large acquisitions to enter new markets. ServiceNow has been a bit more like us to invest organically, but also acquire tech companies and then add the functionality. But I think you have the same network and platform effect, meaning you have a distributed product that's very easy to use, but sophisticated, is loved by its customers and therefore, once you've got all those eyeballs, the friction of adding additional functionality or additional usage is much lower. I think our model is sort of very strong in that frictionless selling. We have -- when it comes to acquisitions I mentioned, we've been very successful in adding technology teams and integrating that into the platform that's been key to our success as we have initially had investments in both logs and Synthetics and RUM from these acquisitions of teams. So I think they're good analogies. I think that we all have been successful in our own markets as platform companies. And I think the growth and the size of Salesforce and ServiceNow is a model that we look at, we learn from and we think is a pretty good analogy.

There was a client question -- questions are on cross cloud management to optimize cost and performance. And by referring to cross cloud, meaning AWS to Google to Azure. Any thoughts as it relates to what you're seeing there?

Yes. I think we're -- we have not only that, but I think you have private clouds also in that. So you have public -- the 3 large public hyperscalers and private clouds. Our clients, particularly the more enterprise clients are in a journey where they are migrating from private clouds or on-prem to hyperscalers and then diversifying from there. So we think we're early stages. We're not at the point where we have perfect hybrid cloud, but it's a long-term trend, and I think it's one of the reasons why we feel very good in the position we're at being able to monitor all those clouds, including the private clouds and bring that all into one platform, it's a significant driver long term of our business.

Security is a more recent offering, but maybe walk through your aspirations and what you're seeing in the overall security market.

Yes. So it's premised on, and we're seeing good signs of it of security being pushed from a centralized function out into DevOps as applications are -- creation of applications are accelerated yet more complex because of the use of containers and serverless, et cetera. That is the audience, essentially in production environments a client-facing and DevOps. We believe that just like the DevOps silos have collapsed that security silos will collapse, but we're early days. We think it can be a TAM multiplier, meaning it can be a very, very big part of the platform. But we're building the product right now and essentially having it pulled by clients in the same sort of frictionless adoption. That way we can learn the buying patterns. But as Oli has said many times, we're early in that, and we'll report back to everybody as we see developments. We're in build stage, much like we are in build stage in the early days of APM as we got that product up and running and then adopted.

A lot of questions kind of around sales capacity, the build-out of your go-to-market. Can you help just bring us up to speed on how you're thinking about that holistically, both from your own internal resources, partners, anything else that you think is important to note in '21 into '22 in terms of how that's going to help you?

Definitely a good question. We, I think, made very wise decisions given the -- our market opportunity of keeping our aggressive hiring plans during COVID. So we've been able to expand our sales capacity successfully very significantly. And we continue to do that. We said all along that we're trying to balance the opportunity with sort of integration of people and not breaking everything. So we've been targeting expanding our sales capacity 50%, 60% and continue to do so. In addition, whereas we're mainly a direct sales team, we've been augmenting that with a partnership network that has been -- is a smaller part of our business but has been successful and growing. We've given a number of examples on our earnings calls of deals that have come in conjunction with partners, with SIs and resellers and integrators. And we've augmented that like we always have with partnerships with the cloud. We've been at this with AWS for years very successfully. We then developed along with Google and enhanced that in the last year. And we have a newer one with AWS that we're very excited about. They're all different flavors of integration into the technology. And the sales team in the case of -- sorry, Azure, if you go into their website, you'll see you can click a button and we're in their panel, their control panel, which we think will be another factor in lessening friction of adoption and in risk diversification for our clients. It's early days with that one. So we don't know the pace of that. But partnering with the cloud has always been a significant portion of our sort of referral network, and it continues to be.

When you think about the pace that you're going at, David, it's unlike many others, 50% to 60% sales hiring. It's tough to keep the wheels tightened and moving. How are you doing this? What's been the secret to this cadence that you're keeping without having these kind of massive flat tires, if you will, or going into the ditch? Why have you been able to sustain this and keep it going as well as you have?

In terms of hiring people, the hiring act, we've made a big investment in recruitment and sort of go to market in that regard. We've been a successful company, which has tended to attract people. We talked about our sales. So I think that's helped once we've been public and successful. In terms of management, it's only possible if we develop management layers below, and we've been doing that essentially. Instead of hiring a sales team and then finding the manager, we basically hire the manager and then that manager hires sales teams. And that is -- it's more time intensive. But as you said, it keeps the wheels going, and it has -- it results in greater scalability. In addition, I think, in bringing in Adam Blitzer from Salesforce, he's seen significant scale. And in terms of all the things you have to do to grow not just salespeople, but sales engineers, technical account managers and things like that, he's been very active in helping us to develop the scalability to make that possible as we grow into a larger company.

