DDOG - Datadog Inc. (DDOG) Presents at Barclays Global Technology Conference Transcript
2023-12-06 19:54:08 ET
Datadog, Inc. (DDOG)
Barclays Global Technology Conference
December 06, 2023, 04:20 PM ET
Company Participants
David Obstler - CFO
Conference Call Participants
Presentation
Unidentified Analyst
Hey, guys, welcome to our next session. We were just debating if we talk one more time about cloud optimization or we talk on [indiscernible]. And then we decided we might do some [indiscernible] again.
David Obstler
But I rejected the [indiscernible]. In fact don't even know what it is. But he said he would talk about the UEFA Champions League football. We could do that.
Unidentified Analyst
We could do that as well. But like yes, a little bit of Datadog first.
David Obstler
We'll a little bit optimization, yes.
Question-and-Answer Session
Q - Unidentified Analyst
I mean -- and I apologize to start like that.
David Obstler
No problem.
Unidentified Analyst
What happen we were talking earlier, it's almost not fair. Like when the [indiscernible] guys is reported, everyone was super scared. And now the off-cycle guys are in the middle of the reporting season. And there everyone is like, oh, my god, yes, I want to be. Like when you reported your results, I mean, we had a nice share pricing action. Like what were the highlights from you, feel free to get everyone back on page? And then we can take it from there?
David Obstler
The themes are similar to what we've been discussing, which was first optimization. We had said that starting in Q2 of last year, we had the effects of optimization. The most intense was around highly ramped cloud-natives in certain industries. In Q2, we said too early to call, but we had seen sometimes a stabilization in that most affected group. And then in Q3, we mentioned that -- and indeed, the signs were more robust that there had been stabilization. And in fact, that cohort, which was the most affected had, in many cases, commit to longer-term contracts and were growing slightly.
We also said on staying on the theme of optimization that even though we still were in a cost-conscious environment that the cohorts other than that had improved somewhat. We used the word generation in the report, less intensity. There are lots of words that we were using. So that was one thing that everybody was very concerned about.
What's going to happen next? We said that in October, we had a relatively strong month, that one month does not a quarter make. But we updated everybody and we don't want to say further after speak [ph] then. But we said essentially that as of our earnings call, we had seen the continuation of less intense optimization. That was number one.
Number two was new logos and all the effects around that. And what we said was on that, we have had pretty strong trends throughout this whole period. And we can talk later about indicating that newer workloads and higher-priority projects were being more maintained that was more stable than the optimization of existing workloads. And we reminded everybody that we had been a net consolidator. We have been winning share. And what we said was that continued.
The next -- I would say the other two topics that we talked about were -- tell me if you want to handle these in later questions…
Unidentified Analyst
Yes, we’ll probably.
David Obstler
But the AI and then the security packaging. So if you want to weigh on that, we can do that. But those were the things.
Unidentified Analyst
Yes, you touched all of my subjects already, but like as a preview, okay, so now the real thing.
David Obstler
We think about that. I mean…
Unidentified Analyst
Yes. It's a shame.
David Obstler
Yes.
Unidentified Analyst
I'm waiting for my first board as you get a university place here, and then I thought you would report [ph].
David Obstler
Yes. Okay.
Unidentified Analyst
Like, you talked about a new logo a little bit. Like what have you -- like throughout the last few quarters, [indiscernible]. And I'm not going to mention optimization again, but how is the new global the whole time?
David Obstler
Yes, yes. Let's say that it's been essentially a very stable gross new logos at slightly higher lands, resulting in some record quarters of new logo. And I think we said that in the last two or three quarters. And we gave examples in the script a number of larger enterprises. And a number of them were in traditional industries who either in a land or in a consolidation had gone with Datadog. And we've seen that trend paying.
Now it's likely that we not had this type of economic environment that, that trend has been better, but they had a lot less variability or volatility. And the learning from that is that either the consolidation or the new workloads and projects, particularly for larger enterprises, has continued to be prioritized even when there's other cost efforts going on.
