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

All right. Thank you, everyone, for joining us here. I'm really excited for this conversation here with Datadog and Oli Pomel, CEO and Co-Founder of Datadog. It's a company that we've known for a long time. And the success they've had really for a long time, but certainly these last couple of quarters, has been a lot of fun to watch. [Operator Instructions]

So you guys are a hot topic. Everybody wants to talk to you guys these days, and I think it's for a lot of good reasons. Maybe Oli, as we sort of reflect back on these last years, you guys had a lot of momentum coming into the pandemic. And I think what we've all learned is the power of software. And with that comes, I think, the realization that if we didn't already know it, it is software is the lifeblood of the economy. Applications are the lifeblood of the economy. And making sure that applications are healthy and safe is more important than ever. Talk about, as you're talking to customers, I mean, we see it in your results, and we see it in peers' results as well. Why is this from your perspective? I mean, what are CIOs telling you? Like I need to ratchet up the spending even more than I was perhaps previously in a post-COVID world.

Yes. I think, so first of all, thanks for having me today. It's always fun. What we hear and what we see in the market is that the rate at which enterprises are moving workloads into the cloud and growing those workloads in the cloud has resumed to pretty much what it was before the pandemic. So if you squint, if you look from afar, that's more or less what we see. And you see a little bit of it through the reacceleration of the cloud providers. But what we also see is that the breadth of enterprises and companies that are embarking in their cloud migration with scale is getting a lot bigger. So we see companies that we didn't see before there. I think as you pointed out, like the pandemic made it very clear that you need to be digital and you need to be in the cloud, too. I think if you were wondering what the right strategy was 2 years ago, I think today it's a lot more clear. And we have seen some premises of that, I would say, a couple of quarters ago. I think we mentioned on some of our earnings calls in the middle of the pandemic that we were getting a lot of new logo deals with enterprises that were really depressed during the pandemic. We think we mentioned train companies, airlines, amusement parks, hotel chains, really enterprises that were fighting for survival during the pandemic. It was very clear to them that they needed to modernize indeed and digitalize. And we're seeing them actually come up with some level of scale now and emerging on the other side of it and being more deliberate about their transformation. So I would say that's the big change we see.

Now I think I want to start with the question that you get every day, well, I get multiple times a day is, it's such an attractive market but there's a lot of players out there. And you've had a very consistent answer over the years saying like, listen, a lot of this is net new workload. A lot of it is net new applications. And surprisingly, the competition, like a lot of these are greenfield deals, right? And I think people still struggle with that sort of thought process given all of the players. And you even look at like a CrowdStrike or a SentinelOne adding observability capabilities on their stacks as well. For just the sake of talking about, when you get into a new deal or even an expansion, I want to talk about your success in APM and logging here in a second. But what do these deals look, just what do they look like today in a market that feels very, very healthy, but also there's a lot of mouths to feed out there?

Yes. So first of all, there's no change in the competitive situation from what we've seen through the history of the company. And what we've heard from the investment side throughout the history of the company is, oh my god, monitoring, it's a crowded market. Observability, it's a crowded market. That's what we heard when we were fundraising for Series A back in 2011. And it hasn't changed, like we still hear the same thing. At the same time, most of our business, most of our new logos are greenfield, net new workloads, net new environments in the cloud. So we land small in these new environments. These are not competitive displacements mostly. The decision our customers take is typically build or buy. And they start using us, they grow with us, adopt more of our products and reach a point where they might consider standardizing on us. So if you think of 3 phases there, one is landing, which is greenfield mostly. The second is expanding, which is adding more products, also typically greenfield. And then the third stage, I would say, which only a few of our customers have reached today, is standardization. Which is they have enough of a footprint in their cloud environment relative to their overall global footprint that they want to start standardizing all of their tooling, observability management around what they are doing in these cloud environments. We've mentioned some examples of that in the earnings calls, but it's still very early. We're early in the transition. So it's still a small amount of our customers that are doing that.

