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

I'm really happy to have David Obstler, CFO of Datadog with me. David, thanks for joining us again.

Thanks for having us. I appreciate it.

David, you were one of the few companies in this earnings season, they had like a very, very clean, very strong numbers with accelerating revenue growth. Can you talk maybe a little bit to level set for everyone just what are the drivers for that? What are the factors here?

Yes. Everything sort of went in the same direction, firing on all cylinders. The first one was usage of our product, which is clients using the same products that they had bought earlier. And that accelerated. That was very strong in the quarter and very strong in a number of consecutive quarters. And we think the reason for that is a resumption of cloud projects, maybe an acceleration of digital migrations. We, secondly, had a very strong cross-selling motion as we gave in some of the statistics. Our products being landing -- with our customers landing with more than one product and then buying more product was very strong and continuing as the platform develops. And lastly, our new logos and our new entrants, and that was very strong. And that was very strong in consecutive quarters. So it takes a while for clients in a land and expand to ramp up to their usage. But because we had landed consecutively in quarters over time, we saw the result of that in the quarter. All of that combined to produce the revenue acceleration. In addition, because of the flatness or relative flatness at the time of COVID, we want to let everyone know the compare was easier than it would be -- have been had there not been COVID.

Yes, yes, yes. No, no, that's true. That's fair. Let's stay with the customer additions a little bit. Like what are you seeing in terms of greenfield versus replacements? Like a couple of years ago, it's like pretty much all greenfield because people were going to the cloud. Is that changing a little bit? Or is that still very much the motion?

It's still largely greenfield. And when we say greenfield, we also are talking about the movement from an open source or cobble together or a hyperscaler product. So it's still largely greenfield. There is, as we talked about on the earnings call, increased impetus in the cloud side, in the digital side to go to the single platform. So we are having some consolidations and replacements, but the majority remains greenfield, as we talked about since we went public.

Yes, yes, yes. And if you think -- talk a little bit about like those guys that tried it somewhere else differently. Is that kind of do-it-yourself open source tools, like -- or is it like our vendors that we know or like where does that come from?

Yes. Largely, it would be -- our biggest competitor we've talked about is, do-it-yourself. That would be an IT department putting together, cobbling together, and that is usually a piece of open source elastic otherwise. In addition, they often start out using some of the tools of potentially the hyperscalers who end up becoming more data sources for us. So that's what we often find in a situation where there hasn't been an investment in the system. And the decision to buy us is for workloads that are being migrated to move more towards a system or platform, which we have.

Yes, yes, yes. And then a lot of questions I have is like, okay, how big can this market get? And so it's kind of important to think about like this whole cloud migration into the different hyperscalers as well. Can you talk a little bit about there, what you're seeing in terms of like how much are you working with hyperscalers? I mean, they are growing at 50%. Not all, 3 of them. So it does feel like we're still in the early innings here.

Yes. I mean, I think that's the -- probably the most important point, which is that the end market is growing very rapidly, as you said. And we're, as we talked about, in greenfield and in digital migrations, cloud migrations, we're heavily aligned. We're usually something that's bought alongside of that. In addition, we believe we're very early innings. The amount of workloads in the cloud is still relatively small. And there are many enterprises and companies that have barely begun their journey. So we see a very long and persistent growth market here for many years. In addition, we have been increasing the functionality of the platform. And given the ubiquity and given DevOps using it, we're trying to add -- relentlessly add more value. And that's allowed us to grow at higher rates than the cloud and the adoption of our platform versus either open source or point solutions has further complement that, we believe.

Yes. And where -- like talk a little bit about your hyperscaler relationships in terms of like, whereas this AWS, which is kind of the earliest and most filled out and [indiscernible] are we -- are you even on all of them? Is there one where you kind of deeper penetrated than the others in terms of workloads, et cetera?

We go very much with the market share in non-monolithic modern developed DevOps. For instance, if what is happening is the Office Suite is being delivered, the Microsoft Office Suite, there's not the complexity that where you get the value from -- more from the Datadog. So in the market share of customer-facing cloud, AWS has been the longest standing, the earliest and the highest market share, and then Google and Azure. In terms of where we are with them, we've always been able to monitor their clouds. We have always and really focused on this, trying to make sure our technology works and is aligned with what they're doing. So when you see reinvent, you'll see lots of announcements that we make about our compatibility with what AWS is doing. We were earlier on in working with AWS in being on their Marketplace, which allows clients to use some of their hyperscaler budget to purchase Datadog or other products on the same invoice. And next, we explore that, develop the data center, and we also are a big customer. And the other 2 have been catching up. We first went to Google, and more recently, as you know, in our announcements to Azure, we are heading towards being in the same position with all of them; technological alliance, customer, co-selling and marketplace. And so that's what we're trying to be the Switzerland. Now we do caution people that most of the sale, this is complementary. Most of the sale is direct. The Marketplace is a convenience, a way to use budget. We get leads, but we really don't rely on them as the main source of distribution. We sell alongside of them. And that's been going on in that pattern for some time. So I think we'll have over the years, we have very good relationships. They're at multiple levels, I just described, and we're going to continue to emphasize that, whether it be technological partnerships or distribution.