Blitzer was a question that we've been getting. To have someone that started a company, sold it to Salesforce, built brand one of their big clouds, right, everyone will say, well, he was an application guy and now he's at an infrastructure company. There are 2 different things. And ultimately, I think they are similar in the sense that they're both software, but at the end of the day, kind of what he's bringing to you and ultimately kind of what you expect his focus to be over the next year?

It's a good question and a good point. One of the things that attracted us so much to Adam was the combination of being a founder and having built a company and seen very significant scale in one of the more successful companies that scaled up like Salesforce. So we think that's a good point and one of the things he can bring to us. And in terms of what he's doing, I think that, yes, it's a different end market, but we agree with you that getting to then servicing that end market in terms of expansion of sales team around the world. He's driving the expansion of the partner network. Developing that, which we were younger at is something that Salesforce has done well, and we can learn from. In addition to how you put all those pieces together, it's not just quota salespeople. It's sales engineers, technical service management, experimentations, not in, I would say, professional services per se, but helping clients use the software. Scaling things like how you manage tickets and help customers resolve problems. All those things are things that he's been very involved in, and operationally, that's where his background is and all things that we need to scale significantly over time to be the type of company we think we can be. And that's what he's focusing on.

There's a perception that you've kind of grown up with the start-ups that are becoming big companies in that you can't really service the established enterprise, maybe a myth versus reality. Can you talk about the reality of what you're seeing in these larger enterprises that are mixed mode environment, cloud, on-prem, how you're helping them? And any good examples you can give us in terms of why that may not be true?

Yes. And we think myth. I mean, basically, as we said over and over again, we're essentially 1/3 SMB mid-market. Many of those mid-market are pretty large companies. They just have less than 5,000 employees in enterprise. And our growth in our enterprise has been -- it's been significant. It's been pro rata and significant across the board. I think every quarter, we give a lot of client examples of companies that are traditional industries, Fortune 100. Our customer base has hundreds of those. And it's really that in those enterprises, where they're maybe earlier but in their shift to the cloud, there are buying units and use cases that need that type of product. And we're the go-to, and we've been really successful in doing that. So our wins, our penetration in what you would say are traditional large Fortune 100, Fortune 400 global companies has been very, very strong. And we've been at this for 3 or 4 years. So I think maybe that was the way the company started 10 years ago. But our landings with very sizable companies have been very strong, continue to be strong, tremendous momentum there and one of our keys to success.

3 years ago, did you envision a $43 billion market cap?

We envisioned a large company against a very sizable market, a large rapidly growing product-led company. Well, how the market values that, those years ago, we weren't envisioning that. We were really, as Oli always says, are thinking about product, customer, scale, people and have really been very relentless of doing that.

There was a question from a client, just I think everyone is trying to envision that there's going to be a win or take all in infrastructure. And it seems like today, there's some pretty clear swim lanes, but over time, do those swim lanes converge into 1 pool where there is 1 dominant swimmer, and I think a lot of people are believing that you're seeing a divergence. I mean, the question about Splunk always comes up and what you see in here around what's going on there and their change in their pricing model and any observations, and I know you don't like to talk about single vendors, but that was the question from a client.

Yes. I mean I think when you talk about -- think about observability or essentially DevOps or DevSecOps and I think that in sort of where the puck's going, our platform has gained a lot of adoption. And so I don't know if there is a single winner. I think we've done pretty well in that market. Our greatest -- most of what we're doing is greenfield. I think our greatest competition really is do-it-yourself or open source, which we think that will be there. In terms of the other companies, Splunk, I mean their core home market is one we don't compete in centralized security logging. And infrastructure, I think that that's not something we're trying to compete in. And I think in our home market, we've done very well in winning with our platform. A lot of the -- we're comfortable. Our pricing has always delivered value to clients. And we think it's very effective. We innovated in pricing of essentially moving in logs, pricing more towards indexing and not towards ingestion. The market is speaking. And I think a lot of what others are doing in terms of their pricing might be reacting to our success. As Oli said, it's pretty boring. We haven't seen any real change in the competitive environment. We continue to win quite well. And in our market, which is observability and may extend to security and reservability in DevOps, we like our position.

You get the magic wand, I'm going to hand it to you right now. You can hold on to it and wave it over any constraint. What are the -- what's the magic wand going over right now that you would love to remove from a roadblock that can even make you more efficient?

The constraint is execution and growth of our capacity in both R&D or capacity and our know-how in R&D and in sales and marketing and being able to do that in a good way that doesn't break things. We've done that well. We pushed it essentially. But if we could push it more, the opportunity is down, we will push it more. So the wand is really about people and really being able to hire more great people, bring them in, extend our expertise and, to some extent, augment that with technology-oriented inorganic, which we've been good at in bringing in teams and know-how and software and then adding that to the platform. So that's the wand.

David, I really appreciate you being here. Thanks so much for joining the Jefferies Software Conference. Thanks, everyone, for joining.

Thanks a lot. Thank you very much, Brent. Be well. Thanks.