Datadog Q120 recap

DDOG - Q120

Public shoutout to sarksnz for his great earnings coverage lately. I like how you dive into numbers and how you sum up CC calls & Q&A.

And if you aren’t reading Software Stack Investing (SSI) blog, dear Fools, you should (see my thoughts at end). He covers most of my/our holdings in great depth.

PR: https://investors.datadoghq.com/news-releases/news-release-d…
SSI recap: https://softwarestackinvesting.com/datadog-ddog-stock-q1-202… [includes a huge competitive review]
buynhold take: https://discussion.fool.com/4056/ddog-q120-34511797.aspx
MajorFool take: https://discussion.fool.com/ddog-q1-review-34520033.aspx
CC transcript: https://www.fool.com/earnings/call-transcripts/2020/05/12/da…
CC recap (sarksnz): https://discussion.fool.com/ddog-q1-2020-cc-notes-34504264.aspx
CC recap (Karen): https://discussion.fool.com/4056/cc-notes-34503451.aspx
gmcnatt CC highlights point to sandbagging: https://discussion.fool.com/i-had-a-couple-of-other-notes-that-a…
sjo Q&A recap: https://discussion.fool.com/qa-with-analysts-during-the-earnings…
sjo on the great go-to-market strategy: https://discussion.fool.com/another-major-factor-that-likely-imp… [good stuff!]

Revenue 131.2M +87.4% ^^
… Int’l 24%
Billings 137.9M +55%
RPO 256M +82%
Gross Margin 80% +700bps, +200bps seq
Gross Profit 104.8M +105% ^^
Adj Op Inc 16.1M (vs -7.0M) swung pos
… margin 12.3% (vs -10.1%) !! +614bps seq
Opex 101.0M +66.2%
Adj Inc 18.8M (vs -6.9M) swung pos
CFFO 24.3M +610% !!
FCF 19.3M swung pos
… margin 14.7% (vs -1.2%) !! +510bps seq
Cash 799M
Custs 11.5K +49%, +9.5% seq

  • Custs >100K 960 +89%
    $NER >130%
  • custs using 2+ product 63% +3100bps YoY, +500bps seq !!
  • 75% of new lands used 2+ product
  • customers asking for shorter contract durations - affected Billings by 10M (adj would have been 70%)
  • gave empls a grant to help during pandemic or to donate; >$1M was donated
  • not affected by less users or seats, only by customers disappearing or by customers having to shrink infrastructure (less use)
  • est <10% exposure to COVID sensitive industries (travel, dining, et al)
  • have a go-to-market approach that starts small and grows… doesn’t require huge upfront deals (which is likely to be more impacted)
  • user conf Dash will be virtual, happening in Q3
  • Security Monitoring module went GA
  • 3rd party integrations now >400; includes new security focused ones with CarbonBlack EPP and Nessus vuln scanner
  • expanded Watchdog ML to new anomaly detection scenarios
  • extended Network Performance Monitoring’s reach beyond internal networks (eg covering data center to data center traffic)
  • further enhanced Serverless capabilities
  • achieved AWS Lambda Ready designation
  • achieved ISO 27001,27017,27018 infosec certifications
  • new Partner Network announced in Jan for better integration to system integrators & related partners https://investors.datadoghq.com/news-releases/news-release-d…
  • most new lands are greenfield (not displacing a competitor), as enterprises start to migrate to cloud
  • huge new lands & expands; 7-figure contract from Fortune 100 pharma, 6-figure contract from large health insurer (via system integrator partner), upsell to mid-market logistics co (now with >$1M ARR), 6-figure upsell to global financial firm w/ stringent security reqs

JPMorgan investor conf notes (Edyboom): https://discussion.fool.com/4056/jp-morgan-conference-notes-3450…

My stance: So much to like. Re-accelerating top line (back to 87% from 76% 2Q ago) is greatly outpacing opex; combined with improving margins meant gross profits rose 105%! Op leverage kicking in on the now positive op and cash flows margins. I had mixed thoughts on how pandemic might affect them, but unlike AYX, it was clearly a net positive. They sell by usage (infrastructure footprint), not user seats, so expanded traffic of some custs during this pandemic (strea) greatly outweighed reductions in other custs. Looking forward, there is strong cust growth, while existing ones continue to spend spending more w/ 89% rise in custs >100K ARR.