Yes, yes. And that's -- I guess I didn't fully appreciate it. So Marketplace is really -- and I know from my Barclays guys, that you don't have to ask for extra Datadog budget because we have a bit 5-year AWS contract, I guess. You can just kind of tap into that one and kind of use credits that way.

That's the benefit. And then we -- it's really the client. We largely are the lead on the sale. The client says, "I want to buy in a consolidated wealthy way to use my AWS, my Azure budget." And then we accommodate them, and we essentially get the delivery through the Marketplace for its invoice. Now one difference is with Azure, we are building ourselves in the platform. So all of this can be done more automatically by their salespeople and customers. They can provision within the platform. That's newer. We'll see if that makes a difference form. And -- but the others, we -- it's not automatic. We do it through co-selling, but it allows them to get either the convenience of a single bill or use budget that they already have. .

Yes, yes, yes. Okay. That makes a lot of sense. Okay. Let's move on a little bit to the cross-sell expansion motion. You've talked for -- I think your official kind of announcements are above 130% NRR. Is there any more kind of qualitatively you can give us in terms of how that has been evolving?

We don't give that metric. We -- essentially, when we say things like organic is very strong, that generally is aligned with strength of the net retention because 2/3 of the net retention comes from existing products that the client -- customer owned a year ago. So when the usage increase, that's the majority of the net retention. So that's an indicative of that. And so we haven't given point estimates, but we've given comments about the strength and gave comments on the strength of the organic, which indicates also strength and it's heavily correlated to the strength in the net retention.

And how has that kind of -- as you think about the pandemic, like what do you see there like in terms of how that had played out?

Yes, yes. We found that in the beginning of the pandemic in March, April, we had 2 things happening. One is we had some optimization or cost management in our client base. And that resulted in -- since we are post-based for the most part, in a number of our products, we had some optimization. Therefore, the organic rate, it didn't go to negative. It just flattened out more. So we also saw a priority at that time in remote work and end point more. So things that were more aligned with how do we work in COVID and a potential delay in some of the forward-looking digital projects that were more customer-facing maybe turning more inward. And as we talked about last year, as we got into the third quarter of last year and then since, we had a recovery happened where clients were turning more towards their digital projects, resulting in higher usage and more adoption of the platform. And that's been strong for a number of quarters that have compounded. We think that now we're in the parlance of their activities of cloud and digital migration. We're back to normal or we may even -- during the course of the pandemic, many of our customers and many of our noncustomers realize how important that digital delivery of products was. And we sell along it could be that you'd have more impetus to that shift, which I think we're seeing now in the world.

Yes, yes, yes. And if you unpack a little bit the usage versus new product kind of most in that drive set, like kind of can you help us understand a little bit like better how that usage versus new products kind of is evolving for you?

Yes. It's been still the majority of these net retentions or comparison of what the client was using 1 year ago. And so because they often land smaller than they get to and they land smaller with the newer products, let's say, their infrastructure and APM, and they start using our logs, they generally don't go, because of the land and expand, full bore. So in that usage number, you do have getting to scale of the products they purchased a year ago. And so that's been in the 60s to sometimes 70%. The other is brand-new products that they didn't own a year ago, that percentage has been increasing a little bit over time as we launch more products. But it's almost like a fast line because often in the category of the organic of the same products, they're actually scaling into the new products they purchase and getting more to full scale of the product use.

And I remember when we talked around the IPO, you were -- as a CFO, you were kind of always really happy that there were people -- you have every quarter like people have overused, and then you had like this extra stuff. Is that still happening? Or are you guys better to help clients? And are the clients better to understand like what their usage will be, and hence, you don't have these kind of...

What they tend to do, and this is about a client think about my seat. Do I want to overcommit not knowing how fast things are going to go? Or do I want to under-commit? And then I know that if I have to use incremental of the product, I have to pay a usage -- a higher usage fee. That continues. Clients still do that. We still have a situation where very often a client runs out long before the year subscription for the most part and then upsell. That's a motion we have, and that's critical. And that's really about client preferences of not wanting to overcommit and have sort of have commitments that they're not going to use. That works for both of us, and we try to help them. We try to give transparency, show them what they're using. And then often, it makes tremendous sense. It's quite evident that they should increase and fix out. And we do that as a regular motion all the time with our clients. And I think our clients like that, appreciate it, and that still is a dominant motion for us.