Go all-in on Datadog. Maybe some of the initial deals were all greenfield or net new workloads or infrastructure. When it gets to sort of standardizing on Datadog, that has to be more of a competitive displacement, pushing out somebody who is perhaps monitoring something that from 5 years ago that when you guys weren't -- when they weren't a customer of yours. When it gets to that level, there is displacement going on at that point?

Yes. And the reason we become the logical choice and no-brainer in this situation is that we have all the mind share, all the usage. We are in the environment that is growing, the environment that is setting the future direction. And we have many more users. We built the product to bring many more teams, many more users to the table. It's very approachable. We typically have an order of magnitude more users on our platform than the products that we might replace on the legacy side. And so that's what makes us a very logical choice to standardize in the end. But again, it's a motion we're only starting to see. Right now, we're really still very early in that transformation. And so as a company, we're very, very focused on new logos and initial expansion in those new logos.

Think longer term, and I can appreciate that it's sort of scary to think about where you could go if you're just scratching the surface on sort of like full, I don't want to say fully penetrated customers. But what is that? If you look and you sort of like look at a Fortune 100 customer, what do you think like an ARR or an ACV at a customer could be if they sort of went all-in? I mean, are we talking $20 million a year, $30 million? I mean, what is sort of like the dream scenario?

I mean, look, we already have customers well into the 8 figures there in yearly ARR. And we see that number growing as we solve the bigger and bigger problem for our customers. One way you can think of the overall ticket we can get is that when we started the company, we thought we would be in a single-digit percent of our customers' cloud infrastructure deal, roughly speaking, and that's what we've seen so far. And I think as we solve the bigger and bigger problem for our customers, replace what used to be different categories before and so different kind of users, we can go higher from that single-digit percentage points of the overall value.

From people, so I'll start to interject those here in a second. But I think what just has blown us all the way is how well you've done in APM and logging. And you started to disclose an ARR contribution 2 quarters ago, most recently $500 million, still growing at hyperscale. Has the success there surprised you? Is it happening sooner than you thought? Or is it like, I mean, I kind of suspected that it would be at this point at this, because these products aren't that old, right, I mean, relative to sort of your core.

So I think we always believed in the vision, the fact that it didn't really make sense for those products to be separate from infrastructure monitoring and to be separate from each other. So we believed in the power of the platform. We knew though that when you solve a new category of problem or get a new set of data or a new data set or bring a new team to the table, there's a learning curve. And it's a game of really understanding what works and what doesn't work for your customers and improving your products and making product broadly applicable to large, very large set of customers. I think we've done that successfully with those products to the point where each of them, in their own right, is considered the best-of-breed solution, which makes them together as a platform a total no-brainer for our customers. So I think it's exciting. What's also exciting is that they both still have a very long fuse in terms of growth. When you think of APM, APM is typically adopted fairly slowly because you need to go and touch every single application to enable it. And it typically takes more time just to redirect all of your logs, for example, or to do a blanket deployment on every single image of your infrastructure monitoring. And we see that the penetration of APM within our customers is growing steadily over time and is still very far from reaching saturation. Same thing for logs, we're very far from reaching saturation with a customer that have started adopting it. So those products have a very long fuse and we are very excited.

And the success has been sort of up and down the customer base. This is not just a mid-market success clearly with those numbers. You're having success with the biggest companies on the planet selling APM and logging.

Yes, exactly. And we have many customers that are in, I would say, in 7, sometimes 8 figures on those products alone. And so we see that success definitely with those products. In general, our 3 tiers of customers are growing at similar rates: SMB, mid-market and enterprise. Though enterprise and mid-market are growing a little bit faster, and that's because we also can direct or go to market more efficiently at those markets.

Got it. We got a question in here from an investor. I think it's a good one. It states, how do you balance new product releases? And you guys have been obviously incredibly innovative on that side. But how do you balance new product releases versus technical partnerships, particularly given how fast you're expanding Datadog's use cases?