Unidentified Analyst
Do you see on new logo -- like, no, to -- let me start over. Because the -- we had optimization in installed base, et cetera. Did you lean in on new logo by having a sales force kind of repurposed a little bit more, just kind of go out and go hunting more around and farming? Did you do anything there or it just naturally happened?
David Obstler
No, we always -- I mean we're always putting our sales team in terms of the major new centers with being in the commercial mid-market and support of the enterprise. So we continued doing that. Our commission plans for enterprise essentially are based on net ARR. So we do all that work in terms of assignment of accounts. But we couldn't change in what we're doing.
I think we are getting better at consolidation selling in terms of looking at both value and the cost side. We found in a lot of places that our customers do want to go to a platform. They do not want one solutions. We have the products in the platform, and we are able to essentially both create greater utility and take that money and also lowering the meantime mediation in a consolidation. And we've gotten better and better at doing that.
Unidentified Analyst
And then the -- as part of that higher ASP that you worked on the new logo side, it's probably your platform is broader there, you have a lot more to do there. Correct?
David Obstler
Yes. Exactly, exactly. That and then what we always said was most of it is greenfield and land and expand. But as you have more existing workloads that are being consolidated from other vendors on the Datadog, you do see a lot of the deals.
Unidentified Analyst
If we look at your space, I remember like a few years back, I wrote these big reports about the availability [ph] war, and everyone is coming from a different angle, et cetera. Now it's funny how much the market has validated way. Like you have like two public companies left. Splunk was the last one that got acquired. Do you see a change in the market in terms of like how competitive certain vendors are? Is it becoming easier for you with like just bidding deals or kind of at least competing with some of those guys?
David Obstler
Yes. I would say this trend has been going on for a while. So when we went public, we were far down the lead table in availability. And now according to Gartner and others, we're number 1 in terms of the revenue. So that trend has been going on for a while. I think it has mainly to do with the product. It has to do with the fact that we start with infrastructure. We then did a very good job of beating up the other products. So the objections were another vendor got there first, might not have the product priority to overcome and the benefits of the platform.
Whether that -- so that's been going on. Whether that will be further we get this asked a lot, will be further enhanced by the going privates and acquisitions, too early to tell. We'll certainly give everyone a sense of what's going on, but it isn't new that we've been winning the market share from those vendors along the way.
Unidentified Analyst
Yes, yes. And then if you think about it like your product set is much broader now. So you remember like IPO, there was a lot of infrastructure monitoring. You guys have been increasing on R&D and product. How is that helping you on the land? Does that give you more landing spots? And then do you have any stats there like how the other products are doing?
David Obstler
Yes. I mean we basically the cross-sell stats were over 80% [ph] are left. So -- and then if you look at what we reported in our script, you see all of those trending up. I mean when you go back to, if you're in the 80s, you can't go to infinity. There's some leveling out of that. But that has definitely identified the land.
The more important factor has been the expanse, where any net retention, about a third of the expansion is products that the clients didn't have a year before. So that is most important factor, but certainly in landing as well, that's been a factor. We talked on the call that we gave some metrics. What we said that infra had passed through $1 billion. And both APM and logs and the families we define them had passed through $500 million. And as you said, we went public, we had some of the other products but much smaller. So that is a very good, I would think for a metric because if you add up the other two, it's double the infra. And we've always said that it's two to three. So that -- we're seeing that directly in the numbers we reported.
Unidentified Analyst
Yes. And I'm still trying to avoid optimization, so I'm going to play on you. The...
David Obstler
We can go back to optimization [ph].
Unidentified Analyst
The -- if you think about -- like how do you think about your customer -- your addressable customers? Like what you think we just had the keynotes now, and we have a very good [indiscernible], et cetera. You guys were always broader. Is there not some sort of a customer base that you're defining slightly more than you used to do or like...?