Yes. Okay. Perfect. And if you look at a couple of quarters back, you talked -- you started talking more about logs and APM as like a really good, strong items in itself. Can you just remind us where we are on this -- those 2 seem to be the big ones at the moment that have scaled up very quickly.

Right. What we have, it's the order of the launch, and I can go into the things like RUM and Synthetics. But essentially, infrastructure continues to grow very strongly. We even said it accelerated, heavily aligned to host and cloud migration. What we said was APM and logs are now together over $500 million. We didn't split it out in hyper growth. And what we mean by that is over 100% growth. Now what's -- why has that happened? First of all, we've done a very good job investing in the product. So we've continued to innovate. Our clients, the research community, et cetera, have sort of concluded that these are best-of-breed products. And there's not weaknesses in them. We also have had increasing motion from landing 75% of the time with more than 1 product to the cross-sell statistics of tremendous adoption. And the reason for that is, essentially, we're there. We're being used ubiquitously. Our clients and DevOps are reliant on us, and they don't want to have to go to other applications and download. They say, "It's so much more effective to see everything unified in a single platform." And that's creating an impetus to buy the platform and the products and the log-in APM products. Now that's been a very strong success, but we're still very early in that. We still have lots of customers that aren't using full bore of those products. So we see a tremendous future and are continuing to invest in those. And then once we get to the next products that we launch, Synthetics, RUM, we're seeing the same thing. And we're seeing, because of the platform and because it makes so much sense and because of the lowering of the friction in the platform itself, but also in cross-sell, clients are adopting this, making it easier for us to cross-sell the incremental product.

Yes, yes. And how -- I mean the -- if I look at just logs or APM, like if you look, there are some very big companies that just did one thing and they become very big. Like if you think about your businesses there, like how excited are you about the future size and future opportunity? How big they can scale there?

We're really excited. We think, again, you have at the core the cloud workloads. You also have the evolution of DevOps and the increased number of applications that are being monitored this trend because right now, a small percentage of applications are being monitored. More value from the product in monitoring the applications. Take, for an example, digital experience. It's not just the back end, it's really how is the application working for the customers. So we get broader and broader audiences, including product managers and user experience experts. So as we add more and more value, we think we'll get more and more adoption to a broader universe at a client. So we think we're -- just like the infrastructure and everything, we're very early in this, and we think all the trends are moving towards greater adoption. In terms of logs, the ability to get more and more data more and more efficiently and then research problems and use machine learning and everything, all of that is helping to remediate faster, which is critical to clients that rely on the digital delivery of their products.

Yes, yes, yes. So, yes. So I mean it sounds like you're this -- we're still on the beginning as like if you look at -- yes, yes.

No, we think we're -- we think we have a long runway and a long runway upward sloping with both cloud migration and also the ability to get value out of the tools and the platform that are being used to look at the digital delivery of products.

Yes, yes, yes. Okay. Yes, it makes sense. And then I wanted to change gear a little bit. And I know you're the CFO, so I apologize. It's going to be the last product question.

I love talking the product.

The -- and that's on security. So security is kind of the one area where I'm getting a lot of the questions like, okay, I get when you're in there. But the question that everyone has it like, okay, how broad can -- how does that concur to what security guys are doing? Are you all complementary? Are you eventually go deeper? So how did you feel it from your seat?

Yes. I mean we're -- just get that over market. The market is -- has endpoint network and then, broadly, cloud or application, and we're really playing on that side. So we're not trying to compete in endpoint. We're not trying to compete inside the firewall. That's a lot where the more traditional security vendors. We're also not designing the products as firewalls or gates. We're basically designing the products to be used by DevOps as they are developing the product really in sort of cloud delivery. And we believe that based on what we've seen in DevOps and what we've seen in early signs, that silos will begin to collapse and that what has been traditionally a very centralized purchase by the security group is going to spread out and go into the DevOps world. There are good signs of that. We've had good reception of our products, but we're earlier on. We're building the suite. And what we're doing right now is letting our clients use it. The more progressive clients, the ones farther along in DevSecOps are the ones using it. They're liking it. They're giving us good feedback, and we're using that to continue to develop the suite. But we're early stages here. This is about a different way to engineer security into products and production. And we see great signs of it happening and the decentralization of the security responsibility. But this is a cultural change in a lot of companies, and we think it'll take some time to be realized. And I think what we said was it may take a complementary distribution of accessing and marketing to the more centralized CISO as well as the decentralized DevOps to get adoption. We don't know yet, but we're trying to learn that and are certainly open to that type of distribution format.