Well, the way we think about it is not in terms of what we want to do as a company and how many more products we want to ship or how fast we need to go to market in specific things. We think about it in terms of how do we solve the problem for our customers and what makes sense to them. And in some situations, it will make sense to do a tech partnership and integrate. And customers use a lot of different products with us, and there are some use cases that they want to do outside of Datadog. In some other cases, the only way to deliver a really great experience is to build the product ourselves and to integrate in Datadog. In general though, we're not there to force anything upon our customers. Even when we have a homegrown solution to solve a problem, if our customers use something else, we'll gladly integrate with it and we'll bring that to the rest of Datadog where we have jurisdiction.

So that's a great answer. And I guess the follow-up to this was, given that view of the world, which is very customer-focused, do you feel any apprehension from adjacent vendors that partner with you today or do you not sense that?

We don't really see that. We don't see an issue there. For us, I mean, we have a number of new initiatives around our app marketplace, for example, that really revolve around building a healthy ecosystem with partners. We built our product on having the best and the most and the fullest integration with the rest of the ecosystem. And so we intend to double down on that.

Got it. That's helpful. As you continue to scale and expand your offerings as we just talked about, are there any changes that you see to the go-to-market engine to position you guys to be $2 billion and then $5 billion of ARR? Or is this, how does this, I guess the question effectively is this, what is the go-to-market motion? How does it have to evolve? Is it more partnerships with GSIs? Just sort of your thought process on the scaling from this point.

Yes. So the, we haven't actually changed the go to market a lot so far. And the reason for that is, as we've been adding products, because of the way our platform is architected and also because of the way the cloud is consumed in general, we've been able to have fairly frictionless expansion into our customer base, which means we haven't had to build a heavily specialized sales force. Some of that might change as we go further in categories where maybe customers might speak a bit of a different language on app security, for example. But I think we're still an order of magnitude simpler in terms of selling our products than other companies out there. And by the way, we still maintain, when we land new logos, we still maintain a focus on deal velocity as opposed to trying to land as many products as possible. We don't want to confuse the customer. We want to slow things down. We don't want to jam more products on their throat. We know that if we land small quickly, we can show value very quickly and then we can expand to adjacent categories. So we keep doing that. As we grow, there are a number of, I would say, segments and motions for go to market or even geographies where we're not fully present yet. One example of that is government. Another example is going to market with channel partners or integrators where we're still just starting to do that. I don't know if it is absolutely necessary for us to reach our goal. And I think it's more of a source of upside as we keep growing over the years to come.

So what you're telling us is that the engine in place is enough to get you to your future goals. There may be some tweaks along the way, if so needed, but this is the engine at this point. And it's more about more products and broader distribution. What always interested me early in the story here is very little service, effectively no services. Now I think on this last call, I remember from a callback with you. I don't recall who my callback was with. But there's talk of maybe a few more services, being a little bit more of a service focus. Why is that now? Is it customers required it because these are getting bigger, sort of more comprehensive deals? I'm sort of curious on that side of the house.

Yes. So I think the, so we didn't have services for a very long time. And we very deliberately did that because we didn't want the product to have the professional services and to become a horrible product that you can't set up on your own without 6-month professional services. So we wanted to reach enough of a product maturity to guarantee that the product will be simple and easy to adopt. What we see today is that we have 2 categories of customers that can benefit from services. First are the customers that are being ushered into the cloud by integrators. And they are going to rely heavily on services to get started, get to initial success and then scale. And we see some of that happening. The other category of customers that can benefit from services are customers that are reaching the point where they want to standardize and they have considerable amount of legacy mess to deal with and to migrate over. And so these are situations where they might need services. We might need to provide some of those services or to provide them through partners. And so we started investing in. For now, I think it's more experimental, it's more understanding what exactly we need to do for those customers, how we can package it and how we can scale it, but that's definitely something we started looking into.

For right now for some customers.

Sorry, I didn't hear the beginning of your question.

Well, it feels like this is just part of your natural evolution, selling more products to customers at this point more than anything, just more than anything because it was such a lightweight product. I mean, not lightweight, it was a very services-light, feature-rich product initially.