David Obstler
Well, we do define in this SMB that's 1,000, was the lower, mid-market, that's 1,000 to 5,000, that's across the enterprise sale. I mean Datadog has 5,000 employees. And then you have 5,000 and above. And so we are broad, and we're broad, I think, and we can be largely because of the way the platform is designed. The platform is simple but not simplistic, extensible with exceptional services. So it's all back to the product in that it can be consumed by a broader group of customers potentially different strategy than ServiceNow.
Be that as it may, there are different ways to go to market. For instance, when you're talking large enterprises, you're talking about a multi-division type of sale, potentially involved in constituency. So we've organized our sales team in that way and looking more what you would say was enterprise selling. And then when you get down to the SMB, it's more of evolving them from a frictionless self-service over time when they know the product to a contract. So it definitely varies but our product because of the architecture is able to appropriate for that product.
Unidentified Analyst
Yes. And then last question on this is like last quarter, you talked about some of the very low tier in Q3. Like can you talk about like -- because like some people still model on number of customers added. But then if someone is free, that's kind of not for long.
David Obstler
Well it's hard. You can't -- it's hard to do that because -- and that's why we gave some intense growth because at the very low end these are self-service customers. So there's no sales in. They will go back and forth between their credit card. So they will move. And I think you said last quarter that the delta in that movement, like 400 or 500 was 50,000. So that's why the metric can be confusing. We have not seen what others have talked about, which has been a falloff of SMB. Actually, the SMB has always grown on a weighted average basis faster than the other segments and continues to do so. It's just we've seen that very low end very little revenue dollars. I would need even say they -- it's a turn, maybe they just went from down to the level that’s very rare.
Unidentified Analyst
Yes, yes, yes. This has nothing to do with your deemphasizing because you have more upper market is just basically a natural…?
David Obstler
No, that's separate from the sales-enabled channel would be this group. So what this group of customers are not any sales on their self-service.
Unidentified Analyst
Yes, yes. So it doesn't impact. Okay. Yes, it makes sense. Shifting gears, a little bit to the install base. Like you mentioned the -- how do you guys call it, the digital have...
David Obstler
[Indiscernible]
Unidentified Analyst
Yes. It got better in Q3. Do you have any visibility that we've done as we think they have done yet? Or do we like I mean some of them had like corporate events where they needed to do -- any visibility for you? Or like it's good for now?
David Obstler
Well, there's visibility. First of all, cloud and observability is always on. So if you're not -- you basically put new workloads and then you see how they work, et cetera. And we study this, we're studying many different cohorts. I think what we said so far is we see some stabilization. But given all the risk factors in the market, we're not comfortable saying it's over. It's not over that is less intense.
Unidentified Analyst
Yes, yes. Okay. And then when I talk to the hyperscalers, the one thing that -- and don't -- correct me if I'm wrong, but I would say that you guys suffered in the hyperscalers were that the motion of moving workloads from on premise to cloud has been a little bit delayed. People kind of been on premise for a little bit longer. And you're still achieving the numbers with kind of that headwind in a way. It's not even optimization. Is that a factor that you kind of consider? Or was it just the hyperscalers kind of thinking they could grow more?
David Obstler
I think the biggest factor in the sort of the picture that wasn't straight line was zero interest rates, a lot of capital-deployed, capital markets that was emphasizing growth versus profitability. And therefore, a number of cloud data and very, very fast. So that was probably like pull-forward or not as well-thought-out planning. And so the biggest factor has been for the duration of that level. It's like the whole world, right? Simply, there is an inflation, a deflation. The rest of the trends, although there is more cost consciousness out there, as I talked about, the new logos, the movement of workloads, the consolidation, the new, all of those have been much more consistent through the process.
So I'd like to think of it as sort of if you draw a line through this and you sort of do normalization, potentially at least, I think, that gives you a better sense of what really is sort of greater. And that's the biggest factor that's happened in the last year. We haven't seen, in particular, the slowdown of new workloads. Essentially, it may have been a bit more if this -- we weren't in this environment. But there could well be some other factors that have allowed us to make up, which could have been our winning, our market share capture, our expansion of our product line. All the things may have overcome the factors that are out there that could have weighed that down further.
