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

Welcome to our next session.

David, great to have you on. I want to start actually more bigger picture a little bit with you. You've been on a -- we've met first time day before the IPO, and you've been on a really great journey. Kind of maybe talk a little bit about the evolution of Datadog from when you kind of joined in, in terms of how this became such a kind of nice [indiscernible] company.

Yes. First of all, thank you for having us. We appreciate it. And I also just want to mention that we are not, in this presentation, going to update our comments relative to what we said on our last earnings call. So just to create expectations -- manage expectations. Yes, I'm going on my fifth year at Datadog, believe it or not. It's been an unbelievable journey. And when I reflect back on it, I joined in 2018, about a year before our IPO. And I was -- the trends that attracted me to Datadog and are driving the company in migration of cloud workloads, DevOps practices, the integration of more within the DevOps environment, including security, have accelerated and persisted and that creates a very strong backdrop for Datadog. But back then, we were more of a single product company. We started with infrastructure. And we were in the build stage of APM and logs. And we had the beginnings of a platform, but that's been a very substantial evolution since I have been there in the last 4 years. The expansion of the product set has been very rapid, very focused and has created a tremendous adoption that's provided more value to clients, more stickiness of product and the growth level. So that's a change, and that's a real evolution. Secondly, I would say, we started out in more of a cloud-native land and expand and more U.S. focused. And in the last 4 or 5 years, we have built out our go-to-market substantially in terms of building out the commercial, the customer success and enterprise teams; continue to evolve that. We're still midway in that. So just the maturation and the growth of our go-to-market. Our marketing has been something that has been persistent. And then when you think about scale and growing out the company, whether it be in the G&A functions, the management team, bringing in new people, getting succession, that's been a very big focus of the team, and we have grown our number of employees from less than 1,000 to going on 5,000 over that period of time. So that's been a very significant growth. So just scaling the company has been a real challenge and joy.

Yes. Okay. Perfect. And then talk a little bit about how your hyperscaler relationship changed over those years.

Yes. I think we have had strong relationships, but we have developed and diversified our relationships from -- starting with AWS towards having strong relationships with all the hyperscalers, so being broader there. We have expanded the number of our instances and our ability to deliver on different clouds. We have developed strong technology partnerships with all the cloud vendors. We've built out GovCloud in order to address that market. And I think we've deepened our go-to-market in terms of being on everybody's marketplace and being more focused on mutual interest of go-to-market. So I would say that we always have had focused on it and always have had the strong relationships, but they've become broader and deeper over the last 4 or 5 years.

Yes. And the question I get from investors a lot is, well, gee, looking at AWS growth coming down, looking at Azure growth going down, what's going -- what's Datadog [ going to do ]. But talk maybe in that respect a little bit about the product expansion because there is a really nice offset here for you guys. Maybe -- you mentioned earlier infrastructure was where you started. But talk a little bit about the scale and the growth that you see in the other parts of the product portfolio.

Yes. I think if you look back and reflect on it, we've always had a higher growth rate than the hyperscalers. And although we are linked, we are linked towards the migration of workloads to the cloud. And then think about what the differences might be. The hyperscalers have a broader set of sort of use cases in end markets. And we tend to be focused on client-facing, real-time applications, which tend to also be more complex and mission-critical. So one, we are probably exposed to some of the higher priority workloads. That's one thing at the core. And then over the course of developing the platform, we have expanded the functionality, which has created a significant growth driver for us as clients have used more and more -- more and more pillars, and that's -- they're in our metrics. And then I think because of that growth of the platform, we have begun to -- our competitive position has strengthened and our ability to get more and more of that functionality on the Datadog platform versus other alternatives has been enhanced as we've made that product investment.

Yes, yes, yes. And then like maybe just -- I mean you did comment in the past about like how logs or APM has become like a certain revenue kind of run rate, et cetera. Where are we on these different product sets?

Yes. I think we said that as a few quarters back or 2, 3 quarters, we said that those new 2 pillars, logs and APM, which we didn't have 5 years ago, were over $700 million of ARR. And if you think about where we are right now, we haven't updated it, but something around the hope of half of the company has been in those new product sets. So when you think about how meaningful that has been not having 5 years ago, these products having about around that of revenue in the company, that just goes to show you the impact of that. And also the appeal of the platform and the fact that we said many times that our clients are not buying individual products, they're using a platform to accomplish business goals, which is real-time monitoring remediation, which is enhanced by having more functionality.