Yes. Okay. Okay. It makes sense. And then the -- you mentioned the evolution of the organization, and you still have to learn, like do you sell securities stand-alone, et cetera? Like from your perspective as the CFO, I assume like, famous question from sell -- from the buy side is always keeps you awake at night. But your #1 problem must be scaling because the growth rates you guys are achieving there is like constant scaling that needs to happen there. Like, can you talk a little bit about that? You don't stay challenged, I guess, in your world, so about the opportunity around that.

It's an opportunity. Totally, I saw the question, and I'm happy you asked it. Yes. My -- I'm -- my -- what I am thinking about all the time is how to support the investment in growth. And given the opportunity and the product strength of the company, that is everything from supportive G&A department; real estate; headcount plans that are flexible and can grow and take advantage of the opportunities; compensation and equity that attracts and retains the best; sales organization models that are conducive to this type of rapid growth, whether it be being able to invest in new territories, new partnerships or compensation models to attract and retain salespeople; and making sure that we have the type of place culturally knitted together where R&D and salespeople and everybody wants to work where we're an attractive employer, where the best can come to us and want to stay. That's our challenge. That's what I wouldn't say keep us up at night, but that's the exciting part of it. It's how can we make sure we create the right company to take advantage of this huge growth. And that's what I think being a growth-oriented CFO is, is how do you help make order out of multiple priorities and lots of audacious initiatives to contribute to it all going as well as possible and realizing the opportunity. That's my job.

Yes, yes, yes. And it's like -- it must be -- I mean, how do you maintain the culture? Like sorry, that's like a more a fluffy question or more like it comes often, but it's like you have more people in your organization every year than you have the year before. Like how do you maintain the kind of -- that they all kind of do the same thing and kind of think the same thing?

Definitely, it's a challenge. I think it's -- I think we all are spending an increased percentage of our time on the people. That is everything from communications, so people understand. For instance, when we did the Investor Day, we make sure that everybody has access to that and are volunteering to go around to everywhere in the company to go through that. It's hard to have a holistic view of the company as you might have sitting in one of these seats. We have essentially emphasis on career tracking, the development of people -- the promotion and development of people in terms of [indiscernible] and making sure people have the amount of equity that keeps them attracted. Town halls, events in COVID where we're a little more isolated that we have the events to get together and that we're developing a culture where people want to come to work where the engagement is very high and then the retention is high. And that's what we're all trying to do every day. It's the people. And we're only as good as scaling this on the people side. And I think that's what many of us are thinking about all the time. So it's a combination of all of that. It's a challenge as you grow. We have more people who have been hired in COVID than before COVID. So it's a challenge to get everyone together. We're having lots of offsites and sales kickoffs and ways that people can get together to get on the same page. And that is increasingly important in COVID. And I think we're pretty good at it and think about it all the time.

And if you think about it -- everyone talks about a tight labor market, especially on sales, et cetera, as well. Like how do you think about scaling the organization there? I mean, do you still have a lot of productivity in the sales? Or does it need to be like a one-on-one? If you want to grow, you need to go hire a next sales guy. How do you think about that?

Well, we do -- so starting more generally and then going to sales. So one, I think given our success and Datadog and our product emphasis and how our clients like our products, we are able to attract people. R&D professionals want to work on interesting projects and winning projects. Salespeople want to have products that the clients love. And I think in the feedback that you get and we get, we have that. So that's a good sign. But the labor market is tighter. We're investing significantly in all the blocking and tackling. We dramatically expanded our recruiting functions. It takes more work to get the headcount growth. So it's not going to happen without the investment. So we're making those investments. That's the recruiters, that's internship programs, that's going to the universities. I think in some countries, in places like in Paris, it's a little bit of an easier labor market for us than maybe in New York or something. So I think we have also some competitive advantages. And so all of those are what we're trying to do in a tighter labor market. Now in terms of salespeople, there's tremendous white space that we have. And so there's lots of markets where we know we need more feet on the street and more supportive sales engineering. And in order to do that in an orderly way, we're using data, we're using attainment. What's the size of the market? What are those companies? Where are they in their cloud migration? And we're not trying to just pile people on for the sake of piling people on. We're trying to do it in a smart way. And if we do that right, we create the right opportunities for salespeople to come here and succeed. And it's hard work, and we try to do it. And so that's how we look at the sales. We're trying to grow very rapidly but not do it in a chaotic way that has a negative effect.

Yes. David, I see my time is up. I could talk with you forever because scaling is so exciting. As I said before, we talked like even my high school has started talking about Datadog. So that's exciting.

Yes. That's exciting. Yes, yes, yes. No, to have that -- when it gets into the culture like that, you know that you have an exciting company that people talk about. And getting back to the culture and the ability to attract people, that's a huge asset that brings people to us, and we just have to continue to grow that.

Yes. No, exactly. Yes. David, great to talk to you.

Thank you so much for having us.

Thank you.

Bye.

Bye.