Unidentified Analyst
Yes, yes. And then I don't know when -- like if it's a finance guy asking CFO. So if you don't want to go there, I'm happy as well. But like how does AI come up for you guys?
David Obstler
Yes, definitely. No. I mean you can't do that without talking. AI is -- one we're seeing is that that Datadog's customer base, one of the strength of it is in a modern software company who is delivering their products to their clients. And of course most of the stack of AI is being delivered right now through APIs and other things. And so that group, that was a 2.5% we went through. And that has been a high growth for us. It's not a large part of the business. So that's serving companies that are providing AI products. We also announced a number of product releases or DASH.
And broadly, they go into three areas. One, we're building integrations with both those sets. That's what we do. We're basically Datadog, so all the data is in there. So as clients develop applications and put them in production, we can monitor. That's just like in beta and being launched, but we see some activity. And that will help us get more volume. And that's what we've seen the types of similar situation.
And then platform investments where we're trying to put more AI in our models in our platform. That could be things like auto remediation or quicker resolution of things for [indiscernible]. So all of those are opportunities. Probably the biggest opportunity would be the workload we sell, where we're not -- we are doing that ourselves in our platform, but we are expecting to be at after clients develop applications and put them into architecture [ph]. I was just listening to the previous speaker go through some discussions with their clients about essentially what software companies and banks even are doing, which is we're not largely in production with a lot of them. They're thinking through options, and we won't see the effect materially until those applications.
Unidentified Analyst
Yes, yes. And I mean it must have been for you, like, look, of capability. You guys did AI like not generative AI, like you guys have been working on AI for a while with any detection, et cetera.
David Obstler
Definitely. I mean the AI was not born 6 months ago. Datadog is essentially taking a lot of data and building correlations and patterns using learning and metric correlations to predict what's going wrong and can be optimized. Of course, if you can create models that do that faster or more predictive, that will improve the utility. And I think the same thing could be said about a lot of software products where not the AI itself, it's what do not do for a client to help them use the software product.
Unidentified Analyst
Yes. And then on new things like, there's still ongoing lots of innovation coming out of you around maturity, that [ph] cycle, et cetera. Like maybe less you but me more [indiscernible]. Like what's the stuff that he is getting [multiple speakers]?
David Obstler
Well, to go back. So half of our R&D investment in the platform. So I think that's one of the ways [technical difficulty]. When you think about platforms, you're thinking about [indiscernible] language model, the auto remediation, ITSM that would be alerting and case management, cost screen, which is the video collaboration. We just bought a little company to keep Excel-type spreadsheets in the platform long or not be downloaded. That is a very important part, and that is in the R&D group.
It may not be as exciting to everybody here, but that's at the very core what we value. So we're all very excited about that. And in fact, a number of our acquisitions are about trying to that platform. And then the biggest things in terms of where we go are, as you mentioned, incremental, and I'll get to that in the shift left.
But even in the APM -- even in APM, there's a lot of great investment. Here's an example. When we launched our APM product, because it's, I would say, less frictionless to instrument application, we launched it, but still there was more work to do in making the instrumentation of applications as frictionless as. So we have projects on that. That's to make APM even easier to use and detect.
And then on security, one of the interesting things we talked about was we've always talked about DevSecOps and DevOps using it as opposed to certain cases. That's where Datadog has the most competitive advantage. That's where Datadog has the data for infrastructure and logs and applications. And what we announced in terms of the packaging was essentially getting to a point with a product and infrastructure or cloud security and abstract was developed at that we could proactively attached. That's a very big opportunity that's aligned with not only the product build but also the world of DevSecOps, which is engineering, security or learning is upfront when you're developing and deploying introduction rather than as a detection and remediation effect.