Yes. I mean in a way -- remember, at the IPO, as part of the S1, you had come up with a TAM. But now with a much broader product set, how do you think about the TAM for the different segments and then bringing that together for Datadog level?

Well, we've updated in our filings the observability TAM. And probably when you think about our platform, it's the percentage of the market we can address through our platform increasing. And then on top of that, we have discussed the fact that we are developing the security product, which is in early stages, both in terms of our development and in the adoption, but that, that could be a TAM multiplier and that wasn't included in the initial TAM. And then there's the shift left in addressing a little more of the developer use cases, which could also be a TAM expander. Be that as it may, we think we're against a very large TAM in our core monitoring and one that has many, many years to grow, et cetera. And so that's sort of the main TAM. And then the TAM, our ability to address it and our expansion of the TAM has been a methodological over time.

And do you think about a mix of the business in the future in terms of infrastructure is now -- more is the majority. Now it's like APM will be this, log will be that? Or is that actually kind of a wrong question because it's one platform? So the platform will kind of be...

Yes. Yes. I think we think about it, as I think you said, more as one product to the platform, and this increases the platform wallet share by providing more functionality. That's really the way. And when you think about how we go to market and how we contract and how we expose all this functionality to clients for them to use within their contracts as they want to, that's really the way we think about it at the core.

Yes, yes. And then does that -- I mean on dollar net retention, you kind of give me a broad-based number. But do you see that -- well, it must be impacting that number, I guess, yes.

Definitely. Dollar -- I think we said that essentially, within 1 year, the growth, which is really dollar net retention, is driven about 3/4 or a little more, maybe 80%, by the expansion of products that the client had a year ago and the rest of it from new products. But that probably underestimates because they're in the process of ramping. So when you think about the fact that about half the company right now are non-infrastructure products, that gives you probably a better sense over multiyear of what the actual compounded impact of the expansion of the product has on the net retention rate.

Yes, yes, yes. And the -- if you think about the -- going back to my original question around the cloud workloads and the -- what the hyperscalers had versus what you're doing. How do you think about that dependency for Datadog and for your revenue in terms of, yes, there's something happening on a macro, but on the other hand, I have a lot more products to sell. How does that come together?

I think they are correlated in direction because at the very core, there is cloud workloads. But then you have, as you mentioned, the fact that all workloads are more mission-critical, client-facing workloads, which we feel would cause stickiness and potential protection that might be a little more concentrated on the positive side in addition to the expansion of the product. So we don't think we're immune to optimization. We think we have a lot more flexibility with our customers. So if they're optimizing in one area, they can use another area of the product set. They can also put more and more of the product set on our platform versus other point solutions, which has been happening for some time, which could result in them controlling their costs, but it may not be as much the expense of Datadog. And then I think, overall, we think this is very early, and this is long term. So there may be variations in this growth, but we think this is a very, very long-term trend towards migration of the cloud and towards increased complexity, which benefits Datadog.

And then the -- I just lost my train of thoughts now. Yes, the -- on that note -- no, let me change. If you think about the environment that we are in now at the moment, have you changed your go-to-market when it comes to -- in terms of the message the sales guys are giving out in terms of more value, more ROI focus, et cetera? Or is it still the same kind of message that you had before?

We've been doing that over the number of years, both in terms of investing in enablement, sales engineering, et cetera, and product managers. So we've been doing that. We've been selling both in terms of this is mission critical. If you don't have this your client-facing could go down. And we've been selling in value-added selling, meaning looking at the cost side of open source to do-it-yourself. We've been putting more resources over time in that, continue to do so. So it's more a continuation of the way we have been selling. I think as the product set has expanded, we know that we have to continue to invest in the training of our sales team, of our customer success, having more -- some more product specialization injected in there. It hasn't resulted in a change of the way we go to market but just the focus of the resources in making that sales proposition.

Okay. And my last question just came back to me. How does the -- I remember we had conversations back in 2020, and there you kind of -- back then you talked about being impacted by the optimization at the hyperscaler level because you were part of the contract. How does 2020 compare to what you're seeing now?