Yes. And I think we're at a point also where because of the balance we have between large customers and small customers, we feel confident that we can start adding services without compromising the simplicity of the product. Because we know if we break it, if we make it horrible, we'll hear from all our smaller customers that we need to.

Got it. On the topic of pricing, you and I have talked about pricing for a long time now. We saw the consumption side of it hurt you guys in the early part of COVID. Now it's been a pretty significant tailwind. Is this the right pricing methodology to get you to $5 billion in revenue? Do you anticipate maybe some broader uses of ELAs as customers get up into the, you've already said 8 figures, but 20, 30, 40, 50, whatever the number might be in terms of ARR? Do you think ELAs become a bigger part of this as you continue to expand usage inside of organizations?

So I think, so first of all, we feel good about pricing in general. The way we structure our contracts and the way we recognize revenue really mimics the way public cloud is consumed. So for customers, it's fairly natural, like it's how they pay their Amazon deal. And the dynamics there between their cloud deal and us is very similar. One thing I should say is that while we do have a usage component, it is all attached to workloads that are recurring in nature. And the dominant motion is really for customers to under-commit. And that's because they don't really understand how much cloud they'll consume or how fast they'll migrate. And so what typically happens is they under-commit, they outgrow commitments and they upsize their commitments. So the motion is very much like a growth motion. The key there is for us to keep it frictionless so they don't have to feel like they need to overcome it. They don't have to overplan. They can consume as they need. And really, nobody understands how much cloud they'll consume ahead of time. The long-term trend, I would say, is one of data explosion. And it sometimes can get completely out of hand. Any application can generate an arbitrary large amount of logs. I think how we can deal with that in a way that doesn't scale costs for customers in an unreasonable fashion is to give them feedback loops so that they can understand what they consume and why and create a lot of value, and then give them levers so they can decide what to consume from us to deal with that data. But whether they send that to us or not, it is generated, it is costing them money. So we need to help them optimize that. If there is no feedback loop, this is a runaway cost on them no matter what. We don't do ELAs. And the reason for that is we're SaaS. And we're SaaS in a domain where data can explode in volume. And we feel good about that.

So what I'm hearing from you is that even as customers spend more with you, there's a realization of there's a significant ROI that they're seeing. They're not just paying to pay you for fear of like, gee, my Datadog budget is going to explode. There's an actual tangible ROI that justifies that spend and increased spend over time because of the tie to value.

And we also need to make sure they understand how to optimize that spend, how to align it with the budget they get. If you get a terabyte of logs from an internal toy application, it's not as valuable as all of the security logs from your bank transaction application. So customers need to understand what they're generating, what's costing them money and how they can align the amount they pay with the value they get. And we help them do that within Datadog for everything we sell at Datadog. We also started helping them doing that for the rest of their cloud consumption. We announced a new product at our conference, which is Cloud Cost Management. And the goal is just that. It's help you close the loop on where the money goes, what's consuming dollars, what aligns with your applications, your customers, your changes, your processes and how you can actually install the right feedback loops directly between the costs, like finance teams and the engineering teams that are generating those costs. So you can drive continuous optimization there.

Got it. That makes a ton of sense. I mean, it feels like COVID was a unique experience in that I think it was Q2 of 2020. It's hard to predict if we get an event like that in the future. But it feels like the long-term trajectory, if you believe in AWS and Azure and GCP growth, these are durable trends regardless of that spike that we saw in that one quarter.

Yes, yes, definitely. And we see, and look, we do see cost optimization from customers all the time. They're usually not all on the same weight.

Point well taken. On the security side, this is a newer, I shouldn't say it's a newer motion, but you guys are certainly, at Dash, it was a huge focus. This idea of DevSecOps. And so I guess to envision a point in the future where you're going to be talking about a couple of hundred million of ARR in sort of app security, what has to happen there? Because to me, it feels like that's a different buyer. Or unless you're talking to the developer, that's more of a DevSecOps motion where they're integrating security deeper into the app development process along with monitoring, observability. What needs to be done to ensure success in a market where, of course, lots of people are focused on as is in core observability? But just sort of like what are the things that you guys are focused on internally to ensure success within the security side of your operations?