Unidentified Analyst
Okay. Yes. Makes sense, yes. And I've got a planted question here. And I'm not trying to get '25 guidance -- or '24 guidance out of you. But as we think about next year, as you think about next year, how would you think the ranking is? What's driving revenue if revenue is changing next year? How would you kind of put this backlist up?
David Obstler
So the biggest factor is the usage growth rate of customers. So that's been somewhere between depending upon 55% and 80% of our revenue growth. So that is the biggest, and that comes, as I mentioned, comes from the same products, one-third from cross-sell. No matter what the new product, biggest opportunity isn't [indiscernible].
When you think about how big the market is, how we have a very significant number of customers who aren't using all the pillars, the attach rate. So that is a product, the biggest. And then there's some things on top of that, that -- our security, now cost management. Instead of managing a number of other products that aren't in that $1 billion or $500 million but are attaching nicely and can be back to growth.
Unidentified Analyst
How do you think about part of that, some of your other guys in the industry talk about like, oh, we need to start thinking about like if things get better and you’ve start investing a little bit more? How do you think about that kind of profitability versus call as you kind of for next year?
David Obstler
Well, one thing, unlike some others, we never went crazy and we never didn't invest. We've been able to modulate that. So even in this year, when the pace has been lapped, we still invested significantly. So we have a list of prioritized projects. And if you go into an R&D and in sales and marketing, we have been trying for some time to all rate a bit there. I think you mentioned that this quarter, we overshot our margins.
Unidentified Analyst
Yes, again, yes.
David Obstler
Again. In that case, both the top line is better than we had thought from the Q2. And we have been very good at optimization. And so we're trying long-term balance and compound the free cash flow, which is a product of revenue growth, the most important, and doing that at a good margin. And I think we gave the guidance on margin back when we went public. 20 to 25, we called it long term. We got there faster than that. But I think we've been able to prove over and over again that we could have a model that is able to be calibrated in attractive ways.
Unidentified Analyst
And it's fair like if you think about like as you grow at and you only need to think about like changing maybe processes or like things need to kind of change and evolve to kind of greater scale. Is there any coming up from your perspective? Or is it just -- it's a very natural evolution in terms of how you kind of…
David Obstler
So when you think about R&D, I'll start there first. We essentially -- we're always pretty good at having projects and executing efficiently. So I think in that way, I think we're getting better about where we hire geographically, doing this in a methodical way. And go-to-market, I think that's where you probably have more maturation in the markets, emerging markets. And Asia, where we already are, but you're doing this -- you're creating a leadership that is a bit more decentralized. So you're making sure you have great heads of EMEA, great heads of APAC.
There's a number of markets, including Fed, where panels are really important. So we're investing more in that. I think essentially diversifying our marketing and that we were very digital and event-based. And I think we're evolving our events to be more spread out geographically, but also getting into account-based marketing and others. So I think there's a lot of things we're doing in maturing in the go-to-market. Because we know these are good markets, it's the timing and investment and we've had good payback. That's some good examples of how we've been, I would say, growing what we're doing and not just rinsing and repeating.
Unidentified Analyst
Yes. And then we've got a minute left, so last quick question. Usage of cash, like how do you think about that? Because you have a cash flow-positive, good cash position, like what's the thinking there?
David Obstler
Well, I like the 5% return right now. I like that. I think that we essentially have wanted to have enough cash so it never holds us back. We've done a good job of that. [Indiscernible] point now where we're saying in any way that we're into stock buybacks, et cetera. But we know that as we accumulate cash, and we don't find a use to it, that our job is not to accumulate on the balance sheet. And we study it. It's not -- now is not the right time, but we do look at that, and we could do that in the future.
Unidentified Analyst
Yes. Perfect. Yes, great interesting statement.
David Obstler
Thank you very much.
Unidentified Analyst
Thanks, David.
David Obstler
Good. Thank you so much.
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Datadog, Inc. (DDOG) Presents at Barclays Global Technology Conference Transcript