Yes. So now that was a -- the world looks like it may end or change. We have to change our priorities very quickly, maybe focus on remote work, don't know what's going to happen. So we had a very high intensity of customers across the board all at once. And it was more focused, and we have higher percentage on the infrastructure side. Now I think we're seeing -- and then we had a rebound. I think we're now seeing, it isn't one size fits all. We have a diversification where we have newer customers who are ramping quite rapidly. We have customers even in cloud native in complemented industries that are continuing, and then we have areas, I think we said on the last call, cloud native, where you've expanded rapidly and you're in affected industry, focusing a little more on cost optimization. So it's more of a portfolio, not everybody doing it all one. And also our product suite has been more diversified, meaning it hasn't been infrastructure. It's been a little more diversified. And in fact, we said on our calls that some of the areas that are more data-focused, like logs or the part of APM where you're storing traces rather than logs are the areas where you can change the dial. So it's been a little bit of a difference. But for the most part, we've ended up in between what happened in COVID and the high point, indicating that it hasn't been one size fits all, and it's been more sort of concentrated in portions of our customer base rather than across the board.

And as part of that, the next question that follows up is, remind us on -- is there a vertical focus for you guys like some of your -- it's not competitors like some other guys take industries like, well, we had a lot of Coinbase, now we're suffering. What's your setup?

Yes, we're pretty diversified and mirrors the digital economy where some of the larger segments might be enterprise software, financial services. I think we said that, for instance, I think consumer discretionary was in the low teens. And I think we had said at the time of COVID, that travel and entertainment was around 10. So we have a number of segments like that. We're very diversified. We don't have a lot of concentration. And so for crypto, et cetera, if we have customers there, it might be an effect, but that's not one of our large segments, et cetera. So it's really the portfolio of all of this. But in general, we are -- as you know from previous, we're very diversified across industries. We don't have great customer concentration. And we also diversified across enterprise, mid-market and SMB. So there is pretty good diversification here. And we tried to point out on the last couple of calls where we've seen the brunt of it and try to illuminate where we're seeing it and not seeing it.

Okay. Let's shift gear and -- you started the call saying we're not going to give you guidance for 2023. I just wanted to -- and I'm not asking a question. I just wanted to kind of maybe have you talk a little bit about the input factors we need to think about so that investors kind of understand the complexity -- not complexity in a bad way, but this is not like '25...

Yes. I think that we have the net retention, which is really less the organic growth. We've talked about use of more of the same products and new products, which has been in the middle for the last couple of quarters. And that will certainly carry over. If you remember in COVID, we were in the 70s and we had a quarter or 2 of compressed growth, and that took us down at that point to 50. And so the number of quarters you have, where your growth is different than historically, will carry over in this model, okay? So that's one thing. So what I think we said we've been in the intermediate that the fact of having 2 quarters of that will carry over for 4 quarters or more, that we've had strong pipeline for new logos and new business. And we haven't seen a disruption about that. That's another factor that is layered in. So it's really the interplay of all of that and how that carries over that governs the growth rate. And then it essentially is the rate of growth of hiring. I think we said we've been investing quite rapidly, but we haven't been able -- we have not been able to invest at the rate of growth of revenues that over the long term, we try to maintain some stability in periods where you didn't have the office expenses and you weren't able to invest at the same level as revenues you would have margin expansion. And then we try to balance that across growth. So that's the other input as you go into next year. The interplay of those 2 things really produces the economic model.

And then the -- as part of the -- just to share some experience here from the last 1.5 days, like pricing came up a lot, in terms of, well, there's inflation, et cetera. Maybe let's start with kind of what's your -- like how do we have to think about your pricing? And this kind of always talks about consumption pricing, like remind us maybe of how you price.

Yes. A couple of things to remember. Land and expand we -- essentially, most of our customers stay short relative to what they think they'll evolve to. So the concept of having software that you bought that is not used doesn't exist at Datadog, land and expand. That's one concept. The second concept is we have been a value increaser through investment, not a unit price increaser so far. So we have essentially gotten our clients to increase their wallet share with us by offering either their expansion of their workloads or the products they're buying. That has put us in a position where we haven't been a price increaser. We are open to looking at that at some point but haven't really found the need to do that. So I think we've been someone -- we've been a vendor who has not sold software that clients don't use has had the structure of increasing the discounts based on volume. So it's been embedded in the price structure and has -- when clients go into on-demand, have worked with them proactively in fixing their commitment to ameliorate that through time, we think that served us well and will continue to serve us well in this environment.