Yes. So the high ground we have for entering security is that we have the attention of all the developers and all of the operations folks. And they typically outnumber the security folks by a factor of, I suppose, 50 to 1 or 100 to 1. So they're the larger crowd, the more impactful crowd in the end just by the sheer volume of people there are. And we think they are the ones that traditionally have been very hard to involve in securing application and securing infrastructure. The other strength we offer in security is that we already instrument everything. We have data about their infrastructure networks, their applications, where the data flows inside of the application, what the users are doing, what the developers are doing, what code is changing. So we have extremely rich information. And we can instrument everything for security purposes without any additional friction, which is the other typical issue you find when you deploy security solutions. So these are the 2 things we rest on. Now what we don't have today is we're not a pure-play security company. So we do lack the direct connection with the security buyer and I would say the credibility that comes in starting as a security company. And these are things that we're building as we keep building out our products.

That's super helpful. For a company that's thrived really in a COVID scenario, helping customers digitize their journey, as the world starts to reopen a bit, just sort of philosophically speaking, what is Datadog's view of hybrid work in the future? I mean, do you think it's a hybrid world from a work perspective, flexible work? And I guess the dovetail question of that is, you guys have been a low-touch model. A lot of it comes directly over the Internet. But as your salespeople get out and start seeing new customers face to face at maybe a higher level, does that help sort of expand your pipeline an even faster rate than the last 2 years?

So it's a bit hard to tell exactly where the pendulum is going to end up for the hybrid setup. I mean, we all know it's going to be more flexible. There's absolutely no doubt about it. And there's going to be many more people working from home. But whether the dominant motion is mostly at home or mostly in the office, it's hard to tell exactly what it's going to be just yet. I think we'll see maybe a little bit of back and forth as folks settle into a new reality in the year to come. On our end, we've actually been doing pretty good before COVID with in-person events. We're actually very good at getting in front of our community and getting people to interact with our product and getting people to come and see us to learn about the cloud migration and cloud technologies and things like that. It's a motion we haven't been able to really exercise for the past 1.5 years, and it's something that we look forward to be able to do in the future. Now we don't exactly know when it's going to come back or if it's going to come back in the same way. So the way we account for it internally is we assume that we bear. As we plan the future, we assume that we'll bear the costs of interacting with our customers in real life, organizing events, visiting customers. But we also don't assume that we'll necessarily get the same ROI right away as we did before. So we don't. For us, this is not a source of upside, I would say.

To wrap here, we've got 2 minutes left. We're sitting here a year from now. I don't think any of us would have imagined a year ago that you would have had an APM and a logging business at a $500 million run rate growing probably triple digits. What do you think we're going to be most surprised with a year from now versus kind of what we know today about Datadog?

I think the surprise might be that a lot of it will look the same, but the year is a little bit further along. The thing with the heavy land and expand motion we have and the expansion for the new products too is that it is very gradual. Like we don't have something that all of a sudden jumps to the top. The new products come in. They're small initially and grow very fast and they gain importance and gain scale, and we layer them on top of the other products. And that's what's been happening in the past, and I think that's what we want to happen in the future.

So it's a little bit of the engine is built. It's a little bit of, it's overly simplistic, but wash, rinse, repeat and just there's a scale factor that whether it's maybe partners or product traction, it feels like it's all part of this building momentum that has secular tailwinds behind it in a competitive market. But still you guys are unique enough that you're winning new deals at a rapid pace and expanding and eventually displacing peers. So I think that's a great overview. For anybody on the line, Yuka here is with us as well. Feel free to reach out to me with any questions. We can put you in contact with Oli or Yuka. But really from all of us here at RBC, Oli, I remember talking to you as a private company years ago and I think at an RBC conference. And to see the success, it feels like in some regards, you're just scratching the surface on a big opportunity. It really is exciting to see and watch. And so from all of us at RBC, best of luck. And we appreciate your time and support.

Thank you. We're excited. Thanks.

Thanks, everybody.