Half of their product line is new in the last year, and the uptake has been incredible; 63% of custs now use >1 product (double last years 32%), and now 75% of new custs land with 2+ products. P-H-E-N-O-M-E-N-A-L execution, yet the CEO still sees this as early innings, with estimates that only 5-10% of app monitoring is in cloud thus far. DDOG tends to land new enterprise customers as they start cloud migrations, so this bodes really well for future success. However, they do expect some cloud migration efforts to delay, so new logo lands may slow a bit for the remainder of the epidemic; guidance was a bit cautious (the only slight negative here). Some deals slipped in Q1, some already got signed in Q2.

Beyond that, only 24% of rev is int’l and they are focused on expanding that heavily. They also want to continue taking advantage of this tailwind they have with the ongoing cloud migration & digital transformation of enterprises, so plan on increasing spend in R&D and go-to-market. New Synthetics product (simulated user actions) seeing huge traction. CEO hinted new Security module has a long road map ahead. CEO also hinted about some new offerings in the works, around automation of event responses [orchestration and automation are things we are hearing about a lot lately in cybersecurity & monitoring platforms].

I highly recommend the competitive analysis in the SSI writeup above. It does a review of the major players in the “Observability Market Activity” section, and direct compares them all in Financial Metric Comparison" section. Dynatrace is highly profitable but at 1/3 of the top line growth. They are placing heavy emphasis on AIOps - which I expect DDOG to follow. The go-to-markets and focus on Security greatly differ, a bit like DDOG/NET vs DT/FSLY. New Relic is falling way behind, now at <1/4 the top line growth. They too have a focus on AIOps in their newly revamped platform, with an AI acq last year. They have a new “distributed tracing” product that focuses on microservice/serverless architectures. [This refers to tracing your software application’s service & data flows, in order to detect what parts of your complex, inter-operating architecture are having bugs/issues.] Splunk’s growth has ground to a halt due to their transition. The cloud segment is doing great (112M +81%) but at the expense of eating into the other segment heavily, and is requiring a lot of spend (op margin -25%). They had some major land w/ Zoom tho, and Shopify & Take-Two expanded. They changed their much maligned pricing structure (eliminating the outrageous data ingest fee, replacing it with an infrastructured-based one like DDOG) so have likely stopped shedding customers as much. Splunk has a way more mature SIEM product vs the newcomer Datadog - the other 2 are ignoring that segment for now.

In the financial comparison, DDOG clearly stands out. It’s the smallest rev base, but has triple the growth of the nearest competitor. It’s completely eating marketshare in the right here, right now, and is doing so WHILE PROFITABLE (adj op & cash flow margins just swung pos). Splunk is having to spend it’s way into maintaining its top dog position (especially on S&M, which is NOT indicative of op leverage). Both Datadog and Splunk finally showed up in the latest Gartner MQ, but at the top of the “Visisionary” quadrant, while Dynatrace and New Relic took top honors. Interestingly, Datadog and Splunk are spending significantly more on R&D the supposed MQ Leaders.

The hypergrowth and execution by Datadog clearly paints an amazing picture compared to what Gartner’s MQ reports. I think it won’t take long for DDOG to double here, potentially overtaking SPLK’s market cap if it doesn’t rise in tandem. Gartner’s gripes with DDOG were: APM workflow & stack tracing capabilities are not as mature as the leaders, and that the leaders are focusing more on AIOps. I expect Datadog to fully rectify these concerns over the coming year as their platform matures, and they will continue to move “up and to the right” on the MQ.

Great review of the landscape from Mr Peter Offringa on his Software Stack Investing blog, and he is absolutely worth a follow if you are not already. He is all over many of the SaaS companies followed here, and tends to have a wider view of the competitive landscape more than other SaaS analysts I’ve seen. Interesting take in his ending bits, on how he lumps ESTC with MDB as a DB provider, instead of into observability or cybersecurity markets. About the only thing I don’t understand in Peter’s takes is his silly rule about not investing in IPOs until he has seen a year of earnings - he’s wasting a lot of effort on researching an amazing company only to not own it, and is missing out on a whole lot of upside. DDOG is +100% YTD (151% up from its March 16 low), and I’m glad to be an owner.

-muji
long DDOG

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If you want to see DataDog in action, here’s a video https://vimeo.com/421247191 of a demo of DataDog observing Fastly (so, it’s a two-fer!). It’s a bit nerdy, but I appreciate them showing real use cases from a user’s perspective versus the slick hype that marketing people tend to use.

In my view, these are two companies with best-of-breed products that also have high business potential.

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