Yes. I remember when we first met, you had the -- you always had that secret buffer for you as the CFO of overages. Where are you -- customers are probably getting better in terms of understanding how to size their kind of commitment with you. I'm sure you were getting better to kind of help them. Is that still a factor for you on the overage side? Or is it...

Yes, still a factor. It's very similar because they stay short, and they've always had a conservative, and we've not pushed them to overcommit, given our go-to-market. It's been and continues to be the same motion, which is they float on a weighted average into on-demand. They make the decision on whether they want to increase the commitment and lower the average price point or stay more flexible. We provide alternatives to them and help them, too. So it's pretty similar. Again, back to your original question, we either -- we pretty much priced based on number of hosts or sort of the infrastructure they use on data they consume or use or test. And on our website, it's very, very transparent. It's right there, and we have discount structures and structures based on reserve, whether you want to reserve or stay flexible. And so that's the pricing. It's been -- and we don't see any reasons to change that right now.

Okay. Perfect. And then last couple of minutes, I want to talk about profitability. The one message that came out so far today and it is very consistent with CFOs talking about like, okay, it's a different time. The cost of capital is increasing. So I need to think more about ROI and [ profit ] ROI. That means like I have faster failure for some new initiatives and things like that. Where are you on that kind of profitability journey? And you were always -- you were one of 2 companies that is high growth, good margins. So your unit cost economy must be really good anyway.

Yes. So I think -- it's a very good point. So I think that, number one, we have good unit cost economics from the way the platform is designed and that has always -- and I think if you look at our G&A and our gross margin, we've always been very prudent cost managers, always investing not beyond our means, but doing this in all the environments. We think we are facing a very long-term opportunity. So we don't want to short-change the company. But we essentially have always looked at sort of the top line weighted average over a long term and tried to invest against it, and we have these economies of scale. So we're going to continue to do that. That may mean that there's a little higher bar, and we prioritize a little more. We don't want to not invest in the priority. Some of the investments we make have returns in the shorter term, and some of them are longer term, and we can play that against the top line to prioritize. I think as [ Ali ] said, we always have and we understand that we're balancing growth against a long-term opportunity and profitability and, as you said, have always evidenced that behavior, and we'll continue to do so.

Yes, yes, yes. Okay. And then that kind of translates into kind of cash flow, good cash flow generation, healthy cash flow. As a CFO now, how do you think about your cash position, usage of cash?

Yes. I mean we've been -- we've been [indiscernible]. We've always had a very good cash cushion. We've only burned in the history of the company before we became cash flow positive, believe it or not, in the 20s of millions of dollars. So we've always been this way. So we're in a position where we have a good amount of cash. Our M&A strategy of basically acquihires and always integrating the functionality in the platform has been very efficient as well. We're not saying we're never going to spend more money on acquisitions, but we've always sort of been able to be prudent there. And so we essentially have a lot of flexibility and a lot in our basic model, as you mentioned, that allows us to have degrees of freedom that, as a CFO, I'm very thankful for, that allows us to make good choices, I think, in a variety of environments and manage that risk, and we'll continue to do so.

Yes. And then last question and then I need to let you go. We had the LinkedIn CEO on stage here yesterday, and he said like the one thing out of the LinkedIn graph that was really interesting is that the New York and San Francisco are seeing the most inflow of people at the moment. So people are coming back. In that respect -- and then we also have the VC-funded companies all kind of looking a bit funny. What do you see in terms of hiring, employee retention, et cetera, at the moment playing out for you?

Yes. We've been -- number one, we've been leading the people back to the office for quite some time. We've never been a company where we say we're going to be remote. We have always maintained our discipline in hiring people, haven't gone a bit crazy. We think that it will be a more benign environment for us. It's a little too early to tell. But given what we're seeing in terms of the competitive companies, whether it be the large companies like Facebook or Google or the pre-IPOs, we think that puts us in a good position to press our competitive advantage and get the right people. So we're excited about that. But it's too early to tell how much of a degree, but we think that will be coming.

Perfect. Okay. Good for a closing statement.

Thank you very much.

Good to have you. Thank you.

Thank you. Thank you.